Sweetgreen (SG 0.97%) is one of the more disruptive companies in the retail/restaurant industry today.
The company has brought a new concept to the fast-casual format as the largest fast-casual salad chain in the U.S. That menu seems to be resonating with customers. Sweetgreen is rapidly adding new locations, and its average restaurant brings in $2.9 million in revenue, a number on par with fast-casual leader Chipotle.
However, an even greater point of disruption from Sweetgreen may be its Infinite Kitchen, a robotic system to help expedite orders, saving money on labor and improving throughput. Of the 40 restaurants it plans to open this year, 20 will have an Infinite Kitchen. The company has also teased the idea of licensing the new technology, which could open up a new revenue stream.
Despite that potential, Sweetgreen has had a forgettable year. Its stock is down 54% year to date through June 4. It has faced several challenges, including the wildfires in Los Angeles, one of its biggest markets and where the company is headquartered, and broader headwinds in the restaurant industry due to concerns about tariffs and other signs of a weakening economy.
In its first-quarter earnings report, the company reported a same-store sales decline of 3.1%. It said quarter-to-date comps were down mid-single digits in the second quarter as concerns around tariffs picked up in April, weighing on demand.
Image source: Sweetgreen.
A fresh opportunity
A 54% sell-off is disappointing for existing shareholders of the stock, but it creates an opportunity to scoop up this promising growth stock on the cheap.
In fact, two billionaires did just that in the first quarter. Israel Englander's Millennium Management purchased 2.17 million shares of the restaurant stock, adding to a stake it started building in Q1 2023. Similarly, Ken Griffin's Citadel Advisors, which is often considered to be the best-performing hedge fund, added 1.27 million shares of Sweetgreen. Citadel first bought the stock when it went public in the fourth quarter of 2021.
Buying the dip on Sweetgreen is risky, especially with an uncertain economy, and declining comparable sales are never a good sign for a restaurant chain. However, management's guidance calls for an improvement in same-store sales over the rest of the year, forecasting flat growth for the year. More importantly, the company's long-term growth opportunities are still significant.
Will Sweetgreen be a ten-bagger?
After the reset in the stock price, Sweetgreen's market cap has fallen to just $1.8 billion. That means the stock could turn $10,000 to $100,000 if its market cap reached $18 billion, a reasonable goal for a restaurant chain.
Despite the weak same-store sales, Sweetgreen continues to aggressively open new stores. It plans to add 40 locations this year, growing the store base by 16%.
Over the longer term, CEO Jonathan Neman sees the company growing to at least 1,000 stores, if not several thousand. This should drive the stock higher over the longer term, assuming Sweetgreen can pull off that expansion.
In the meantime, the company is delivering strong average unit volumes of $2.9 billion, and its restaurant-level operating margin of 19% is good enough to drive profitability, especially as that margin is likely to increase over time. Investments in the Infinite Kitchen system seemed to have weighed on the bottom line but should spread out over time.
Finally, Infinite Kitchen should give the company a competitive advantage in areas like labor and throughput, and the effect of the technology should eventually show in the financial results.
Overall, Sweetgreen is the leader in a growing fast-casual category, its restaurants are generating strong traffic, and it has a potential technological advantage in Infinite Kitchen.
The stock is risky, but the upside potential is there, especially once the economy improves. The company should return to same-store sales growth when that happens.
