Sweetgreen, Inc. (NYSE:SG) Q3 2023 Earnings Call Transcript

Sweetgreen, Inc. (NYSE:SG) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good afternoon. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to Sweetgreen, Inc. Q3 2023 Earnings Call. [Operator Instructions] Thank you. Rebecca Nounou, Head of Investor Relations, you may begin your conference.

Rebecca Nounou: Thank you and good afternoon, everyone. Here with me today are Jonathan Neman, Co-Founder and Chief Executive Officer; and Mitch Reback, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release is available on our website at investor.sweetgreen.com. During this call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company’s SEC filings, including the section titled Risk Factors in our latest Annual Report on Form 10-K filing and subsequently filed quarterly report on Form 10-Q. These forward-looking statements are based on information as of today, and we assume no obligation to publicly update or revise our forward-looking statements.

Additionally, we will be discussing certain non-GAAP financial measures, which are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon’s press release available on our IR website. With that, it’s my pleasure to turn the call over to Jonathan to kick things off.

Jonathan Neman: Thank you, Rebecca, and good afternoon, everyone. Together with my co-founders, Nicolas and Nathaniel, we opened our first Sweetgreen in a 560 square foot old burger Shack in Washington, D.C., a little over 16 years ago, with a vision to redefine fast food. We sourced fresh, local and organic ingredients from local farmers markets, to serve the community healthy, delicious meals. We worked alongside 10 team members to prep, chop and roast every day in the restaurant. Fast forward to today, we source from over 200 farmers we know and partners we trust. We work with over 6,000 team members across our 220 restaurants nationwide and thoughtfully prepared these ingredients and cooked from scratch to deliver food that is fresh, craveable and nutritious with our signature sweet touch hospitality to millions of devoted customers around the country.

And while we have grown and evolved a lot, a few things have not changed. Our mission of building healthier communities by connecting people to real food and our long-term commitment to being a positive force on the food system, while creating a sustainable and durable brand and business. For the past 16 years, we have been at the forefront of our industry, pioneering a new category. Our third quarter results demonstrated our continued commitment to building what we refer to as an ant company, one that balances growth and profitability. We reported third quarter revenue of $153.4 million, generating 24% year-over-year revenue growth and same-store sales growth of 4%. Restaurant level margin in the third quarter was 19%, a 300 basis point improvement year-over-year.

Strong sales growth, restaurant level margin expansion and disciplined support center spending, resulted in an adjusted EBITDA of $2.5 million for the quarter. It is also worth noting that on a year-to-date basis, our adjusted EBITDA loss is under $1 million. This represents a $31 million improvement over the same period in 2022. Said another way, over 40% of each incremental dollar of revenue in 2023 is flowing through to the bottom line. Sometimes the progress in a business is not always visible to the outside world. And in many ways, off the back of COVID, we had to spend more time stabilizing our company than building it. While we waited for the world to return, albeit somewhat slower than we would have liked, we spent time strengthening the foundation of our business, tackling our costs and focusing on driving margin expansion.

There is, of course, always more to do, and we think you, our partners and shareholders will see the fruit of that work in the coming quarters. While we still find ourselves in a complex and shifting environment, what I can say for certain, is that we are back on the offensive and believe the flow-through at the unit level will drive significant returns on capital in the years ahead. Now let me provide an update on our strategic priorities, starting with our footprint. In the third quarter, we opened 15 new restaurants, including our first in Milwaukee and Orange County. We ended the quarter with a total of 220 restaurants. As a result of front-loading our development this year, in the fourth quarter, we will be opening one restaurant, a second Infinite Kitchen in Huntington Beach, ending the year with 38 new restaurants.

We continue to be pleased with the class of 2023 openings performing in line with our financial expectations. Our Infinite Kitchen pilot continues to deliver many benefits to our operating model, such as increased throughput, near perfect order accuracy, portioning consistency, a better team member experience, improved restaurant level margins and an accretive return on capital. The feedback we hear consistently is that we are delivering a much better customer experience. Just last week, the Infinite Kitchen was recognized by time as one of 2023’s best inventions in the food and drink category. It was selected as one of 200 groundbreaking inventions for leveraging automation technology to create a speedier, more precise way to assemble menu items, while bettering the customer-employee experience.

