Chit Chat Stocks - Sweetgreen (SG) | Not So Deep Dive

Episode Date: April 19, 2022

Sweetgreen is a fast-casual restaurant concept that serves salads. The company has 150 stores throughout 13 states and Washington DC. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Sweetgreens. Enjoy the show! This episode is sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Contact us: [e-mail] Timestamps Company Background | (3:25) Industry | (7:35) Management & Ownership | (9:39) Valuation | (14:33) Earnings | (16:50) Balance Sheet | (19:57) Our Analysis | (21:50) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. This is the show where we go over an individual stock in about 40 to 45 minutes. And today we have Ian Gray joining us,

as always, as the bi-weekly guest. I don't know if bi-weekly is every other week. We're talking sweet green ian this was your choice what inspired you to to make this one uh the pick for this week i've got a couple of friends who really like sweet green and i'd seen that it had gone public a couple months ago and wanted to take a look i've never actually eaten there yet i'm planning to have a meal there sometime soon i'm going to be going up to san francisco and i think there's a few around up there so um but anyways that's that was the inspiration yeah ryan you've had it i'm sure we'll talk about animal evidence but they're not in the seattle area so unfortunately i wasn't able to do any investigation in that regard. What do they call it? The Motley Fool boots on the

ground research, but we're going to get into it. I'm going to let Ryan introduce the company and how it's one of the fast casual businesses out there. But first let's talk about our advertisement today, Potential Multi-Bayers. Now they've been, they were our first non-automated ad, our first ad that we reached out to ourselves. Sponsor, partner, sponsor, whatever. And they've been great. Chris, who runs it over there in the team, they've been fantastic. They also come on the show plenty of times. So if you want a little tease to the service, listen to some of the episodes they've had with us. We covered Upstart, Fiverr, a few other ones. But the aim of the potential multibigger service is to find stocks that can go up 10x over the next 10 years or

compound at 26% per year. So they're looking at the high growth compounders. They pick them to hold for a long period of time. And of course, they are constantly updating you So whenever there's new information, say a stock dips 30% because of some earnings report, they will go through the fundamentals and say, okay, this was for a reason that I think is an actual concern or no, this was some short-term blip that you shouldn't need to worry about. And they'll be- It's a very holistic service.

Yeah, they'll be honest with you and say, okay, no, we made a mistake with this one. I mean, they're not doing this constantly, but say like a few years down the line, they're like, okay, no, we made a mistake. this didn't happen as it was. We're going to forget this one, but also they'll tell, you know, they'll recognize when there's a winner. Yeah. A lot of them will be winners and yeah, it's just a great research service. If you're looking for finding either new stocks that are in that high growth universe, if that's your style, or you are just looking for someone to help guide you along. If you're not an expert, if you want to become a multi, you can go to

Seeking Alpha and look for From Growth to Value. Google it or go to at From Value on Twitter. It's a fantastic service. All right, Ryan, introduce Sweetgreen. Sweetgreen is a fast, casual restaurant concept that serves salads. So for simplicity purposes, I say just think Chipotle of salads. There's bowls, bowls, right? Yeah. It draws a lot of similarities to Chipotle actually, but it's not a franchising model. So they are the owner and operator of all their stores. They have 150 stores as of the latest quarterly report. That's what they ended with. And they're scattered throughout 13 states and Washington, D.C., but most of their stores

are in the Northeast. So that's primarily, that's where they started. That's where they've mostly expanded. But they have, I think, 26 stores in California and I want to say eight stores in Texas. So they've slowly moved outside of just the Northeast. But as far as like the menu goes, it's pretty comprehensive. They've got like, it's almost like mod pizza. I don't know if that's like a regional or national thing, but they've got like recommended salads. And then they've got basically the build your own bowl where you can add like your typical bases. So whatever leaves or whatever type of salad you want or leaves you want. And then you've got like proteins you can add to like chicken or whatever other bases. There's like sweet potatoes. It's pretty comprehensive. So it kind of goes more beyond just like the typical leafy greens. And then the salad price,

just to kind of like put perspective or like a customer's perspective on it. I've been a few times and it's usually like just over 10 bucks. So I, maybe you could say that's on the higher end, but I would say that's like a pretty standard lunch price these days. That's on the Chipotle bowl is what, like nine bucks on the high end. I don't know if you make lunch at home.

It's like, I'm talking about if you're going out, I mean, I feel like it's closer to five. I don't know. I guess I don't go out for lunch that much, but I feel like it should be. Clearly, I haven't been out in the last few months. Inflation hit. Oh, inflation.

You haven't seen inflation. Whatever. Yeah. But I mean, it's definitely on the higher end. Well, I'm going to say it's on the standard end, but they are sort of average there. But they have about 200 domestic food partners slash suppliers that it procures its food from. And a lot of the supplier relationships are localized. So the partners are kind of in close proximity to the stores.

They have like regional partners. And then the majority of their sales comes through digital channels. Most of that is their own digital channel. So they're either the Sweetgreen app or the Sweetgreen website. But they also get a lot of their orders through third-party delivery networks like DoorDash. And their app is built. I thought this was just kind of a cool anecdote because we've talked about Olo on the show before, and they built their app using Olo's white label solution. So it's cool.

