Rising Costs And Tariffs Will Constrain Margins Yet Spark Recovery

Key Takeaways

• Wage inflation, labor cost pressures, and high upfront capital expenditures may limit profitability improvements and constrain future earnings growth.
  
• Intensifying competition from at-home dining, delivery options, and market saturation could erode in-store traffic and reduce incremental revenue opportunities.
  
• Weak urban demand, rising costs, operational inconsistencies, and reliance on premium offerings pose risks to revenue growth, margins, and path to profitability amid economic uncertainty.

Catalysts

Operates fast food restaurants serving healthy food and beverages in the United States.

• Although Sweetgreen continues to benefit from growing consumer demand for health-focused, sustainable dining and is reporting robust digital customer acquisition through its revamped loyalty program, persistent wage inflation and rising labor costs could offset these gains, limiting improvements in net margins over the long term.
  
• While the company's increased menu innovation pipeline and culturally relevant collaborations have driven higher ticket averages and strengthened customer engagement, intensifying at-home dining options and delivery technology may erode in-store traffic and reduce future revenue growth opportunities.
  
• Despite leveraging automation with its Infinite Kitchen format to drive efficiencies and scale, continued high up-front capital expenditures, especially with the added impacts of tariffs on equipment and build-out costs, may constrain earnings growth and delay meaningful improvements in profitability.
  
• As Sweetgreen expands into new metropolitan markets to capture the urban, convenience-oriented segment, economic strain among core customer demographics and greater market saturation among younger, urban professionals could reduce the incremental revenue that can be achieved from new store openings.
  
• While the company's digital and off-premises channels continue to outperform, regulatory risks around packaging waste and supply chain disruptions from geopolitical or climate volatility present ongoing threats to food and packaging costs, posing a risk to both gross margin stability and long-term earnings predictability.

Sweetgreen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sweetgreen compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sweetgreen's revenue will grow by 15.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Sweetgreen will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Sweetgreen's profit margin will increase from -13.0% to the average US Hospitality industry of 8.1% in 3 years.
• If Sweetgreen's profit margin were to converge on the industry average, you could expect earnings to reach $86.5 million (and earnings per share of $0.68) by about August 2028, up from $-89.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, up from -16.2x today. This future PE is greater than the current PE for the US Hospitality industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 3.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.

Sweetgreen Future Earnings Per Share Growth

Risks

• Sweetgreen reported a 3.1% decline in same-store sales for the first quarter and noted that April saw a mid-single-digit decline, signaling softening consumer sentiment and lower transaction frequency, particularly in key urban markets like New York, Boston, and Los Angeles, which could negatively impact future revenue growth.
  
• The company acknowledged rising build-out costs, driven by tariffs on components and packaging sourced from China, with projected impacts of about 10% per new unit and additional cost pressures on Infinite Kitchen installations, which could compress net margins as Sweetgreen pursues rapid expansion.
  
• Management highlighted persistent operational inconsistencies in service, speed, and portioning in legacy and high-volume markets, which create risk to maintaining guest satisfaction and may limit Sweetgreen's ability to achieve sustained same-store sales growth and effective cost leverage, affecting overall earnings.
  
• The company continues to operate at a net loss, with a $25 million net loss in the first quarter despite growing revenue, raising questions about the timeline for achieving durable profitability, especially if ongoing capital expenditures and elevated G&A costs are not offset by sufficient margin improvements.
  
• Sweetgreen's reliance on premium and innovative menu offerings faces long-term risks from changing consumer spending patterns, with management themselves citing broader economic uncertainty, value perception concerns, and reduced discretionary spending that could challenge transaction volumes and revenue if economic conditions remain pressured.

Valuation

• The assumed bearish price target for Sweetgreen is $15.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sweetgreen's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $86.5 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $12.32, the bearish analyst price target of $15.0 is 17.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.