I want to express my gratitude to the entire Sweetgreen team for making the Infinite Kitchen a reality. Our confidence in the Infinite Kitchen technology, as our assembly line engine in the future is very high. As such, we have moved into an initial production phase with an industry expert in equipment manufacturing. Looking ahead in 2024, we anticipate deploying approximately 7 to 9 Infinite Kitchens into new units and 2 to 4 retrofits. In order to align the delivery schedule of Infinite Kitchens with our real estate pipeline and to minimize future retrofits, we envision opening between 23 and 28 new stores during 2024. The Infinite Kitchen will be weighted towards the back half of the year. The retrofits will be in high-volume urban stores, where we are most interested in understanding how fast their throughput will translate into higher revenue and flow-through, and thus a higher return on capital.

We remain focused on expanding our footprint in a capital-efficient manner, to capture the white space and expect to see our real estate pipeline resume on a higher trend line during 2025. In Q3, we elevated our focus on building our brand. We bolstered our team with two exceptional individuals to lead our multidimensional traffic-driving strategy, which includes menu expansion and innovation, leveraging and strengthening our loyalty program, Sweetpass and amplifying our marketing efforts to drive brand awareness. In August, Michael Kotick joined as our Head of Marketing; and Chad Brauze joined as our Head of Culinary. Collectively, Michael and Chad will help lead the expansion of the Sweetgreen brand and menu to reach a wider array of customers and drive additional guest occasions.

Last week, we marked a major milestone in our long-term brand and menu strategy, to unlock and capture broader consumer segments, with the nationwide launch of protein plates, including Miso Glazed Salmon, Southwest Chicken Fajita and our revamped Hot Honey Chicken plates. These protein plates feature between 30 and 50 grams of protein alongside a double portion of grains at a compelling value. With approximately 35% of customers eating Sweetgreen for dinner, we’re building out the plate category to appeal to more customers, particularly at dinner time. While a week into the launch, customer reception has been fantastic, with notable strength in Texas and the Southeast. As part of this rollout, we were the first national fast casual restaurant chain to announce that we will be cooking all of our proteins, grains and vegetables and extra-virgin olive oil.

We believe it’s important our customers have confidence that all Sweetgreen ingredients down to our cooking oils, meet our high sourcing standards, and we will continue to double down on the quality of our food, even as we scale. Moving forward, we will continue to focus on broadening our menu with relevant new products that reinforce the reputation and ethos of the brand in order to drive traffic. Our loyalty program, Sweetpass, launched at the end of April and continues to add members. As a reminder, Sweetpass is a two-tier loyalty program today, with a free component and a paid component called Sweetpass Plus, where for $10 a month, customers get $3 off daily, as a hero benefit. Up until late September, Sweetpass is only available for digital orders, adding the ability for our Sweetpass members to scan to earn and redeem awards in restaurants, by scanning a QR code at the register is an exciting expansion to our base loyalty program.

Through strategic enrollment programming with new lapsed and low-frequency customers in the second half of 2023, we increased our Sweetpass Plus subscription membership by 25%, putting us on pace to achieve our internal 2023 Sweetpass Plus enrollment targets. These activations are helping us build the playbook to continue the growth of this strategic pillar of the business. Turning to another strategic priority, running great restaurants. As part of creating a 5-star team member experience, we are constantly improving our operations, to make the work easier, simpler and faster. This includes simplifying the execution of our menu, redefining our labor deployment model and creating proprietary tools, to drive productivity and ensure quality. During the third quarter, we removed the prep of 5 of the most popular dressings from our restaurants, to create a more consistent product.

While on the surface, it sounds like a small initiative, this was a year’s long decision that was done with much thought and care. Without sacrificing quality, taste and our food ethos, this move has allowed our team members to shift their focus away from prepping some of our most intensive recipes and instead focus on hospitality and throughput. We see additional opportunities to improve throughput in the coming quarters through small tweaks in deployment. We will be focusing on throughput, where we’ve seen tremendous growth on the front line as well as reexamining labor deployment at peak periods. Additionally, we’ve been investing in hospitality training, so that speed does not come at the expense of a great customer experience. Our restaurants are fully staffed, and we remain pleased with the high caliber of talent we are able to attract.

