Sweetgreen IPO: Salad Chain Heads to Public Markets

Recent IPO Activity and Sweetgreen's Entry

Rent the Runway is anticipated to determine its initial public offering (IPO) price later today, with trading expected to commence tomorrow morning, assuming all preparations proceed successfully.

Udemy is also progressing toward a public market listing, as is Allbirds.

Sweetgreen Joins the IPO Wave

This week, Sweetgreen has officially filed for an IPO.

The company is a well-known fast-casual restaurant chain, particularly recognized for its salads which are a favorite among those who purchase lunch while at work. This is based on firsthand experience from a previous role in a major city office environment.

Venture Capital Backing

The relevance of Sweetgreen to TechCrunch stems from the substantial capital it secured as a private entity.

This includes numerous rounds of venture capital funding, culminating in a Series I round in 2019, alongside investments from a diverse range of other sources.

Essentially, Sweetgreen is a highly-funded unicorn, distinguished only by its focus on salads rather than, for example, enterprise-level software solutions.

Analyzing the IPO Filing

Let's examine Sweetgreen's IPO filing to gain a comprehensive understanding of its business model and financial performance.

We will conclude with an acknowledgement of the difficulty in accurately valuing the company, a challenge previously encountered with Rent the Runway.

The Broader Implications

The coming days and weeks will be insightful in evaluating the worth of businesses leveraging technology, especially when compared to more purely digital or hard-tech ventures.

This dynamic is once again coming to the forefront.

The performance of these IPOs will provide valuable data points regarding investor sentiment towards various business models.

Sweetgreen's Position in the Fast-Casual Dining Sector

Sweetgreen currently manages 140 locations across 13 states in the U.S., as well as Washington, D.C. A substantial customer base of approximately 1.35 million individuals had placed at least one order within the 90-day period ending September 26, 2021.

A significant portion of Sweetgreen’s revenue is derived from digital channels. For the fiscal year up to September 26, around 68% of all revenue was generated through digital orders.

The Influence of Office Culture

The company’s growth has been notably linked to office culture. Sweetgreen’s S-1 filing details the impact of the COVID-19 pandemic – and the resulting shift away from traditional office environments – on its business operations.

Throughout its history, Sweetgreen has demonstrated consistent expansion. The filing indicates the presence of 119 restaurants at the close of fiscal year 2020, increasing to 140 locations by the end of September of the current year.

This expansion requires considerable investment. Sweetgreen is currently planning for an average investment of approximately $1.2 million for each new restaurant it opens.

Key Trends Supporting Growth

Several underlying trends contribute to Sweetgreen’s positive outlook. These include a growing consumer preference for plant-based diets and the rapid adoption of digital ordering and delivery services.

These channels are crucial for driving the food chain’s revenue growth.

The core business model of Sweetgreen appears strategically sound. Increased consumer focus on health and convenience, coupled with the suitability of salads for delivery, positions the company favorably.

Given the potential for profitability in the food industry, Sweetgreen’s prospects are worth considering.

Analyzing Recent Business Performance

Let's examine Sweetgreen’s financial performance over the past few years to understand its trajectory.

• The company has experienced consistent growth in both restaurant count and digital revenue.
• Investment per new restaurant remains substantial, reflecting a commitment to quality and expansion.
• Consumer trends in health and convenience are aligned with Sweetgreen’s offerings.

Is Sweetgreen’s Business Truly Profitable?

The answer, in fact, is no.

Sweetgreen currently operates at a loss and doesn’t demonstrate immediate prospects for substantial profitability. While incurring deficits isn’t inherently negative—many venture-funded companies accept losses during expansion—it’s a deliberate strategy involving the investment of private capital, prioritizing growth over short-term profits.

However, Sweetgreen is not a nascent startup. Established in 2007, according to Crunchbase, the company is approaching a stage where one would anticipate greater financial maturity. Shouldn’t a company of this age, backed by significant private investment and comprised of experienced professionals, be able to achieve profitability?