It's a pretty easy business to understand. I would just basically say, think Chipotle of salads. And then the history I thought was actually kind of an interesting backstory. So there were three Georgetown students named Jonathan Neiman, Nicholas Jammett, and Nathaniel Rue. and they saw basically this market opportunity for a healthy, fast, casual restaurant. I imagine it's just like, I feel like I've had this epiphany before where it's like, why don't we just do the Chipotle of blank? Yeah. Well, Chipotle tried to do that and they kind of failed. So maybe it takes more execution than we're thinking.

Yeah. And it worked for them. They opened a store on their college town, like right down the street from where they were living. It was in Washington, DC, obviously, because I believe that's where Georgetown is located. And they raised $300,000 from family and friends to kind of start this initial store. And it was a hit. So they really found product market fit, especially in that area. And they continued to add more stores around the area. The rest is kind of history from there. That was in 2006. And so they IPO 15 years later, they brought on more of a professional CFO in 2015, I believe. But yeah, the IPO was less than six months ago. So really, really new to the public markets. Yeah. And I'll hit industry here. This is kind of a weird one.

I don't think TAM or anything like that is really applicable for a company like this, because you kind of know everyone eats, but I'll give some numbers anyways. So the chain restaurant industry is valued at approximately $150 billion. It was growing virtually every year before the pandemic. Pandemic, it fell off, but now we're recovering. We'll probably get back to those highs soon global wellness and health food and this is the category they try to hype up that is expected to grow at a 9.2 percent kegger which just means compound annual growth rate so each year that type of category which sweet green serves a small niche of supposed to grow at a pretty healthy clip way faster than the overall uh food market because you know the u.s

population growth. We eat a lot here, but it's growing a lot slower than 9% and our food consumption is usually going to be in line with population growth. Competitors, again, this is easy. It's all places people are buying food at, but specifically your competitors are for the lunch hour fast casual. So Chipotle, Panera, Panda Express, many, many others, that is their core competitor because they're really going for that lunch rush hour. I don't know. That seems what they've tried to do as well they've that's what's attracted people to them but that's what they try to target as well for delivery office deliveries all that good stuff there there are also a lot of i don't know if any of them are public regional chains that do something very

similar to this there's so many like essentially just uh build your own salads i think i mean even the lunch stuff at grocery stores is you know what i mean like go to salad at grocery stores whole foods whatever but there's i mean so the ones that's coming to mind uh grab a grain is a big one i think they're in seven states tossed is another one grab a grain if i'm not mistaken was based in arizona i don't know if that's around you and i have not seen grab a green i mean there's there's so many there's restaurants constant there's so many around there's thousands across the country that they're competing with um cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts

oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply let's hit management and ownership though So Ian, what'd you find about the team there? Yep. So Jonathan Neiman is the co-founder and CEO. There's also two, the two other co-founders are still involved. One's the chief brand officer. The other one's the chief concept officer,

which was kind of, I'm sure they have different roles and whatever, but it was kind of funny because I would think most places you'd have like one or the other of those. They see, they sound kind of synonymous, but I'm sure they have distinct responsibilities. these um this has basically been their life because they opened their first location just three months out of college and it wasn't wasn't like they went and worked some other places and then came back around to this idea they had this idea in college like ryan was talking about and they executed on it um go ahead yeah yeah they also i i just kind of remember seeing this

anecdote but they met in like uh an entrepreneurship class and i think they may have all lived together Cause I remember them saying that they would like, they were developing the business plan and they'd like work in the kitchen and then they'd go to the, the, the sweet green location and go back and forth. And so they've kind of just been around each other for what's now 15 years. And they even mentioned in the S their letter in the S one that they all work in the same, like the exact same office now, like, like the same room, which I found a little strange. Like, I feel like they could afford their own like rooms, but yeah.

All right. I, it sounds like they've, they've been friends for a long time. And if you're business for 15 years together, it seems like they've enjoyed their own, enjoyed each other's company. Yes. And, and I think that's, that's the dream of all those entrepreneurship classes, right? When they talk about these, these entrepreneurship programs at schools, they're always like sell you this big story about how it's going to look

exactly like that. You're going to meet these awesome co-founders and you're still going to be working together. You're going to ask great thing. And they're actually the success story out of all the, all the people who, um, kind of get sold that bill of goods. They actually, they've actually executed on that. But anyways, um, and a slightly more controversial, um, piece of the management team is that last year, uh, Jonathan Neiman, um, the CEO, he wrote this LinkedIn post that basically was making the case that curbing obesity was the best way to combat COVID. which a lot of people you know whether you agree with that or not there was a lot of people who were giving him flack for that because away really yeah weird i mean isn't that he's just trying to save lives what that's strange people get upset about everything i mean right people get upset about everything and and it seemed there's a lot of people who were like you're

just trying to sell more of your overpriced lettuce it was basically healthy well that's crazy trying to make people healthy i mean you don't have to eat from sweet green you can buy some two dollar lettuce at the store whatever i don't need to talk but it's also like the john mack wasn't the whole foods the whole foods guy the old whole food ceo came out and like said something similar to this which is like and i guess sweet green's not making a whole lot of money so it and we'll talk about that so maybe maybe it's a little different but but like how can you sit on your soapbox and be like you got to eat better and then charge like just exorbitant prices for healthy foods like that's a good point does but i mean you don't have to shop there i

