Sweetgreen Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 15 speakers on the call.

Operator

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome to the Sweetgreen Inc. 2nd Quarter 2024 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. Thank you. I would now like to turn the conference over to Rebecca Noonu, Vice President, Head of Investor Relations. You may begin.

Speaker 1

Thank you, and good afternoon, everyone. Speaking on today's call will be Jonathan Neiman, Co Founder and Chief Executive Officer and Mitch Reback, Chief Financial Officer. Both will be available for questions during the Q and A session following the prepared remarks. Today's call is being webcast live and recorded for replay. I'd like to remind everyone that the information under the heading forward looking statements included in our earnings release also apply to our comments made during the call.

Speaker 1

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. We also direct you to our earnings release for additional information regarding our use of non GAAP financial measures, including reconciliations of non GAAP financial measures mentioned on the call with their corresponding GAAP measures. Our earnings release can be found on our investor website. 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. We had a strong Q2, a testament to the groundwork we laid in 2023, the impact of our growth strategies and the strength of our team. We reported sales of $184,600,000 representing 21% year over year growth. Same store sales grew 9%. This consisted of a 5% benefit from menu price and 4% positive traffic and mix.

Speaker 2

Restaurant level margin for the Q2 was 22.5%, expanding over 200 basis points year over year, making this one of the highest restaurant level margin performances in the company's history. Additionally, we generated an adjusted EBITDA of $12,400,000 for the quarter. We delivered a strong second quarter due to several factors, including the launch of caramelized garlic steak, disciplined operational execution and strong restaurant openings, all part of our simple 2 pronged strategy. 1, continue building our brand by creating great products and guest experiences. 2, expand our connection to guests by building and operating great restaurants.

Speaker 2

Let me share some of the highlights from this quarter. During the Q2, we opened 4 new restaurants, 1 in Washington, D. C, Chicago, Morristown, New Jersey and Salem, New Hampshire, New Hampshire being a new market for us. Our 2024 cohort of new restaurant openings are ramping nicely and continue to have an average weekly revenue that already outpaces the existing fleet average. As we shared a few quarters ago, we relaunched our Intimacy at Scale playbook to execute new openings.

Speaker 2

This playbook prioritized choosing the best real estate, having the right leaders in place and strategically investing in brand awareness, which is paying dividends. Additionally, we saw strong top line performance in emerging markets such as the Midwest, Texas and the Southeast. Our results continue to show that our brand's relevancy extends far beyond our current footprint with considerable white space in both new and existing markets. Sweetgreen's high quality offering and compelling value is clearly resonating with consumers in today's industry backdrop. On July 15, we completed our 1st Infinite Kitchen retrofit at Penn Plaza, which is now the fastest way to get Sweetgreen in New York City.

Speaker 2

The retrofit began in June and took 7 weeks to complete. We were able to keep the restaurant partially open during 6 of the 7 weeks of renovation for online ordering and delivery. The restaurant was fully closed 1 week. It is the 1st Infinite Kitchen made by our contract manufacturer, which was delivered on time and at target cost. Since reopening, we are seeing some of the highest throughput levels we have seen at the store.

Speaker 2

While less than a month in operation, we are pleased with the performance of the restaurant. We remain on track to open a total of 7 new restaurants featuring the Infinite Kitchen as well as retrofitting 2 to 3 existing restaurants with the Infinite Kitchen in 2024. Looking ahead, we are resuming a new unit growth rate of 15% to 20% annually with 2025 being at the lower end of this range and 2026 and beyond targeting the upper end of the range. The majority of our 2025 pipeline is identified and we are working on our 2026 pipeline. Our menu innovation has attracted new guests, driving traffic and check sizes.

Speaker 2

Caramelized garlic steak, which launched in May and protein plates have been particularly successful at driving same store sales at dinner and on weekends in the Q2. Dinner now represents 40% of sales, excluding the 2 to 4 pm midday daypart. This was an expansion of 3 percentage points year over year. Additionally, in June, weekend same store sales grew by double digits. We've also seen our share of Nail guests acquired steadily increase since the Q4 of last year.

Speaker 2

We believe our culinary innovation will allow us to further grow our dinner mix as well as be a driver of long term traffic. With respect to operations, our teams remain focused on prioritizing the guest experience and increasing throughput. We saw progress across the fleet and it reflected in our results this quarter. This will continue to be an area of focus for us moving forward. Part of our culture is creating an ownership mindset and our incentives are aligned to these values.

Speaker 2

These incentives include bonuses and equity grants for our head coaches. As we prepare for more restaurant openings in the coming years, we are building a solid pipeline of future head coaches and are thrilled about the growth opportunities for all of our team members. This is why we've been focused on investing in the employee experience, including upgrading our learning path with an emphasis on leadership skills like performance management, culinary skills and hospitality. We believe that Sweetgreen offers a career and not just a job. Many of our best head coaches are developed from within and we are proud that over 50% are promoted from within.

