Sweetgreen, Inc. (SG) Earnings Call Transcript & Summary

Welcome, everyone. We're going to jump right into it. Jonathan Neman is one of the 3 founders, current Chief Executive Officer of Sweetgreen; Mitch Reback, the company's Chief Financial Officer. Gentlemen, thank you so much for coming.

So let's see. You went public in what was obviously a robust IPO market in the second half of '21, I mean at that point. And I think investors were generally focused on probably what could go right in the business, maybe a little bit more than what could potentially go wrong, which is always interesting to see how waves kind of come back and forth. And certainly, I think just from your stocks movement, a number of things over the past year did not meet your own expectations. So -- and not to necessarily dwell in the past, but let's think about kind of in the future of putting Sweetgreen on kind of the right pace, the right quality of growth in terms of just like resetting kind of expectations for what had been, obviously, a very dynamic world. There's so many things that happened that we couldn't have predicted of just kind of setting the path for 2023 going forward of achieving growth and very importantly, reducing risk. And it was meant to be, obviously, kind of like a great question to kind of kick it off, and I'll get more into the specifics.

Thank you, John. A big question. I would probably start off and say, I think one of the biggest changes from when we went public 'til now, is when we went public in November 2021 and throughout 2021, one of the driving assumptions in the business, is by the end of 2023, urban office occupancy would be back to somewhere like 90%. Think of it as really pre-COVID levels. And I think as the year unfolded, first year being public, what we find is that the data stuck somewhere in the high 40s and really seems to be pretty sticky there. And Sweetgreen, as you know, if you certainly look back to the time we went public, has a very large urban footprint and a footprint in central business districts.

Yes.

These stores today, fortunately, are the fastest-growing piece of the fleet. So there is movement, but I would say it's off considerably from where they were in 2019 and really from where we expected them to be right now.

Yes. So part of that, this urban recovery, so I will just focus on this thing. So self-help that you can do to kind of drive some of the recovery in urban stores outside of just overall traffic. Maybe it's consolidation of your store footprint. Maybe different things that you can do digitally. I mean just kind of like, okay, listen, this is the environment. I don't know when we're going back to 100%. This all could be by the end of '23, but maybe some of that -- what -- the part that you can control or want to control versus the environment being what it this.

Yes. I can talk a little bit about that. So there's a number of things that we've been focused on here, for those urban stores. One is just how we operate those stores, focusing on throughput and throttle, so throughput being our frontline speed of service and our throttles on our back lines. We've -- during the pandemic, customers we got used to all digital business, customers wearing -- team members wearing mask, kind of lost a lot of that hospitality experience across the whole industry. It's been a huge focus for us across all of our stores around really bringing back the sweet touch, bringing back the hospitality, bringing back that vibe inside of our restaurants. With that, a huge focus on staffing, call-outs, our full-time/part-time mix and how we deploy labor. And we've made a lot of improvements there. So we reported on our last earnings that we saw throttles in our highest-volume stores, in those urban stores, where you really have this short window to capture a lot of revenue. We saw about a 20% increase in those throttles. So we're leaving a lot less money on the table during that peak launch than we were before. And so it's been a lot of things in terms of training, how we actually build those lines for faster throughput and a number of other changes. The second has been call-outs. Call-outs, something that has plagued the industry during COVID. We've seen about a 22% reduction in call-outs from our peak, continuing to see improvements there. With that is our full-time/part-time mix of more of a full-time workforce will help us. They're just more productive, the more hours you get working. Overall, we see higher NPS scores with a more higher full-time mix and better margins. So again, another focus. From a channel perspective, we've had this Outpost channel. Pre-COVID, it was growing like crazy. It has actually been growing pretty significantly this year, but we recently introduced catering. And catering works really well in this environment. While people may not be going to work 5 days a week, which makes sense for the Outpost customer, they're coming together and teaming a few days a week more around some teams get together once a week. And so Sweetgreen becomes this perfect opportunity for catering. So catering was piloted last year, has been growing. We officially launched it last week with just enormous interest around the brand, as you can expect. It's kind of like the perfect food for catering. So a number of improvements. In terms of the footprint itself, you actually look at those -- you look at those urban stores. While they're not where they were, I think most people would actually be pretty happy with those stores. They're still very -- if you go walk around our stores in New York City, I don't think anyone would be like these stores are empty. These stores are still packed. It's just they were just crazy before COVID. So we don't think we need to close those stores. However, we are looking at the fleet as leases roll to think about how we can optimize our footprint. So recently, we announced 2 stores that are both in urban environments, one in Boston, one in New York, coming up on their lease expiration, decided not to renew. We have stores very close by in both of those. As you know, 2/3 of our business is digital. We're able to move that traffic very effectively. And overall, you're going to see a nice flow-through by moving that traffic. So you'll see us very surgically adjusting our footprint as leases roll in those urban environments to improve -- all to improve our profitability.

