Sweetgreen Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Good afternoon. My name is Jeanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sleek Green Inc. Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. SimplyPress. Thank you. Rebecca Noonu, Head of Investor Relations, you may begin your conference.

Speaker 1

Thank you and good afternoon everyone. Here with me today are Jonathan Neiman, 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. Fleetgreen.com.

Speaker 1

During this call, we will be making comments of a forward looking nature. Actual results may differ materially from those expressed the SEC filings, 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 ks filing and subsequently filed the 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. The SEC.

Speaker 1

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. This call.

Speaker 1

With that, it's my pleasure to turn the call over to Jonathan to kick things off.

Speaker 2

Thank you, Rebecca, and good afternoon, everyone. Together with my co founders, Nicholas and Nathaniel, we opened our first Sweetgreen in a 5 60 Square Foot Old Burger Shack in Washington DC 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.

Speaker 2

We work with over 6,000 team members across our 2 20 restaurants nationwide Thoughtfully prepare these ingredients and cook 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 this call 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 Q3 results demonstrated our continued commitment to building what we refer to as an ant company, one that balances growth and profitability.

Speaker 2

The reported Q3 revenue of $153,400,000 generating 24% year over year revenue growth and same store sales growth of 4%. Restaurant level margin in the 3rd 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 $2,500,000 for the quarter. It is also worth noting that on a year to date basis, our adjusted EBITDA loss is under $1,000,000 This represents a $31,000,000 improvement over the same period in 2022. Said another way, over 40% of each incremental dollar the You know, sometimes the progress in a business is not always visible to the outside world.

Speaker 2

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.

Speaker 2

Now let me provide an update on our strategic priorities, starting with our footprint. In the Q3, we opened 15 new restaurants, including our first in Milwaukee and Orange County. We ended the quarter with a total of 2 20 restaurants. As a result of front loading our development this year, in the Q4, we will be opening 1 restaurant, our 2nd 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.

Speaker 2

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 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 and 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 of 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.

Speaker 2

In order to align the delivery schedule of Infinite the With our real estate pipeline and to minimize future retrofits, we envision opening between 2328 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 faster throughput will translate into higher revenue and slow 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.

Speaker 2

We bolstered our team with 2 exceptional individuals to lead our multi dimensional traffic driving strategy, which includes menu expansion and innovation, leveraging and strengthening our loyalty program SuitePath and amplifying our marketing efforts to drive brand awareness. In August, Michael Kodik joined as our Head of Marketing and Chad Brous 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 locations. Last week, we marked a major milestone in our long term brand and menu strategy to unlock and capture broader consumer segments the nationwide launch of protein plates, including miso glazed salmon, Southwest chicken fajita and our revamped hot honey chicken plate. These protein plates feature between 30 50 grams of protein alongside a double portion of grain at a compelling value.

Speaker 2

With approximately 35% of customers eating Sweetgreen for dinner, we're building out the plates 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 1st national fast casual restaurant chain to announce that we will be cooking all of our proteins, grains and vegetables Extra Virgin Olive Oil. We believe it's important our customers have confidence that all sweetgreen ingredients down to our cooking oil 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.

Speaker 2

Our loyalty program SuitePass launched at the end of April and continues to add members. As a reminder, SuitePass is a 2 tier loyalty program today With a free component and a paid component called SuitePass Plus, where for $10 a month, customers get $3 off daily as the hero benefit. Up until late September, SuitePass was only available for digital orders. Adding the ability for our SuitePass members to scan to earn and redeem awards the By scanning a QR code at the register is an exciting expansion to our base loyalty program. Through strategic enrollment programming with new lapsed the low frequency customers in the second half of twenty twenty three, we increased our SuitePass Plus subscription membership by 25%, putting us on pace to achieve our internal 2023 SuitePass Plus enrollment targets.

Speaker 2

These activations are helping us build a 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 During the Q3, we removed the press of 5 of the most popular dressings from our restaurants to create a more consistent product. While on the surface, this sounds like a small initiative.

Speaker 2

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 and deployment. We will be focusing on throughput where we've seen tremendous growth on the frontline 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.

Speaker 2

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 Q3, 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.

Speaker 2

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 this is a 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.

Speaker 3

Thank you, Jonathan, and good afternoon, everyone. Total revenue for the Q3 was $153,400,000 up from $124,000,000 in the Q3 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.

