RESTAURANT INSIGHTS | SG, BYND Delays 10k, BLMN

Challenges Ahead: Navigating Sweetgreen's Hurdles in Achieving Sustained Growth and Profitability

Despite Sweetgreen's earnings announcement of exceeding expectations in the fourth quarter, which was driven by strategic initiatives and significant pricing adjustments, our outlook on the stock remains unchanged and tilted towards skepticism. Our apprehensions center on several key areas:

Operational and Scaling Challenges: Scaling up, especially with innovative initiatives like the Infinite Kitchen, brings about operational challenges. The high upfront costs, potential execution risks, and the time required to achieve operational efficiencies could weigh on profitability. Moreover, the expansion into new markets and the introduction of new menu items, while strategic, entail risks associated with customer acceptance and market competition. There's also the added complexity of managing supply chain sustainability and ingredient sourcing at a larger scale, which could impact margins.

Financial Performance Under Pressure: Despite showing revenue growth, Sweetgreen's path to profitability, particularly in terms of adjusted EBITDA, remains a concern. The company has reported losses, and the journey towards sustaining profitability could be longer and more arduous than anticipated. This situation is exacerbated by ongoing technological investments, new store openings, and marketing efforts to build brand awareness and customer loyalty. The financial strain from these investments and the competitive landscape of the fast-casual dining sector could potentially dampen investor enthusiasm.

Market and Competitive Risks: Sweetgreen operates in the highly competitive fast-casual restaurant industry, where consumer preferences are constantly evolving and competition is fierce. The company's focus on healthy, sustainable eating aligns with current trends, but maintaining differentiation as competitors also innovate on menu and sustainability fronts poses a challenge. Additionally, economic downturns or shifts in consumer spending towards more budget-friendly dining options could impact Sweetgreen's sales. The reliance on digital sales channels and the performance of loyalty programs like Sweetpass also introduce uncertainties, particularly if technological advancements do not yield the expected increases in customer engagement or transaction volumes.

Q4 financial highlights include:

• Adjusted EBITDA of ($1.8M), against FactSet's expectation of ($3.9M).
• Revenue reached $153.0M, surpassing FactSet's forecast of $152.0M.
• EPS was ($0.24), compared to FactSet's ($0.23) prediction.
• Comparable store sales growth stood at 6%, exceeding FactSet's estimate of 4%, including a 5% benefit from menu price increases and a 1% benefit from changes in the product mix.
• Sweetgreen opened 35 new restaurants in 2023, increasing the total to 221, and plans to open 23-27 more in 2024, including several featuring the Infinite Kitchen concept.
• The introduction of protein plates and the potential rollout of caramelized garlic steak are aimed at broadening customer appeal and driving traffic.

In a test of two stores, the Infinite Kitchen has delivered operational benefits, including higher throughput and lower team member turnover, contributing to a more than 10% increase in average tickets in locations where it's implemented. The Infinite Kitchen is Sweetgreen's innovative approach to enhancing operational efficiency, accuracy, and customer experience within its restaurants. Here are the key details and benefits associated with the Infinite Kitchen, as highlighted during the earnings call:

The Concept and Technology of the IK

• The Infinite Kitchen is a cutting-edge, automated kitchen system designed to increase the throughput of meal preparation, improve order accuracy, and maintain consistency in portioning.
• It represents a significant leap in restaurant automation, integrating technology to streamline the food preparation process.

Operational Benefits Of The IK

• Higher Throughput: The system can handle approximately 500 bowls per hour, significantly increasing the potential volume of orders that can be processed.
• Order Accuracy and Consistency: By automating certain aspects of meal preparation, the Infinite Kitchen ensures that orders are prepared accurately and consistently, enhancing the customer experience.
• Lower Team Member Turnover: The automation and efficiency provided by the Infinite Kitchen have led to substantially lower team member turnover rates, reducing the costs and disruptions associated with staff changes.
• Average Ticket Increase: Locations with an Infinite Kitchen have seen the average ticket price more than 10% higher than their respective markets, indicating potential for increased revenue per transaction.

Financial Implications Of The IK

• Cost: The current incremental cost for implementing an Infinite Kitchen in a new restaurant buildout is between $450,000 and $550,000. Sweetgreen anticipates that these costs will decrease over time as the technology scales and efficiencies are realized.
• Margin Improvement: Sweetgreen has observed that restaurants equipped with the Infinite Kitchen deliver margins well ahead of internal projections. Specifically, they have indicated a clear path to 20%-plus four-wall margins with their current operating model. They believe restaurants with the Infinite Kitchen will accretive to restaurant-level sales and margins.