I mean, I think he was, he was also saying that they should put taxes on sugar and taxes on processed foods and those types of things. And so anyways, it was just, it was a little bit, if you go looking him up, that's like the first story that'll pop up is, um, there's a few stories about that. So I don't know if that means anything, but it is, you know, well, he owns 5% of the company. The other co-founders own an additional seven and a half percent combined. And so there's pretty high insider ownership. this is one of those companies where you know it doesn't all depend on the co-founders but

the co-founders are involved and it tends it's not always the case but it seems like more often than not you see at least in my experience you see ceos that are founders or co-founders that are more well known and make more public statements and say stuff like that than you do with um like more like quote-unquote professional ceos right there's just a higher likelihood that you see some of these stories come up which sometimes is a good thing and it's really you know promotional and gets people excited about sweet green other times there may be some negative news stories around that's been the only thing that's really at least that i could find that has been controversial about anything that he said but and some people right it's it's debatable

whether it's even controversial but that's um that's just one of those stories that's out there that's interesting uh with those type of ceos i think it's nice because you can understand their philosophy because they're driving the high level decisions. So if you understand that, you can see where they're going, why they're making acquisitions, why they're doing all the expenses that they're doing. But let me hit valuation. Interesting one here. I'll maybe go through some stuff because they are unprofitable, so it's hard to value. But the market cap as of this recording is about $3 billion and their ticker is SG. Very easy one. I'm surprised they got that. Enterprise value is technically a lot lower because of the cash they raised during the

IPO, but I would not use enterprise value here because the cash balance there is not available for shareholders, at least theoretically. In my mind, it's not because they're burning so much cash and they said they're going to keep growing store count and they don't really seem to be at a clear path to profitability over the next couple of years. I think all that IPO cash is going to be for reinvesting into the business. So I would really go with market cap. And using that, Their price-to-sales ratio, which is market cap divided by trailing 12-month sales, is 8.8. And like I said, unprofitable and not cash flow positive. So I'm going to try to do a little contribution profit here.

Let's look at starting at revenue and subtracting out all the major costs for a restaurant, which are very easy for people to understand. So if you subtract out food and packaging, which is 28% of revenue, so food and packaging costs as a percentage of their overall revenue, You subtract out labor costs, which were 32% of revenue, occupancy costs, which are 15% of revenue, and other restaurant expense, which is 13% of revenue, which they have. Well, looking at their expense lines, it's like they had a double income operating expense lines. It's crazy. If you subtract all that out, you have 12% margins. So that seems okay from a restaurant level, but there's still some other stuff. There's still corporate level OPEX and marketing, and there's still depreciation and amortization.

So this company is not profitable or even close to at all. And even if you assumed operating margins at 10%, that would give the stock a price to operating income of 88. So again, very expensive. Also, they're very heavy share diluters. They seem to be giving out options to everyone at the company, which could be great over the long term. Were they doing that before the IPO? Uh, pretty heavy granting pace from what I saw. I don't have any numbers. It's hard to remember those tables, but pretty heavy granting pace. Yeah. Okay. All right. I'll dive into the earnings.

Yeah. So 2021, their revenue was $340 million. That was up 54% year over year. Their same store sales were up 25% year over year. Um, but this was due largely to a big drop during COVID. So they had less foot traffic in their stores during COVID. So I believe 2020, they had, I think it was like a 26% decline in the same store sales. So they're actually still not back to their pre-COVID levels on a per store basis. So the term they use is average unit volume, which I believe they were at like $3 million per store a year, $3 million per store a year. and they're still not back to that. I think I should probably have this down, but on the fourth quarter, it was still just below 3 million. So they're getting back, but it's gradual.

And then 67% of their revenue came from digital channels. And that's down slightly from last year. As I mentioned, COVID, a lot of people transitioned to in-store pickup or delivery, as opposed to just walking through the line and ordering your salad that way. but 70% of the digital revenue is from their own channel. So that remaining 30% roughly is from the third party services. And as Brett alluded to, they are not profitable just about any way you look at it, but in 2019, so which was basically their least conflicted year,

there was no sort of, you couldn't point your finger at COVID. They had restaurant level profit margins of 16%, 16%, which that's not true profitability. It's basically if you exclude a bunch of expenses, primarily corporate-related, so like general and administrative. Preston Pyshko, CFO Alphabet and Google Yeah, they exclude a lot. Nick Neuman, Yeah. There's even some stuff that I thought maybe shouldn't be excluded, like I think depreciation

and amortization, if that's at the restaurant level, should be included there, but it wasn't totally clear what that number indicated. But I guess if you want to look at maybe a mature comp, you could use Chipotle. That's obviously an aggressive way to look at it, but that's potentially what the economics of a place like this could look like. And if I'm not mistaken, I haven't looked at Chipotle in a while, but they are owner operators, right? Same model, yeah. Yeah. So not franchising model. And then they ended the year with 150 locations. That was up 26% year over year. They have been expanding locations pretty fast.