Speaker 3

Total digital sales represented 58% of our Q3 revenue, With approximately 2 thirds of those sales coming from our owned digital channels. Our average unit volume in the Q3 was 2,900,000. In the Q3, we delivered $2,500,000 profit on an adjusted EBITDA basis, an improvement of 9,700,000 the Q3 of 2022 loss of $7,200,000 Our 3rd quarter revenue increase of $29,400,000 year over year Was a significant driver of this improvement. We opened 15 new restaurants this quarter for a total of 2 20 restaurants. This year we've opened 34 net new restaurants year to date with one plan for the Q4 in line to achieve the top end of our fiscal year guidance the As a reminder, we have a year 2 target AUV of $2,800,000 to $3,000,000 the new restaurants.

Speaker 3

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.

Speaker 3

Restaurant level margin in the 3rd quarter was 19%, a 300 basis point improvement from the Q3 of 2022. Restaurant level profit for the Q3 was $29,000,000 up over $9,000,000 from a year ago. For 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 Q3 of 2022. This improvement was primarily due to menu price increases and a decrease in both chicken and fish costs.

Speaker 3

Labor and related costs were 29% of revenue for the 3rd 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 Q3 of 2022.

Speaker 3

General and administrative expense was $36,000,000 or 23 percent of revenue for the Q3 of 2023 as compared to a $42,000,000 or 34 percent of revenue in the prior year period. The decrease in general and administrative expense is primarily due to a $6,000,000 decrease in stock based compensation. We expect our stock based compensation for fiscal year 2023 to be in the low $50,000,000 range, declining to the mid $30,000,000 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 $25,000,000 compared to a loss of $51,000,000 in the prior year period.

Speaker 3

The $26,000,000 improvement in net loss is primarily due to a $15,000,000 decrease in non cash restructuring and impairment charges, $9,000,000 increase in our restaurant level profit and a $2,000,000 increase in interest income as well as a decrease in G and 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 Spice and an increase in depreciation and amortization the associated with additional restaurants. Adjusted EBITDA, which excludes stock based compensation and certain other adjustments this $2,500,000 for the Q3 of 2023 as compared to a loss of $7,200,000 in the prior year period. This $9,700,000 improvement was primarily due to an increase in restaurant level profit and a decrease in general and administrative expenses as the We ended the quarter with a cash balance of 275,000,000 down $5,000,000 versus the 2nd quarter. Year to date, we've generated $18,000,000 of positive operating cash flow, a $43,000,000 improvement over the same period in 2022.

Speaker 3

Now turning to guidance. We anticipate finishing 2023 with 35 net new restaurant openings, revenue ranging from $575,000,000 to 5 the $5,000,000 same store sales growth between 3% and 5%, restaurant level margins between 16.5% 17 point the Adjusted EBITDA loss between $8,000,000 $3,000,000 This guidance reflects 3 holiday weeks in the Q4 for Thanksgiving, Christmas and New Year's, which are extremely light volume weeks. The Q4 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 and A as a percent of revenue decreased 11 points.

Speaker 3

As a result, our adjusted EBITDA loss is less than $1,000,000 year to date. Additionally, we've generated $18,000,000 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 squeakwing flywheel And the ability to reinvest cash flow into the business to capture more white space. With that, I'll turn the call back to the operator to start Q and A.

Operator

Your first question comes from the line of Brian Mullen with Piper Sandler. Your line is open.

Speaker 4

Hi, thank you. Thanks for all the detail in 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 1 third of those will have the Infinite Kitchen. If that goes well, would the plan be to reaccelerate openings in 20 25.

Speaker 4

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.

Speaker 2

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 on 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 success of the deployment to have a greater share of Infinite Kitchens in that 2025 pipeline.

Speaker 4

Okay. That's great. Thank you. And just as a follow-up, for those initial 7 to 9 in 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 traditional store, dollars 2,800,000 to $3,000,000 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 7 to 9 this.

Speaker 4

Units or range.

Speaker 2

So, here's what I could tell you. We've opened 1 unit so far and we're really pleased with the results we're seeing. We're really pleased 1st and foremost with the customer experience. Customers, all the feedback we get is people love it. They love the speed.

Speaker 2

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.

