Sweetgreen (SG)

Casual salad chain Sweetgreen (NYSE:SG) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 5.4% year on year to $166.3 million. On the other hand, the company’s full-year revenue guidance of $750 million at the midpoint came in 1.8% below analysts’ estimates. Its GAAP loss of $0.21 per share was in line with analysts’ consensus estimates.

Company Overview

Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE:SG) is a casual quick service chain known for its healthy salads and bowls.

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Competitors in the casual quick service industry include Chipotle (NYSE:CMG), CAVA (NYSE:CAVA), Noodles & Company (NASDAQ:NDLS), and private companies such as Chopt Creative Salad and Just Salad.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $685.3 million in revenue over the past 12 months, Sweetgreen is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.

As you can see below, Sweetgreen grew its sales at an excellent 18.9% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Sweetgreen reported year-on-year revenue growth of 5.4%, and its $166.3 million of revenue exceeded Wall Street’s estimates by 0.9%.

Looking ahead, sell-side analysts expect revenue to grow 17% over the next 12 months, a slight deceleration versus the last five years. Despite the slowdown, this projection is admirable and indicates the market is forecasting success for its menu offerings.

Number of Restaurants

The number of dining locations a restaurant chain operates is a critical driver of how quickly company-level sales can grow.

Sweetgreen opened new restaurants at a rapid clip over the last two years, averaging 16.4% annual growth, much faster than the broader restaurant sector. This gives it a chance to scale into a mid-sized business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Note that Sweetgreen reports its restaurant count intermittently, so some data points are missing in the chart below.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Sweetgreen’s demand has been spectacular for a restaurant chain over the last two years. On average, the company has increased its same-store sales by an impressive 4.2% per year. This performance along with its meaningful buildout of new restaurants suggest it’s playing some aggressive offense.

In the latest quarter, Sweetgreen’s same-store sales fell by 3.1% year on year. This decline was a reversal from its historical levels.

Sweetgreen has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 19.5% gross margin over the last two years. Said differently, Sweetgreen had to pay a chunky $80.49 to its suppliers for every $100 in revenue.

Sweetgreen’s gross profit margin came in at 17.9% this quarter, in line with the same quarter last year. On a wider time horizon, Sweetgreen’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold

The restaurant business is tough to succeed in because of its unpredictability, whether it be employees not showing up for work, sudden changes in consumer preferences, or the cost of ingredients skyrocketing thanks to supply shortages.Sweetgreen has been a victim of these challenges over the last two years, and its high expenses have contributed to an average operating margin of negative 16.2%.

On the plus side, Sweetgreen’s operating margin rose by 4.3 percentage points over the last year, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

This quarter, Sweetgreen generated a negative 17.2% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Sweetgreen’s full-year earnings are still negative, it reduced its losses and improved its EPS by 16.8% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Sweetgreen reported EPS at negative $0.21, up from negative $0.23 in the same quarter last year. This print beat analysts’ estimates by 3.6%. Over the next 12 months, Wall Street expects Sweetgreen to improve its earnings losses. Analysts forecast its full-year EPS of negative $0.77 will advance to negative $0.56.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Over the last two years, Sweetgreen’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.7%, meaning it lit $7.69 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Sweetgreen’s margin dropped by 2.5 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.

Sweetgreen burned through $29.86 million of cash in Q1, equivalent to a negative 18% margin. The company’s cash burn was similar to its $9.98 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Sweetgreen’s five-year average ROIC was negative 44.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sweetgreen burned through $60.94 million of cash over the last year, and its $329.4 million of debt exceeds the $183.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Sweetgreen’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Sweetgreen until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Sweetgreen blew past analysts’ EBITDA expectations this quarter. We were also happy its same-store sales and revenue narrowly outperformed Wall Street’s estimates. On the other hand, it lowered its full-year revenue and EBITDA guidance. Overall, this was a weaker quarter. The stock traded down 9.6% to $16.43 immediately following the results.

Updated: May 15, 2025 at 10:33 PM EDT

Before deciding whether to buy Sweetgreen or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

To kick things off, its revenue growth was exceptional over the last five years. And while Sweetgreen’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its new restaurant openings have increased its brand equity.

Sweetgreen’s EV-to-EBITDA ratio based on the next 12 months is 43.3x. All that said, we’d hold off for now because its balance sheet concerns us. We think a potential buyer of the stock should wait until the company’s debt falls or its profits increase.

Wall Street analysts have a consensus one-year price target of $24.80 on the company (compared to the current share price of $15.29).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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