Goals to get a thousand, right? Or am I just stealing that from you? It's a thousand. They said they can see a path to a thousand by the end of the decade. And they said that they're trying to hit 35 plus new store openings this year, which would still be, I believe, right in that 20 to 30% growth range. So they're growing fast, losing a lot of money in the process, but customers seem to love the concept. Yeah. Ian, balance sheet, wrap things up. Yep. Simple balance sheet here. $472 million in cash, as you were talking about, Brett. They've got no debt. They do have leases, which this is just kind of an interesting note.

They don't actually show up on this balance sheet because most of the time we see leases on balance sheets, but it's not actually required until, at least from what I was reading, And it's not required until basically this fiscal year, the current 20 fiscal years beginning after December of 2021. And so they in all of their materials right now and in the 10K they just filed, it shows no debt. It shows no leases on the balance sheet. But because of new revenue or not revenue recognition, but because of new accounting rules, they're going to have to have those leases as a liability on the balance sheet, which will change going forward. In the next balance sheets we see, we'll start to see those leases on the balance sheet, which will change if you're doing any sort of net debt calculations and you're including leases in it. Then you'll see those numbers, but it shouldn't have any material impact on the business. Nothing is actually happening. It's just how it's being accounted for.

But that's something to keep in mind that the next time you see a balance sheet, all of a sudden, they'll probably have a bunch of debt on the balance sheet that wasn't there before. but, um, it's not actually nothing about the business is actually changing. And from what I could tell, it looks like they have lease obligations of about $370 million. And so even if you count leases as debt, it would still have about a hundred million dollar net cash position. Yeah. Do they, yeah, they're being a bit weird about this little off balance sheet leases and they didn't really make it clear about that operating lease stuff. I don't know. You have to piece stuff together, which is a bit like that is not a red flag, but it's a bit of a yellow flag for me when people aren't clear about their expense structures. And Ryan was talking about

it earlier with the restaurant level operating margin. This episode is brought to you by Ben and Jerry's. In the mood for some over-the-top indulgence, but not a fan of dairy? Well, then grab a spoon because you're in luck. Ben and Jerry's has taken their decadent Coors line non-dairy. How does boom chocolata made of mocha and caramel sound? Or bananas foster with cinnamon and almond toffee pieces. It's pure euphoria without a drop of dairy. Find your next favorite at BenJerry.com slash non-dairy. Well, let's move to anecdotal evidence.

Ian, I don't know, have you been there? Is it in Phoenix or no? You said maybe in San Francisco. Yeah, it's not in Phoenix. They're headquartered in LA actually, but I never went to one. I kind of drove by a couple in LA, but I'm planning to,

I'll be moving up to San Francisco soon and plan to go there. It's very popular with a lot of my new coworkers. So I'm sure I'm going to try it out. The stipend at the investment banks, right? Right. You say that as a joke, but a lot of, so my anecdotal evidence, it was that when I was in DC interning for a company that Ian was also

interning for, they gave like lunch checks out sometimes. As just like gifts to employees and a lot of the, whether that was like a DoorDash gift card or whatever, I would redeem it often on Sweetgreen and I really enjoyed it. It was like a very seamless process. How's the food though? Good? Yeah, I really liked the, I thought that was definitely one of the better salads I've ever had. And it was, it's very customizable and you can like, you can almost make it more of like a protein bowl, I guess. Because of the customization. yeah you can add like the quinoa and the sweet potatoes and avocados chicken all that stuff it doesn't have to be leafy greens and the uh but i know this isn't super pertinent to the investment thesis can be i don't know it can be it has to taste good but i was going there like if they're

they're anti-beef i saw that in their conference call they don't do beef at all yeah i guess i don't really remember yeah i don't really remember them having beef but the um does any salad have beef on it though i feel like no i mean like protein but if it was protein bowls you never had a pulled pork uh pork salad so healthy uh i went that's not beef either but i'd say i went there once a week it was very easy it's a good i don't know i like these fast casual healthy concepts as long as you have that lunch time and i mean let's go let's do it yeah and it wasn't i don't know it's like a nice if if i've had chipotle too many times it's good to like switch i guess is the return to the office kind of i feel like that's either bullish or bearish

depending on how you roll with that you know i say well i'd say people working in person this is probably helpful that's probably but i would feel like i know but is that happening i don't know oh that's the whole thing yeah i have no idea all right i mean mine i haven't had it but i downloaded the app kind of floated around on it seemed like a solid app workable i mean that's that's a big thing with restaurants yeah like some of their apps are really bad i don't know i looked at the prices maybe i just looked at a random restaurant in la thought the prices were a bit expensive and for the for like the stuff they're using because like salad ingredients are so darn cheap like i don't know where their expenses are coming from because

the stuff is first off it's not like a complex meal because you're just dumping ingredients in a bowl which i can do at home you just dump it in the bowl and boy like what is that you put on dressing i mean come on i mean avocados are expensive i guess i don't know what's what's the cost here what's the big cost well clearly there's some costs clearly they i mean whatever they're trying these automation things i i don't know what the costs are but like it seems like compared to something that's serving a lot of meat which is more expensive that just seems like i I don't know where their costs are coming from, but maybe it's because they do the local farms.

That's probably more expensive. Yeah, I agree. All right. You don't have any anecdotal. I haven't eaten it. I haven't eaten it. I just downloaded the app for any info there. Let's move future growth opportunities.