Speaker 2

And so we gave a number on the Naperville margin last quarter, we're not going to report on 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, we'll 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 opened in a suburban restaurant, We're opening a second one here in Huntington Beach.

Speaker 2

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, couple of urban deployments, couple of other suburban deployments, really understanding how it works in different, 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 targeted into stores that have slightly higher volumes for us. I think I covered all of your questions there.

Speaker 4

Yes. Thank you very much.

Operator

Your next question comes from the line of Brian Bittner with Oppenheimer. Your line is open.

Speaker 5

Thanks. Just a follow-up to that question. I mean, I think the Infinite Kitchen dynamic is Pretty popular just given how successful it's been early on even though it's only been in 1 unit. Can you help us understand maybe the longer term retrofit opportunity. I know there's a big opportunity in your new unit pipeline, but what are the main restrictions or maybe even perhaps opportunities As it relates to this dynamic on being able to insert Infinite Kitchens into existing legacy units.

Speaker 2

Thank you for the question, Brian. So as we mentioned on the prepared remarks, we're planning 2 to 4 retrofits next year. We do see a huge retrofit opportunity and that's again something we're looking to learn. We're looking to learn a few things in a retro that I think will be different from a the store. Specifically, what does that max throughput do to our AUV in that restaurant?

Speaker 2

As we mentioned before, the Infinite Kitchens can do about 500 bowls per hour, so really fast production. And so we want to understand you put it in a high even really high demand store, Think about like a CBD store that has really high peak demand. Can we not only get the margin leverage, but could we capture more demand In those restaurants and have, of course, a better consistent experience. So that's what the retrofit learnings will be for us next year. In terms of where we'll go with it, we do see a lot of restaurants that can eventually be retrofitted.

Speaker 2

The way we're thinking about the technology is it's quite modular both in terms of layout, it can be square or it can be linear, also it can be modular in terms of components to scale costs up and down depending on the AUV. So a lot of flexibility with the machine and Still, I just want to caveat a lot of learnings to have. We have one that we're really happy about, but still a lot more to learn. And I think next year we'll start to provide a lot more of those learnings for us. And the last thing I'll say is, what's interesting about the Infinite Kitchen is, the cost on the Infinite Kitchen as we scale We'll go down as we start to see economies of scale, we'll continue to scale down and we've already started to see that.

Speaker 2

On the flip side, as we've all seen, labor this. So we have 2 cost curves going, one significantly inflationary on the labor side, while the cost of the technology will come down. So over time, this. This can become very a really powerful tool for us, especially as we've seen significant wage increases around the country.

Speaker 5

And you have seen wage increases, but one very positive dynamic this quarter is the leverage that you're getting on the labor line. Q3, a couple of 100 basis points there. I know you slightly touched on some of the drivers of that, but can you dive a little deeper Into how you're pulling this off. I know you're getting tighter with operations, but is there maybe are some of the new stores that you've built just doing much better on labor. Is there anything else to unpack, to help us better understand the drivers of the year over year leverage on the labor line?

Speaker 2

Absolutely. So as you know, our business is all about seconds and cents. So we've really been working towards pulling all the levers we have. In terms of the labor Specifically, the gains have been around better deployment. Some of us have been having our head coaches working more time on the floor consistent with the rest of the industry.

Speaker 2

Otherwise, it's been getting tighter with our labor deployment models. We've also seen a pretty significant increase in our head coach stability. And as I mentioned on the call, we've seen turnover come down 15 points. So we expect turnover to continue to improve and the biggest indicator on productivity Is a more stable team and teams that are more tenured. So at Sweetgreen, we invest a lot in our teams, in our training, in our culture.

Speaker 2

It's a huge part of what we do to provide that key touch to our customers. And as our teams get more time enrolled, They're more productive, not only in providing a better experience, but a more profitable experience. So a lot of the gains have been just more stable teams and better leadership And just really strong head coach performance and we expect that to continue. As you know, COVID brought a lot of the noise around the labor market and we've now seen the stabilization. And then the last thing I'll say on that is we introduced tipping this quarter And we've seen some really positive results.

Speaker 2

Our team members are loving it. And we see that as another accelerant to start to continue to bring turnover down. Awesome. Thank you.

Operator

Your next question comes from the line of Chris Carroll with RBC Capital Markets. Your line is open.

