Sweetgreen Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen Incorporated First Quarter 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

To ensure that we can accommodate as many participants as possible, we kindly request that each participant limit themselves to 1 question and one follow-up Thank you. I would now like to turn the call over to Rebecca Noonu, VP, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Here with me today are Jonathan Niemann, Co Founder and Chief Executive Officer and Mitch Trevak, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release is available on our website at investor. Sweetgreen.com.

Speaker 1

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 ks Filings 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.

Speaker 1

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.

Speaker 2

The momentum Sweetgreen had at the end of 2023 is continuing to build as we begin 2024. With the focus on guest experience, we are driving growth and adjusted EBITDA profitability exceeding the high end of our Q1 guidance. Our strategy is working. We have a strong foundation to build on and multiple levers to drive long term capital efficient growth. The results today wouldn't be possible without the hard work of our team members.

Speaker 2

I want to take a moment to extend my gratitude to each of them for their unrelenting passion to further our mission of connecting people to real food. We reported sales of $157,900,000 representing 26% year over year growth. Same store sales were 5%. Total digital sales represented 59% of our total first quarter revenue with 56% of those sales coming via our own digital channels. Restaurant level margin for the Q1 was 18.1%, expanding over 400 basis points year over year, making this one of the highest first quarter restaurant level margin performances in the company's history.

Speaker 2

Restaurant level profit for the Q1 was $28,500,000 a nearly 70% increase from a year ago. Additionally, we generated positive adjusted EBITDA for the quarter. As I shared on our last call, our strategies are simple. 1, continue building our brand by creating great products and guest experiences and 2, expand our connection to guests by building and operating great restaurants. Over the past year and a half, we've been focused on these strategic priorities to improve our financial model with the goal of driving both revenue growth and profitability.

Speaker 2

Our Q1 results demonstrated revenue growth, expanded margins and adjusted EBITDA profitable growth. Let me share some of the highlights from this quarter. During the Q1, we opened 6 new restaurants, including 2 of these in a new market, Seattle. We also opened restaurants in San Francisco, Miami, Denver and Austin. Our Q1, 2024 cohort of new restaurant openings have an average weekly revenue already outpacing the existing fleet average.

Speaker 2

Building on the momentum of the Totem Lake opening, which has quickly become one of our top performing restaurants, the South Lake Union location in Seattle had one of the strongest opening weeks in the company's recent history. Both restaurants are operating at volumes akin to our large urban restaurants. Openings like these demonstrate that our brand has significantly greater reach than our current physical footprint and that there is massive white space for our category defining concept. We remain pleased with the performance of our 2 infinite kitchens. At the end of the Q1, the 2 infinite kitchens located in suburban trade areas are tracking to an average year 1 average unit volume of $2,600,000 and they delivered an average first quarter margin of 28%, 10 points above the fleet average giving us confidence in our go forward deployment strategy.

Speaker 2

They also continue to demonstrate additional benefits to our operating model such as faster throughput, better order accuracy, portioning consistency and substantially lower team member turnover. Additionally, we continue to see higher average checks than the markets they operate in. In 2024, we remain on track to open approximately 7 new Infinite Kitchen restaurants as well as retrofit 3 to 4 large urban restaurants with the Infinite Kitchen. Our first retrofit will be in New York City this summer. In 2025, we plan to deploy an increasing number of new restaurants powered by the Infinite Kitchen.

Speaker 2

As we build our future real estate pipeline, we see tremendous white space opportunities across the United States in both new and existing markets. Starting next year, we plan to return to a growth rate of 15% to 20% new unit growth per year, with 2025 being at the lower end of this range and 2026 and beyond targeting the upper end of the range. We continue to execute our culinary roadmap to broaden our menu, drive menu innovation, traffic, mix and check. Protein plates continue to over index at dinner and as well in the Southeast and Texas markets. In February, we launched a test of our caramelized garlic steak across the Boston market.

