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

So good morning, and thank you to everyone in the audience and on the webcast for joining us at Bank of America's Consumer and Retail Conference. Kicking us off is Sweetgreen. I'm very pleased to be joined by Mitch Reback, the CFO of Sweetgreen. And I think you're coming up on your 10-year anniversary in the role.

Yes, yes.

So congratulations. And yes, for anyone who's not familiar, Sweetgreen is a fast casual chain known for its plant-forward seasonal menu and of course, its innovative approach to automation with the Infinite Kitchen. So with that, Mitch, it's great to be with you.

Thank you for having us.

So first, I'd like to talk about the current demand environment, certainly very dynamic. So first, a clarifying question. On the fourth quarter call, you noted that extreme weather in January and February affected like across approximately 60% of the fleet. But I don't believe that number included Los Angeles. So I just wanted to clarify, given that Los Angeles did see negative double-digit comps, how would you quantify how much of the fleet was impacted by severe weather if we include Los Angeles?

Well, I would say the first quarter started off pretty challenging for us and the industry. It began with the holiday move to a Wednesday, which essentially took out the first week of January. And the LA fires began and the fires went from, I think, the second week in January to the end of January, and Los Angeles is about 15% of our revenue. And in part of January and much of February, we saw pretty severe weather, which impacted about 60% of the fleet. So when you put it together, I would say, in the first 2 months, we had a very, very high portion kind of this -- our revenue impacted by kind of idiosyncratic events. As we pulled further away, I think the business began to pick up from those events. And during the first 2 months, I think we disclosed that our comp was about negative 6%. And we think we had about 7 points impact from these events.

Right. And then something else I wanted to clarify just on the way that weather impacted your traffic. Did you see more of an impact from disruptions in mobility, so people aren't out and about because of extreme temperatures? Or did you also see operational impacts like limited staffing because of callouts or not even being able to open stores or have normal hours. So the question is, how would you contextualize that same-store sales decline? Was it more of demand headwind changing consumer behavior? But did you also see sort of operational headwinds in there as well?

Well, there is certainly a degree of operational headwinds and a number of stores were closed usually because of weather and staff having difficulty getting to work, but the larger impact would be on the demand side where we just saw more and more people when the weather gets really rough staying home and really hunkering down rather than coming out and going to work. So both impacted but probably the demand side much greater than the ability to get workers in.

Great. Understood. And then I guess moving past that. So Mitch, you also spoke about business improving considerably from February -- or in February from January. What do you think is driving that improvement given that in February, you didn't have menu innovation or marketing? And have you seen improvement in the Los Angeles market as well?

Yes. I think I would break it apart into a few different segments. One, when you talk about the fires, the greatest impact was in January. Los Angeles essentially shut down. As the fires were put out at the end of January, there is a lingering impact on really in our business as people's housing and office and commutes are just really displaced with so many people now finding different housing and different patterns. With weather, what we find is when the weather dissipates, the business bounces right back. I think the other factor was that we launched our Protein Plates late November in 2023. So we really, in Jan-Feb, in particular, we're lapping the very successful launch of Protein Plates. So we were lapping a very strong launch period during a period of really adverse weather and fires and things of that nature. And the further we get away from that, I think the business kind of resumes more of a normal trajectory.

Understood. Can you tell us how business trends are in March so far? Maybe add some color about Ripple Fries, very exciting new menu innovation there.

I think what I would say about March is we -- I think we had our earnings call 2 weeks ago tomorrow and gave guidance on March. And the guidance really shows the business improving in March from Jan-Feb, and continuing to improve throughout the balance of the year.

That's great. So given the context of -- again, sorry to go back to fourth quarter again. Just given the context of these meaningful declines in Los Angeles in January and the guidance for the first quarter, can you talk about where else in the U.S., your comp trends are positive? Which regions and markets have been the most resilient? And to what do you attribute the strength?

I would say we see very, very strong comp trends in all of our new markets. Think of that as Texas, Atlanta, Florida, the Upper Midwest, very, very strong comps pretty consistently, and we're very pleased with the way those markets are performing. I would say in some of the legacy markets, they've been a little bit on the other end.