Here’s a review of the financial data:

Please note that the timeline in this table progresses from east to west, with the most recent fiscal year displayed on the left.

Examining the last two fiscal years, 2020 presented challenges for Sweetgreen, with revenues decreasing from $274.2 million to $220.6 million, and net losses doubling from $67.9 million to $141.2 million during the same period.

More recently, the company has experienced revenue growth. In the three quarters ending in late September, Sweetgreen reported $243.4 million in revenue, a significant increase compared to the $161.4 million recorded in the same period last year. However, losses remained substantial, decreasing only slightly from $100.2 million (2020 through September 27) to $87.0 million (2021 through September 26).

Comparing the quarters ending in late September 2020 and 2021—the middle columns in the table above—revenue increased considerably from $55.5 million to $95.8 million. Conversely, net losses only marginally declined from $36.9 million to $30.1 million.

This lack of substantial operating leverage as revenues grow is concerning. As Sweetgreen’s revenues increase, its losses aren’t diminishing at a corresponding rate.

Beyond standard GAAP metrics, the company highlights several non-GAAP measures, which are nonetheless noteworthy. Consider the following:

These periods align with those previously mentioned for clarity.

Proponents of non-GAAP profit metrics, such as adjusted EBITDA, will observe improvements in the company’s adjusted profit margins in both the 39 weeks ending in late September 2021 and the most recent 13-week period—approximately one quarter. However, the company remains unprofitable due to its corporate expenses.

The company notably excludes “depreciation and amortization” costs from its adjusted EBITDA calculations, a point we will revisit shortly.

The company presents two “restaurant-level” profit metrics, a method to separate the profitability of its restaurants from its overall corporate costs. If the restaurants generate sufficient profit, they should be able to cover the company’s total expenses.

In the 13 weeks ending September 26, 2021, “restaurant-level” profit was $13.1 million. The company defines this metric as follows:

However, a question arises: why aren’t “depreciation and amortization” included as restaurant-level costs, impacting restaurant-level profits? The reason, we suspect, is that including them would reduce the company’s recent 13-week “restaurant-level” profit from $13.1 million to $3.8 million. This would also make the $36.1 million in other non-restaurant-level operating costs appear considerably higher.

We believe these costs should be incorporated into restaurant-level results, as they are directly related to opening and operating restaurants.

Regarding the 13-week period ending September 26, 2021, the company notes that its $9.3 million in depreciation and amortization costs represent 10% of revenues:

It appears that the core business of operating restaurants and selling food isn’t highly profitable, hindering its ability to fund broader corporate initiatives. And this assessment is likely accurate.

Including depreciation and amortization in both adjusted EBITDA and “restaurant-level” results would present a less favorable picture, but would be more transparent. This approach mirrors concerns regarding how Rent the Runway handles clothing depreciation costs. We are skeptical of Sweetgreen’s accounting practices.

We could delve deeper into this S-1 filing, as it contains a wealth of information. However, let’s conclude with a discussion of cash flow and future outlook:

Remember that free cash flow is calculated as operating cash flow minus investing cash flow. As shown above, Sweetgreen is heavily reliant on cash for both operations and investments, resulting in consistently negative cash flows.

The company recognizes that its current model isn’t sufficiently profitable at the restaurant level to support its overall cost structure and is actively working to reduce labor costs. As Sweetgreen states (emphasis: TechCrunch):

If successful, this is a positive development. Automated salad preparation is a welcome innovation. We would gladly consume them. However, the timeframe for achieving these improvements remains uncertain.

Finally, Sweetgreen has two share classes—Class B, with 10 votes, and Class A, with one vote. It’s noteworthy that a salad company is adopting the Silicon Valley practice of granting insiders substantial voting power to maintain control. The rationale is that it allows founders to make difficult decisions that benefit the business long-term, such as significant investments in new technology.

It’s important to remember that Sweetgreen sells salads.

Determining the company’s value is challenging. It was last valued between $1 billion and $2 billion in the private market. Time will tell.