Speaker 2

Our caramelized garlic steak features tender cuts of grass fed steak seasoned with a garlic spice blend, expertly roasted and finished in a blend of olive oil and herbs. Guests can order steak in any of our chef crafted entrees, including the steakhouse chopped and caramelized garlic steak plate, as well as have the option to add the new protein on any existing or custom item. During our testing phase in Boston, we saw caramelized garlic steak become a dinner time favorite with steak included in nearly 1 in 5 dinner orders. Having successfully completed our market test process and exceeding our internal expectations, we launched steak fleet wide this past Tuesday. As we innovate our menu, we've always believed in listening to our customers to deliver more of what our guests want.

Speaker 2

Incorporating steak into our menu provides customers with something they've been seeking for years. With a deep commitment to sustainable practices, finding the sweet green way to source steak in our restaurants took time. We're proud to introduce our 100% grass fed pasture raised steak from ranchers who align with our commitment to high quality nourishing ingredients and high sourcing standards. Turning to operations. At Sweetgreen, our people are the most important ingredient to running great restaurants.

Speaker 2

They are on the front lines connecting guests to our mission by serving real food sourced from local farmers and prepared in house daily. Our organization is rallied around prioritizing the guest experience and driving throughput. We've aligned our incentives around these priorities, including bonuses for our head coaches and tipping for our team members. As a result of the investments we are making in our talent and culture, our turnover is 19 points lower than it was in the Q1 of 2023 and has stabilized at the lowest levels we've seen since prior to COVID. Our 90 day retention is 10 points higher compared to the Q1 of 2023.

Speaker 2

Over 50% of our head coaches are internal promotions and as we move forward, our goal is to increase this percentage. As we plan to ramp our restaurant openings in the years to come, we have a strong pipeline of future head coaches and are excited about the growth opportunities for all of our team members. We remain focused on capturing additional urban lunchtime demand where we know we have a walk away factor. We have made meaningful progress over the last few quarters with improvements in labor scheduling and having head coaches spend more time on the floor with customers. Over the coming quarters, there are opportunities for further labor deployment improvements by reducing time on routine in restaurant tasks and improving deployment across all day parts.

Speaker 2

Across the organization, we remain focused on hospitality and operating great restaurants, leading to growth and expanding margins. Today's consumer is increasingly selective with how they spend their discretionary income. Customers are choosing Sweetgreen given our mission driven brand, unparalleled quality of our product and the value we offer with our menu innovation. Our commitment to sourcing permeates every aspect of our menu. We partner with farmers we know and trust ensuring the highest quality ingredients and scratch cook every day in each of our restaurants.

Speaker 2

This dedication is our promise to guests. The positive results both on the top line and our restaurant level profitability is evidence that the investments we are making in our people, our operations and financial model are the right ones. I'm very proud of what our team has accomplished together. You see their accomplishments in the financial results today and also in the experience in our restaurants through their exceptional hospitality and high quality food we serve. Looking ahead, we have a massive opportunity to bring real food to more communities and disrupt the industry with the rollout of the Infinite Kitchen.

Speaker 2

We are building a durable business and shaping a healthier future for the next generation. Now I will turn over the call to Mitch to review our financial results in further detail.

Speaker 3

Thank you, Jonathan, and good afternoon, everyone. As you just heard from Jonathan, the Q1 demonstrated that the groundwork related 2023 is driving strong momentum across the business. Total revenue for the Q1 was $157,900,000 up from $125,100,000 in the Q1 of 2023, growing 26% year over year. For the Q1, same store sales grew 5% year over year. This consisted of a 5% benefit from menu prices and flat traffic mix.

Speaker 3

Same store sales sequentially improved each month within the quarter. Our Q1 traffic was impacted both by January weather and the inclusion of 2 additional holidays in the quarter. Our average unit volume in the Q1 was $2,900,000 Restaurant level profit margin in the Q1 was 18.1% compared to 13.5% a year ago. This is greater than a 400 basis point improvement from the Q1 of 2023. Our restaurant level margin of 18.1 percent was the result of several factors including strong revenue growth and margin improvement in our new restaurants.

Speaker 3

The restaurants that are excluded from our comparable restaurant base, that is the non comping restaurants, had substantial restaurant level profit margin expansion from the Q1 of 2023 and collectively had a margin that was close to the fleet average of 18.1%. Additionally, we saw some of our fastest sales growth in our newest markets. In particular, our new Southeast markets collectively grew double digits as they continue to accelerate their ramp. We also expanded margins across our legacy markets as a result of disciplined labor scheduling and having head coaches spend more time on the floor to improve both hospitality and guest throughput. We continue to focus on margin expansion across portfolio of restaurants.

