Sweetgreen: An 'unforgiving' reaction from Wall Street after big Q2 earnings miss
Shares are down 71% since going public in November of 2021.
It's been a rough stretch of nearly 24 hours for Sweetgreen.
The fast casual salad chain disappointed Wall Street by reporting a Q2 loss and missed forecasts on both the sales and earnings fronts. The stock, since the Q2 results were revealed on Thursday after market close, has plunged nearly 13% as of early Friday. Shares were slowly recovering as of publication time, down nearly 11%.
But the company's forecast that it will turn profitable by next year didn't seem to help much.
The details: Last quarter, adjusted earnings per share came in at a loss of $0.24, lower than analyst estimates of a loss of $0.18. Revenue was short of estimates too, $152.5 million, up 22% year-over-year, but lower than expectations of $156.4 million. Same-store sales increased 3%, boosted by higher menu prices, but short of estimates of a 4.10% increase.
The company saw a net loss of $27.3 million, but did post an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $3.3 million, compared to a $7.8 million loss in Q2 2022 (making Q2, by some measures, the first profitable quarter for the company).
On the plus side: Margins were stronger at the company's restaurants and wage pressures eased along with supply chain improvements, per TD Cowen analyst Andrew Charles, who has a Market Perform rating on shares.
Meanwhile, Sweetgreen updated its 2023 guidance. It now expects restaurant profit margins to be between 16 to 18%, compared with guidance set in Q1 of 15% to 17% — and adjusted EBITDA between a $10 million loss and breakeven. That's up from Q1, when the company said it expected losses in the $3 million to $13 million rage.
Sweetgreen, which has seen its shares plunge around 70% since going public in November of 2021, is now aiming to win over Wall Street. (There are currently five buys, four holds and one sell on SG's stock.)
An 'unforgiving' reaction to the same-store sales miss
Citi analyst Jon Tower, who has a neutral rating on shares, anticipated this stock reaction in a note to clients.
TD Cowen analyst Charles said his firm is "concerned about the organic path to profitability in a challenging external environment that we expect to weigh on 2023 same store sales and long-term development."
On a bullish note, JPMorgan analyst John Ivankoe, who has an Overweight rating, said to clients: "We still maintain enthusiasm around a perceived ability to leverage an already-built technology platform, enjoy multi-market expansion to eagerly awaiting consumers, and benefit from urban recovery to provide a jolt to the legacy store base." (Sweetgreen's first location was in Washington, D.C.)
"For a small cap company with a choppy post-IPO track record and shares almost double off recent lows, we expect the immediate reaction to the second quarter print will be unforgiving for a same-store sales miss (despite increases in 2023 store margin/EBITDA guidance) with some room to bleed down," Ivankoe said.
Last quarter, sales in urban markets were up high single digits, while suburban markets lagged to roughly flat and negative.
Some more positives: CEO Jonathan Neman said on a call with investors that the company's new loyalty program, Sweetpass, is expected to have "a significant impact on unit economics." Menu innovation is also expected to be a positive.
Christopher Carril of RBC Capital (Outperform rating) seemed to agree: "Near-term, we expect continuing sales benefit from menu innovation, including Sweetgreen's summer menu (launched June 13th), add-ons (drinks, desserts) and new warm offerings later in the year," he said in a note.
Neman and some analysts, meanwhile, were optimistic on new tech, particularly robotics.
The Infinite Kitchen, its first automated restaurant that opened in May, saw a restaurant-level margin of 26% in June, more than a typical restaurant opening in its first month, with "significantly faster throughput."
Neman added the team does "not plan to disclose this metric quarterly," though.
Neman said, "Today, the Sweetgreen Infinite Kitchen has the capability to produce between 400 and 500 bowls, plates and sides an hour, 50% more than a restaurant's front and digital make line combined." It also hired one-third the workers of a typical store with similar volume.
Other news: Sweetgreen added 10 new restaurants last quarter and plans to open 30-35 in total this year.
That includes another Infinite Kitchen location in Huntington Beach, Calif., set to open by the end of the year.
William Blair analyst Sharon Zackfia (Outperform rating) was optimistic about it in a note to clients. She said, "We believe it will likely prove transformational for Sweetgreen's future."
The bottom line: Given the performance of the stock, the robots have their work cut out for them.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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