Sweetgreen (NYSE: SG) shares experienced a significant decline today, dropping over 13% following the release of its second-quarter earnings report. The fast-casual salad chain disclosed results that missed analyst expectations across multiple key metrics, primarily driven by ongoing challenges related to a cyclospora outbreak that began in mid-July, despite the company stating it has not been directly affected by the contamination.
The core issue stems from a noticeable decline in customer traffic, which Sweetgreen attributes to consumer wariness surrounding the cyclospora outbreak, even though the company does not use iceberg lettuce – the specific ingredient linked to the outbreak. This perception-driven avoidance has impacted same-store sales, a critical metric for restaurant chains that measures sales growth at locations open for at least one year.
For the second quarter, Sweetgreen reported same-store sales decreased by 6.2%. While this represents an improvement from the first quarter’s 12.8% decline, it remains substantially negative and underscores ongoing pressure on the company’s core business. Revenue, buoyed by new store openings, increased 3.8% to $192.7 million. However, this figure fell short of the consensus analyst estimate of $194.5 million, indicating that new store growth alone was insufficient to offset the drag from declining sales at existing locations.
Profitability metrics deteriorated further. Restaurant-level profit margin, a key indicator of operational efficiency at the individual store level, contracted from 18.9% in the prior year period to 13.1% in the current quarter. More concerning, adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) – a measure often used to assess core operating profitability – swung from a positive $6.4 million to a loss of $0.2 million. This shift highlights how the sales decline is leveraging through to the bottom line, eroding the company’s ability to generate cash from operations.
On a per-share basis, Sweetgreen’s GAAP (Generally Accepted Accounting Principles) loss expanded from $0.20 to $0.22, which was worse than the consensus estimate of a $0.12 loss. This deterioration in earnings performance directly contributed to the negative market reaction, as investors reassess the company’s near-term profitability prospects.
Despite the disappointing headline numbers, management pointed to some positive underlying trends. Same-store traffic was down only 2%, suggesting that the majority of the sales decline resulted from lower average transaction values – influenced by the company’s national rollout of wraps (which are priced lower than its signature bowls) and increased discounting activity. Importantly, Sweetgreen noted that same-store traffic had flattened in June, indicating potential stabilization in customer visits.
Looking ahead, the cyclospora outbreak’s impact prompted Sweetgreen to significantly revise its full-year guidance. The company now expects same-store sales to decline between 7% and 8% for the entire fiscal year, a notable deterioration from its previous outlook of a 2% to 4% decline. Concurrently, the adjusted EBITDA forecast was lowered to a range of $23 million to $27 million in losses, compared to the earlier projection of a $1 million to $6 million profit. Management characterized the pace and timing of any recovery as “uncertain,” acknowledging that the outbreak’s influence on consumer behavior may persist for an indeterminate period.
This earnings miss and guidance cut serve as a reminder of how external factors, even those not directly impacting a company’s operations, can significantly affect consumer perception and behavior, ultimately translating into tangible financial performance challenges for consumer-facing businesses like Sweetgreen.