Speaker 3

Our fleet wide restaurant level margin on a trailing 12 month basis is running 18.5%. Restaurant level profit for the Q1 was $28,500,000 a nearly 70% increase from a year ago. For a reconciliation of restaurant level margin to comparable GAAP figures, please refer to the earnings release. In the Q1 of 2024, we opened 6 restaurants, including 2 in Seattle, South Lake Union and Totem Lake, ending the quarter with a total of 227 restaurants. In 2024, we anticipate opening between 2327 new restaurants, approximately 7 of which will contain the Infinite Kitchen.

Speaker 3

Our new restaurant openings are weighted toward the back half of the year. As Jonathan mentioned earlier, in 2025, we plan on a unit growth around 15%, accelerating towards 20% in 2026. We're pleased with the early reads from the Infinite Kitchen and our results in new markets giving us confidence that we have the opportunity to capture the considerable white space both in existing and new markets. Food, beverage and packaging costs were 28% of revenue for the quarter, an 80 basis point improvement over year over year. This improvement was primarily due to menu price increases.

Speaker 3

Labor and related expenses were 29% of revenue for the Q1, a 2 40 basis point improvement year over year. This improvement is primarily attributable to menu price increases and improvement in labor optimization. Occupancy and related expenses were 9% of revenue, a 95 basis point improvement year over year. General and administrative expenses were $36,900,000 or 23 percent of revenue for the Q1 of 2024 as compared to $34,900,000 or 28 percent of revenue in the prior year period. This increase in general and administrative expenses was primarily due to a $5,100,000 benefit received in fiscal year 2023 from the employee retention tax credit that was partially offset by a $4,600,000 decrease in stock based compensation expense.

Speaker 3

We continue to demonstrate operational leverage in the support center in the Q1. Excluding the one time benefit of the 2023 retention credit of $5,100,000 our support center costs grew 6% year over year as sales grew 26%. Our net loss for the quarter was $26,100,000 compared to a loss of $33,700,000 in the prior year period. The $7,600,000 improvement in net loss is primarily due to a $11,600,000 increase in our restaurant level profit and a $1,900,000 decrease in pre opening costs. The increase in our restaurant level profit and the decrease in pre opening costs 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, increases in general and administrative expenses as described previously as well as an increase in depreciation and amortization associated with additional restaurants.

Speaker 3

Adjusted EBITDA, which excludes stock based compensation and certain other adjustments, was $113,000 for the Q1, an improvement of $6,800,000 from the Q1 of 2023. Adjusting for the onetime employment credit in the Q1 of 2023, our adjusted EBITDA year over year improvement was 11,900,000 dollars We ended the quarter with a cash balance of $244,000,000 Now turning to guidance. For the fiscal year 2024, we update our guidance to reflect the strength of the Q1. 23 to 27 net new restaurant openings, revenue ranging from $660,000,000 to $675,000,000 same store sales growth between 4% 6% restaurant level margin between 18.5% 20% and adjusted EBITDA between $10,000,000 to 19,000,000 dollars In closing, we saw strong revenue growth of 26%, expanded restaurant level margins by over 400 basis points and delivered positive adjusted EBITDA of $113,000 Looking ahead, Sweetgreen remains committed to innovation, including expanding our menu offering and deploying the Infinite Kitchen. These initiatives together with our focus on running great restaurants are poised to drive traffic, create better customer and team member experiences as well as unlocking long term value for our shareholders.

Speaker 3

Our unwavering focus on sustainable profitable growth coupled with a healthy balance sheet positions us well for the opportunities that lie ahead. With that, I'll turn the call back to the operator to start Q and A.

Operator

Thank you. We will now begin the question and answer Your first question comes from the line of Brian Bittner of Oppenheimer. Please go ahead.