That's very helpful. And then maybe if we can get into the specifics of your first quarter and fiscal 2025 same-store sales growth guidance. What is the traffic component that's embedded in that guidance?

I would say in the first quarter, the company has around 3% of price. The company took 1.5 points in price mid-February. That is the only price move that we envision taking in 2025 at this point. So the 3 points in price will begin to roll down each quarter throughout the year.

Okay. That's helpful. And maybe I'll actually skip to a question on pricing. How do you see Sweetgreen's value proposition holding up relative to your competitors in fast casual? And then maybe as a second question there, how are you approaching pricing decision?

Yes. What I would say is at Sweetgreen, we serve a very high-quality product. We source direct from farmers. We scrap-cook in our kitchens. And our customers understand that, and our customers have always had a willingness to pay for that difference in the product. We sell a product that customers repeatedly tell us they can taste the difference between our product and other people's product. So in that context, we really feel that we have kind of a loyal, strong customer base. But the company has been very fortunate in the past several years, we've taken a lot less price than a number of our competitors. And as a result of that, we really see the price differential between Sweetgreen and other people, particularly in fast casual, but even to a certain extent, QSR is narrowing considerably. And we're kind of pleased with that outcome.

Great. And on this notion of Sweetgreen having a very loyal customer base, but also introducing new customers into the brand, can you talk about where frequency is today maybe versus a year ago, historically? And you can break that out into your most loyal customers versus an average customer.

Yes. We're very, very fortunate. We sell a product you can eat frequently, eat all the time. And we have another number of very, very high-frequency customers. And a number of those people eat the same thing all the time. And what we find is that our [indiscernible] is amongst the highest in the industry for food. And when we survey our high-frequency customers, we ask them what would it take to come more often? And they consistently have told us two things, that they want a loyalty program that they feel as though the company is missing out by not having loyalty when so many of our competitors do. And a number of our customers have asked us to [indiscernible] our seasonal menu, that they felt that the seasonal menu gave them a little bit of variety to get them to come one extra time or so a quarter. So in 2025, we will be returning to the seasonals.

That's great. And I would echo that on the seasonal menu. And I've heard that anecdotally as well, actually, that customers do miss that. And then on Protein Plates, which has been, I think, very meaningful for Sweetgreen, have you seen changes in frequency, I guess, particularly as it relates to maybe transforming some of these lunch occasions into dinner occasions? Or are you seeing these as additional transactions?

What we've seen is our dinner business grow. Our business has usually been around 35% of the business up until around a year ago. And as we broadened our menu with Protein Plates, steak, the dinner portion has moved up to 40%. So the business today is 60% lunch, 40% dinner. And if you think about the number of very dense urban stores that we have like Bryant Park, Rock Center, they do very little dinner. So the 60-40 mix is actually pretty strong when you get away from the very dense office environments that are really a very high lunch percent.

Right. How is return to work trending? How are transaction levels on Mondays and Fridays relative to pre-COVID?

It seems to be a constant question since 2021. Let me say that our business is strong Monday through Thursday. And to a certain extent, those urban stores have really kind of regrouped Monday through Thursday. Friday continues to look much more like a Saturday and have a pretty big drop-off. We do read probably the same things everybody reads about greater return to office happening, more firms calling people back to work, many of them calling them back 5 days a week. I was a little surprised to see in last week's Los Angeles Times that California finally called people back to work last week. And I think I would just say that more people coming back to work and back to offices is a tailwind for Sweetgreen's business. We're happy to see it.

Yes, yes. I don't know if I am, but I'm happy for you. So...

I won't ask you.

So in terms of leveraging G&A, right, so on the 4Q call, you spoke about holding G&A relatively flat and shifting dollars, where you're seeing better returns like marketing. So can you give some more color on how you approach this reallocation of G&A spending? Maybe speak to the redirection of some of these investments where they were before, where they're going and how you arrived at those decisions?