Speaker 2

As we move forward, our goal is to increase this percentage. We've been focused on investing in head coaches to improve stability because keeping leaders in place can reduce restaurant turnover, which has stabilized at a new post pandemic low. Last week, Sweetgreen turned 17. Since day 1, we've had a vision to redefine fast food by creating a concept that is committed to being fresh, craveable, convenient and sustainable. Our unique sourcing model, partnering with farmers and suppliers we know and trust, combined with our commitment to delivering compelling value at scale, has made Sweetgreen a category leader.

Speaker 2

We plan to continue to lead and define this category by thoughtfully expanding our menu, building out our digital program, introducing new formats and innovating how restaurants of the future will operate via the Infinite Kitchen. I want to thank all of our team members for their hard work. Over the past 2 years, we've been focused on strengthening our operations and financial model and positioning ourselves to accelerate profitable growth. 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 Jonathan just shared, our hard work over the past several quarters and commitment to disciplined capital efficient growth is demonstrated in our 2nd quarter results. We achieved our 13th consecutive quarter of over 20% revenue growth with same store sales reaching its highest level in 2 years. This flowed through to restaurant level margin and adjusted EBITDA. For 2024, we remain on track to be adjusted EBITDA positive on an annual basis.

Speaker 3

Total revenue for the quarter was $184,600,000 up from $152,500,000 in the Q2 of 2023, growing 21% year over year. For the Q2, same store sales grew 9% year over year. This consisted of a 5% benefit from increased menu prices and a 4% increase due to positive traffic and mix. All markets comped positively with very strong growth led by newer markets Texas, Florida, Atlanta and the upper Midwest. Year to date same store sales change is running at 7%.

Speaker 3

Our average unit volume in the 2nd quarter was 2,900,000. Dollars Restaurant level profit margin in the 2nd quarter was 22.5% compared to 20.4% a year ago. This is more than a 200 basis point improvement from the Q2 of 2023. Margins were strong across all regions and age cohorts. Year to date restaurant level profit margin is 20.5%.

Speaker 3

Restaurant level profit for the 2nd quarter was $41,500,000 a more than 30% increase year over year. For a reconciliation of restaurant level margin to comparable GAAP figures, please refer to the earnings release. In the Q2 of 2024, we opened 4 restaurants, including restaurants in Washington, D. C, Chicago, Morris Town, New Jersey and Salem, New Hampshire, a new market for us. We ended the quarter with a total of 231 restaurants.

Speaker 3

Our Infinite Kitchens continued to deliver on our financial, operational and customer service metrics. Naperville just crossed its 1 year anniversary in May with $2,800,000 in sales. For the 2nd quarter, the restaurant level margin was 31 0.3%. In its 1st year, team member turnover was around 45% less than what we see in a classic restaurant at a similar stage. Our Huntington Beach IK is 6 months old and following a similar trajectory.

Speaker 3

Our Penn Plaza retrofit open for a few weeks has shown strong performance. On its 2nd day, the Infinite Kitchen produced nearly 200 bowls in 30 minutes with 100% on time reliability and has the potential to reach 500 bowls per hour. As Jonathan mentioned, Penn Plaza offers the fastest way to get sweet green with an average order completion time of just under 3 and a half minutes. For 2024, we are on track to open between 2426 new restaurants, 7 of which will contain the Infinite Kitchen. These 7 restaurants are scheduled to be opened in Q3 and Q4 of 2024, one of which was opened this week in Fashion Island in Newport Beach, California.

Speaker 3

Food, beverage and packaging costs were 27% of revenue for the quarter, flat year over year. Labor and related expenses were 27% of revenue for the 2nd quarter, a 200 basis point improvement year over year. While we experienced wage rate increases, this is more than offset with improvements to labor optimization. Occupancy and related expenses were 8% of revenue, a 100 basis point improvement year over year. General and administrative expense was $39,200,000 or 21 percent of revenue for the Q2 of 2024 as compared to $40,400,000 or 26 percent of revenue in the prior year period.

Speaker 3

The decrease in general and administrative expenses was primarily due to a $3,600,000 decrease in stock based compensation expense, which was partially offset by an increase in our investment in advertising. Net loss for the Q2 of fiscal 2024 was $14,500,000 as compared to a loss of $27,300,000 in the prior year period. The decrease in net loss is primarily due to a $10,400,000 increase in our restaurant level profit and a $4,500,000 decrease in restructuring, a $1,200,000 decrease in pre opening and a $1,100,000 decrease in general and administrative expenses described above. These decreases were partially offset by an increase in depreciation and amortization expense, primarily associated with an increase in restaurants as well as an increase in other expenses related to the change in fair value of our contingent consideration. Adjusted EBITDA, which excludes stock based compensation and certain other adjustments was $12,400,000 for the 2nd quarter, an improvement of $9,100,000 from the Q2 of 2023.