Ian, what do you got? So I'll start by saying what Ryan and Brett are going to talk about here, the most important future growth opportunities, but this is pretty interesting. So in January, they launched this thing called SweetPass, which for $10, you could get a $3 credit once each day for 30 days. So to do the quick math, there's potentially $90 of savings or of credits towards your salads for paying $10 per month if you bought a sweet green salad every single day for 30 days. It seems a little complicated. It's not that complicated, but it seems... I don't know.

These subscription programs with restaurants are always like sort of interesting to me, but they also always seem, uh, they fail. I don't know. Yeah. They don't work that often. And no one's really, it's like Panera's unlimited coffee for coffee is basically a cost, not costless, but really cheap. So they're trying to like, you have to make it a loss leader, right? Yeah. I, I just, I sometimes am reluctant with the, like the subscriptions. I like the loyalty. I think sweet green has a loyalty program too.

I like that more than subscriptions, but from a customer perspective, I don't know. That seems pretty compelling. I just don't know if I'll be eating a salad 30 times a month. Yeah. I mean, Chipotle. Now the thing is, yeah, the rewards programs are good. The thing with like the sweet pass is I was like, okay, if I'm going to have four or five salads a month, then it makes sense. right? The $10, uh, is worth it, right? Because you're making back 12 or 15 or whatever,

but it just, it seemed a little bit convoluted, right? Like it's not that convoluted, but it just seemed like, I don't know. I there's something, they seem to be playing around with this. And so my future growth opportunity is that they are doing this. There's, they should have more info in the Q1 call. And they kind of alluded to that because they just launched this in January, but they seem to be playing around with this model a little bit. So I think it's something to keep an eye on to see if there's whether it's this type of thing or whether they tweak it a little bit or something um somewhat related that you should keep an eye on subscription model with sweet green um as they go forward yeah it is it is interesting because i know sweet green

has sort of like a culty following so or culty customer base so maybe maybe it'll work for them my uh future growth opportunity is just and this is the most obvious one but dense store expansion So I put dense there for a reason. They highlighted this as sort of a core tenant of their expansion strategy. Basically, this just means that they're trying as they expanded to new cities, instead of like one store in every city, they'll do like five or six stores in a city. It's kind of like the fortressing strategy that Domino's has. And it's worked out really well for them. they highlighted this in their S1. They said, in the markets in which we operated at the beginning of fiscal year 2014, we more than tripled our restaurant count from fiscal year 2014 to fiscal year 2019. So they tripled their store count in the existing markets. And in parallel, our AUV, or our average unit volume, grew in those markets by approximately 85%. So they did not, adding a store right next to one of their other stores, did not cannibalize the customer sales.

So I think that that's ultimately going to be a big, a big way for them to grow moving forward. Obviously store expansion in general is kind of implied here at these prices. You have, you're, you're basically baking that in, but I do think there's a lot of other ways they can grow. And I know Brett's about to allude to one, but I'll even say this one because you're not going to say it. The Chipotle's equivalent, so the Sweetgreen's drive-thru. They copy that almost exactly, right? Yeah. I think that's… They even call it Sweetlane's, right? No, did they really?

I'll look it up. Sorry, keep going. I think that's one way to do it. Just adding new touch points, adding new easier ways to pick up, just kind of making the transaction process as seamless as possible. That's what Chipotle's done. it's worked out really well for them. Yeah. Sweet March 23rd, 2021. So you're right on the ball here. Sweetgreen to open its first ever sweet plane concept. So. All right. You want to talk about yours? Yeah. So mine, one of the keys for them to getting profitability is going

to be same store sales growth because right now none of their units are profitable. I mean, they claim they're profitable, but they're really not because you've, I mean, corporate expenses count i mean come on yes uh but the key then they need to have the solid same store sales growth i think an expansion into healthy smoothies and using that mark because you know most of the smoothies that you get at maybe java juice or something like that it's kind of just that juice and that ice and it's kind of it's not as good as maybe one you'd have at home but taking that same concept that they had as claiming you know like their their styles are healthy and stuff like that taking that with smoothies it mixed perfectly well with them and i'm using that as

example, but expanding their menu in general could be great, all these healthy stuff. But I think smoothies is a key one for one reasons. You drive higher spend per order. A wealthy consumer would probably be willing to spend 20 bucks plus on a bowl and a smoothie, and it wouldn't take that much more space at a restaurant. So I think you can add these to the restaurants. And then second, it's perfect for rapid digital orders like they're trying to do, because you can add that to your order. You can also just get that, and it would be super easy. I know people have probably been to Chipotle, skip the lines. You see that little table that they line stuff up on adding smoothies there would be really easy. And then third, it can help them more. I think they

really need to go into like they're, they're doing office stuff, but I think catering and stuff like that needs to be something they try to get into, especially if dense cities are one of their core markets. So I just think expanding the menu in general, because if you look at it, it's slightly bare bones. You have the customizable stuff, but if you're going to do catering and big office lunches you can't customize everyone's order that'd be impossible so you got to do more i think you'd have a little more variety with and smoothie seems like the best option yeah i do think smoothies are sort of the logical next step if you're listening and you work at sweet green you know take that into consideration yeah and it's the same ingredients really because it's just