Speaker 4

Thanks for taking the question. The quarter was impressive as is the guidance raise and I just want to dig into the update on your same store sales guidance range for 24%, now 4% to 6%. At its midpoint, it would suggest the rest of the year looks very similar to 1Q, which was up 5% and you had some tough weather in the Q1 and now you have steak rolling out, which did not really impact the Q1. So is there perhaps some conservatism baked into the new same store sales guidance? Or is there anything else you can unpack regarding your assumptions for the remainder of the year?

Speaker 3

Thank you, Brian for the question. Yes, I understand the way you're looking at it. I think what I would simply say is, if you recall for the prior 2 years, as we came through the holiday periods, the company saw a lot of negative traffic, particularly starting around Memorial Day and then through the summer. And I think that really what we're doing is taking an approach that says we're uncertain as to how the holidays impact the business. And frankly, we had a major launch as you know on Tuesday with stake and really have not factored that heavily into our guidance given the fact that we've only had 2 days of history.

Speaker 4

That's really helpful. Thanks, Mitch. And my follow-up is just I'm hearing a lot of positive commentary on new unit sales volumes and on new unit profitability more so than past earnings calls. What do you believe has led to the inflection in the performance of units that are outside the comp base? And how does this inform you about how you're going to open new units and the strategy behind that moving forward?

Speaker 2

Sure. Hi, Brian. Thanks for the comments. And just want to start off by thanking our team for all the amazing work with putting together a great quarter. As we look at new units, I think there's a few things that we've done.

Speaker 2

One, we've adjusted our real estate targeting and I think taking a lot of the lessons of the past and how we target real estate, especially as we look at our suburban expansion and what are the attributes for successful stores. Secondly, we've clearly had an unlock in brand awareness as we've continued to grow. And there's markets that are waiting for us to open, Seattle being a great example. I also you can see the unlock in the brand and some of the performance you've seen in some of the markets that were once struggling, places like Texas, Atlanta and Florida. And as the brand has unlocked, there from an awareness perspective, we're seeing a lot of positive growth.

Speaker 2

We've also adjusted and taken a lot of our learnings around how we operate those restaurants, how we staff them, the head coaches that we have to lead those stores, how we train them and really the training and the internal promotion focus of bringing head coaches that understand our business, understand our culture and having them open up those new restaurants. And then lastly, as we've talked about in past calls, we've adjusted a lot of our marketing strategies. So as we've shifted how we market and open new stores as well as how we could support those new restaurants, not just for the launch, but for the 1st 90 to 3 to 6 months, we've seen really positive results. So we feel really good about the new stores. I think we're getting a lot of momentum here and it gives us a lot of confidence as we look to reaccelerate our pipeline.

Operator

Your next question comes from the line of Rahul Groul of JPMorgan. Your line is now open.

Speaker 5

Good afternoon, guys, and thanks for taking my question. It's on the supply chain optimization side, and it's now an increasing focus. I think we discussed this in the past on how certain ingredients can be less local if it's not worth the cost or quality perception. What things would you say we are on this exercise? And I understand it's an evolving process, but can you discuss the opportunity set with some examples currently underway?

Speaker 5

And I have a follow-up.

Speaker 2

Sure. Thank you, Raul. So, we're constantly looking on ways to continue to innovate our menu, both bringing new items that our guests will love, but also making it easier for our team members to execute. So we can deliver on our promise with every single meal. And so as you know, we put this steak launch, it was a very big launch for us, first time having meat on the menu, very proud of the offering that we've put forward with a grass fed, pasture raised.

Speaker 2

And in that process, we also simplified some of our menu. So we moved a couple of SKUs and optimized a few things to continue to make it easier. So I'd say we're always we're continuously looking at what is the customer value, where do we want to double down. I'll give you an example. Last year, we made the upgrade to olive oil for all of our cooking.

Speaker 2

And then sometimes we look at some rationalization around SKUs of things that are not heavily used or customers don't value. So we're going to continue to look at things as things evolve. But we like one of our philosophies at Sweetgreen is how do we get better as we get bigger. And so we really are looking to continue to protect our supply chain and the quality of our food because that's really what people love about us. And as we scale, we should continue to see efficiencies there.

Speaker 5

Perfect. And on a similar note, like what earnings are you on the labor scheduling and streamlining the labor prep hours today, which I believe is 10 points of labor. You can talk from a current compliance or further opportunity standpoint on this aspect.

