Fast casual health food restaurant chain Sweetgreen Inc. (NYSE: SG) shares have had a healthy pullback towards its Q1 2024 earnings gap fill price level at $24.03. The company had a stellar first-quarter earnings report back on May 9, 2024 that launched its stock from $24.03 to a high of $36.72 afterward. Shares may have gotten ahead of themselves, but now they've pulled back to a very important support level. Investors who missed the earlier run-up are getting a second chance to partake in the company’s improved path to profitability ahead of its Q2 2024 earnings release due after the close on Aug. 8, 2024.
Sweetgreen competes in the consumer discretionary sector with rival fast-casual restaurants Chipotle Mexican Grill Inc. (NYSE: CMG), CAVA Group Inc. (NYSE: CAVA), El Pollo Loco Holdings Inc. (NASDAQ: LOCO).
Salad Chain Needed a Shot in the Arm
Sweetgreen was a struggling, fast-casual, health-oriented restaurant primarily selling market-fresh, hand-cut, locally sourced organic salads and bowls. They routinely stock nearly 50 ingredients to make their artisan salads. The company struggled with rising labor costs, which took up 29% of its total revenues. The appeal of the salad chain had a narrow audience, but things changed with the addition of steak to its menu.
During its testing phase in Boston, the Caramelized Garlic Steak quickly became a dinner-time favorite. In fact, 20% of all dinner orders included steak. The market test was an unbridled success as it started to roll out steak across all its restaurants.
Carnivores Take Notice of a Game Changer Addition to the Menu
This changed with the introduction of steak to its menus, which was a game-changer. Its tender cuts of grass-fed steak, expertly roasted and seasoned with a garlic spice blend in a finish of oils and herbs, was a major hit. Adding this beef protein option expanded its target audience. Carnivores took note as the protein options took a leap from Buffalo Chicken, BBQ Chicken, Hot Honey Chicken, Miso Glazed Salmon, and Fish Taco to include Caramelized Garlic Steak now. The fleet-wide steak addition was launched on May 7, 2024. The first quarter ended at the end of March 2024.
SG Stock Triggers a Second Bear Flag at the Gap Fill Level
The daily candlestick chart on SG illustrates a second bear flag pattern. The first bear flag breakdown formed when shares fell through the $29.02, selling off to $22.71 and closing at the post-earnings gap, filling price support at $24.20. SG rallied to $27.49 but fell below the $25.19 ascending lower trendline to retest the gap-fill support level at $23.03. This level is significant and needs to be held in order to stage a meaningful rally. The daily relative strength index (RSI) is attempting to bounce at the 37-band. If it can bounce through the 50-band, then a divergence bottom can form. Pullback support levels are at $24.03, $21.66, $18.77, and $17.26.
The Key Takeaways From Q1 2024 Earnings
On the surface, Sweetgreen's Q1 2024 earnings report didn't stand out as a barn burner. The company missed consensus EPS estimates by 5 cents with a loss of 23 cents. Revenues were robust, growing at 26.2% YoY to $157.85 million versus $152.02 million. The most impressive metric was the strong same-store sales (SSS) growth of 5% versus 3% prior guidance. This happened organically, even before the rollout of the Caramelized Garlic Steak.
Sweetgreen took a conservative in-line guidance stance with full-year 2024 revenues of $660 million to $675 million versus $666.85 million consensus estimates. However, this was raised from its previous forecast of $655 million to $675 million. SSS was also raised to 4% to 6% versus the previous guidance of 3% to 5%.
The Impact of the Steak with Start in Q2 2024
Remember that the first-quarter earnings report didn't include the impact of the Caramelized Garlic Steak's addition to the menu. In fact, the launch occurred on May 7, 2024, in the middle of the second quarter. The full impact of the steak's addition will be seen in Q3 2024.
During its steak testing in Boston, Massachusetts, nearly 1 in 5 dinners ordered was steak. The question is whether the steak was ordered instead of an existing salad option or if the steak bowl order came from a net new customer. Ideally, the steak should attract a wider audience rather than be a substitute for what an existing customer normally orders. This will be evident in the SSS metric.
AI and Robotic Automation Through Infinite Kitchens
In 2021, Sweetgreen acquired Spyce, a restaurant that uses automated robots designed by MIT engineers to prepare lunch bowls. This acquisition was seen as a stepping stone for future restaurant concepts leading up to its IPO.
Sweetgreen launched its first Infinite Kitchen in Naperville, Illinois, on May 10, 2024. It’s the world’s first robot-driven Sweetgreen restaurant. Customers come in and order their salads at the counter on a tablet and then watch as the salad gets constructed automatically in an assembly-like fashion on a conveyor belt. The apparatus is a large metal wall outfitted with glass tubes that store all its ingredients. The machines seamlessly build the salads to order, going from one station to the next as each ingredient is added on through to a human who tops it off with the finishes and presents for pickup.
Rise of the Machines: 7 New Infinite Kitchens to Open in 2024
By the end of Q1 2024, the two Infinite Kitchens located in a suburban area are averaging a $2.6 million annual revenue run rate. The average Q1 margin was 28%, a 10-point improvement versus the human fleet average. The robots are quicker, more accurate, and more consistent with ports, and they also generate higher average checks in the markets in which they operate. The Infinite Kitchen has the capacity to crank out 500 bowls an hour. Sweetgreen plans to open seven new Infinite Kitchen Sweetgreen restaurants in 2024 and retrofit one in New York City.
Sweetgreen analyst ratings and price targets are at MarketBeat. There are 11 analyst ratings comprised of eight Buys and three Holds, with an average consensus price target 33% higher at $32.20.
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