Sweetgreen: Can This Salad Chain Grow Into a Long-Term Compounder?​

Since its initial public offering in November 2021, Sweetgreen (NYSE: SG) has taken its investors on a wild ride.

In the first year of trading, shares tanked 74%. They then proceeded to skyrocket 236% until late November 2024. After that point, the stock cratered, and it currently trades 85% below its all-time high (as of Jan. 16). This is a lot for investors to digest.

Maybe there are better days ahead. Can this salad restaurant chain grow into a long-term compounder?

Image source: Getty Images.

Carving out its corner of the fast-casual space

The restaurant sector is incredibly competitive. There are low barriers to entry, customers have no switching costs, margins are thin, and tastes are always evolving. This is why Sweetgreen deserves credit for successfully carving out a niche in the industry, with its focus on healthy salads and bowls.

The business might draw growth-minded investors because it's expanding at a brisk pace. After the company opened 25 net new stores in fiscal 2024, the outlook called for 37 net new locations in fiscal 2025 and 15 to 20 in fiscal 2026. If the sizable openings keep up, it means there is potential for much higher revenue down the line.

Sweetgreen has leaned into technology to supercharge its operations, most notably with its Infinite Kitchen robotic machine that can automatically prepare customer orders. Adding this concept to more stores is supposed to boost throughput, support labor during peak times, and drive operational efficiencies.

Macro conditions are having a negative impact

Investors might be confused at the broader macro picture. On the one hand, U.S. GDP grew by a healthy 4.3% in Q3. On the other hand, consumers are tightening their purse strings. And restaurants such as Sweetgreen are feeling the pain.

During the third quarter (ended Sept. 28), the company reported declining foot traffic of 11.7%. This resulted in same-store sales (SSS) falling by a troubling 9.5%. Management's forecast is for SSS to drop between 7.7% and 8.5% for fiscal 2025. This is a major red flag for any retail-based business. And it clearly demonstrates how economically sensitive demand can be for Sweetgreen's pricey offerings.

With a relatively small footprint of 266 stores, I'd argue that Sweetgreen hasn't built up enough scale to command strong brand recognition. Additionally, its current size doesn't afford it a cost advantage, which would allow it to better spread out its various expenses over a bigger store base. This is evident in Sweetgreen's significant ongoing net losses.

Understanding these unfavorable sales and earnings trends will make investors question if Sweetgreen can be successful over the long term. Its business model is showing signs of weakness. Major fundamental improvements must be made before the company can prove it has what it takes to be a compounding machine.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool recommends Sweetgreen. The Motley Fool has a disclosure policy.