Speaker 3

We ended the quarter with a cash balance $245,000,000 During the 1st 6 months of 2024, we generated a positive operating cash flow of $22,500,000 dollars Now turning to guidance. For the fiscal year 2024, the raise in guidance reflects our strong performance in the first half of the year. We remain cautious for the second half of the year given what we are reading about the uncertainty U. S. Economic backdrop.

Speaker 3

Additionally, our guidance reflects the retrofitting of 2 high volume restaurants with the Infinite Kitchen, including Willis Tower in Chicago. 24 to 26 net new restaurant openings, revenue ranging from $670,000,000 to $680,000,000 same store sales growth between 5% 7%, restaurant level margins between 19% 20% and adjusted EBITDA between $16,000,000 $19,000,000 As we shared before, we remain committed to disciplined capital efficient growth and driving profitability so that we can accelerate the sweet green flywheel. We remain focused on building our brand, culinary innovation, leveraging our unique supply chain and delivering operational excellence. With this focus, we believe we are well positioned to deliver long term growth for our stakeholders. With that, I'll turn the call back to the operator to start Q and A.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Speaker 4

Hi, thanks for taking the question. The quarter comp was really impressive and obviously had this nice uptick sequentially in transaction and mix. Can you talk about what was the primary driver between those two components? Because I recognize a stake was probably a mix benefit. So I'm not sure how much we should really attribute to traffic versus mix.

Speaker 4

And then secondarily, Mitch, when you're talking about the uncertainty in the macro environment, it doesn't seem like you're seeing anything, but I just want to clarify if that is in fact the case.

Speaker 3

Thank you very much, Sharon, for the question. So let me break the question apart into 2 buckets and take the first one, which was on the second quarter. We have any kind of comments about the traffic and mix and how it's sequentially built. Let me just say that for the quarter, our traffic was positive and it sequentially built each month during the quarter. The mix benefit was largely attributable to the launch of stake.

Speaker 3

Your second question, I believe, was what are we seeing in terms of the cautious guide? And I guess I'll translate that a little bit to what are we seeing early on in Q3. Like a lot of other people have reported, the 1st week of the quarter was soft around the 4th July. As we moved away from the 4th July, our business picked up. And for the last 3 weeks of July, our business comped at the top end of our guidance.

Speaker 3

I think what I would say and kind of making an overall comment is, we feel really happy and comfortable with the things that we control in our business. We're very happy with the menu innovation and more importantly the customer acceptance of our new items. We're very happy with our marketing that we've moved to more out of home and that's showing very strong results. We talked in the past about improving our labor scheduling and deployment in order to improve hospitality and lower labor costs as a percent of revenue and we're very pleased with our results. And as we alluded to in the script, very pleased with our new market response and the strong comp growth rates we're seeing across all of our new markets and the class of 2024 opened up very strong with higher weekly revenue than we're seeing in the fleet.

Speaker 3

However, we feel like we do not control the outside world and we kind of read the same stuff and the same papers everybody reads and reports on. And I think we have a degree of kind of cautiousness around the external environment. Having said that, we are pleased with the fact that July, last 3 weeks of July came in at the top end of our guidance.

Speaker 4

Thanks for that. And as my follow-up, on the IK at Penn, are you seeing customers discover the improved throughput via walk in or does it happen more in the digital channel first? Thanks.

Speaker 2

Sure. Hi, Sharon. Good to hear from you and thank you for the question. So just before I begin, love to just thank our the whole Sweetgreen team for a phenomenal quarter. A lot of hard work to get to this point.

Speaker 2

And I just want to take a moment to thank every single person, especially our frontline team members, our head coaches that really bring the Sweetgreen mission to life every day. As it relates to Penn Plaza, I think if you go and experience it, it's pretty amazing. I mean, we're delivering food in under 3.5 minutes. If you had gone to that store before at peak, you would have waited in line 10 to 15 minutes. And then once you started your order, probably you're about another 3 minutes until you get your food.

Speaker 2

But you can now pretty much walk in. There's almost the way we've designed it with the kiosk ordering as well as the concierge ordering, practically zero wait to order and your food is out in 3.5 minutes. So that is aside from the digital orders, which again are if you're ordering on your phone, it's also that fast. So very encouraged. We're seeing some really positive feedback from consumers, also seeing some great positive feedback from our team members, which is really important.

Speaker 2

This is the 1st restaurant where we had team members that worked in an old an existing Sweetgreen that are now working in the new model. So we get an interesting test on seeing how they view the experience and they're really thrilled. It's just a lot more fun and it's easier place to work for them. And so really excited about it. I think it's early, but encouraging.

Speaker 2

And I think over time as customers understand how fast it can get through and get their sweet green, I think we will continue to see some traffic driving potential there.