Okay. I think I would start off and say around 2021 or so, the company committed to being adjusted EBITDA profitable in 2024, something that we were. And that was a commitment that we made both to the Street and to ourselves. We saw that as something that was very important for the business' progression. A key part of that was to continue to drive up revenue with these stores, drive up our margins and to hold our G&A flat. And that was really a commitment that we made, and we have done that over the past several years, and we'll continue to do that. But then the G&A, what we do find is that we periodically move the mix around a little bit. Right now, there are 3 areas that we are looking to invest more in. One is development to accelerate our pipeline. In 2025, we said we're going to open up at least 40 stores. That's up from 25 in 2024. We are investing in the -- into our Infinite Kitchen, which we see as a game-changing technology that will give the company a sustainable competitive advantage for years to come. And we are investing heavily in that, and mostly today in more installation teams in order to speed up the deployment of the IT. And finally, what we find in the business is when we have new menu items and marketing, the business accelerates very quickly. I think it was last -- second quarter last year when we launched steak and drove up our marketing spend. The business comped around 9%, had a similar trajectory in fall with our Brussels sprouts, and looking to do that with much greater frequency in 2025. So the big areas that we're moving money into are development, Infinite Kitchen deployment and more marketing. Everybody else, coming down.

Great. Okay. And then in terms of marketing, I'm curious if there are any differences in the messaging for your out-of-home kind of top-of-funnel marketing versus social media. It's my sense that customers that are more familiar with you maybe get a different message than others. I don't know if that's accurate. How do you -- I guess, how do you think about marketing to your loyal customers and incremental customers where brand awareness might be a little bit different?

Yes. I think what I would say is the company kind of drives two areas: one is frequency of our loyal customers, and the other is new customer acquisition in top of funnel. And we definitely have markets in various phases, kind of their evolution, right? We got a lot of new markets. We have some existing markets. So we try to balance the drive for new customers and driving higher frequency. And that takes us to like different media mixes. Frequency, we can drive digitally to our existing customers. And a lot of our customer acquisition and to a certain extent, frequency, we drive with out-of-home. And you've seen more out-of-home being done by us, particularly in New York, more billboards, bus shelters, bus signs, some. We found really, really good success with that in some of our larger markets.

Yes, definitely. I see it every time often when I'm taking the subway. I see the Sweetgreen ads and yes, it's very exciting. And then so tariffs, I'd be remiss if I didn't ask about them given your exposure to avocados and avocado oil. How is Sweetgreen positioning the business in response to potential tariffs? Are you planning on making any changes to your ingredient sourcing?

Are there tariffs?

Fair question.

Haven't checked this morning. I thought it was interesting. I think our earnings release was 2 weeks ago tomorrow. And that Wednesday morning, the front page article in the Wall Street Journal was CFO is preparing like mad for tariff questions. And there was a day when the tariffs were called off, I think, and I had no tariff questions and thought have we gotten through this? Let me say, Sweetgreen almost by definition, sources more domestically. And where we can, we source more locally than even within the United States. So while we do import certain items and the one that's frequently written up are avocados. We got most of ours mostly through California. Part of the season, we have Mexican avocados and sometimes Colombia for the East Coast. What we believe would happen with tariffs, and it's really at this point just a belief, is that if tariffs were to come into play in a broad way in agriculture, that more likely than not over time, the U.S. commodity prices would move up to match the tariff price. We think that, that would then dissipate over future growing seasons. And for part of the beginning of that, we're protected through our contracts. So a long way of saying, we think there's a period where we would be impacted by tariffs, probably relatively short-lived, probably in the neighborhood of maybe 50 basis points, depending upon the extent and the duration, not so much from the actual pain of the tariff but the movement of domestic prices up to the tariff price.

Understood. Can you remind me what component of COGS avocados represent, what percentage?

I don't know. Certainly not as large as other items, yes.

That's fair. And then tie into what the expectations are for commodities inflation in 2025 as against today.

Yes. We see pretty moderate inflation. I think we said low single digits for both labor and cost of goods. It's been really relatively tame for us for about the past year. We don't see much change in that in the near future.

Okay. Maybe then switching to labor. So Sweetgreen rolled out an AI-powered workforce management system, streamlines labor planning, improves shift coverage. Talk about what the benefits are of someone like a head coach to focus more on guest experience or team development, where [ is labor ] being reallocated? And are there -- how do you think about those benefits in the restaurants?