As we work to improve our team member experience, we’ve seen turnover decline over 15 points from the start of the year, and we’ll continue to find ways to improve both the customer and team member experience through initiatives, both big and small. In the third quarter, we delivered our 10th consecutive quarter of over 20% sales growth, and significantly expanded our restaurant level margins year-over-year. Our goal from here is to continue to raise the bar. As I mentioned at the beginning of the call, I believe we have achieved great things in the face of an unprecedented environment. We have used this time to build a better business, in ways that should become more obvious as we scale. We have a category-defining, mission-driven brand known for quality and transparency.

And what gets me excited today, is the massive amount of innovation you are seeing from the company. The Infinite Kitchens and our new menu options are just two powerful examples, that when coupled with the significant improvements we have made to our operations, have the potential to unlock significant shareholder value in the company in the years ahead. Now I’ll turn it over to Mitch, to walk through the quarter’s financials in further detail.

Mitch Reback: Thank you, Jonathan, and good afternoon, everyone. Total revenue for the third quarter was $153.4 million, up from $124 million in the third quarter of 2022, growing 24% year-over-year. Same-store sales grew 4%. This consisted of 5% price, flat traffic, offset by negative 1% in mix. As shared on the last call, the mix offset continues to be largely attributable to channel movement into the frontline and pickup from native delivery. Total digital sales represented 58% of our Q3 revenue, with approximately two-thirds of those sales coming from our owned digital channels. Our average unit volume in the third quarter was $2.9 million. In the third quarter, we delivered $2.5 million profit on an adjusted EBITDA basis, an improvement of $9.7 million from the third quarter of 2022 loss of $7.2 million.

Our third quarter revenue increase of $29.4 million year-over-year was a significant driver of this improvement. We opened 15 new restaurants this quarter for a total of 220 restaurants. This year, we’ve opened 34 net new restaurants year-to-date, with 1 planned for the fourth quarter in line to achieve the top end of our fiscal year guidance of 35 net new restaurants. As a reminder, we have a year 2 target AUV of $2.8 million to $3 million for new restaurants. The class of 2021 restaurants underwritten pre-pandemic are now on track to meet this goal. The class of 2022 continues to ramp. Currently, it’s projected to hit our year 2 target AUV in year 3. The class of 2023 openings are performing in line and are tracking to meet our financial targets.

I should point out nearly 50% of this class is based in new markets such as Cranston, Rhode Island, Milwaukee, Wisconsin and Tampa, Florida. Restaurant-level margin in the third quarter was 19%, a 300 basis point improvement from the third quarter of 2022. Restaurant level profit for the third quarter was $29 million, up over $9 million from a year ago. For a reconciliation of restaurant-level margin to comparable GAAP figures, please refer to the earnings release. Food, beverage and packaging costs are 27% of revenue for the quarter, a 100 basis point improvement from the third quarter of 2022. This improvement was primarily due to menu price increases, and a decrease in both chicken and fish costs. Labor-related costs were 29% of revenue for the third quarter, down 200 basis points from the comparable period in 2022.

This improvement is primarily attributable to head coach schedule optimization we implemented in the spring. Our restaurants are fully staffed, and we remain pleased with the quality of talent we are able to attract. Additionally, we’ve generally seen an easing of wage pressures. Occupancy and related expenses were 9% of revenue, consistent with the third quarter of 2022. General and administrative expense was $36 million or 23% of revenue for the third quarter of 2023, as compared with $42 million or 34% of revenue in the prior year period. The decrease in general and administrative expense was primarily due to a $6 million decrease in stock-based compensation. We expect our stock-based compensation for fiscal year 2023 to be in the low $50 million range, declining to the mid-$30 million range in 2024 and mid-teens in 2025.

The significant reduction is primarily related to the accounting treatment of pre-IPO-related grants. Our net loss for the quarter was $25 million compared to a loss of $51 million in the prior year period. The $26 million improvement in net loss is primarily due to a $15 million decrease in non-cash restructuring and impairment charges, $9 million increase in our restaurant level profit and a $2 million increase in interest income, as well as a decrease in G&A, as previously discussed. These decreases in expenses were partially offset by an increase in other expenses related to the change in fair value of our contingent consideration, from our acquisition of Spyce, and an increase in depreciation and amortization, associated with additional restaurants.

