Sweetgreen stock jumps 14% after Bank of America upgrade

Sweetgreen stock (SG) gained as much as 14% on Thursday after Bank of America (BAC) upgraded shares of the fast-casual salad chain to Buy from Neutral with the firm nearly doubling its price target.

The rating change reflected a spike in foot traffic, positive same-store sales gains, and long-term automation plans, BAC analyst Katherine Griffin said in a note to clients. The firm also raised its price target to $17, up from its previous price target of $9. The new price target reflects a 30% increase from its stock price at the time the note was published ($13.40).

SG was trading at $14.81 per share midday Thursday.

The chain's automation plans, like its pilot store that uses new tech, dubbed Sweetgreen Infinite Kitchen, in Naperville, Illinois, shows a "meaningful" opportunity for the chain to narrow the profit margin gap with its big rival, Chipotle, Griffin said.

The firm estimates Sweetgreen to end fiscal year 2023 with restaurant-level margins of roughly 16%, compared to its estimates for Chipotle (CMG) of approximately 27%.

Year to date, shares are up more than 70%. The company is set to report its fiscal second quarter 2023 earnings results after market close on July 27.

The impact of the COVID-19 pandemic on Sweetgreen's foot traffic is in the rearview mirror, per Bank of America. Investors had been worried about the chain's urban footprint and a slower return to office.

Per data cited by BofA from the data intelligence platform Placer.ai, visits to Sweetgreen are up 46% year over year in the second quarter of 2023 so far; in the first quarter, visits were up 39%. Analyst Griffin said this boost in foot traffic is "removing a key overhang on the stock."

In a call with investors following the first quarter earnings results, CEO Jonathan Neman addressed the recovery of its urban locations.

"We're really starting to see the urban stores and particularly the Central Business District stores come back and come back fairly strongly on a four-day-a-week basis. I could say Mondays today are starting to level off at the same volume we see Tuesday through Thursday....we're actually pretty pleased with what we've been seeing in the urban stores."

Bank of America expects this momentum to continue. Griffin said, "Sweetgreen's increased focus on improving operations (i.e., incentivizing store leaders to drive throughput, order accuracy) could be driving customers to return to stores more frequently."

Sweetgreen ended the first quarter with 195 total locations.

Bank of America added that digital menu innovations and a new loyalty program, Sweetpass, which launched in April, provide the "potential for higher digital sales mix and in turn, higher frequency."

Griffin said, "We think there is incremental upside to growth in app downloads and MAU [monthly active users] from [the] Sweetpass trial and new loyalty membership."

In Q1, digital sales represented 61% of total revenue, with nearly two-thirds of those sales coming from Sweetgreen's own digital channels.

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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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