fruit vegetables and i mean i don't know if i'll be throwing sweet potatoes my sweet potatoes but i mean a lot of the same ingredients you know right you know there are a lot of yeah berry overlap you could say and lettuce overlap right spinach yeah spinach sure i don't know about like iceberg lettuce but no no no yeah definitely not the iceberg and the smoothie that would taste that would taste strange uh okay we hit all future growth opportunities highlights and lowlights yeah i think they've got um a clear path to store growth i'm i like that all three founders are still involved and seem to be working well together and i also like their branding i think they've got some incredible branding and just um the everything's just real slick it works

real well together maybe they've spent too much money on that but maybe that's the benefit of having both a chief branding officer and a chief concept officer is that your your concept and your brand are just really clean and um i don't know it's it's a cool brand right everybody's like oh man this is cool and i like i've talked to people before who you can tell like oh yeah i'm so cool i just had a sweet green salad so they've like hit that well i think they've got the cool factor. Um, a couple of the low lights for me, and I know you guys are going to touch on this too, but margins, right. It's just unclear where margins can be and if this can really be that profitable. And then I'll also say prices, um, which is a little bit of a double-edged sword

right now. They are priced probably slightly higher than the average Chipotle meal, but kind of in that same ballpark, which is good if they can earn margins on that. But I, I think there's an opportunity for some other competitors to come in and, um, undercut them on prices. Like there's, it's different because it's not the same coolness factor and they probably don't have all the same commitments to, um, uh, like natural ingredients and all that type of stuff. Um, and organic ingredients that sweet green does, but there's a, there's a chain in Phoenix that's gotten pretty popular called salad and go, and you can get a salad there.

That's like a huge salad for, uh, like $6 and an iced coffee for a dollar. and breakfast burritos for $4 or something and just all sorts of stuff like that. And because like you were talking about, Brett, you can make a lot of this stuff at home for pretty cheap. And there's a lot of people who want to eat this out. But I wonder if there's a spot in this market where someone's going to slide in

and be able to undercut them by 25% or 30% on prices and be a little less cool, but attract some business because the pricing is just a little bit better. I mean, it's a big hangup here is their margins. Yeah. Yeah. And I, that, that's my low light or at least one of them.

And I'm looking at it right now on the S1. They have had operating losses every single year for the last eight years. So they, they haven't been profitable, profitable at any point. They kind of have the VC mindset. They have VC investors. So I don't know. They talk a lot about, I mean, this isn't real low lights, but they talk a lot about technology in their S1.

i think someone said that is a bit of a low light to me although i mean sass they call it i don't know if someone joked about this or actually someone actually say it but they joke that they're trying to make it salads as a service well which there it's a bit of a red flag i do i mean i i'm a big fan of making your operations at each restaurant as streamlined as possible and of technology helps with that um that's great but they made an acquisition recently which kind of threw me off i i don't like when companies that are kind of in growth mode expanding store count decide to like shell out what i'm not even sure what that wasn't too much money but i think there's low yeah but i mean it's a weird acquisition that doesn't i don't think it's gonna work yeah i

that just fell out of place for me highlights though my customer experience there was great And I really liked the salads. I think they found product market fit. And I do think there's a chance that this is quite literally like the Chipotle of salads. Also, the average unit volume and store growth have both been good over the last year or so. And they were able to weather COVID. For lowlights for me, I think it's hard to forecast what profitability is going to look like. And I'm also not in love with the management team. And it's nothing personal against them as much as I don't really like when there's three founders that are still big executive roles. It just doesn't feel public market ready, I guess, is what I'd say. Like, and maybe that's more of like a personal thing for me, but I like seeing like CEOs that have experience in the public markets and are kind of ready to take that challenge head on. Well, are they, I think a real concern, are they, are their priorities growing earnings per share and free cashflow per share?

I don't know. I don't know. From what I could tell, it didn't seem like it. i mean i would think so considering that they all own a huge chunk yeah maybe they're not being explicit about it but i mean they talk about the win-win-win like taking care of everyone kind of that mentality but some of the stuff i was like come on guys yeah that's right i think i think you're right that it's not like that doesn't seem to be their primary concern in the short term right like i think ultimately if you said are you trying over the long term to create

free cash flow for share for people you know for employer for your shareholders i think they would probably say yes right would be like you know they'd be in some trouble if they didn't say yes but i think in the short term they do say stuff like we're looking for high profile locations and we're getting this these iconic restaurants and we're opening in these new markets and it seems this isn't you know there is a little bit of hardware this isn't peter luger's or whatever those steakhouses are in new york city this is sweet green it's a it's a chain what do you mean iconic they said iconic restaurants yeah i'll have to find the exact quote is in the in the conference call but iconic i mean you want you i mean you obviously want things with high foot

traffic you want good locations yeah but i don't know if it needs to i don't know if anything will ever be iconic just because you serve salads well here's here's one uh you just mentioned focusing on short-term losses right i think there's a difference between a company that's focusing on well not focusing on is not making money currently classic examples walmart home depot didn't make money for years or generated cash for years but have good unit economics but i'm concerned that uh sweetgreen isn't focused on good unit economics which is a real that's the big hold up i mean well it's it's just kind of hard to see it i feel like If they're, if it is because they give their cash on cat,

their year two cash on cash return is pretty solid. Yeah. I guess we'll know when we see it, we'll see it maybe in the next few years. We'll see. Yeah. All right. Um, or Ian, anything flat? Yeah. Just to give that, to give that full quote, that was from their conference call on a Q4 and they said, um, sorry, the CEO said, Oh, I just lost it. There it is. He says, so I want to give a huge hat off to our real estate and development teams, really building a healthy pipeline of just iconic locations.

