What happened

Shares of salad-centric restaurant chain Sweetgreen (SG -1.24%) pleasantly surprised investors on Friday after the company reported financial results for the first quarter of 2023. As of 12:10 p.m. ET, Sweetgreen stock was up 10%.

So what

In Q1, Sweetgreen generated revenue of $125 million, up 22% year over year and within management's guidance. Same-store-sales growth of 5% helped boost revenue. But the bigger boost came from opening nine net new restaurants during the quarter. Since the chain only has about 185 locations, a few openings can make a big difference.

Turning to the bottom line, Sweetgreen had a net loss of almost $34 million. That's much better than its net loss of $50 million in the prior-year period. Moreover, investors might be excited about something a little deeper beneath the surface.

Because this is a small restaurant chain, certain operating expenses can rob Sweetgreen of profitability now but could diminish in significance as the business scales. Focusing on profit margins at the restaurant level, therefore, can be enlightening. Management had guided for a restaurant-level profit margin of 11% to 12% in Q1. In reality, the company delivered a margin of 14%. This undoubtedly encouraged investors today despite the ongoing losses.

Now what

Regarding its financial guidance, Sweetgreen's management chose to maintain most of what it had issued previously. That's notable for its full-year restaurant-level profit margin guidance of 15% to 17%. In other words, management expects to improve on the performance in Q1 but doesn't expect outperformance in Q1 to lead to better-than-expected results for the year. This might imply that company execs see less room for improvements than before.

Finally, Sweetgreen gives profitability guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It previously guided for a full-year adjusted EBITDA loss of $13 million to $15 million. Now, it expects an adjusted EBITDA loss of $3 million to $13 million.

However, adjusted EBITDA is being assisted by employee retention credits related to the pandemic, which won't help Sweetgreen in most quarters. And the company will need to keep finding improvements in the business if it's going to reach its goal of adjusted EBITDA profitability in 2024.