Speaker 2

I'd say we're still very much in the early innings around labor. So I'd say that we've made a lot of headway, but as we've seen this quarter in Q1 and as we're starting to see in Q2, how we deploy labor, not just from an efficiency perspective, but to better capture peak demand and offer that hospitality that our customers expect, there is a ton of opportunity. So today, we put a huge focus on both of those things on staffing for the peak and being ready to serve as many customers as we can in those periods. But we are looking at investments around different labor deployment systems that we think over time can continue to drive more efficiencies in how we deploy labor. In the past, we've also talked about efficiencies in what we prep in restaurants, what we upstream, how do we make it easier to make that job easier and more efficient in the back of house.

Speaker 2

And again, we'll consistently look at both tools and products that will make it easier to provide the experience that customers expect.

Operator

Your next question comes from the line of Sharon Zackfia of William Blair. Your line is now open.

Speaker 6

Hi, good afternoon. I guess, two questions on my allotment. In California, I don't think you did take price when minimum wage went up, but I know you already pay a healthy wage in California. But did you see kind of incremental labor pressure in California? And maybe give us an idea of where you expect the labor inflation to be in the Q2 relative to what you saw in the first?

Speaker 3

Thanks, Sharon. In the Q1, we saw very little. As you know, the California Wage Act took place April 1, it's really hit in the 2nd quarter. Our wages did go up in kind of mid to high single digits in California and we offset that with a 5% price increase in California, which took place February 21. And the more broader question, do you not see a lot of labor pressure anywhere else for the rest of the year at this point in time?

Speaker 2

Yes. If there's anything I could add, Sharon, as I mentioned on the call and in the prepared comments, we've actually seen a lot of momentum with our team. As we've focused more on the stability of our head coaches as well as the internal promotion, we've made huge strides in getting fully staffed at all levels. And I think we're seeing really great quality talent come in. And I think how we train them and continue to grow them through the system, you'll see a much bigger focus over time of continuing to drive that internal promotion rate.

Speaker 2

That is our people flywheel and so much of what we can offer at Sweetgreen is really part of what I call the American dream of starting somewhere as a team member and within 3 years being a head coach making over $100,000 a year. So it's a huge part about what we're trying to do is not only create something great for our customers, but create a great opportunities for our team members.

Speaker 6

Great. And then on Infinite Kitchen, just considering the metrics there remained very healthy at the margin level. Ultimately, kind of where do you see the overall fleet as it relates to Infinite Kitchen? I mean, is this something where eventually all locations are retrofitted? And separately, if not, would you consider just adding kiosks to all locations over time just given the check lift you're getting?

Speaker 2

Sure. So, thank you for the question. So we're very excited about the results we're seeing with Infinite Kitchen. Not only are we seeing great feedback from a customer perspective, we're seeing we're delivering on what we expected from a unit economics perspective. So as I mentioned, the 2 stores that the 2 pilot stores we have, which are kind of trending towards $2,600,000 AUVs ran a 28% margin in the quarter.

Speaker 2

So about 10 points ahead of the rest of the fleet. Last quarter, we had shared that we expect about 7 points of leverage on Infinite Kitchen stores. So we're seeing a little bit higher than that and that's very promising for us. As we think about what the Infinite Kitchen could look like going forward, we do think it's going to be a huge part of our go forward strategy. As we get manufacturing set up and get more confident in this in both the how we design those experiences and continue to drive down the cost of the machines to fit into more places, you'll see a much higher mix of our deployment in new stores.

Speaker 2

We talked about retrofitting 3 to 4 stores this year. We're going to learn a ton from those experiments. As we learn about how much downtime there is, what the cost of the renovation is and what the uplift is, we'll start to understand how much more of the fleet we think we can retrofit. We've talked in the past that there's definitely a huge chunk of very high volume stores that we think have an opportunity for retrofit. But I think we have a little bit more to learn in terms of understanding, does it go everywhere and at what timeframe and do they do we wait for the renovation cycle or do we pull it forward?

Speaker 2

So there's a lot to learn, but I'd say we're very bullish on the technology and the experience. We expect it to be a huge part of future deployments and probably increasing the percentage of NROs that feature an Infinite Kitchen each year. And as we learn more about the renovations, we'll start to go back and tackle that as well.