Speaker 1

Thank you.

Operator

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

Speaker 5

Hi. Thanks for the question. First, I wanted to ask another question, I guess, on marketing. It's been a different tact for Sweetgreen, the advertising around the caramelized garlic steak launch. It's clearly been successful.

Speaker 5

It seems like you're seeing a return on it. So I'm curious if this is something you're thinking about incorporating in your go forward strategy or if it's more something that's reserved for a big culinary launch. Just any thoughts, I guess, on advertising for Supreme going forward?

Speaker 2

Sure. Thank you for the question. So I'd say it's much more of how you can expect us to go forward. We've made some good investments in the talent around our marketing team. So shout out to our marketing team, you've done a great job.

Speaker 2

Really taking really thinking about 360 campaigns, including how we leverage out of home, digital, community, and we're seeing some really great results around it. So we will be incorporating this into our go forward strategy. We've also many people still think about Sweetgreen as a salad company. We've never viewed it that way. From the very beginning, the idea was to create a company that leveraged in a really unique fresh supply chain, craft around how we make our food and then applied that to different types of food.

Speaker 2

Of Of course, we started with salads and that's what we're very much known for. But as you're seeing, we're starting to branch out and leverage that license the brand has around the quality craveable fresh food and then apply it to plates and over the next year or so you're going to see a lot more menu innovation. And one of the things that we're really excited about that we've seen in this quarter, which is something we've been working on for a while is that broadening of our consumer and broadening of our daypart. So we've seen a nice shift in dinner with a huge growth of that dinner daypart. We brought in the consumer and some of the results we've seen, a lot of the success was actually from a lot of the emerging markets that at one point were a little bit questionable for us.

Speaker 2

We saw some massive comps in those markets and I attribute that to a combination of the great culinary innovation we've had with this new approach to marketing.

Speaker 5

That's great. Thank you. And then on the menu innovation that Sweetgreen's been executing, I'm curious how it's resonating with your existing more like habitual customer base. And I guess what that means for how you're thinking about balancing menu innovation going forward in order to appeal to your new cohorts versus existing?

Speaker 2

Yes, we've seen success across both. If you look at if we look at the both the customer acquisition and the frequency trends, we've been pretty pleased about both how it's brought in new customers and remove that veto vote in many ways and created that occasion where I want that sweetened experience. I may not want a bowl full of greens, but now I can get a steak bowl with wild rice and caramelized garlic steak and it's a really hearty dinner option with a really great value especially in this environment. And our existing guests are loving it too. So I'd say we're seeing it in both existing and with new customers.

Speaker 5

Great. Thanks, John.

Operator

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

Speaker 6

Hey, thank you. Just a question on development. As you look to next year, do you have visibility yet in terms of how many of those locations might have infinite kitchens? Or is that still yet to be determined? And really wondering if that answer has more to do with the way you're constructing your pipeline or if there are any contract manufacturer constraints to think about as well?

Speaker 2

Sure. So the short answer is you expect a much higher percentage of Infinite Kitchens in the pipeline. We're not yet disclosing exactly how many as we're finalizing designs, but expect I'd say a majority, more than 50% of new units would include an Infinite Kitchen next year.

Speaker 6

Okay. Thank you. And then just follow-up, Jonathan, more of a strategic question for you. But if the Infinite Kitchen continues to progress the way you hope, can you just talk about the strategic optionality that gives the company over the next 5, 10 years or even longer? What does that help you do with development?

Speaker 6

And does it also give you opportunities to do anything with the value perception with consumers and the value proposition?

Speaker 2

Yes, absolutely. I mean, one of the reasons the reason we were so excited about this is we saw this as a huge tool for us and especially as labor becomes more challenging and more expensive. And today, we're seeing a lot of success. But to your point, over time, there's a lot of optionality, whether that be things we do from a price value perspective, the unlocking TAM that it allows us for with the margin increase and the fewer employees that we can run it with, it should unlock a lot of white space for us. And the way it's been designed and the innovation team we have around automation is we believe that there's applications outside of this core bowl application as well.

Speaker 2

So I'd say there's a lot of option value around automation and what we built with the Infinite Kitchen. And I just want to take a moment to thank the whole Spice team who've done just an incredible job leading this project.

Operator

Your next question comes from the line of Logan Reich with RBC Capital Markets. Please go ahead.

Speaker 7

Hey, thanks for taking the question. Congrats on the really solid results. My question was on restaurant margin, obviously really impressive growth this quarter or margin expansion this quarter year over year. Obviously, steak is coming in the mix, more so going forward. But I guess just like how do you sort of think about restaurant level margins sort of trending and what are the puts and takes beyond sort of this year that you guys are most looking out for?

Speaker 7

And then I have a follow-up.

