Sweetgreen Q4 Earnings: Throwing In The Towel For Now (NYSE:SG)

Overview

As far as I can tell, Sweetgreen (NYSE:SG) stock price has been adjusted down because the resumption of office workers has not resulted in a commensurate increase in store traffic and sales. The stock price has taken a further beating as a result of management’s lowered projections for FY23 unit openings, and it remains to be seen if growth will resume in FY24 and beyond. The emphasis on quality rather than quantity or short-term gain is, however, promising. Possible avenues for expansion of the company’s market presence include the loyalty programs and the introduction of beverages via subscription. However, my current stance is that investors may need to adjust their expectations downward because growth in the years ahead is likely to be slower than in the past. In the recent past, I’ve given a buy rating to SG stock but no longer advocate investing in SG for now.

Results

Despite a downward revision following the 3Q22 results release on November 8th, reported 4Q22 results still fell short of expectations. Revenue of $118 million compared to $96 million a year ago; comps in 4Q22 were 2% higher than 2019 (pre-covid) levels and sequential growth from 3Q22 was flat. Profit margins were also low. This quarter’s store margins of 10.8% were significantly lower than the 16.1% and 12.9% reported in 3Q22 and 4Q21, respectively.

Urban traffic

The return of office workers has been anticipated for a couple of months, or even before the covid fear was over, with the hope that this will improve urban traffic for SG. This is increasingly unlikely to be the case. Additionally, I’ve accepted the possibility that SG’s weekday traffic levels will never again reach their pre-recession highs. It’s a shame this has to be the case, but reality sets in. The increased foot traffic seen in cities and the return of workers to the office were not fully translating into an increase in customers at the store level. The downward adjustment in the stock price reflects investors’ reassessment of growth and potential earnings, and I believe that this is the case, suggesting that shorter work weeks may be the new way to frame SG.

Unit growth

Management’s reduction of expected FY23 unit openings from 45-50 units to a range of 30-35 units was probably the dealbreaker for the stock. Management also expects FY23 growth will be the trough, and believe it will pick up again in FY24 and beyond. Management seems optimistic, but I’m starting to be more skeptical. This is a major growth driver for SG in terms of business and share price. I would be monitoring this like a hawk to moving forward.

As for the current portfolio of stores, 3 stores were recently closed from the current portfolio. I fully endorse management’s decision to prioritize quality over quantity going forward, as doing so will yield a higher AUV, RLM, and improved cash flow profile. It is certainly encouraging that management is placing a focus on near-term profits. All of these, I believe, suggest that future growth will be slower than in the past, and that investors’ expectations should be lowered accordingly.

Subscription

In April, loyalty programs (subscription and free) will go live across the country, and I can’t wait to see what new products are developed to satisfy consumers preferences. Additionally, management is fully dedicated to a significantly more craveable menu and meeting the needs of the customers. For instance, there are many popular foods and drinks that aren’t offered at SG, including sweets, healthy sodas, and fatty, fatty foods like crispy chicken smothered in a rich, creamy dressing. Brands today, in my opinion, need to be adaptable enough to meet the preferences of what consumers actually enjoy eating, which means appealing to a wide variety of people. To that end, I think this would be useful for the SG brand as it allows SG to extend their product offerings to include beverages, which is a huge market potential.

Digital sales

Overall, the proportion of digital sales in 4Q22 was 61%, which was relatively stable compared to 3Q22’s 60% but down from 2Q22’s 62% and 1Q22’s 66%. The percentage of owned digital revenue has been roughly 40% for the past three quarters, holding steady after falling from 43% in 1Q22/4Q21. Success stories like Sweetlane in Illinois, where 75% of customers used the drive-thru and spent 20% more than the Chicago market average, and the digital ‘pick-up only’ kitchen in Washington, DC, where customers came more often and had no complaints about the elimination of the front line, bode well for future efforts to reduce build-out costs. In the second half of FY23, two locations will pilot an automated “Infinite Kitchen” format, which I believe should be quicker, more consistent, and more efficient than current methods while also resulting in significant labor savings.

Conclusion

While SG’s revenue and comps showed some improvement in the 4Q22, the reported results still fell short of expectations. The return of office workers did not fully translate into increased foot traffic and customers at the store level, which I believe has led to a downward adjustment in the stock price. Management’s reduction of expected unit openings for FY23 was also not helpful for the stock and it remains to be seen whether growth will pick up again in FY24 and beyond. However, the focus on prioritizing quality over quantity and near-term profits is encouraging. The loyalty programs and the potential for extending product offerings to include beverages through subscriptions could provide growth opportunities for the brand. Overall, investors’ expectations may need to be lowered as future growth is likely to be slower than in the past. I am not recommending to buy anymore.