Speaker 6

Hi, Jonathan and Mitch. This is, Katie Johnson, Chris here.

Speaker 2

Hello. My first

Speaker 6

question is, just when thinking about your priorities around menu innovation. Can you talk about your current market share at different dayparts and the specific opportunities the brand has to lean into as

Operator

it relates to the dayparts? Sure.

Speaker 2

So one of the most exciting things we've done in a long time, the biggest menu launch we've had in years has been what we launched last Tuesday with protein plates. So as I mentioned on the call, it's a new category. I love the tagline, the marketing tagline that we have with it, which is you don't have to be a salad person to be a sweet person. And the goal there is a few things. One is to broaden the consumer.

Speaker 2

There's many people that want to eat healthy, real, delicious craveable food, But may not want to eat a salad all the time. So this really starts to capture that broader consumer. It really removes the veto vote in many cases, Which we're really focused on driving that with our kids meals. And it does help us on dinner as well. We've talked about the fact that dinner is about 35% of the business today.

Speaker 2

So we see a huge opportunity in growing share at dinner and really balancing that out and that should be really accretive to our unit level economics. What I can share is, it's only been 9 days, but really encouraged by the early by the launch of protein plates. One, the feedback from guests has been just phenomenal. People are loving it. It's delicious and craveable.

Speaker 2

But the product mix has exceeded our expectations And we're actually seeing it really over index in some of our Southeastern markets, almost doubling what we expected. So certain markets like Texas and the Southeast, We're seeing really strong receptivity to it. The last thing I'll say on it is, this is just the beginning of building out this category. So we launched 3 protein plays last week. You could expect this over the coming quarters years to continue to build on top of this.

Speaker 2

So think about different unique base options, other proteins that will build onto it. And over time, I see protein plates really broadening the consumer, helping us win dinner and really helping us increase the TAM of the company.

Speaker 6

Great. Thanks. And next one

Operator

for me is, Can you expand

Speaker 6

a bit more on SuitePass? Any detail around the frequency or spend versus non loyalty customers would be great? And How are you thinking about the next steps for growing the SuitePass user base?

Speaker 2

Absolutely. So we launched SuitePass earlier this year. It's been approximately the 6 months since launch. We've been very focused on enrollment in both tiers, both the free tier and the paid tier, the membership tier. We just launched, as I mentioned, the ability to use SuitePass in store.

Speaker 2

So for the first for most of the history of SuitePass, it was a digital only program Starting just a few weeks, about a month ago, you can now use it in restaurants. So you could scan to earn loyalty points and use rewards in store, which is a very important and large channel for us. So we're really starting to learn a lot more about what it can do. What I can say is, We expect to beat our internal targets from an enrollment perspective on SuitePass and we are seeing some nice incrementality out of it. However, I do believe there's a lot of this opportunity for us to make minor tweaks around how we leverage the CRM and the different customer journeys to see more incrementality out of that.

Speaker 2

So As we look forward to 2024 and the comp drivers the focused comp drivers for us, continuing to optimize and leverage SuitePass was very high on the list.

Operator

Great. Thanks, guys.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Kathryn Griffin with Bank of America. Your line is open.

Speaker 7

Hi. Thanks for the question. First, I wanted to ask about just the increase in discounting this quarter and sort of what you're seeing in terms of customer sentiment right now, if you can speak a little bit to the quarter to date trends and if that's sort of why you're seeing a little bit more discounting, is it a response To that or is it more about customer acquisition with loyalty? I'm just sort of curious about the ethos with discounting and I think what we should think in terms of maybe headwinds going forward just on the mix component

Operator

Hi, Kathryn. Thanks. It's Mitch.

Speaker 2

I think what

Speaker 3

we would say is that we're really seeing no real change in kind of our customer sentiment, Although we are watching very closely and kind of in line with everything we read, it's showing some degree of concern on the future. Our discounting is up slightly in the quarter, largely due to the launch of SuitePass Plus More than increased discounting by the company.

Speaker 7

Okay. So, yes, I mean, I guess the Question then is just as you think about iterating the loyalty program, to what extent do you plan to incorporate discounting? And I guess, sort of how should we think about kind of how long that sort of headwind exists before you start see the return on that in terms of your expectations for loyalty.

Speaker 3

No, I would say at this point in time, we don't see a need to increase discounting for SuitePass Plus.