Yes. So regaining urban traffic in your core markets being one point. New unit volumes, new market entry, I would suggest, at least from my perspective, would be another point. So in terms of hey, being closer to 100% in new markets, there's no such thing, but closer to 100% of the stores within new markets or new trade areas, what have you, I mean, talk about how the company has perhaps pivoted to, again, perhaps reducing some risk or uncertainty, just kind of being a closer range of band in terms of what's successful versus not.

Yes. I think the company, we talked about in the last earnings call, is a huge focus on disciplined capital efficient growth. In this environment, we have a very strong balance sheet and we want to protect that balance sheet. We know...

Congratulations and great decision.

Thank you. And we want to protect the balance sheet, and we know that when we choose the right real estate, we execute well. The return on capitals that we -- the return on capital that we can achieve is just phenomenal. So we target a year to 42% to 50% return on invested capital. We've maintained at that threshold. And so we're just focused on slowing down a little bit to make sure that we execute. We're not -- we don't need to be heroes and open stores that push us out of our comfort zone. And so the things that we've done differently. One is going and looking at more iconic stores, especially with the market entry. I think what we did over the past few years is we densified markets a little bit faster than we typically would have going back in our history. So as you'll see in a lot of the markets we're going, instead of going and opening 7 and 8 stores right away, we'll open 3 high-profile stores with the right unit economics. That will give us not only let us build the brand, build the people pipeline, but also give us a lot of data around the customer and traffic patterns. We have a lot of spotting data given our app on how people are using the brand. Based off of that, we can then plan our second wave of restaurants. So that is one kind of shift in terms of -- it's actually going back to very much how we used to do it. What we've talked about is bringing back our intimacy at the skill place. One of the things that has made Sweetgreen is our focus on community and how we build the brand on the ground. These are things from when we've opened restaurants, how do we engage with local suppliers and partners, have a chef collaboration, work with local impact partners, have an opening day party, kind of make some local [ swag ]. It's all kind of simple things that during COVID, we're operating remotely, the best thing we could do is offer a free delivery promo. So we really switched and brought that back and the results, again, have been phenomenal. I think, John, you were -- I couldn't make it, but you were at our event in Miami.

Yes.

What did you think?

Well, it's the single best, most delicious. I would come back probably 5 days in a row product I had.

It was good, right?

It was fantastic. So this is the fourth point you talk -- the food network does a -- I think it's 20 years, they've -- like more or less, food and wine show in Miami every February. you have a number of different chefs and collaborations and you had a collaboration with the -- I mean, they call him Michelin star chef up and coming, he got [ a lot of true ]. So I think a chef that's kind of made it with a huge impact in Miami, almost overnight. It feels like Boia De. Maybe he did a chef's collaboration with you and that was phenomenal. Yeah. And the beverages and the sweets and everything about it was like, wow, the bowl was amazing. I think you could probably -- you could do it…

And that's what I mean.

And that's the point. That's why I'm so excited about it. Like that idea.