Speaker 3

Thanks, Logan. I think let me answer that question more in the broader term over the next few years. Since I think that's the way the question was phrased, we continue to see our margins expanding near term. And I think most of that is going to come from a few areas, continuing to see more improvements around labor and labor deployment. And I think we've seen great success in the past few years, but we could see a lot of opportunity coming forward.

Speaker 3

There's going to be some opportunity, of course, in our occupancy. As a small company, our occupancy was heavily influenced by deep urban areas. And as we grow and grow in newer markets, our occupancy will steadily come down. And I think the other area of the P and L basically in the area of other expenses, we continue to find leveraging opportunities throughout them. And you'll see us continue to drive some of those.

Speaker 3

So I believe over the next few years, you'll see our margins increase. I want to caution, it may not be on an exactly on a quarter by quarter basis, but on an annual basis, they should improve over the next few years. And this is absent the deployment of the IK. The IK, I believe, will supercharge the margin expansion, particularly if we can retrofit very high volume stores rapidly.

Speaker 7

Great. Thanks. And then, on the Penn Plaza retrofit, I guess what are the sort of key learnings there that sort of instruct your views going forward on the retrofits, whether that be sales performance through that 6 or 7 week period? How does that sort of impact your guys' views on the retrofits going forward?

Speaker 2

So is the question what did we learn or what are we trying to learn? Yes, I guess like what were

Speaker 7

your learnings relative to expectations during that retrofit? Yes.

Speaker 2

I'd say, well, first of all, I think it was impressive that we were able to keep the store operating during that time. So we were able to do the for the first one, we were able to turn that store in 7 weeks and keep it running from a with a digital ordering, so delivery and pickup running during that time for 6 of the 7 weeks. We made the decision to close for 1 week really to focus on hospitality training for the team in that week. But I think it was an encouraging start for us and I think over time we should be able to bring that down. Other learnings, I think we're learning continuously with each new Infinite Kitchen.

Speaker 2

We just opened one week on Tuesday. Like I've said many times in the past, we feel very good about the technology and that will continue to improve and we'll continue to scale the cost down. We're still working to perfect the overall experience. And I think with each new one you see, you'll notice a lot of things that we're trying and testing as we start to really perfect. It's really that feeling that you get the look and feel the vibe of that restaurant when you walk in as well as the team member experience and making sure we just nail down all the right adjacencies from a labor perspective and the right flow from a customer perspective, all while trying to bring our build out costs down pretty significantly as we look to accelerate openings.

Speaker 2

So it's a huge focus area for us. We're learning both about new builds and retros, but I'd say with 4 under our belt, we've learned a ton and I'm very pleased with the results thus far, which is what has given us the confidence to continue to accelerate this year, 7 more we'll open a bunch more this year and next year we're going to open a lot more and we wouldn't have that confidence if we didn't see the results we're seeing today.

Speaker 7

Okay. Thank you very

Operator

much. Your next question comes from the line of Rahul Crowe with JPMorgan. Please go ahead.

Speaker 8

Good evening, guys. Congrats on excellent results and execution. As Sweetgreen expands from being regional to truly national over time, can you share some of your early thoughts or your of reinvesting some of the margins you realize back into customer balls or menu price? How are you as an organization thinking about this today as you build out into your TAM? And I have a follow-up.

Speaker 2

Sure. So thanks for the question, Raul. So to your point, one of the one I think for me, one of the most encouraging things that we've seen over the past couple quarters has been the momentum across the company, the breadth and depth of the sales growth, specifically a lot of the momentum we've seen in the emerging market in the upper Midwest where we grew a lot. We planted a lot of restaurants last year in Texas, in Florida and Atlanta, all markets that we're seeing really robust growth. I think that once we get to a scale, I mean, people have a different number, whether that's 400 or 500 units in national, I think it does unlock a lot of marketing efficiencies as we're able to advertise more nationally.

Speaker 2

We're still a couple of years away from that, but we do think that over time, we are seeing a lot of success with our marketing activities and brand awareness. And as we continue to drive our margin to get scale, I think there's a lot of opportunity to get more people aware in trying Sweetgreen. Because one thing that we know is once consumers try Sweetgreen, they're very sticky. There is a natural flywheel built in given the habitual nature of the food. Something that we just got to do is just get more people to know who we are and give us a try.

Speaker 2

Perfect.

Speaker 8

And then considering the labor savings we discussed in the past on the Infinite Kitchen, longer term, would you expect to build any stores without Infinite Kitchen set all?

Speaker 2

So I think I heard the question being, would you build any stores without an Infinite Kitchen? The way I'd answer that question is that correct, Rahul?

Speaker 9

Yes.

Speaker 2

Yes. So I'd say the vision would be to get to a place where all stores in the future to feature an Infinite Kitchen. At this moment, we're very we're still learning a lot and we're trying to make sure we meet our capital return thresholds. So you're seeing it put into more stores that have higher volume or higher throughput needs or maybe have more challenges from a labor perspective is where you'll see us prioritize. But over time as we bring down the overall build out cost around not just Infinite Kitchen, the cost of the automation, but the entire build, I think it will unlock the ability to be in really most and eventually all restaurants.

