Tariff Pressures Could Reshape Restaurant Buildout Economics, Says Analyst

TD Cowen analyst Andrew M. Charles expects potential tariffs to impact new restaurant construction costs more than ongoing operating expenses.

Since only 5% to 20% of cost of goods sold (COGS) typically comes from international sources, the overall COGS impact remains minimal.

However, restaurants face steep tariffs on Chinese equipment (145%) and other materials like steel (25%) and potentially lumber, which together make up 40% to 50% of total new store construction costs.

Initial estimates indicate a 10% to 15% rise in build-out expenses. However, the projected effect on cash-on-cash returns appears manageable and unlikely to disrupt short- or medium-term development plans.

Despite this, the analyst says returns would remain attractive. For example, a 40% cash-on-cash return could drop to 35% under current tariff pressures, still maintaining viability for expansion.

Sweetgreen Inc.'s (NYSE:SG) Infinite Kitchen concept faces elevated exposure to U.S.-China tariffs, as some of its proprietary components are sourced from China.

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While the company disclosed potential build cost increases in its 10-K following the February 4 tariff hike, current 145% tariffs on Chinese imports may drive capital expenditures significantly above the initial $450,000–$550,000 guidance.

The analyst estimates that Infinite Kitchen can boost cash-on-cash (CoC) returns by about 600 basis points in the base case scenario, assuming a $450,000 build cost and a 10% restaurant margin lift.

Even with build costs climbing as high as $750,000, CoC returns could remain accretive, provided less than half of the component cost is exposed to Chinese tariffs.

A projected 12.5% rise in construction costs would delay free cash flow (FCF) break-even timelines by about a year for several restaurant chains not yet generating positive FCF.

Companies like Sweetgreen, First Watch Restaurant Group Inc. (NASDAQ:FWRG), and Kura Sushi would see setbacks if they maintain current development plans.

Analysts forecast FWRG reaching FCF profitability in 2029 instead of 2028, while KRUS could be delayed until 2033, up from 2032.

Although Sweetgreen's target of 2030 remains unchanged, the potential profitability level would be significantly lower due to cost pressures.

Other restaurant operators such as Dutch Bros Inc. (NYSE:BROS), Cava Group Inc. (NYSE:CAVA), Chipotle Mexican Grill Inc. (NYSE:CMG), Shake Shack Inc. (NYSE:SHAK), and Wingstop Inc. (NASDAQ:WING) are not expected to face meaningful impacts to their free cash flow forecasts from the projected increase in build costs, noted the analyst.

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