That's what built our brand, is that that local relevance, working -- having that culinary credibility working with these chefs, and really connecting to the community and this -- that's what I mean by intimacy at scale. It's connecting and being relevant to each community. And that's the Sweetgreen's special sauce. So we did it. We didn't do it when we launched in Miami, but we came and we did it last month, launching with Boia De, and we're very excited for that bowl to launch. And kind of where we haven't launched with that playbook, we're going back and doing it, and we're seeing some nice results. We are also launching all new markets with that more creative local playbook.

Chef's collaborations certainly are interesting, but talk about that pivot in terms of more craveable types of products that still fit within your overall food ethos. I mean just kind of the opportunity for the brand to -- I mean, how can I say, expand its reach, also expand its frequency, give people the opportunity to maybe treat themselves on a Friday afternoon different than what they would eat on a Monday afternoon, for example. I mean, what type of an opportunity do you have? And what led you to believe that you did have that opportunity?

Yes. So what you're referring to is what internally what we call commit to craveability. And maybe by answering that, I'll rewind a little bit. When we started Sweetgreen, there was pretty much no hot food. There was no rice. There was no warm bowls. It was just salad. Over time, we've evolved the menu and warm bowls today make up a larger portion of our menu than salad. So we've already been moving this way, a long kind of evolution, towards where we are today. We think that this is just a natural extension of where we're going. We've always believed that Sweetgreen and the food that we stand for, it's about health, but really it's about real food. What we focus on is the suppliers that we source from, the soil health that drives the taste of that food and that's what drives nutrition. So we're never about calorie counting. We do think that what makes food healthy is unprocessed food that is very nutritious. And so we kind of really own that platform. And that's where this commit to craveability really just extends our -- the advantage we have and the brand positioning we have into different dayparts occasions and broadens our consumer. So we don't think it should be -- Sweetgreen stands for just salad. We think that we have a lot of license to get into food that is more applicable during dinner, desserts that are our wink or version of healthy dessert. We just launched a rice crispy treat. You'll see some more things coming out on the sweets. We have a lot more coming out on the drinks side, and this year, you'll see a lineup of new menu items. What we're really excited about, one of the ones that's coming up next month or in 2 weeks, is our Chipotle Chicken bowl. This will be our first bowl -- our first bowl without any lettuce. So it's just going to be -- it's essentially our version of a burrito bowl and I'm excited for everyone to taste it, it's just incredibly craveable.

Okay. Nice.

We have a number of other hits coming out, some partnering with chefs, some made internally. But you'll see a lineup of new menu items coming this year, all pushing towards that heartier - that heartier more craveable offering. And we are working internally on a number of things around new proteins. We think that proteins often drives the occasion. And so we have a few things in the works around new center-of-the-plate proteins.

When we have -- so well, first, I don't want to just -- I don't want to skip over that, I almost did. How important are new center-of-the-plate proteins to you? I mean, is it -- I know you do handle raw chicken in a store but cook it in the ovens. I mean, can you do that? I mean is -- it would be, for example, Chipotle, the brand killed it, for example, with their brisket, which actually came in precooked. It was kind of like reheated in store. But do you have opportunities that are like that in the future? I mean, in some cases, it can be a real needle mover when you get it right.

Yes. We absolutely do. Well, first of all, our kitchens are scratch cooking kitchens. So we have -- the lines and ovens are built that give us a lot of capability beyond what we do today. We do roast all of our vegetables in-house. We have 2 types of chicken that we make. We have a blackened chicken, a black and roasted chicken and then a chicken breast. We also do a fish, a steelhead. We've been testing into salmon as an alternative. And we have a number of things that we're working on, one being a turkey meatball. We do think that meat steak is totally not off the table, something that we do see us doing at some point, and we do have the capability to do. So we totally agree with you that menu innovation is going to be a huge driver of growth in comp for us, not only for our existing customers, but opening up those dayparts. And making us more relevant to across the country, where people want to eat healthy, but maybe wanted something a little bit heartier.

Yes. Healthful and healthy are kind of 2 different things.