Speaker 8

Thank you, John.

Operator

Your next question comes from the line of Jon Tower with Citi. Please go ahead.

Speaker 6

Great, thanks. Maybe just a

Speaker 9

little bit more on the Kitchen and one other after. Just on the retrofit itself, can you maybe give us a range of the cost to retrofit the store? Obviously, you gave us the timing. And specifically on the machine, I think you had mentioned that you've now moved on due to the contract manufacturer. And originally you talked about a cost of roughly $400,000 to $550,000 for the machine itself.

Speaker 9

Are you seeing that begin to bend a little bit lower?

Speaker 3

Hi, John. Let me say the costs are coming in right in line with the guidance that we gave. These are early machines that are just kind of rolling off for them. In fact, I think Penn Plaza was the first unit made at the contract manufacturer. So by no means have we obtained any type of scale in manufacturing.

Speaker 3

We would anticipate some of that to come down the road. In terms of the total cost of Penn, we really don't want to give out the CapEx numbers on an individual store by store basis, but the number you have is what the IK get costs. There were of course other remodeling done at the same time when we had store available.

Speaker 9

Okay. And then just maybe pivoting to pricing. I know this year you're running about 5% price given some of the inflation that you're seeing across the model. But I'm just curious as you alluded to earlier, Mitch, there is some softness seemingly forming with the consumer. And how do you guys think about pricing into 2025 if we're kind of in a backdrop where consumers are a little bit more pinched on their spend?

Speaker 3

Yes, John. Yes, first let me just make a comment that in the month of July, we did have one point to price roll off. So we're currently running at about 4 points in price. We really haven't begun to finalize our view of 2025 or certainly at the pricing level, but I can certainly say that we take a from this vantage point today, taking a slightly more cautious view than maybe we have in the past couple of years. Like a lot of people and reflected in our guidance, we're kind of watching the outside world pretty closely.

Speaker 9

Got it. Awesome. Thanks for taking the questions.

Operator

Your next question comes from the line of Brian Bittner with Oppenheimer and Co. Please go ahead.

Speaker 10

Thanks. On the restaurant margins, the upside that you're demonstrating in restaurant margins relative to expectations, it's continuing to be driven by significant leverage on labor. As it relates to this quarter and moving forward, is that just a result of the strengthening same store sales? Is there maybe some other strategic factors that keep you optimistic about this line item, as you execute moving forward? And secondly to that, Mitch, can you help us understand what's going on with the other restaurant operating expense line item?

Speaker 10

There is some deleverage there this quarter despite the very strong comp?

Speaker 2

Yes. So let me talk about labor for a moment headwinds and some of the things that we're seeing. So yes, obviously, we're seeing some leverage with sales. We're also we've also seen the addition of stake and a lot of positive developments there. But beyond that, we've been very, very focused on finding and developing the best head coaches and improving the retention of our teams.

Speaker 2

And we really believe by having the greatest, the best head coaches that stay with us and that are promoted from within, They create a stable, great working environment for their teams and that reflects in the results. And we had a lot of improvements over the past year there. So our turnover has continued, it has stabilized at Lowe's. We continue to see our head coach stability grow and our head coach tenure grow. And we're working on some very exciting things that we think can continue to drive that.

Speaker 2

Beyond that, we're working on some things around labor deployment that we think can help us not just on hospitality and throughput, making sure we're staffing the peaks properly, but also in terms of continuing to leverage that labor line. So all to say, I think we have some really some exciting things in the works to continue to drive leverage on labor and drive our restaurant level margins.

Speaker 3

And Brian, I'll take the second part of your question, which I think was on the other expenses. The other expenses were largely the result of channel mix shifts in the business and really a higher level of our repair and maintenance, particularly around the HVAC, not unlike what other people have reported as things have heated up across the country.

Speaker 10

Okay. Thanks for that. And my follow ups on Infinite Kitchen surprise, surprise. I know the math behind these basically says every store you open should be an Infinite Kitchen. And ultimately, even Jonathan, you just said to a question, yes, that's true.

Speaker 10

But I guess the question is, we're obviously still in the early stages of the learnings here. But are you starting to gain more and more confidence that this prototype can work in more and more trade areas than maybe you originally thought? And I just think it's an important thing to understand because at only 2 30 units, the vast majority of the scaling of this brand remains in front of us. And the portability of this prototype is how you're thinking about the portability of this prototype is obviously very important to the long term future of the company?

Speaker 2

Absolutely. And I'd say that the short answer is yes. And you think you'll start to see that this year. So already very intentionally with the deployments of the Infinite Kitchen, we've piloted in very unique environments and neighborhoods. So whether it be Penn Plaza, heavily urban, fast paced environment to just this week in Fashion Island and then Huntington Beach and Naperville being more suburban.

