The new Sweetgreen restaurant stock is better than the chipotle Mexican Grill in this key metric
Mexican Grill Chipotle was one of the most successful restaurant actions all time. Investors have loved its profitability over the years. And part of the reason it has been able to generate significant profit is that its Average Unit Volume (AUV) – or the average annual sales per location – is quite high.
Newly public catering company Soft green (NYSE: SG) has a higher AUV than Chipotle and maybe that’s why investors are so excited about this stock. And in this video from Motley Fool Pass behind the scenes, recorded on December 6, Fool contributor Jon Quast explains to fellow contributor Danny Vena that there is more to love with Sweetgreen than just his high AUV.
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Jon Quest: It is the SG stock symbol, Sweetgreen, founded in 2007, so a whole new concept of restaurant. It’s a restaurant chain focused on salad. It currently has 140 locations in 13 states. This includes Washington DC. IPO in November. And, I said at the start of the show, this is a company that hasn’t used the free PSPC money that is out there. Instead, going through the IPO process because of the valuation they could get, got a much higher valuation, may have raised the $ 333 million from the IPO’s proceeds somewhere. on the stock market getting that $ 3 billion valuation. But, down 50% since they went public.
It has dropped considerably from its peak. From the price of the IPO, it’s not that low. The IPO price is around $ 28, I think it’s around $ 25 now. But on the first day, it shot up to $ 50. Either way, it went public at 10 times the sales. Just to put it in perspective here, Chipotle Mexican Grill – this has always been a stock that people felt was overvalued – it has never traded more than eight times sales. This is Chipotle’s record in its 15 or 16 year history in the public market. Sweetgreen goes public at 10 times the sales valuation. It is an expensive stock.
I wanted to point out that this is a business that is owned exclusively by the company, so it does not do a franchise. It’s interesting here. They say they have 1.35 million active customers. I don’t know if I have ever seen a restaurant company talk about their customers in this way. And the reason they talk about it that way is because they have a really big digital business. Almost all of their orders arrive either through delivery partners like Uber and Grubhub, or they come natively through the Sweetgreen website. In fact, you need to create an account. They are able to follow it that way. An active customer is someone who has placed an order within the last 90 days. Very interesting. The way they talked about it shows what this business is for.
Danny Vena: One thing that I found very interesting about this, Jon, is that we were talking a bit about the coffee companies and Starbucks earlier. Starbucks has a very strong loyalty program and its customers consistently send their order through the app and then pick it up later. It seems very similar in this regard.
Quarter: The benefit of having a strong digital business is like what you say you can build operational efficiencies there and also all the marketing that you are able to do. If someone is an active customer and then drops your active customer count, you know that, and you can do something about it, you can take action. It’s really good and that’s why I think a lot of people are interested in Sweetgreen because he’s strong in the digital arena.
As for growth, 140 locations, they’re looking to double that over the next three to five years, which is why they’re going public, why they’re raising so much money. The unit economy here is quite interesting. Average investment, $ 1.2M to open a location. Average unit volume, they draw between 2.8 and 3 million dollars. In 2019, they had $ 3 million in higher average unit volume than Chipotle. During the pandemic there was a little bit of a blow, so there is a little below now, but trying to get back to that average unit volume of $ 3 million. The profit at the restaurant level between 18% and 20% is what they are aiming for at the restaurant level. This means that they have a second year cash-on-cash return of between 42% and 52%. Anyone who invests in real estate knows these are exceptional cash returns. This is why people are excited about Sweetgreen when you look at these budget units.
Now, the company’s mission is to build healthier communities by connecting people to real food. With the word “connecting” you can see that digital plays a big role in their strategy, the real food. It is a healthier fast food product. The mission statement is also general enough that you can see them opening up different restaurant concepts. I haven’t seen anything in the flyer that says, that’s the plan right now, just focusing on that Sweetgreen brand.
I wanted to point out that they are looking to expand right now, the majority of their locations are in Los Angeles, Boston, New York, DC, these are very large markets. These markets require higher unit volumes. There are a lot of people concentrated in the small geographic footprint and this lends itself to higher unit volumes.
A company we’ve seen like this is Shake Shack during its first IPO, very high average unit volumes because they are mainly located in Manhattan. As they began to diversify their business footprint away from New York City, these average unit volumes began to decline as they were no longer in such highly concentrated areas. It will be interesting to see with Sweetgreen, as it expands beyond these very dense urban areas into suburban areas, if those average unit volumes will hold up. Part of their growth thesis here is that they’re going to be able to generate those cash returns.
Danny Vena owns Chipotle Mexican Grill and Starbucks. Jon quest owns Starbucks. The Motley Fool owns and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Uber Technologies and the following options: $ 115 short calls in January 2022 on Starbucks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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