Shares of Sweetgreen (NYSE: SG) increased by more than 33% after the restaurant operator raised its outlook following strong second-quarter results. The stock has now tripled this year.

Already one of the hottest stocks on the market, Sweetgreen may seem like a missed opportunity to anyone who was sitting on the sidelines during its post-earnings surge. But let's take a closer look at the company's most recent quarter and outlook

Increased outlook

In the second quarter, Sweetgreen's revenue jumped 21% to $184.6 million. Same-store sales climbed 9% with price increases contributing 5%, while traffic and favorable product mix accounted for the remaining 4% growth.

The company credited its expanding menu as the primary reason for its strong sales results. The new caramelized garlic steak, for example, has become a hit with customers.

On the bottom line, Sweetgreen reported a loss of $0.36 per share, an improvement from the $0.55-per-share loss it reported a year ago. Adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) soared from $3.3 million to $12.4 million over the same period.

Labor costs as a percentage of sales declined two percentage points to 27%, contributing to a restaurant-level margin of 22%, up from 20% a year ago. This is an important metric in the restaurant industry as it tells investors how profitable locations are before adding in corporate costs.

The company opened four new locations in the quarter and 10 through the first six months of the year.

With these latest results, Sweetgreen increased its full-year guidance across the board.

Data source: Sweetgreen.

Sweetgreen's biggest opportunities

The biggest opportunity for Sweetgreen is its ongoing expansion. At the end of Q2, it only operated 231 locations in 20 states and Washington, D.C. When it went public in late 2021, it talked about doubling its store count, which was then at 140 locations, in the next three to five years. It's currently on pace to hit that goal.

However, the concept should be able to support a much larger footprint. By comparison, Chipotle Mexican Grill has over 3,500 locations and will open more this year (between 285 and 315) than Sweetgreen currently has in total restaurants. While it may never rise to Chipotle's heights, there is a lot of growth potential from new restaurant openings over the next decade.

Increasing its average unit volumes (AUVs), which is how much a single restaurant averages in annual sales, and restaurant-level margins are two other important opportunities. Between 2014 and 2019, Sweetgreen was able to nearly double its AUV from $1.6 million to $3 million. AUVs dropped to $2.2 million during parts of the pandemic and have since climbed back to $2.9 million. With menu innovation and steady price increases, there is no reason the company can't continue to increase this metric in the years to come.

Sweetgreen's restaurant-level margin, meanwhile, is solid, but it still trails that of Chipotle, which guided for about 25% in Q3. As the company gains scale and improves buying power, there should be solid room to improve this number as well.

Does the stock still have upside from here?

Valuing restaurant concepts with long runways of new store growth in front of them can be challenging, and traditional metrics such as the price-to-earnings ratio (P/E) often don't reflect a growth-oriented restaurant stock's potential. For that reason, I like to look at where the company's sales could be in five years.

Though management had previously set an ambitious target of hitting 1,000 locations by 2030, Sweetgreen has been more conservative with its new store openings the past two years. That said, it's on track to double its store count in about four years' time. Maintaining that pace moving forward, the company could reasonably have 500 locations in the next five years.

Meanwhile, modest annual same-store sales growth of 3% over this period would bring AUV for the company to about $3.4 million. With 500 locations at the end of 2029, that adds up to an estimated $1.7 billion of revenue for the company.

Before the stock's post-earnings rally, Sweetgreen traded at 4.5 times sales, close to the average it's seen as a publicly-traded company. Applying that multiple to the $1.7 billion revenue forecast (and assuming no change in share count), shares could climb to over $65 in the next five years. That's enough to handily outperform the broad market. Of course, the company could see its actual results come in higher or lower, but the estimate gives you an idea of the potential upside the stock can deliver.

Over that time, though, Sweetgreen will need to strengthen its profitability and expand its footprint without hurting same-store sales. To support these efforts, the company does enjoy the benefits of a strong cash position and no debt.

The upside potential for Sweetgreen is attractive, but this is still a relatively small chain in the early stages of its growth story. Anyone buying the stock today must be patient as management figures out what level of expansion is profitable and sustainable.

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