Shares of Sweetgreen (NYSE:SG) gained 7% in pre-open trading Monday after analysts at Piper Sandler upgraded the stock as margins are "inflecting".
Analysts upgraded the salad-focused restaurant operator to Overweight from Neutral and raised its price target to $19 from $13, suggesting 35% upside from Friday's close.
"While it has been "tough sledding" thus far for SG as a public company, we think the tide may be turning here a bit, and we’d advise positioning for what we expect will be a meaningful improvement in sentiment in the coming months," the analysts commented.
They note restaurant level margins (RLMs) seem stable now with an improved trajectory ahead. At the company, trailing 12-month RLMs are currently at 15.2%, showing a sequential increase of approximately 40 bps in the latest reported quarter. "Importantly, with earnings late last week, management just raised its FY 2023e guidance to a range of ~16 to 18%, which implies an improved trajectory from here," the analysts added.
Further, the analysts note the technology behind the Infinite Kitchen is unique and promising for investors with RLM % in the month of June at 26%. Moreover, management stated that they anticipate a higher stabilized margin once the store is fully ramped up. Despite having the chance to downplay this expectation, they chose not to do so.
Although risk is higher than typical in limited service restaurant investments, the potential for greater rewards makes it compelling, the analysts concluded.