What happened
Shares of salad-centric restaurant chain Sweetgreen (SG -2.38%) sank on Thursday, after an analyst cut his target price for the stock in half. As of 1:45 p.m. ET, Sweetgreen stock was down almost 12%.
So what
Citi analyst Jon Tower lowered his price target for Sweetgreen stock today from $32 per share to $16 per share, according to The Fly. As far as price-target reductions go, that's pretty steep.
The price-target reduction is also a quick reversal. Tower initiated coverage on Sweetgreen stock in April when it was trading at around $28 per share, at which point it was given its original price target of $32 per share. However, keep in mind that Tower didn't recommended buying the stock in April or today. Rather, Tower's rating was and still is neutral, noting that the company is promising but its financials don't yet measure up to winning restaurant stocks of the past.
Now what
To Tower's point, certain Sweetgreen metrics do look very promising. For example, average unit volumes (AUV) measures sales per location. A higher AUV is theoretically very good for restaurants because they can leverage the high cost associated with owning physical stores. Sweetgreen's AUV is $2.8 million as of the first quarter of 2022. For perspective, this is even better than Chipotle Mexican Grill's AUV of just under $2.7 million.
The question for Sweetgreen is whether its AUV will hold up as it expands. As a small chain, its locations are concentrated in areas ideal for higher volume per location. So far, this part of the thesis is holding up. But I agree with Tower that we may need wait and see more about how this company executes over time before deciding whether it could be a good long-term investment or not.