Totally. And we've been saying meeting customers where they are. There's days that I want to eat a salad and there's days that I want to eat real food that is unprocessed, but…

Right. Healthful.

But I maybe don't want lettuce and I want a bowl of rice and chicken or steak. And I consider that healthy, and I think -- and I do think our customers will as well.

The balance sheet didn't determine your slight reduction in unit development for this year. So talk about just kind of like what kind of fell off, if you will, the overall development pipeline? And as you think about the future footprint beyond '23, how should we be thinking about kind of progressing towards the TAM?

John, we agree with you the balance sheet did not determine the pace of new stores. The balance sheet remains extremely healthy. When we look at the stores and the number of markets, we really wanted to, in this environment, bias it towards higher confidence markets, higher confident stores. As John talked about, we densified, we think, a little bit quickly in some of the new markets. And pulling that back at the margins, we think, will kind of lend itself to a stronger portfolio, allowing us to go in and densify in the next year or 2. We think the TAM is perfectly secure. We actually think it's more secure in this environment of higher interest rates, but it's much more difficult for someone to come into our space at this point in time. So in that context, kind of slowing up a little bit, getting stores to perform at a higher rate, turning the company profitable, is probably more important than just opening up stores.

We have talked previously about margins, margins relative to expectations, it really wasn't in your prime costs, food plus labor, it was really in the fixed cost component of your business and the fixed cost component of the business is driven by volumes, right? More or less. I don't want to completely put like words in your mouth. But is there any self-help? Would you want to engage in any self-help on the margin side? Or do you guys feel that you have the fixed and variable component set correctly in the stores as of now?

We think there's always opportunity. When we look at our margins, we clearly see a path to over 20% in the next few years. While you're correct, our prime costs are very competitive, we do see opportunity both in cost of goods and labor. If you look historically, the company is running around 32% labor, we guided this year to 31% or better. So you're starting to see some of that happen. I think in terms of the fixed cost, we see opportunities. Right now, I would say the occupancy runs a little bit heavy. That's a factor of the urban recovery. And that will work itself out over time.

Yes. The industry took pricing that I've never seen. Am I happy? I know it's embarrassing. I mean I don't even want to do the math. It's something like 28 years of doing this. So anyway, so here I am. But nearly 10% price. A question that I've asked many people is, do you think the pricing has influenced your traffic? And it's like, no, a lot of people say, everyone's take a price and the consumers have an expectation. They're going to trade out whether we took pricing or didn't take pricing. And that's, okay, well, that'd be really interesting to actually to be able to test that, but I'm not sure that's the case. But the industry did take very high pricing. The industry overall had negative same-store traffic. So it's going -- you could kind of correlate one to another. So how do you feel about the level of price taking, I think, more price coming up soon, I think maybe you just did. So just we talked about broadening the food appeal, but how do we feel about the overall pricing? It's like we want to have a more frequent consumer, a broader consumer, but you're also making the brand in nominal terms more expensive. So talk about that.

I think what I would say is in 2022, we took 6% in price, we took all of that in January and had no additional price moves in 2022. The beginning of 2023, we took around 3% and envision taking a small price increase in the next several months. What I would say about it is our relative price points have actually improved as the industry has taken probably twice as much price as us. We feel as though that our product is -- has a habitual nature, a high-frequency nature and a very loyal customer. So we haven't really seen a lot of pushback from our customers around price. But having said that, in this environment, we're approaching it with some degree of caution.

Okay. And overall -- so full year pricing, I mean, I think at this point, I mean, you guided to some pricing in the third quarter, I mean, expecting around 4% for '23?

Roughly.

Okay. All right. Perfect. I mean, so the industry taking more. So when you did -- hindsight being 2020, the 6% price that you took in January of '22. I mean would you have done it in smaller increments based on the frequency of your customer? What do you think the right thing is a series of 2%s going forward? Or do you like kind of that 1% and done?

No. I think going forward, we see more frequent smaller increases that allow us to measure the impact on traffic and to see it on a more regional basis.