Yes. I'd begin by saying the head coach generally does the scheduling, and scheduling can be a very laborious process and one that's not particularly fun. And in some of our larger stores in New York, it can be really, really quite a taxing experience. And what you find is when you ask people when they want to work, it really becomes kind of this giant matrix of when people are available, what they are able to work, what shifts they're able to work in, what zones in the store. And it becomes this massive balancing act for a head coach. And what happens is if you give someone a shift they don't want, sometimes they try to swap it, which is then more complicated or worse, they don't show up. So what the AI tool largely does is allows the team member to say what they want. And by the team member being able to say what they want to work, it matches their availability to what we need. And in doing that, what we find our callouts come down, attendance gets better, people are happier, there's less movement around and the head coach time gets freed up. And as the head coach gets freed up, the head coach is really able to do other things like engage in hospitality, manage the staff. We talked last year about our head coaches now having line time, which we found has been really beneficial, not really so much from a labor perspective, but from the head coach perspective to get out and meet the guests and see how to make the lines move faster and to kind of understand the business from the line time. So we think it's been highly beneficial both to the team member and the head coach.

That's great. I imagine too that as Sweetgreen's labor force becomes more experienced and the restaurants are running more smoothly, that paves the way for introducing new menu items. So I'm curious how you can share with me some of the operational considerations for introducing new menu items? Maybe you can speak specifically to something like Ripple Fries.

Ripple Fries, have you got them?

Yes, and they are delicious.

Thank you. Then let me just say on Ripple Fries, we tested them in Los Angeles for a few months. The test was not a customer acceptance or demand question. We knew our customer wanted, and we obviously understand how popular fries are in the U.S. It really was 100% an operational question. How do you perfect the fry and how do you do it in a way that doesn't slow down throughput? And in our stores, how do you do it and balance the oven time? And it really was 100% around operations. And we're real happy with the reception, but we launched literally, I think, 1 week ago today. So it's been national for a week.

Yes, right. No, I encourage everyone to try them if they haven't.

Happy you've tried them.

Yes.

I should add that they're served with homemade condiments, and our pickled ketchup is one that a lot of people have written in about.

Absolutely. I know pickled ketchup, who knew? Yes. No, very, very good, all exciting stuff. So moving to the Infinite Kitchen. Can you remind me how development plans for Infinite Kitchen impact other operating expenses? I'm curious how you weigh sort of the benefits of offsetting some of the increased expenses associated with retrofitting and new builds of Infinite Kitchen.

Okay. Let me begin by saying we're very, very happy with the Infinite Kitchen. We have 12 of them running. I believe at year-end, we had 12. I think we put 10 in, in the fourth quarter. [Audio Gap] and 50% will contain the Infinite Kitchen. When you get to the back half of 2025, it will be up to about 75%. So they're back-ended and will be moving at a very, very fast deployment rate in the back half of 2025. What we find with the Infinite Kitchen is we generally have about 7 points of labor savings. And the easiest way to think of that is all of the assembly of salads and bowls are automated. And that's about the amount of labor on the front line, in addition to which we see about 1 point of cost of goods savings, and that comes from perfect portioning and no waste. Our customers have told us in surveys that they love it. And what they really see are the benefits of it as many people say the food tastes better. The reason for that is the Infinite Kitchen stores the food in sealed and temperature-controlled tubes as opposed to being open and exposed on a front line. So the food looks better, customers say it tastes better. It's much faster and much, much higher accuracy. And if you speak to any of our team members who work in an Infinite Kitchen store, they'll tell you they never want to go back to a classic. It's just such a much easier environment to work in. So it's cleaner, it's quieter, it's faster. So we view it as a win-win-win. The company is thrilled with it and its performance. Our customers love it and the team members love it. And we're looking to accelerate it. And as we look out, we basically think that the company will have a sustainable competitive advantage in the industry as labor is the largest cost component in a restaurant, and it's been one of the most fastest increasing cost components, and we use so much less labor with the Infinite Kitchen.

Understood. Why is this -- the 50% of new openings, why is that the right anchor? How are you thinking about the pace of development in 2025?

Pace of development?

Of Infinite Kitchen.

I see it accelerating. As I said, it will accelerate in the back half of 2025 to [indiscernible] 1 a week. And we talked earlier about the G&A, really making more investments [Audio Gap] in 100% of our new stores, but I think it will be in a very, very high percent as we go forward. And when we end 2025, approximately 10% of the fleet will have IKs in it going into 2026. So in 2026 and beyond, you'll probably begin to see the margin benefits rolling through the company.