Ah, iconic. Well, that's not that bad. It's not. Yeah. We made it sound a little worse, but I think they do have an emphasis, which is part of building the brand. And this will get into my bowl case. But I think they do have an emphasis on like, we want it to be cool, right?

We want it to be a place. They're not trying to attract the people that I was describing before. that are looking for the deal. They're trying to attract people who want a high quality salad, who are eating a sweet green, who are probably young professionals and all that type of stuff.

And I think that for my bull case, I think over the next 10 years, that sweet green, and they arguably already are the clear market leader, but they continue to maintain that position as the clear market leader. They enter new markets, hit their thousand store goal.

And I think what it depends on though is getting Chipotle level multiples. Chipotle trades at about 55 times EBIT, which is fairly expensive, definitely above market multiples, and particularly expensive for a restaurant. I think for Sweetgreen to be a successful investment from here, you have to believe that they're going to have high multiples like that at maturity, which depends on how much they're continuing to grow. And it's really not at maturity, but how much they're continuing to grow 5 or 10 years from now. In my mind, that's what it really depends on. It's just the multiple. And if they can't demand that type of multiple because of bad margins or growth is slowing or things like that, and they're trading at 20 times EBIT, which would be something more akin to like a McDonald's, that would be concerning. So I think it's all about what multiple can command here. Yeah, makes sense. Makes sense. Ryan, bull case? Full case for me, I think you basically have to assume this is going to be the next Chipotle

and that this is a national chain with 1,000 plus stores by 2030. And you also have to assume they can get to 15% operating margins if those things happen. Do you think 15? Yeah, you got to get to at least low teens, maybe mid-teens percentage operating margin. For this to be a good investment, I think you got to get to those levels. Like a strong, yeah, yeah. And I think you're going to go through the math here, but there's obviously a lot of growth priced in.

So you got to be sure that this concept translates everywhere and that there isn't some replica, like some competitors that already have a foothold in some of those Western markets. So I'm thinking Washington, Oregon, Colorado. like we have a lot of that out here yeah i mean maybe it'll work though just because the brand's better yeah maybe the the bulk case i think you gotta assume a thousand stores and you gotta assume that it doesn't just work in the city centers but in the suburbs as well like much

probably you know it'll work uh and mine i mean same yeah i expect a thousand stores like both you guys said and you gotta have that with solid compro so if you expect auv which is restaurant per store revenue. And Ryan mentioned it's hovering, getting close to 3 million. If you get that back up to 4 million and you have a thousand stores, that's $4 billion in revenue. If you have 10% operating margins, that's $400 million in operating income. Compare that to the stock price, or excuse me, the market cap today at about 3 billion, probably price and share dilution of, I don't know, up to 4 billion at their granting pace. Depending on the multiple, 20 you get a double uh 30 times earnings you get a triple i mean but that's a double or triple

probably over 10 years so like 10 years so it's not that great so like those are pretty aggressive assumptions yeah i mean not i don't think four million auv and it's out i mean a thousand stores is aggressive i don't think four million in auv and 10 operating margins are aggressive no i think both those are potentially achievable but at a thousand stores here's a concern are they going to get the operating cash flow positive to be able to self-fund that i think that's something you have to expect as well all right let's move to bear cases um i bet we have similar ones here ian what's your margin compression yeah that's it yeah so my bear case is it does have that piece of it that margins are tight sweet green um just it's just the reality of

being in the restaurant business but i think the bigger problem here is that sweet green isn't unknown or boring at this point it's too cool and the valuation reflects high expectations and so there's a lot of these types of businesses that i really like um like five below or um like domino's pizza or chipotle that we're able to um like just build store count and hey we're gonna slow, you know, we're going to have some same store, uh, sales growth, but a lot of it is just, we've got a clear path to building out our store base. And you can kind of see the path towards returns with how kind of cool and hip sweet green is the valuation seems to be higher and probably because of where it's located too. And some of the major financial markets, um, there's just,

even if they execute on that store growth, um, plan, it doesn't necessarily, I don't see exactly where the returns are coming from. So I feel like there could be, you know, they could execute on this thousand stores, but it could be a lost decade where you're basically, you know, flat or, or trailing the market because of stock-based compensation and, uh, and just the high valuation that's sitting out today. Yeah. Right. Yeah. And I think it's currently still like the lockup agreement has not expired. So short float. Yeah. There isn't a whole lot of float that's traded out there. The short-term bear case is pretty simple to see. Yeah. The IPO lockup is going to happen. The stock's going to crash most likely. Yeah. I imagine that there's