And done, in often cases, more surgically. So we have a lot of ways to -- in fact, to impact pricing without doing kind of broad-based pricing. So one thing we've talked about in the past is microzoning. That's one way in which we do use. We've stores in a lot of really high income neighborhoods and really high labor where people are totally fine paying -- paying extra. So we can impact the overall pricing by changing pricing in some of these microzoned areas. We also have different channel pricing delivery versus in the store, a number of other opportunities in that way. What's I think important is the barbell pricing strategy that we do have. It's very important for us to have an entry level of around $10 in all of our markets. So right about 10% or under 10% in all of our markets, we do have a full meal that you can get. We think that's really important. But in certain places, we're going to have bowls or plates, again, at $15 or $16. And so to Mitch's point, on a relative basis, I mean I'm shocked every time I go out to eat these days how much everything has gotten. So on a relative basis, I do -- like Sweetgreen actually has done well compared to peers. But looking at the CPI print this morning, inflation is definitely -- inflation is definitely an issue. What is good news for us is on the labor side, we've seen an easing of the inflationary pressures. So we are fully staffed. We're seeing a much more robust labor environment. We're seeing those quite quits kind of going away, those callouts going away. We've seen our head coach stability increase by 8 months last year. So we're holding on to our head coaches a lot longer than we were. And with that, we're seeing turnover rates come down significantly. We expect this year turnover to kind of at the company's historic lows. One just thing that I think is really important is the change we made internally around how we operate the company as we move to more of a decentralized organization. So we've introduced what we call an RGM structure. We have 4 GMs running the company. And we think this is really important. As we studied some of the best companies, retailers around the world, we found that having more empowerment, accountability and entrepreneurial energy closer to the customer and the team member drives much better results. And so we made this change at the end of last year. With that, we flattened the organization. We've removed the layers and we gave a lot more power to these RGMs and the results so far are phenomenal. One, follow the money. Everyone is now compensated on a profit share. So with our focus on driving towards profitability, giving the GMs both the tools and the incentive around profit, is working. We've also expanded our area leader spans and our push to the profitability and changed their bonus program. Again, we're seeing great results there. So huge focus on this path to profitability and accelerating that path to profitability, but I think this decentralized organization has been a huge unlock for us overall.

Digital, I mean so you really set the path, I think, in digital. I mean it's a very young company. I mean you're famous for your digital, like where your brand was getting a lot of attention nationally or maybe even globally based on how high your digital sales mix is, generally seen as what restaurants would become in the future. And in fact, some restaurants have really tried to achieve what you achieved some years ago. So you were definitely a forerunner there. So digital sits at, always correct me if I'm wrong in my number, 60% of sales. Your own channel of that is 40 points of that 60 points. So that comes through at actually sweetgreen.com or through the app. So -- But part of this, it's interesting, talking about an app redesign that I think actually requires you to download the new app in order to…

No, it's an upgrade.

No? Okay. All right. So well, it upgrade the apps. I got a notification. It's like you have to update your app. So that's just something to do. So talk about the app redesign. Talk about your initial kind of forays into loyalty. Talk about how say, hey, we had a competitive advantage on digital. That's closed, but talk about reexpanding that. So just, again, part of -- one of the -- food made this business great. Digital supercharged it. So let's talk about that second component of the digital ask.

Yes.

Long questions.

A lot to unpack there. Okay, so…

But that is very important, so you talk and I'll listen.

First and foremost, Sweetgreen is a food company and a brand at its core. Always has been, and we always believe technology was an accelerator, a wedge for us to improve our unit economics, serve more customers and we were first movers in that, one of the first companies to introduce the mobile ordering app, secondary meat clients, et cetera. We're continuing our innovation both on the digital side and broadly on the technology side. And so we may talk about our Infinite Kitchens and our push into robotics, which we think is kind of the next frontier from a technology perspective. As it relates to the app, a few things. One is we recently introduced a replatform of the app. That was done partially for the front end, but a lot of it for the back end and how we will actually accelerate our ability to develop on that app much more critically. Specifically, we have 3 separate apps, an iOS app, Android app, or web app. We combine the code bases, which means we can now develop much faster. With that, we redesigned a lot of the customer flows, made it easier to search for locations and really made the app make much more sense for our omnichannel model. So far, we've seen really great success. Not only are we developing and pushing updates much faster, but we've seen a 10% conversion increase on that app. So customers are converting at a higher rate once they're within that app.