That's great. And then can you remind me how are the build costs and development time lines different for Infinite Kitchen retrofits versus a new build?

Every Sweetgreen is different. They don't all look the same. And as a result, every retrofit is a little bit different. And what we're still trying to learn on retrofits is how to do them faster and how to do them with minimal disruptions to our customer. They're all a little bit different in terms of what type of store closures would be involved. Late in 2024, we retrofitted our very large store at Willis Tower in Chicago. And Willis Tower is a very interesting retrofit. We had a very strong store and we knew we had a very, very compressed lunch time really, I think, like all 110 floors probably have lunch of like 11:45 to 1:00, and there was a high walk-away factor. And we're very fortunate there's about 1,000 square feet right next to our store that became available. So we put in an Infinite Kitchen. And we now run an Infinite Kitchen for the digital side, and we kept the front line. So with that retrofit, there was no disruption. I think we closed for 2 days in December, all around training, but no disruption from construction. So really, each one is unique. I think if we could do it in a way that was very quick and had minimal disruptions to our customer, we would move much faster on retrofits. One of the things we are doing in New York in 2025 is we have at least 2 stores that have been open for over 10 years whose leases are up. And we are -- instead of retrofitting these stores, we are actually moving the stores literally like within a block zone to get to a better real estate location and put it in an Infinite Kitchen. So we see the benefit now coming to a better -- kind of a better real estate location and the Infinite Kitchen. And that may be another way that we move forward.

Right. And I mean in the near term, so yes, you've spoken about the importance of retrofitting high-volume locations with Infinite Kitchen. But I mean, going forward, I think you've spoken before in the past that IK development is most like focused in regions where you have maybe a more challenged labor market where labor costs are higher. Do I have that right?

Yes. I think what I would say is the benefits from the labor and cost of goods are pretty consistent. And the cost of the IK is essentially the same. We've disclosed it's between $450,000 and $550,000 a unit. So if you're able to get a benefit of, say, 8 points, 8 points of $5 million is bigger than 8 points of $3 million. So obviously, higher volume stores have better return on capital. So if you said where are we kind of biased towards it, it would be first to deploy in higher volume. And second, as you pointed out, what I would say, to deploy it in more problematic labor environments because employing less labor probably means less complications.

Yes. No, I understand that. And then in terms of -- I mean you spoke -- you alluded a little bit to this just on something like Willis Tower where you have a compressed lunch window and people are looking possibly to save time. Can you talk about what frequency looks like at one of those stores, let's say, Willis Tower, a high-volume Infinite Kitchen store? What does it look like compared to a traditional format?

Yes. I think your question is do IK stores comp faster than classics? I would begin by answering that and say, generally, it's viewed in the industry that faster throughput over time translates to higher AUVs and faster comp growth rate. I mean that's kind of taken as heuristic in the industry. We think that is true. We think that takes time to see. Obviously, at Willis Tower, you're getting very rapid comp growth rate right away as you capture the high walk-away demand that we knew was present in that building. On the call, we disclosed that our 1 retrofit that's been open for some period of time, Penn Plaza, it's been open about 6 months. I think it's seen about a 15% comp growth rate on its digital side of the business. And that's largely coming as customers see the benefits of the IK and coming into that store more frequently. We're real pleased with it. I think it's going to take a while to see that as more stores kind of come into that comp base and have longer to operate.

Right. And there is -- yes, so there's this idea that, first, you can capture that traffic from the look-and-leave customer and then over time as customers become more familiar with the Infinite Kitchen, how fast it is, there's word of mouth, that spread. So -- but that's very -- that's helpful context, especially on Penn Plaza, given how long it's...

I should say that, that's because it's so early to see the comp growth, that's part of the reason we do a lot of customer survey work to really measure what is our customer satisfaction with the IK. And I think we disclosed that on the last call that our last survey showed over 90% satisfaction to very satisfied with the performance of the IK. Most of the customers today really almost look past the IK. They don't think of it as going to an IK store. They think of it as just going through a Sweetgreen that runs faster and has a higher accuracy and timeliness.