Operator

Okay. Thank you. Your next question comes from the line of Jon Tower of Citigroup. Please go ahead.

Speaker 7

Thanks. Thanks for taking the question. Hoping you could we've heard from others in the industry that second quarter Q1 itself was kind of choppy, Q2 also kind of going in the wrong direction for a handful of concepts. I was kind of curious to get your perspective on what you're seeing with respect to consumer demand, specifically on the traffic side.

Speaker 3

Thank you, John. Let me spend a minute and first talk a little bit about the Q1 and what we saw and then I will end with a few remarks on the Q2, although we're still under halfway through the Q2. Like other people, the Q1 started off a little bit slow. And I would say January, we were very slightly negative, really attributable in our view to weather, something many people have commented on. February, the business was somewhere in the mid single digits and by March, we were in very high single digits and that averaged itself out to about a 5%.

Speaker 3

Also in the Q1 for us, with our shifting calendar, we did pick up 2 additional holidays that we didn't have last year. As we start off in the Q2, we're tracking a little bit ahead of the high end of our guidance halfway through the quarter. On the positive, that's also prior to our stake launch and prior to us really turning on media. So we feel pretty good about where we're at at the Q2 at this point.

Speaker 7

Great. Thank you for the color. I appreciate it. So I can maybe drill a little bit into the Infinite Kitchens and specifically the stores you're seeing that you've got in Naperville as well as in Southern California, maybe you could speak about the traffic versus check perspective. I know you'd mentioned on the last earnings call, you were seeing a nice lift in check.

Speaker 7

Just curious to know how traffic has trended as those stores have kind of matured a little bit more in those markets. As awareness is built around the technology and what you're serving, has that led to increases in traffic at the level you were expecting?

Speaker 2

So both stores are thank you, John. Both stores are under 1 year old. So we're not able obviously actually, Naperville just hit its 1 year anniversary. I think it was yesterday. So we're just going to start to understand what that looks like year over year.

Speaker 2

But overall, we've seen momentum in those stores. And so as awareness has continued to build, the stores are strengthening, not weakening. So we're pretty we feel very good about those restaurants and the experience we're putting forth. And as I said before, we actually think a lot of people have asked about the Infinite Kitchen, how we feel about it and what our confidence level is and what I've shared in the past and I'll reiterate is that we feel very good about the technology and what the scalability of the technology, it works, our teams love it and it delivers. I think there is a lot of opportunity for us around how we continue to elevate that experience featuring the Infinite Kitchen.

Speaker 2

So how do we add more of that Sweetgreen magic within that experience and more hospitality components and those sorts of things? You'll see us continue to iterate on store designs and experiences to just something that we always do is just try to make a better experience. So overall, very pleased, continued momentum and we'll continue to iterate to improve.

Operator

Your next question comes from the line of Andrew Charles of TD Cowen. Please go ahead.

Speaker 2

Great. Thank you. I wanted to

Speaker 8

ask about stake that in test markets, you mentioned that was included in 1 in 5 orders. Given the robust data you have from loyalty users, can you help us understand the incrementality of stake sales and repeat usage that you observed in test?

Speaker 2

Sure. Hi, Andrew. So we're very excited about Steak. It launched 2 days ago. We ran a test in Boston that was very encouraging, as we mentioned, 1 in 5 dinner orders.

Speaker 2

We're also I think one of the good things about steak and one of the intentions was to broaden the consumer, bring more customers in, broaden the daypart and also expand that customer base. A lot of the surveys, consumer insights that we had is there's a lot of fast casual customers that won't go somewhere unless there is a meat option and especially with a huge focus on protein, which we've been leaning on with our protein plates, it's a big opportunity. So we're seeing a wonderful reception. We have seen a really, really nice repeat rate as well, which is why it gave us confidence in moving from a test to a launch. So it wasn't just trial, we saw people coming back and ordering it and we did throughout the pilot period, the test period make some changes and we saw improvements as we started to iterate on the actual recipes and builds.

