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Shares of salad restaurant chain Sweetgreen (NYSE: SG) were up 166.7% in the first half of 2024, according to data provided by S&P Global Market Intelligence. This torrid move higher was punctuated by two big gains that occurred each time it reported quarterly financial results.

It likely goes without saying, but returns for Sweetgreen stock absolutely dwarfed the otherwise impressive 14.5% gain for the S&P 500.

SG data by YCharts.

Sweetgreen’s growth rate had decelerated. However, on Feb. 29, the company reported financial results for the fourth quarter of 2023, showing 29% top-line growth compared to just 23% in the prior-year period. In other words, growth reaccelerated.

On May 9, Sweetgreen reported financial results for the first quarter of 2024, demonstrating a continuation of the trend. In Q1, the company’s revenue was up by 26%, whereas revenue was up by only 22% in the same quarter of 2023.

Sweetgreen’s growth is picking up, catapulting the stock to huge gains in the first half of 2024. But July has been a different story — the stock is already down 20% this month, and it’s worth talking about.

The challenge ahead for Sweetgreen

Profitability is challenging even for the best-run restaurants. Sweetgreen is no exception. It had a Q1 operating loss of $27 million and an operating loss of $122 million in 2023. However, the chain isn’t without hope — the numbers look better at the restaurant level.

Sweetgreen had Q1 general and administrative expenses of nearly $37 million. These corporate expenses are important, but they’re not core to running a restaurant. When adjusting for corporate expenses, the company had a Q1 operating margin of 18% at the restaurant level.

If Sweetgreen can grow sales enough by opening new locations and growing same-store sales, perhaps its restaurant profits will go up enough to pay for corporate expenses, leaving real profits for the company as a whole.

Sweetgreen’s menu prices tend to be on the higher end of the spectrum, and investors are increasingly worried that consumers are pulling back on spending. That could hurt this company’s growth potential in the near term, exacerbating losses, which is why the stock is down sharply in July.

Looking ahead

After pulling back in July, the price-to-sales (P/S) valuation for Sweetgreen stock has come back down slightly.

SG PS Ratio data by YCharts. PS = price to sales.

Some investors would say a P/S of 4 is still too expensive for Sweetgreen stock. And I’d agree, with one caveat: I question how well the company can scale and turn a real profit. If it can’t, it will lose money and destroy shareholder value, meaning it will be a bad investment regardless of valuation.

On the flip side, the P/S valuation for Sweetgreen is entirely reasonable, given its growth rate and potential. The only missing piece is the profit. If I’m wrong and it can become a cash cow, then today’s price will eventually be seen as a bargain.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Sweetgreen. The Motley Fool has a disclosure policy.

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