What transpired
Today saw a recovery in Sweetgreen's stock price.
The stocks of fast-food salad chain restaurant Sweetgreen (SG, 1.14%) experienced a notable drop of around 9% on Friday. However, the stocks have recovered slightly, with an increase of 8.8% as of 1 p.m. ET, on Monday.
The slide occurred after the company failed to meet Wall Street's expectations in terms of both revenue and earnings on Friday. Nonetheless, investment bank Piper Sandler upgraded the stock and enhanced its price target on Monday.
What exactly?
In a morning note broadcasted on StreetInsider.com, Piper Sandler analyst Brian Mullan upgraded the stock from 'neutral' to 'overweight' post the decline, and increased his price prediction for Sweetgreen by around 50%, setting it at $19 a share.
Mullan acknowledged the company's difficulties, such as flat unit volumes and a 1% decrease in foot traffic, along with a loss of $0.24 per share. Nevertheless, he contended that the price hikes have stabilized the company's profit margins and investors can anticipate a notable enhancement in the coming months.
What next?
Sweetgreen reported just mid-single-digit sales growth after the price increases, a per-share loss that was 50% higher than anticipated by Wall Street, and trailing free cash flow of negative $125 million. The only positive aspect for the company at present seems to be the prospect of improvement, but even that appears quite uncertain.
The company expects to generate sales of $575 million to $595 million this year, representing a 24% increase over 2022, despite just a 2% to 6% growth in same-store sales. This suggests strong growth in sales volume and potentially higher prices throughout the remainder of this year. Meanwhile, Sweetgreen predicts its restaurant-level profit margins to increase from approximately 15% in the last quarter to between 16% and 18% by the end of the year.
However, this is not sufficient to make the company profitable this year. Operating costs will consume all of Sweetgreen's gross profits if it achieves every goal it has set for itself this year. In fact, no analysts foresee the company becoming profitable before at least 2030.
Therefore, if you own Sweetgreen stocks, your best move after Monday's price surge might be to sell the stock.
Given the stock's sudden surge after Piper Sandler's positive outlook and price target increase, an investor might consider reallocating their funds into other opportunities with more certain profitability prospects, as analysts do not anticipate Sweetgreen becoming profitable before at least 2030. Furthermore, the company's high operating costs could potentially eat into its gross profits, even if it achieves its financial goals for this year.