Speaker 2

So it's still very early, only 2 days in, media has not even turned on yet, but we're very encouraged by the early results. And so what we'll see with stake is probably a few things. 1, given the price, you'll see some tailwinds from a mix perspective, but we should also hopefully see some transaction growth as we bring in more new customers and hopefully drive that extra occasion specifically around dinner.

Speaker 8

Okay, super. And then my follow-up was just, you talked about the incremental throughput opportunities through more productive staffing and better staffing. No doubt a product of Barzan's initial observations of the brand. Can you help us identify the ultimate opportunity, the ultimate unlock on traffic that you think this can also provide once you're able to fully optimize this?

Speaker 2

Are you asking what's the ultimate unlock on traffic in general?

Speaker 8

Yes, from the improved staffing and the more efficient staffing that you recently were talking about?

Speaker 2

Yes, I think it's a few things. One, there's the immediate pickup of those additional transactions. So as you go faster, you can pick up those additional transactions. I think what you get over time is a change in perception around the brand. So you think about lunch or dinner and you think about your how much time you have and there's brands that are in your consumer in your consideration set and then there's ones that's not.

Speaker 2

And as we start to pick up throughput, you start to enter that consideration set for people that have more limited time and we know that over time that drives transactions. So already we're seeing some really nice moves there, in terms of both how we train our teams around throughput, how we deploy our labor and a huge why we talk about our turnover and why we think about our turnover and head coach stability and internal promote is those are leading indicators for our ability to drive throughput in hospitality. So I really just want to thank our head coaches, our whole field team and our operators for the amazing job they're doing. I think we're really just getting started here.

Operator

Your next question comes from the line of Brian Mulan of Piper Sandler. Please go ahead.

Speaker 2

Hey, thank you.

Speaker 9

Just a follow-up on Infinite Kitchen. Jonathan, 1,000,000

Speaker 3

volumes

Speaker 9

1,000,000 volumes, what it might be? And then separately, is it fair to think if in a kitchen location in an urban setting happened to see AUVs above the system average, maybe something above 3,000,000. Would that urban location potentially see restaurant level margins that were higher than 28%? Just any thoughts on that idea would be great.

Speaker 3

Thank you, Brian, for the question. Yes, let me first answer the first part. Yes, I would probably say, I think the 28% margin that we saw in the Q1 for Huntington Beach and Naperville is probably a good margin for AUV Suburban $2,600,000 IK. There was absolutely nothing in the Q1 performance for those two stores that would lead us to think anything else. With the potential maybe exception that Huntington Beach is still a very new store that was its Q1.

Speaker 3

So maybe a little bit of upward momentum under Huntington Beach as we roll forward. We believe your second question is largely correct that as the IK gets deployed in higher AUV stores, particularly in busy urban stores, that the margin improvement will be greater than we're seeing in the suburban stores. And we also believe that we will see a big uptick in throughput driving up the AUV. And of course, on that higher throughput, the flow through will be approximately 70% as the only kind of cost that will drag us cost of goods with no additional labor. That is part of the reason we're doing the retro.

Speaker 3

And hopefully in the next call or the call for the Q3, we'll be in a position to kind of give more accurate and complete numbers around that.

Speaker 9

Okay, that's great. Thank you for that. And then just a question on development. Last quarter, you mentioned you were looking at potentially exploring a smaller format unit as well. Could you just talk about that?

Speaker 9

What's some of the work you're doing? How far along are you? Is that perhaps part of the plans for the next year or 2 or is that a bit further out? Any color.

Speaker 2

Sure. That kind of plays into my comments earlier around how we're thinking about continuing to evolve the actual experience. And so we have a few designs and prototypes ready that we've iterated on and you should expect to see those smaller format units begin testing early next year. So they're pretty we're about a year away from those kind of hitting we're starting to see starting to understand how they perform. And we think that will be one of the levers as we think to as we look to accelerate our pipeline.

Speaker 2

I'd say beyond the smaller format, we do see other formats as a huge part of our playbook. So we do believe drive thrus are a really big opportunity, something we are looking at and we have some opportunities especially powered with the IK. As you know, we've seen some great success with our current suite lane. We also have a pickup kitchen that does phenomenally well, which is a super small, just a pickup only mobile order and pickup only store. Again adding the IK into that unlocks a lot of TAM for us.

