Sweetgreen, Inc. Q3 FY2024 earnings call

• Sweetgreen is committed to redefining fast food through innovation in food and technology, with the Infinite Kitchen transforming convenience and accessibility. - Opened 5 restaurants in Q3, with 3 powered by Infinite Kitchen; new market openings in Columbus and Charlotte had strong opening weeks. - Infinite Kitchens are improving guest experience, with Penn Plaza showing faster service, higher product quality, and lower turnover. - Menu innovation includes new protein varieties, fall harvest menu, and testing items like ripple fries in Los Angeles. - Labor optimization efforts include an AI-driven labor scheduling system rolled out to 70 restaurants across six markets. - Focus on high sourcing standards, expanding menu beyond salads, and simplifying operational complexity in restaurants.

For the third quarter, Sweetgreen reported sales of $173.4 million, representing 13% year-over-year growth. Same-store sales grew 6%, consisting of a 4% benefit from menu price and 2% positive traffic and mix. Growth was led by emerging markets with the Midwest, Texas, and the Southeast all comping double-digits. Restaurant level margin for the third quarter was 20.2%, expanding by over 100 basis points compared to last year. Adjusted EBITDA came in at $6.8 million for the quarter. Total revenue for the quarter was $173.4 million, up from $153.4 million in the third quarter of 2023. Restaurant level profit margin in the third quarter was 20.2% compared to a 19% margin a year ago, marking the seventh consecutive quarter of year-over-year restaurant level margin expansion. Food, beverage, and packaging costs were 28% of revenue, labor and related expenses were 27% of revenue (with over 100 basis point improvement year-over-year), occupancy and related expenses were 9% of revenue, and general and administrative expense was $36.8 million or 21% of revenue.

• Raised 2024 guidance: 24-26 net new restaurant openings, revenue ranging from $675 million to $680 million, same-store sales growth between 6% and 7%, restaurant level margin between 19.5% and 20%, adjusted EBITDA between $18 million to $20 million. - 2025 guidance: expect to open at least 40 new restaurants, approximately half of which will be powered by the Infinite Kitchen. The guidance reflects the retrofitting of two high volume restaurants with the Infinite Kitchen.

Q: Discuss the brand awareness in the context of broadening the appeal of Sweetgreen as you focus on organic traffic growth and evolve TAM to a wider demographic and different income cohorts?

A: Jonathan Neman talks about broadening appeal with new menu items like ripple fries, handhelds, and desserts, testing in markets and planning rollouts.

Q: On the in-store productivity improvements, how much opportunity is there to reduce labor hours or costs, and how do we think about reinvesting these dollars along with IK productivity gains into the store menu price, among other avenues?

A: Jonathan Neman mentions continuing to simplify prep, push on destemming kale, and upstream dressings, with productivity gains captured by the company to broaden menu and improve food quality.

Q: How trends performed throughout the quarter, how we're looking fourth quarter to date when it comes to same-store sales?

A: Mitch Reback says same-store sales growth of 6% in Q3, September was the strongest month and momentum carried into October with confidence in revised upward guide of 6% to 7%.

Q: Thoughts on the retrofits for 2025, recognizing the big opening pipeline for Infinite Kitchen next year?

A: Mitch Reback says look at AUVs of stores and challenging labor markets; over time, labor savings in IK stores can increase as they learn to operate more efficiently.

Q: Any additional thoughts to share around AUVs at those stores based on another quarter of results?

A: Mitch Reback says expect volume in IK stores to grow over time due to faster throughput and higher customer satisfaction, with Penn showing growth in October.

Q: Labor optimization main driver of year-over-year favorability in labor, and next steps?

A: Mitch Reback says labor optimization from scheduling and head coach deployment, with AI scheduling tools bringing more room for optimization.

Q: Food and labor inflation rates in the third quarter and view forward?

A: Mitch Reback says food and labor inflation ran approximately 2% and is tame currently.

Q: Reinvesting in four walls with 700 basis points of margin savings and impact on labor optimization?

A: Mitch Reback says AI labor tool has efficiencies for business with IK or classic stores; near term margin savings drop to company margin. Jonathan Neman adds it helps improve customer and team member experience, with shift swapping and better staffing.

Q: Trade-off between adding new menu items and operational complexity?

A: Jonathan Neman says top concern, with stage gating process, testing, and ensuring new items fit operating model, balancing art and science of new ideas.

Q: Same-store sales trend in the quarter, comps in more mature markets?

A: Mitch Reback says same-store sales averaged around 6% for the quarter, doesn't break down by mature markets; total components of 2% positive are traffic and mix.

Q: Retrofits, average cost and downtime?

A: Mitch Reback says retrofits take around 6-7 weeks on average, store dependent.

Q: Impact of steak on COGS?

A: Mitch Reback says steak had higher COGS than other menu elements, slight upward pressure on COGS but nothing overly significant.

Q: Cost of Sweetgreen from contract manufacturer for Infinite Kitchens in 2025 and beyond?

A: Jonathan Neman says guided to $450,000 to $550,000 in incremental cost for Infinite Kitchens, expecting savings as scale increases. Focus on reducing overall build costs of new units including IK.

Q: Uplift to average weekly sales or run rate AUVs at Penn Plaza retrofit?

A: Mitch Reback says seen the store grow and grow more rapidly over months.

Q: Stronger sales trends in September and October, broader macro dynamic or Sweetgreen specific?

A: Mitch Reback says hard to know exactly, but Jonathan Neman adds intentional move away from seasonal menu and return to seasonal items with fall harvest menu.

Q: New unit economics relative to IPO targets?

A: Mitch Reback says build out costs for IK are higher than classic stores by ~$0.5 million, with ~700 basis point improvement in margin, but second order benefits harder to quantify.