Sweetgreen shares rose on the strong outlook. Is it too late to buy the stock?

Actions of Sweetgreen (SG 1.63%) rose more than 33% after the restaurant operator raised its outlook following strong second-quarter results. The stock has now tripled this year.

Already one of the hottest stocks on the market, Sweetgreen may seem like a missed opportunity to anyone who sat on the sidelines during its post-earnings rally. But let’s take a closer look at the company’s most recent quarter and outlook

Increased perspective

In the second quarter, Sweetgreen’s revenue rose 21% to $184.6 million. Same-store sales rose 9%, with price increases contributing 5%, while traffic and a favorable product mix accounted for the remaining 4% growth.

The company credited its expanding menu as the main reason for its strong sales results. The new Caramelized Garlic Steak, for example, has become a hit with customers.

All in all, Sweetgreen reported a loss of $0.36 per share, an improvement from the $0.55 loss per share reported a year ago. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $3.3 million to $12.4 million over the same period.

Labor costs as a percentage of sales fell two percentage points to 27%, contributing to a restaurant-wide margin of 22%, up from 20% a year ago. This is an important metric in the restaurant industry because it tells investors how profitable locations are before adding in corporate costs.

The company opened four new locations in the quarter and 10 in the first six months of the year.

With these latest results, Sweetgreen raised its guidance for the full year.

Data source: Sweetgreen.

Sweetgreen’s biggest opportunities

The biggest opportunity for Sweetgreen is its continued expansion. At the end of the second quarter, it operated just 231 locations in 20 states and Washington, DC. When it went public in late 2021, it talked about doubling its store count, which was then at 140 locations, over the next three to five years. He is currently on pace to achieve this goal.

However, the concept should be able to support a much larger footprint. By comparison, Chipotle Mexican Grill has more than 3,500 locations and will open more this year (between 285 and 315) than Sweetgreen currently has in total restaurants. While it may never reach the heights of Chipotle, there is a lot of potential for growth from new restaurant openings over the next decade.

Growth in average unit volumes (AUVs), which is the average annual sales value for a single restaurant, and restaurant-level margins are two other important opportunities. Between 2014 and 2019, Sweetgreen was able to nearly double its AUV from $1.6 million to $3 million. AUVs dipped to $2.2 million during parts of the pandemic and have since climbed back to $2.9 million. With menu innovation and constant price increases, there’s no reason why the company can’t continue to increase this value in the years to come.

Meanwhile, Sweetgreen’s restaurant-wide margin is solid but still lags Chipotle’s, which ran about 25% in Q3. As the company gains scale and improves purchasing power, there should be solid room to improve that number as well.

Image source: Getty Images.

Do you still have the stock here?

Valuing restaurant concepts with long new store growth runways ahead of them can be challenging, and traditional metrics such as the price-to-earnings (P/E) ratio often do not reflect the potential of a growth-oriented restaurant stock. Because of this, I like to see where the company’s sales could be in five years.

Although management previously set an ambitious goal of reaching 1,000 locations by 2030, Sweetgreen has been more conservative with its new store openings over the past two years. That said, it’s on track to double its store count in about four years. Keeping this pace going, the company could reasonably have 500 locations in the next five years.

Meanwhile, modest annual same-store sales growth of 3% over this period would bring the company’s AUV to about $3.4 million. With 500 locations at the end of 2029, that means an estimated $1.7 billion in revenue for the company.

Before the stock’s subsequent increase in earnings, Sweetgreen was trading at 4.5 times sales, close to the average it considers a publicly traded company. Applying that multiple to the $1.7 billion revenue forecast (and assuming no change in share count), the stock could climb to more than $65 over the next five years. That’s enough to easily beat the broad market. Of course, the company could see actual results go up or down, but the estimate gives you an idea of ​​the growth potential the stock can offer.

However, during this time, Sweetgreen will need to strengthen its profitability and expand its footprint without affecting same-store sales. To support these efforts, the company enjoys the benefits of a strong cash and debt-free position.

The growth potential for Sweetgreen is attractive, but this is still a relatively small chain in the early stages of its growth history. Anyone buying the stock today needs to be patient as management figures out what level of expansion is profitable and sustainable.