What happened

Shares of salad-centric restaurant chain Sweetgreen (SG 8.34%) plunged on Wednesday after the company reported financial results for the third quarter of 2022. Revenue and profits came in lighter than Wall Street was hoping and the company lowered its expectations for the rest of 2022. As a result, Sweetgreen stock was down 20% as of 1:15 p.m. ET.

So what

In Q3, Sweetgreen generated revenue of $124 million, an increase of 29% year over year. And importantly, same-store sales were up 6% from the prior-year quarter, adding to the company's top-notch average unit volume (AUV) of $2.9 million. For perspective, Sweetgreen's AUV of $2.9 million is better than top restaurant company Chipotle Mexican Grill's AUV of $2.8 million.

Wall Street lowered its price targets for Sweetgreen stock today in light of Q3 results. Oppenheimer analyst Brian Bittner and Cowen analyst Andrew Charles set price targets of $25 per share and $19 per share, respectively, coming down from $30 per share and $23 per share. Both would still recommend buying Sweetgreen stock. However, lowering their price targets didn't give the market confidence.

Now what

The market was also reacting today to Sweetgreen's guidance. Management had expected full-year revenue of $480 million to $500 million but it now believes it will fall short of this. However, it's still maintaining its growth plans, anticipating opening 35 new locations in 2022 as it marches toward 1,000 restaurants by 2030. For perspective, it has about 175 locations now.

All told, Sweetgreen's Q3 results looked pretty good to me but its expansion plans may be risky. Yes, this restaurant stock enjoys industry-leading AUV and has impressive restaurant-level profit margins of 16%. However, 33% of revenue so far in 2022 came just from locations in New York City. The company is concentrated in urban areas like this that are naturally more conducive to higher sales volume. 

Growing to 1,000 locations implies moving into more suburban areas, and it's fair to wonder if volume could hold up in places like that for a salad restaurant like Sweetgreen. Therefore, AUV and restaurant-level profit margins are two metrics for Sweetgreen shareholders to watch as the company expands.