Converting mean buying.

Buying. Yes. I got it. I gotcha. I gotcha. I was just checking.

Buying. Yes. Go in there. What I think you're going to see with the app is actually much more to come than you've seen because, again, think about the replatform as a new platform, which we can now more quickly add more features, given the new code base. So things that are coming. One is loyalty. I think anyone in technology knows that data is really the mold here and how we leverage that data. So we're in the very early innings of how we use that data and going from kind of one-size-fits-all experience or cohort experience to truly personalized. So you'll start to see us move rewards and challenges as an example, to be fully personalized. We know as having seen -- our CTO, joined us from Starbucks, we know that the magic of once you personalize rewards and challenges, the returns are much, much better. In our testing, we've done control testing on using personalized rewards versus not and how much better that is. As you mentioned, we're in the process of rolling out -- we're in the process of rolling out our loyalty program right now. So we're live in 3 markets today, so far going well at Sweetpass and Sweetpass Plus. So there's a free component and a subscription component. And again, digital -- our high digital penetration gives us a lot of confidence and that's going to do really well for us. To be honest, in this environment, not having a loyalty program has been a huge disadvantage. In terms of kind of your broader philosophical question on technology, I think we've always known like in my earlier comments, Sweetgreen is a brand and a food company. That is like the core of what we are, and we've had to make certain technology investments to go to market. We're fully aware of the cost of those investments and how at some point, there is a life cycle, where some of these things mature. COVID did mature the technology landscape. It pulled people forward significantly. So one, we've been adjusting our cost structure and how we actually build a build versus buy technology to be more in line with the industry as it's matured. And you've seen that with our G&A leverage that's happened and we're going to continue to push on that. Secondly, the ownership of the data is really the key. And how we can take our lead and make the app much more responsive and personalized in so many ways. So we have a lot of things on the pipeline -- on the digital pipeline on our road map that we think are going to be very cool. Whether that's going to be localized leaderboards around making your own bowls, to personalized menus, to group ordering. There's a lot of things that we're going to be working on over the next few quarters and years that we think will drive higher engagement and help us add more customers. One within that, payment processing, changing our payment processing, adding different payment methods. There's just so much we can do. And the replatform has really allowed us to do this in a much more effective way.

And as we just finish up, I mean the next wave, if you will, the next functionality in terms of being digital kitchens and robotics. I mean, when can we experience this in Sweetgreen? And how transformative is it to the business model?

We think it's -- so when? This year, so stay tuned. It's coming very soon. We're very excited about it. We've seen it. I was with the team in Boston recently, seeing the lab testing and things are going really well. The machine is beautiful, the efficiencies that we're finding are great. I mean, I think most importantly, the product comes out better and more consistently. The team members love it. It makes their job so much easier. Our team sizes can shrink significantly, and our throughput is just through the roof there. So we're excited to bring this to life. What we've guided in the past, as you all know, the Infinite Kitchen really handles the majority of the assembly of the bowls. And if you go into our restaurants, you can see how many people are doing assembly. We've guided that about 1/2 of our -- 1/2 half of our labor, our associate labor is assembly. So a large portion of that will be handled by the Infinite Kitchen. And so we're very excited for that to come, to learn from it, and we do expect to use that both in new builds and retrofits.

It is transformational to the model.

Yes, absolutely. It's absolutely transformation to the model and I think will be transformational for the industry.

Sounds great. Gentlemen, let's end with that. Thank you.

Thank you, John.

Thank you.