Right, right. Maybe going back to, yes, you're looking at your system as a whole. You've recently expanded into newer markets like Charlotte and Columbus. How does brand awareness compare in these newer markets versus your home markets? What is that differential?

Well, what we have found is as we've gone back and we talked a little bit about this to our new store opening playbook of putting marketing people on the ground and meeting communities before the store opens, that our new markets have opened very strong. Seattle opened at very, very high levels for us in 2024. Charlotte's very strong. And we've just seen really almost all of the new markets starting off at consistently pretty high AUVs. I believe on the call, we've said that our classic 2024 in year 1 will have about a $2.7 million to $2.8 million AUV. So we'll really achieve the year 2 goal in year 1. And we're very pleased with the market performance. And we really see that as so important to continuing opening up our TAM.

Absolutely. Can you remind me what that marketing outreach looks like when you open in a new market? What is the playbook?

I think what I would say, in general, we bring people in and we go around and we try to meet local communities. We meet run clubs, we go to local gyms, yoga studios, and we try to begin a marketing effort to let people know who we are and upcoming. Occasionally, we'll do salad drops in office buildings to let people kind of taste Sweetgreen. But increasingly, what we're finding is the brand awareness is ahead of the business. So that when we open up, there's this pent-up demand and people are looking forward to Sweetgreen and know Sweetgreen. And I think that's made a little bit of the openings a little bit easier to kind of run.

Right. And then, yes, on this -- so on the topic of development. So in the fourth quarter, your new openings were weighted towards the end of the quarter kind of around the holiday season. Did that have any impact on that brand or the marketing playbook for opening in new stores?

Well, I think what I would say, like most companies, we really would like our new stores to be balanced by quarter. Ideally, it would open an equal number per quarter. It just makes it easier on the company and easier on the operations. Sometimes, it just doesn't break that way in terms of the development of the real estate pipeline, when construction begins and when it opens. We actually try not to open stores really past Thanksgiving. I think it was just the way the pipeline broke in 2024. I would certainly tell you it wasn't the way we'd ideally do it.

So in terms of, yes, those kind of later openings, I guess you mentioned there are some constraints that are sort of out of your control. So that is something you're still seeing. Is it permitting? Is it labor shortage? I guess how would you explain that?

No. I think it's just a calendarization of there's so many moving parts that go into finding real estate, signing leases, getting permits, construction that as you kind of go through the chain of events, it just kind of broke that way.

Okay. I understand. So I guess maybe we can -- we have a few minutes left, maybe we can end on sort of talking about the culinary proposition. And I think that's something that Sweetgreen has had quite a lot of success with, recently steak, Protein Plates, fries, potentially things like handhelds. So can you talk about, I guess, yes, some of the importance of introducing new menu items and how you can use those to attract your loyal customers and incremental customers?

Katherine, I would start off by saying we are first a restaurant. We are a food company. We sell food. We use a lot of technology, but we are a food company. And we believe that there are ways to make food taste good, be craveable and, to a certain extent, that occasionally to kind of even go after classics and do them in a healthy way. An example would be our Ripple Fries, right? So I think we have 5 ingredients in them. And they're all scratch-made in our stores and they're air fried, not deep fried. And I would say things from Ripple Fries to our best-seller Chicken Pesto Parm, we like to go after kind of mainstream items, make the mainstream items healthier, craveable and tell our customers about that. And we think by sourcing in a way where we know farmers and we source directly, we scratch-cook, we serve healthier food. We think that there's just a lot of tailwinds in terms of trends and what customers want and what people -- in a way people want to eat and live. And we think that's something that we'll benefit from. So we kind of go take the extra step and like being able to say that there are ways to make great classics healthier.

Yes. No, I like the way that Jon put it the affordable indulgence, I think that's what it was.

The affordable indulgence.

Yes. Something I think...

I think that's a big part of the model. And I think you'll continue to see us do a lot more of that as we go forward, and our customers seem to love it.

Yes. Yes. No. Yes, I'm one of them, so I'm looking forward to that. All right. Well, yes, we are almost out of time. So with that, I'll say thank you, Mitch, for your time. Thanks for joining us in Miami. And thanks, everybody, for listening. .

Thank you very much for having us.