Sweetgreen Recalls Jalapenos, Details How Cyclospora Outbreak Will Weigh on Sales

Dow Jones
Aug 07

The salad chain's shares tumbled after hours, but it said it doesn't use iceberg lettuce and only uses jalapenos in two dressings

Sweetgreen reported second-quarter results Thursday.

As overlapping food-safety concerns continue to sweep up restaurant chains this summer, Sweetgreen on Thursday became the latest to put numbers on the impact.

The fast-casual salad chain on Thursday cut its outlook for the year, as the U.S.'s largest-ever cyclospora outbreak keeps diners away from lettuce and other uncooked leafy greens. Moreover, management said the company issued a voluntary recall involving some jalapenos a day earlier, as health authorities try to halt a more recent salmonella outbreak across multiple states.

Sweetgreen shares $(SG)$ tumbled nearly 15% after hours on Thursday. The drop extends a nearly 30% decline for the stock over the past month amid growing fears over cyclosporiasis, a parasite-based illness that investigators this summer linked to iceberg lettuce.

Sweetgreen said it expects same-store sales to decrease between 7% and 8% this year. That's worse than the chain's forecast in May for a decline of 2% to 4%.

The company, in its earnings release on Thursday, said its expectation for weaker sales reflects "reduced consumer demand for fresh prepared foods due to the multistate outbreak of cyclosporiasis since mid-July."

It added: "The pace and timing of recovery remain uncertain."

During Sweetgreen's earnings call, CEO Jonathan Neman said that the chain did not use iceberg lettuce in any of its menu items. He added that the company had "no indication from our suppliers or public-health authorities that Sweetgreen is connected to that outbreak."

He noted that jalapenos were used in only two of its dressings, and nowhere else on the menu. The company said it had removed jalapenos from a supplier in "affected areas," and Neman said it was too early to gauge the potential impact of the recall.

The cyclospora outbreak has sickened thousands of people since last month, with a particular concentration of cases in Michigan. However, health authorities in the state on Thursday said residents could "resume routine guidance" for eating salads, as reports of new cyclosporiasis cases start to fall.

Restaurants like Chipotle Mexican Grill $(CMG)$ and Qdoba also pulled jalapenos from their menus this week, as health officials investigate a new salmonella outbreak across several states. Analysts have downplayed the potential impact on those companies' sales.

The remarks from Sweetgreen also come amid signs of fast-casual fatigue over the past year and broader caution among consumers.

Last week, Chipotle said fears over the cyclospora outbreak had slowed foot traffic, but it raised its sales forecast for the year nonetheless. Yum Brands (YUM) said that sales had rebounded at Taco Bell, after health officials linked the cyclospora outbreak to lettuce served at its restaurants.

For the second quarter, Sweetgreen's revenue rose 3.8% to $192.7 million, below Wall Street analysts' estimates for $194.5 million. Same-store sales fell 6.2%, worse than estimates for a 4% decline. On a GAAP basis, Sweetgreen lost 22 cents a share during the quarter, worse than estimates for a loss of 15 cents a share.

-Bill Peters

 

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