Sweetgreen Q4 Earnings: Infinite Kitchens Drive Margin Optimism

Summary

• Sweetgreen's stock surged 30% after strong Q4 earnings driven by optimistic margin outlook.

• New Infinite Kitchen concept expected to boost restaurant margins by ~700 bps to low 20% range.

• Stock up 130% since our initiation coverage

• Infinite Kitchen has higher upfront costs but expected to drive labor savings, sales growth long-term.

Sweetgreen's Stock Surges 30% on Upbeat Q4 Earnings

Sweetgreen's stock jumped 30% after reporting strong fourth quarter 2023 earnings. The healthy fast casual chain now expects its restaurant profit margins to reach 18-19% in 2024, up from previous guidance.

Stock Up 130% Since Our Coverage

Sweetgreen's stock price has surged 130% since our initial coverage of the company after its IPO. The latest post-earnings spike demonstrates continued confidence among investors about Sweetgreen's growth trajectory.

Source: Seeking Alpha

Infinite Kitchens Expected to Boost Margins

This more positive outlook is driven by optimism around Sweetgreen's new Infinite Kitchen concept. Management believes the Infinite Kitchens can boost restaurant margins by about 700 basis points. If achieved, this would lift Sweetgreen's overall restaurant margins into the low 20% range, which is very high for the restaurant industry.

The Infinite Kitchen utilizes more automation in food prep and delivery. This is expected to lower Sweetgreen's labor costs over time. Management also believes it will improve order accuracy, customer satisfaction, and potentially drive sales growth.

Upfront Costs Expected to Decrease Over Time

Pre-IPO, the typical buildout cost for a new Sweetgreen restaurant was around $1.2 million, before accounting for inflation. But with rising construction costs in recent years, that number is now closer to $1.5 million.

In contrast, adding an Infinite Kitchen to a restaurant is estimated to cost $450,000 to $550,000. So a restaurant with an Infinite Kitchen would total around $1.95 to $2.05 million upfront. But CEO Jonathan Neman expects these costs to decrease over time as more scale is achieved.

While more expensive initially, Sweetgreen believes the long-term benefits of the Infinite Kitchen will outweigh the upfront costs. The company is making a big bet that this new tech-enabled model will drive higher margins and continued growth.