going to be a lot of people selling at lockup expiration. I think, yeah, you're going to lose money in the short-term with multiple compression. There's no way this trades at 10 times sales it terminally like 8.8 but still yeah so um yeah that that's i guess the short-term concerns for me and then the long-term concerns is that they are quite spendy um the frugality hasn't seemed to be a like i signed up naomi osaka like i don't know like come on just like that that probably us a lot of money and what was the roi in that i don't think very high yeah i would say that maybe this isn't like a winner take maybe they aren't the winner that takes most of this market if that happens this isn't going to be a great investment you you really have to assume that they're going

to be the chipotle of this market and the size of the market is similar chipotle of lunch salads yeah yeah yeah that's that's probably expected yeah i mean if you're not it's not gonna happen i think that on part of the bear case concerns yeah margin also sbc labor i think is one of the big inputs to the margin i do not like businesses that have labor i don't know it's like uh it's like every business has labor no labor in the form of uh like like like labor like at a like at a restaurant or a manufacturing plant or something labor right now hands-on labor okay yeah that right now has a lot of pricing power with their wages which is great for the world but bad for you know companies like corporate margins yeah they better have pricing power

and i would be more given where their price point is now and given how like i'm more confident in chipotle having pricing power which they flexed and i've seen that the burritos around here i know it's different everyone from like seven bucks to 850 i'd be more confident in chipotle having pricing power than sweet green but i could be wrong and especially if we can try to be as expansive as they did just raise prices sweet green i know they said they were able to do whatever six percent i think but like labor inflation was like seven percent so exactly so right now it's basically a wash i don't know the labor there they weren't able to be profitable when labor was so cheap i mean maybe they were ended

up paying people well already but like uh i don't know that's it's just it's just a concern for me we just it's uncertainty it's a lot of uncertainty all right more or less interested ian let's start with you i am a little bit less interested i was hoping that this would be probably a little less expensive and it's something that i'm going to be keeping an eye on it's probably going on the watch list because i think i think they do have a path to a thousand stores and i think they've done a good job with the brand but there's just still enough uncertainty about margins particularly that i don't want to it's going on the watch list but it's it's um i'm i'm slightly less interested than i was before we did this okay right less interested uh pretty easy one here

i could see this having like a 70 to 80 percent drawdown this feels like we were looking at it a year ago like all every comp everything that's looked like this a year ago has drawn down 80 percent and now it's like we're getting a chance to look at another one dutch bros hasn't i don't think i don't know what it's up with these restaurants but people are so bullish on these things it doesn't make any sense to me the could be wrong let me look at the chart yeah dutch bros is up 40 from the ipo what is going on that's insane there are only six times sales but that means that's still expensive so the i guess the concern the thing that's if i'm gonna buy a restaurant stock. I'm not a fan of the restaurant industry being a shareholder in that industry.

And if it's going to happen, it's going to be because there's a company that trades at a really steep discount, except the restaurants are still going to generate profits. I have really no way to tell what restaurant's going to be the big restaurant in 10 years. Yeah. You want to get the one that's already the big restaurant that's had a slip up and is trading at a discount evaluation because you know the concept's proven yeah there's like there in certain industries you can kind of tell which companies are going to grow durably for the next 10 years the restaurants for me that is not an industry where i can predict that same with like sometimes like retail brands yeah i struggle with those yeah fashion brands come on we're not i mean that's it's always

inherently pretty cool yeah with food too it can get trendy you know some people like some stuff what diets are in fashion that's just random from whatever bloggers are popular if they pull if they pull a chipotle 2015 maybe and there's like whatever health cause maybe i'll jump in i read a good short report um who actually wants to come on and discuss sweet green so maybe we'll get him i forget his name i don't have twitter apologies you might be listening uh they said chipotle was profitable in 2004 so they were founded in what 96 90s yeah they were yeah 2004 right before the ipo they were they're already profitable like why isn't uh speaking profitable i guess at least to me less interested i mean come on i i do i agree with both you guys

i do sometimes think they they went public because they needed it yeah well they got the cash runaway that's a positive the cash runaway how much of that is from the ipo i know a lot i'm saying they have the cash runaway like they can't they have at their burn rate at least a few years three four years probably so i mean that's that's a positive but but i mean with unit economics improvement i'm just not interested um all right that's gonna do it next week is my turn we're gonna stick with restaurants the one that ian mentioned that is trading at a potentially better valuation. So it might be more fun. Portillo's. I was hoping you'd say that. Let's go. It'll be a good competition. Hot dogs. Total opposite of salads.

Also, I want to say that people, as a person, I want to embrace healthy eating, but as an investor, I know people are addicted to fat and sugar. So I like those types of investments better. Sugar, caffeine, tobacco, fat products, salt. That's way better. We're obviously a big ESG podcast here. from an investing perspective, it's just smarter. I mean, look at the stock charts of what we talked about Hershey on that round table. But yeah, Portillo's that falls into that category, Chicago hot dogs, I think. Oh, we'll investigate. All right. There's got to be some protein in there there. Yeah. I don't know what they say, whatever they say at Costco, it's all beef.

All right. So it's healthy, but that's going to do it for this episode. Give us a review on iTunes or not iTunes, Apple podcasts or Spotify. He hasn't been doing that. So great. We'll probably stop here shortly saying that every time, but that's going to do it. Let's get to the disclosure. It's not coming to my mind, but we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. Thank you.