Deployment Strategy

• Sweetgreen has opened its second Infinite Kitchen in Huntington Beach following the introduction of this concept. The company is pleased with the operational and financial benefits realized so far.
• The plan includes expanding the presence of Infinite Kitchens in new and existing locations, emphasizing retrofitting high-demand urban restaurants, and can benefit significantly from increased throughput and efficiency.

For Q1 2024, Sweetgreen has provided the following guidance:

• Adjusted EBITDA between ($4M) and ($2M), against FactSet's forecast of ($5.9M).
• Revenue is projected to be between $150-154M, surpassing FactSet's expectation of $147.8M.
• Same-store sales change of approximately 3%.
• Restaurant-Level Profit Margin of 16%-17%.
• FY 2024 guidance includes:
• Adjusted EBITDA between $8M and $15M, compared to FactSet's consensus of $9.5M.
• Revenue is forecasted to be between $655M and $670M, closely aligned with FactSet's estimate of $661.5M.
• Same-store sales change projected between 3-5%.
• Restaurant-Level Profit Margin is expected to be between 18.0%-19.5%.

Several key themes emerged from the Q&A session of Sweetgreen's call:

Infinite Kitchen Deployment and Impact: The Infinite Kitchen (IK) was a significant focus, with questions around its cost, the impact on margins, and plans for future rollout (see above)

Financial Performance and Guidance: Sweetgreen expressed optimism about achieving adjusted EBITDA profitability in 2024, highlighting aggressive growth and margin expansion plans. We doubt they can hit these as they have never hit annual guidance as a public company.

Menu Innovation and Customer Reach: Introducing protein plates and testing new items like caramelized garlic steak were discussed as strategies to broaden Sweetgreen's appeal beyond its traditional salad offerings. These innovations aim to attract a wider audience and drive traffic, especially during dinner day. The company mentioned the positive reception of these new offerings and their potential impact on expanding customer reach.

Strategic Priorities and Growth Plans: Sweetgreen's strategic priorities include building the brand through product and guest experience innovation, expanding its physical footprint, and leveraging technology for operational efficiency. The company plans to open new restaurants in new markets and accelerate unit growth in 2025. Sweetgreen aims to continue driving margin expansion through operational improvements and strategic initiatives like Sweetpass and the Infinite Kitchen.

Sweetpass Program Optimization: Discussion around the Sweetpass loyalty program focused on its current performance and future potential. Sweetgreen acknowledged the program hasn't yet significantly impacted transactions as anticipated but sees considerable upside. The company plans to iterate and improve Sweetpass to increase transactions and customer acquisition.

Operational Improvements and Leadership: Questions were raised about Sweetgreen's operational strategies and the recent hiring of a new Chief Operating Officer. The company's focus on driving transaction growth through significant operations and customer experiences, reaccelerating the store opening pipeline, and driving down capital expenditure on new stores were highlighted as crucial operational priorities.

Decoding the Delay: Unpacking Beyond Meat's Postponed 10-K Filing and Its Market Implications

Today, Beyond Meat has conveyed a problem in its operational controls. The firm acknowledges a snag in dispatching its Annual Report on Form 10-K for the fiscal year concluded in 2023. Citing "technical difficulties in assembling the submission," Beyond Meat has been compelled to defer its filing, originally due by the close of February 2024, with a revised target set for March 15th.

This unforeseen deferral spawns a series of probing inquiries. Notably, the absence of forewarning during their earnings dialogue on February 27th raises eyebrows. The impediments in marshaling the report may well suggest deeper-rooted administrative quandaries, veiling perhaps a tumultuous fiscal journey through 2023 more so than previously surmised.

In the preceding month, Beyond Meat's equity valuation experienced a buoyant surge, escalating by 60%, fueled by burgeoning optimism that its financial abyss was not as imminent as feared. With the latest earnings showcase and a narrative of sales momentum that surpassed expectations, the firm aimed to solidify investor confidence despite issuing a fraught outlook for 2024. Yet, this hiccup in filing punctuates a spell of uncertainty, prolonging market suspense for an additional fortnight.

The forthcoming interval is critical for Beyond Meat. The optimal scenario would see the company dispense its 10-K report imminently, accompanied by commentary that could mollify stakeholders. Conversely, a revelation of more profound tribulations within the report could incite severe market backlash. The essence of Beyond Meat's market stature is inextricably linked to its ability to articulate a convincing narrative of fiscal solidity and operational agility.