Baron Funds, an asset management firm, published its “Baron Small Cap Fund” fourth quarter 2021 investor letter – a copy of which can be downloaded here. A return of 4.69% was delivered by the fund’s institutional shares for the fourth quarter of 2021 and 15.84% for the year. This well exceeded the returns of the Russell 2000 Growth Index (the “Index”), which was flat in the fourth quarter and up 2.83% for the year. This was a quarter and a year where small-cap stocks did worse than large caps. The S&P 500 Index gained 11.03% in the quarter and 28.71% for the year. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
Baron Small Cap Fund, in its Q4 2021 investor letter, mentioned Sweetgreen, Inc. (NYSE: SG) and discussed its stance on the firm. Sweetgreen, Inc. is a Los Angeles, California-based restaurant company with a $2.9 billion market capitalization. SG delivered a 4.35% and it closed at $27.35 per share on February 11, 2022.
Here is what Baron Small Cap Fund has to say about Sweetgreen, Inc. in its Q4 2021 investor letter:
“This quarter we participated in the IPO of Sweetgreen. Sweetgreen is one of the fastest growing restaurant chains in the U.S. and sits at the intersection of health and wellness, plant-based food consumption, digital adoption, and purpose-driven brands. As of the third quarter of 2021, the company operated 140 restaurants in 13 states, with the goal of being as ubiquitous as traditional fast food.
Sweetgreen’s menu is designed to be a delicious, customizable, and convenient way to empower customers to make healthier choices for both lunch and dinner. They currently offer signature salads, warm bowls, and plates that are complemented by a seasonal menu that changes five times a year. Sourced from over 200 domestic food partners, Sweetgreen’s assortment of roughly 40 freshly prepared or cooked ingredients allows customers to create millions of unique, customized orders to accommodate almost any flavor profile or dietary preference and allows for high frequency of use. The company utilizes a multichannel approach with 68% of revenue via digital channels and 47% of revenue coming through their own App. This is one of the highest digital penetration rates among restaurant companies, which gives Sweetgreen a valuable data and customer relationship advantage relative to peers. Digital customers tend to come more often and spend 20% more on average. Also, this data helps assess market density and viable new store locations.
With just 140 restaurants in 13 states there is considerable whitespace for the company to expand and we believe the company can grow units at a 25% CAGR over the next five years as they enter new markets, densify existing regions, and introduce new restaurant formats such as drive-thru and pick-up only. Historically concentrated in large urban markets, Sweetgreen should benefit from a recovery in those markets as the effects of COVID recede, driving outsized same-store sales, and potentially over 40% revenue growth over the next two years. Sweetgreen has also been planning for future growth by intentionally building additional capacity in existing restaurants to handle more order volume without adding more costs or square footage. Unit economics are already strong with new restaurants expected to generate revenues of approximately $3 million, with a healthy restaurant-level profit margin of 18%-plus, and year two cash-on-cash returns of over 40%.
As we’ve seen with other category leaders such as Chipotle and Panera, leading chains can have thousands of units over time. Sweetgreen is currently the largest chain in salad, and we believe that the company’s strong brand, early investments in technology, and high-quality, founder-led management team could position it to have over 1,000 units in 10 years and generate revenues greater than $3 billion (from around $350 million today), which would result in a multi-fold increase from its current market capitalization.”
Photo by Louis Hansel on Unsplash
Our calculations show that Sweetgreen, Inc. (NYSE: SG) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.
Disclosure: None. This article is originally published at Insider Monkey.