Adjusted EBITDA, which excludes stock-based compensation and certain other adjustments, was $2.5 million for the third quarter of 2023, as compared to a loss of $7.2 million in the prior year period. This $9.7 million improvement was primarily due to an increase in restaurant level profit and a decrease in general and administrative expenses as described previously. We ended the quarter with a cash balance of $275 million, down $5 million versus the second quarter. Year-to-date, we’ve generated $18 million of positive operating cash flow, a $43 million improvement over the same period in 2022. Now turning to guidance; we anticipate finishing 2023 with 35 net new restaurant openings, revenue ranging from $575 million to $585 million; same-store sales growth between 3% and 5%; restaurant level margins between 16.5% and 17.5%; adjusted EBITDA loss between $8 million and $3 million.

This guidance reflects 3 holiday weeks in the fourth quarter for Thanksgiving, Christmas and New Year’s, which are extremely light volume weeks. The fourth quarter also contains a 53rd week, which is excluded from our same-store sales calculation. I am pleased with the progress we’ve made strengthening our financial model. In 1 year, our restaurant level margins grew 300 basis points and G&A as a percent of revenue decreased 11 points. As a result, our adjusted EBITDA loss is less than $1 million year-to-date. Additionally, we’ve generated $18 million of positive operating cash flow. We are set to reach our goal of generating positive adjusted EBITDA on a full year basis in 2024. This will be a meaningful milestone for the company, unlocking the sweeping flywheel and the ability to reinvest cash flow into the business to capture more whitespace.

With that, I’ll turn the call back to the operator to start Q&A.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Brian Mullan with Piper Sandler. Your line is open.

Brian Mullan: Hi, thank you. Thanks for all the detail on the prepared remarks. Just a question on the development guidance for next year you gave. It sounds like at the midpoint, you’re going to open maybe 25 or 26 restaurants next year. About one-third of those will have the Infinite Kitchen. If that goes well, would the plan be to reaccelerate openings in 2025? And if so, would you expect the mix of Infinite Kitchens to increase over time as well? And just are there any constraints in terms of what your manufacturing partner might be able to deliver?

Jonathan Neman: Hey Brian, thanks for the question. So you’re correct. The reason for the slight slowdown is to better integrate the Infinite Kitchen technology into the pipeline. As we mentioned in the comments, we will begin to deploy the Infinite Kitchen in the back half of the year in the pipeline, and we wanted to better integrate that, and so we don’t have to go back and do as many retrofits. We do expect to speed up development in 2025 and hope based off of the base of the success of the deployment, to have a greater share of Infinite Kitchens in that 2025 pipeline.

Brian Mullan: Okay. That’s great. Thank you. And just as a follow-up, for those initial seven to nine Infinite Kitchen units next year, could you perhaps just share what you’re targeting for an AUV and a restaurant level margin and maybe compare that to what I believe is for a traditional store, $2.8 million to $3 million on the AUV and maybe an 18% to 20% margin? And then just related, any way you could give a sense of what it might cost per unit for those first seven to nine units or a range?

Jonathan Neman: So here’s what I can tell you. We’ve opened one unit so far, and we’re really pleased with the results we’re seeing. We’re really pleased, first and foremost, with the customer experience, customers, all the feedback we get is people love it. They love the speed. They love the cleanliness, just the hospitality experience we’re able to bring and our team members love it as well. We see lower turnover. It’s a more enjoyable experience to work in. And of course, we’re seeing a lot of margin leverage in that restaurant. As we’ve guided before, we see significantly less labor. And so we gave a number on the Naperville margin last quarter. We’re not going to report on it every quarter, but significant margin leverage as well.

While we’re not going to talk about the exact cost, what I can say is that the deployment of the Infinite Kitchen will be accretive to our return on capital. So whatever the incremental cost will be, the gains from the leverage on the labor will be accretive to that return on capital and what we expect in a classic unit. In terms of where we’re going with them, we’re still very much in a learning phase. So we’re – while we opened the first one, trying to – we opening a suburban restaurant, we’re opening a second one here in Huntington Beach. As we look at the pipeline for next year, we’re trying a bunch of different types of restaurants. So whether that be opening a new market with an Infinite Kitchen and seeing how that goes, a couple of urban deployments, a couple of other suburban deployments, really understanding how it works in different types of real estate.

So we know where we go with it in the future. Obviously, the Infinite Kitchen it does better with higher volumes, so we would like to generally target it into stores that have slightly higher volumes for us. I think I covered all of your questions there.

Brian Mullan: Yes, yes. Thank you very much.

Jonathan Neman: Of course.