Speaker 7

Okay. Fair enough. Thank you.

Operator

Your next question comes from the line of Matt Curtis with William Blair. Your line is open.

Speaker 8

Hi, thanks for taking the question. Just to follow-up on the SuitePass discussion. I mean, I understand it's going to be an important driver of comps for you in the future. But I was just wondering if you could talk about what the impact SuitePass has had on comps so far or is it too early to say?

Speaker 2

I think very marginal so far. As I mentioned earlier, we're very much in the enrollment and acquisition period, more of an investment period. And as we build that membership ways, we'll move into leveraging it. So like I said, it's a huge focus for us to make some optimizations Less on the underlying framework. We're pretty happy with how that works.

Speaker 2

But I think there's some work we can do in terms of the journey of how we leverage the CRM Drive that frequency of guests and there's probably a few minor things we can do in terms of driving better enrollment upfront. So expect to see some minor changes, but overall, to Pleased with the start and do you think this will be a big comp driver in the years ahead and has not been a huge impact for us customers.

Speaker 8

Okay, got it. Thanks for that. And then just one other question on the quarter. It looks like Other restaurants OpEx was up pretty significantly, at least more than they were expecting. Can you just describe what drove that?

Speaker 2

Yes,

Speaker 8

sorry. It's just a question on the 3rd quarter Other restaurant operating costs. It was up pretty significantly, at least more than we were projecting. I was just wondering if you could say what drove that?

Speaker 3

No, actually, it's difficult for me to explain why it was up versus what was We saw no significant change in our inside numbers or planning.

Speaker 8

Okay. Thank you.

Operator

The. And your last question comes from the line of Andrew Charles with TD Cowen. Your line is open.

Speaker 9

Thank you. This is Zach Ogden on for Andrew. Just looking at the updated guidance relative to the start of the year, the store openings are at the high end And the same store sales are at the midpoint. The midpoint of the same store sales was unchanged. So the revenue guidance was Updated to the lower half of that range.

Speaker 9

So can you talk about what's leading that if everything else is

Speaker 2

at the high or at the midpoint or higher end of the range?

Speaker 3

Yes. Thanks for the question. I think all I can really say about that as we kind of head into the Q4 is we're kind of cognizant of all the consumer uncertainty that we hear and read about. And as you know, seasonally, we're heading into our softest quarter of the year, and it contains 3 holiday weeks. I think those factors all kind of play together to lead us to the guidance number.

Speaker 9

Okay, got it. Thank you. And then just a question on the Q3. So The same store sales for the full quarter, it seemed to exceed what you had disclosed for the July period. So was there that acceleration Throughout the quarter and what do you attribute that to?

Speaker 3

Yes. Thank you. We saw our same store sales grow each month in the Q3. So August is bigger than July and September was bigger than August. So we saw a period of sequential growth all quarter.

Speaker 9

Okay, great. Thank you.

Operator

We do have another question from Brian Mullen with Piper Sandler. Sir. Your line is open.

Speaker 4

Hey, thanks for taking a follow-up. Just a question on the restaurant level margins. If we were to take the upper end of The guide this year and say you got to 17.5 percent. That's a lot of really good progress year on year. If you put aside the Infinite Kitchen for a second, Do you think restaurant level margins could expand next year?

Speaker 4

And I ask that within the context of I believe you still think there's a path to 20% over time Without the Infinite Kitchen. So I'm just curious if you could kind of give some early thoughts on, if you could expand them next year.

Speaker 3

Thanks for the question. We do see our restaurant level margins to continue to expand year over year. We believe next year in 2024, they will exceed 2023. And we clearly see a path to kind of that benchmark 20%. We had a 20% margin in the Q2 of this year.

Speaker 3

We ran 19% in the Q3. We think as we kind of look out on the things that we've discuss earlier both on the cost structure side around labor optimization and on the growth side around menus, SuitePass Plus that we actually see drivers to increase revenue and costs coming down. And we think it's clearly a path to 20% near term and that's without any benefit from the IK, which Quite frankly, it could be transformational over the next few years.

Speaker 4

Okay. Thank you, Mitch.

Operator

This concludes today's call. You may now disconnect.

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Earnings Conference Call
Sweetgreen Q3 2023
00:00 / 00:00
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