Sweetgreen's Challenges and Path to Potential Growth

Sweetgreen: Navigating Challenges, Charting Growth

Sweetgreen (SG -0.11%) has experienced a challenging 2025. The fast-casual salad chain's stock is down 72% year-to-date, with comparable-store sales declining, continued losses, and high prices seemingly deterring customers.

As evidenced by recent earnings reports, Sweetgreen has faced a consistent downward trend throughout the year.

However, beyond these immediate hurdles, Sweetgreen has the potential for significant expansion. With a current market capitalization of just $1 billion, reaching $10 billion seems achievable, particularly considering its past valuation of nearly $5 billion. Comparatively, similar restaurant growth stocks like Dutch Bros and Cava boast market caps of $10.7 billion and $7.6 billion, respectively.

Let's examine the factors that could contribute to a potential tenfold increase in the stock's value.

Addressing Short-Term Obstacles

Sweetgreen's performance in the first half of 2025 was impacted by challenging comparisons to its strong 2024 results and external events like the California wildfires, given Los Angeles's significance as a key market and the company's headquarters. In the second quarter, comparable sales decreased by 7.6% year-over-year, but this was compared to a 9.3% increase in the prior year, resulting in a net positive over two years. Additionally, the transition of its loyalty program and the discontinuation of the Sweetpass subscription program created a 250 basis-point headwind to same-store sales in the second quarter. This impact, however, is expected to be temporary.

Furthermore, the restaurant industry has experienced a broad slowdown, potentially due to consumer concerns about tariffs, inflation, a tightening job market, and recessionary fears. Even Chipotle reported declines in comparable sales during the first two quarters of the year, and Cava's growth has slowed down significantly.

These challenges appear to be transient and not structural. Sweetgreen management anticipates improved same-store sales in the second half of 2025 due to easier year-over-year comparisons. Their guidance projects flat comps in the second half, which, while not stellar, would still represent a marked improvement from the first half.

Sustained Customer Appeal

Sweetgreen's average unit volumes (AUVs), or average sales per restaurant, decreased slightly from $2.9 million to $2.8 million in the second quarter. Despite this dip, the AUV remains competitive compared to many established restaurant chains and aligns with industry leaders like Chipotle.

To stimulate growth, management is actively working to enhance the chain's value proposition. Key initiatives include increasing chicken and tofu portions by 25%, updating chicken and salmon recipes, and implementing changes to improve customers' perception of price and value. Early indications suggest a positive response to the chain's summer menu, potentially foreshadowing promising results for the third quarter. Consumer behavior suggests that customers are seeking both quality and affordability.

Extensive Growth Potential

Sweetgreen holds the position of the leading fast-casual salad chain, but it remains relatively small, operating around 260 locations as of the end of the second quarter. However, the company is aggressively expanding its footprint. Management plans to open 40 new locations this year and aims to grow the chain to at least 1,000 stores over the long term. This ambitious goal requires careful site selection and effective marketing strategies.

The company's robust AUVs suggest strong demand for its offerings, leaving ample opportunity for expansion within the U.S. and potentially even internationally. Further research into optimal location demographics and market penetration strategies would be beneficial.

The Transformative Potential of the Infinite Kitchen

Sweetgreen's Infinite Kitchen represents a significant differentiator, automating a large portion of the salad preparation process. This technology allows the chain to expedite order fulfillment, increase throughput, and reduce labor costs.

Management remains optimistic about the Infinite Kitchen's impact and is retrofitting more existing stores to incorporate the system. It will also be implemented in 20 of the 40 new stores slated to open this year. While the Infinite Kitchen increases the initial investment for new Sweetgreen locations and may contribute to short-term losses, its long-term financial and operational benefits are anticipated. This technology could provide a competitive edge in the fast-casual market.

In conclusion, Sweetgreen presents an attractive opportunity. The company has demonstrated demand for its products, but needs to execute its new loyalty program effectively, maintain reasonable prices, and expand the Infinite Kitchen's implementation. Success in these areas could unlock significant upside potential, potentially leading to substantial returns for current investors. Continuous monitoring of customer feedback and adaptation to market trends will be crucial for long-term success.