Speaker 2

You'll see us this year open try to open in a new market, 1st store in a market with an infinite kitchen. We'll open in other more urban markets, more suburban markets really perfect this and we do believe it's going to help us a lot on the portability. And I think it's what we're really waiting to learn is again less about the technology, more about perfecting the overall experience, including how we make sure we get the experience right with the broadening of the menu and the broadening of the brand position that we're pushing for beyond salad. So we're excited to share more about where that's going in coming quarters. But with the success of plates and steak expect us to continue to push to broaden what really Sweetgreen needs from a format perspective to consumers and how we can leverage the Infinite Kitchen to power that.

Speaker 10

Thank you.

Operator

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

Speaker 11

Great. Thanks. Mitch, on the positive track for the quarter, I'm curious if first you can just disclose what that was within the 4% combined mix traffic. I know you said that it

Speaker 9

was positive and picked up

Speaker 11

for the quarter, but first off, if we could just get the number. And then second, can you help just rank order the drivers of positive traffic? It's obviously a rarity right now in the industry,

Speaker 9

but you've got a couple

Speaker 11

of tailwinds between outsized contributions from new store sales ramps that historically grow substantially in their 2nd year, the buzz around stake, speed of service improvements from more Australian operations. So how do you help rank order? What drivers of that positive traffic was in the quarter?

Speaker 3

Thank you, Andrew. Let me

Speaker 12

say that in a high level, I think you kind

Speaker 3

of hit it that everything that we seem to have fired on all cylinders, as I say, in the Q2. The stores that came into our comping base were very, very positive. Our new markets had very strong comp growth and very strong traffic. The menu was very well received and broadly well received. And I think it was really just a comment and of course the labor deployment picked up on our throughput.

Speaker 3

And I think it was just a question that all of these things kind of coalesced and had very positive traffic. And as I said earlier on the call, the traffic grew sequentially throughout the quarter, something that we're really happy with.

Speaker 9

Got you.

Speaker 11

And then just a follow-up question is around that labor deployment, driving speed of service enhancement. Can you help us quantify what you're seeing there? Is it transactions per peak labor hour or peak 15 minutes? How are you monitoring this? And what kind of improvement did you see to help us better understand how those efforts are resonating?

Speaker 2

Andrew, I'd say it's a little bit too early. I'd like to come back and share more on that. But we do we would expect to see higher throughput at peak, as well as overall labor leverage through better scheduling. You see things like less overtime, better management around fair work week, etcetera. So I'd say there's a lot I think we see a lot of benefits from this new way of deploying labor.

Speaker 2

And we've also really done a lot of work. We've talked about in the past around simplifying both the role in the restaurant, whether it be at the head coach level, how do we make that job easier, more joyful across all their everything they do, whether that be administrative tasks or in store tasks. And similarly for our team members, how can we make that continue to make that job a little bit easier to do and that's through micro changes like we could do things like upstreaming, tools, systems, layouts, adjacencies, the restaurant business, it's a game of inches and we just continue to optimize and look to be better every single day. So we see, as Mitch mentioned earlier, a steady path to continue to leverage our margin over the next few years.

Speaker 11

Very good. Thank you.

Operator

Your next question comes from the line of Christine Cho with Goldman Sachs. Please go ahead.

Speaker 13

Hi, thank you. First off, congrats on a great quarter. Firstly, could you help us bridge the gap between kind of really solid same store sales growth averaging kind of 6% in the last 4 quarters versus kind of a flattish AUV of $2,900,000 since Q2 of last year. I think I would imagine some of this is coming from the new store dynamics. But if you look at the new store mix, it's actually coming down a bit on a year over year basis.

Speaker 13

So it would be great if you can help us understand the factors that are driving that and also what you need to see in terms of AUV increasing again? That's the first question and then I'll do a follow-up.

Speaker 3

Thank you, Christine. You're right. The same store sales has grown about 6% over the trailing 12 months. It's been up 7% in the first half of twenty twenty four and our AUVs remained at about $2,900,000 It's really just two factors. One is the one you articulated.

Speaker 3

It's just a new store dynamics as we're bringing in more stores every quarter into that comping base. And the second one is just a degree of rounding and the fact that we take it to $2,900,000 There is some build underneath it and we are mindful of it.

Speaker 13

Okay, great. Thank you. And John, I think I've heard you highlight attachments as kind of a largely untapped opportunity for Sweetgreen. Is this something that you're increasingly thinking about? And whether there are any kind of specific products or marketing initiatives we can look forward to in the near future?

Speaker 13

Thank you.