Speaker 2

So as we look forward for our pipeline, we actually see a lot of densification opportunities in markets that we already we do already very well in, as we're able to kind of fill in with some of these smaller formats and different types of formats.

Operator

Your next question comes from the line of Catherine Griffin from Bank of America. Please go ahead.

Speaker 10

Hi, thank you. First, I just have a quick clarification and then a question. So just to clarify, because I think the previous revenue guidance had some assumptions baked into it in terms of the downtime associated with the retrofits. That's still the case. I think even though you haven't it sounds like you haven't really like quantified exactly what that downtime might be, It's still baked into the guidance?

Speaker 3

Yes, that's correct, Catherine.

Speaker 10

Okay, great. And then, the question is just on protein plates as a pretty meaningful traffic driver, it seems like. Can you help me just frame or even like quantify how much of the transaction, I don't know, growth that you've seen is from protein plates over the last couple of quarters? And then, I guess how much of that do you think is like trial versus something that's more sustainable going forward?

Speaker 2

Sure. So I can take that. We've been very pleased with protein plates. I think again, it's created it's made Sweetgreen something that people now want at dinner. It's expanded our customer base and is definitely over indexing in new markets as well.

Speaker 2

So some of the performance we're seeing, as I mentioned earlier around these newer markets where we're seeing double digit comps, much of that is coming from Protein Play and the dinner growth we're seeing and the weekend growth we're seeing is really, really promising. So still again, it's less than 6 months in with Protein Place, but we see a lot of opportunity. And as we talked about before, we see Sweetgreen as more than just the salad place and we're going to continue to build on these warm, hearty, craveable, but still healthy options for our guests.

Operator

Your next question comes from the line of Brian Harbour of Morgan Stanley. Please go ahead.

Speaker 11

Yes, thanks. Good afternoon. Mitch, could you just update us on pricing for the rest of the year? I think you had previously said about 4%. Is it still the right number looking forward?

Speaker 11

Or is it going to be closer to 5?

Speaker 3

Thank you, Brian. It's going to be closer to 4. There's one point that's going to be rolling off, I think, in April. And at this point in time, we don't plan any more price moves for the rest of the year.

Speaker 7

Okay, got it.

Speaker 11

And then just on the topic of throughput and operations, is there anything you could say about any way you could quantify it in terms of speed of service or in terms of sort of like digital order throughput, other things that might frame for us the improvement you've seen relative to last year?

Speaker 2

So there's a few ways we think about throughput. We think about throughput both on our front line and then and we measure that in a 15 minute period. And what we talked about before is that with an additional 5 transactions in a store that's about a point in comp. So there's a very big frontline opportunity. And then on the back lines, our digital make lines, we have much better data because the way it's managed is through what we call a throttle.

Speaker 2

And where we see the huge opportunity in that is we see we understand what the line's theoretical throttle are. We understand what the line max throttle is and then we know where we're running. And if you look at the stores that are running at max versus things running where the average is, there is a ton of room on those throttles which we manage for 15 minutes. So the best stores can do up to 90 orders per 15 minutes and then you have many stores more in the 40 to 50 range. So there's a big opportunity as we get staffed and trained and deployed correctly to continue to unlock the throttles on our digital make lines, which we think is a really big opportunity.

Speaker 2

And again, I'll take this opportunity to talk about so much of our focus right now is just on running great restaurants. It's about delivering a consistent, hospitable experience to our guests, which we know brings them back, they tell their friends, it drives that word-of-mouth and given the type of food that we serve and the feeling that it gives you, it really it has this habitual nature to it. So when we do what we need to do, things really work out well and we're very, very much focused on this. And as we've invested in our operations team, very excited to have Ross Anne here with us her leadership as well as Anne, our VP of Operations. We feel very good about the work they're doing to continue to drive great consistent experiences.

Speaker 2

Thanks.

Operator

There are no further questions at this time. I will now turn the call back over to Rebecca Nuno for closing remarks. That concludes our Q and A session.

Speaker 2

Yes, I'll just take this opportunity again to thank our team. Thank you for all that you do every day in delivering our mission and we'll see you next quarter. Thanks everyone.

Operator

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

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Earnings Conference Call
Sweetgreen Q1 2024
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