Speaker 2

Absolutely. I don't want to share too much because we're not quite ready to announce everything, but we do have a very robust culinary roadmap and some of that includes how we tackle both attachments, whether that be a signature side dish, how we think about beverage, which if you look at our business, we do not index near the industry where we should from a beverage perspective. And we think there's opportunity around kind of like treat occasion as well. So all things that we have really nice robust innovation going on, lot of testing and piloting across the country that we're learning from and expect to see some exciting things next year both within the core kind of core entree format of innovation there, but also as you mentioned kind of outside of the bowl around size and beverage and treat.

Operator

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

Operator

Please go ahead.

Speaker 14

Yes. Hey, guys. Good afternoon. A quick one, Mitch, would you mind citing wage and food inflation in 2Q for us?

Speaker 3

Yes. Thanks, Brian, by the way. What we really saw was very low level of inflation in the Q2. Wages were in both wages and COGS were in very low single digits.

Speaker 14

Okay, thanks. Yes, curious about Salem, New Hampshire. I think you call it new market. It's sort of on the periphery of one of your existing strong markets. How's that one done kind of out of the gate?

Speaker 14

How much of your pipeline is sort of that expansion into kind of peripheral towns of some of your core markets as you think about this year and next year? Are you finding it easier to open some of those units given your scale kind of in New England?

Speaker 2

Yeah. I'm actually glad you asked. It's actually something that we're seeing a lot of success in as we think about how to expand out of really strong core markets. And if you look at Sweetgreen today, we're in most major metros at this point. And very intentionally when we set out, we wanted to build a national brand as a category leader.

Speaker 2

And so we went out and we planted flags across all these major cities. But if you look at a lot of them, you got you're very, very you're just really not dense in a lot of these places. All of Texas, we have sub-twenty restaurants. And if you look at the Midwest, it's just brand new and there's so much room to run. So as we look forward, we actually see a huge opportunity of densifying existing markets and tackling more of the adjacent markets.

Speaker 2

And the benefits there is we'll see a lot of leverage around our food costs, our supply chain, a lot of the economies of scale happen regionally. So we'll see some leverage there. Obviously, anyone in the restaurant business knows opening an existing markets is a lot easier from an operations perspective. We'll be able to leverage management and build a really robust bench of leaders. And we also get to leverage a lot of our marketing spend within those markets and kind of the overlapping eyeballs between places like Boston and New Hampshire.

Speaker 2

So we think that in some ways we did the hard part first, planting flags in all these places. And as we look forward, you'll see fewer new markets and more going back and going deep in existing markets where we see a lot of room and kind of expanding just out into these other adjacent markets. So I'm actually quite excited for this way and it's how we think we can accelerate our footprint and do so in a really profitable and disciplined way.

Operator

And your last question comes from the line of Dennis Geiger with UBS. Please go ahead.

Speaker 3

Hi, guys. Can you hear me?

Speaker 2

We can hear you.

Speaker 12

Great. Terrific. Congrats to the team. Two quick questions. The first one, as it relates to the IK margin versus the non IK, helpful to get the Naperville solid number there.

Speaker 12

It sounds like Huntington Beach seeing something, I assume, probably somewhat similar. Just wanted to get a sense on sort of that margin spread, if it's sort of in the ballpark of what we saw

Speaker 7

in the last quarter, how you'd kind of frame that

Speaker 12

up if there's anything more to add there?

Speaker 3

Thanks, Dennis. I would say it's certainly in the ballpark or slightly better than we thought in all of our modeling

Speaker 8

and what we've seen in

Speaker 3

the past, largely coming out of the labor line, obviously, which you can see when you visit an IK store with some additional benefits and cost of goods. So very pleased with the early results.

Speaker 12

Appreciate that. And then just a second one, just as it relates to thoughts on average unit volumes on the IK stores now that we have another quarter kind of under your belt. I know it's early days, but thinking about kiosks, thinking about throughput, any kind of latest views on where that potential could go at this early juncture from an AUV to non IK AUV? Thank you.

Speaker 2

Yes. I'd say on the suburban stores, we continued on the 2 original pilots, we continue to see similar trends with the higher ticket. We do believe with the better experience that customers are having, it's more accurate, it's on time. We're we just have Naperville as the 1st store to now hit a year to start to see comp numbers. But we do expect based off a better experience to see some comp opportunity in those restaurants that will drive AUV.

Speaker 2

The real test of this is when we go into urban environments where we do have long lines and we can capture more customers. And that first time we're seeing this is now with Penn Plaza. Fashion Island should be a pretty heavily traffic store as well. But I think that's when we're really going to start to understand in these high traffic locations, can we get an AUV lift just by serving more customers in those peak periods. So in some ways, I'd say we're very encouraged.

Speaker 2

I think better experience will help us continue to drive comps and in more high traffic locations, definitely an opportunity, but pretty early to say, for now. Great. Thank you.

Operator

This concludes today's Q and A session and today's conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Sweetgreen Q2 2024
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