Sweetgreen, Inc.
Q1 2022 Earnings Call Transcript

Published: 7 May 2022

[Operator:]

Good afternoon. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen, Inc. First Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Ms. Rebecca Nounou. Please go ahead, ma’am.

[Rebecca Nounou:]

Thank you, and good afternoon, everyone. Here with me today are Jonathan Neman, Co-Founder and CEO; and Mitch Reback, CFO. Before we begin, we have a couple of reminders. Our earnings release is available on our website at investor.sweetgreen.com. During this call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company’s SEC filings including the section titled Risk Factors in our latest Annual Report on Form 10-K filing and subsequently filed quarterly report on Form 10-Q. These forward-looking statements are based on information as of March 27, 2022, and we assume no obligations to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon’s press release available on our IR website. With that, it’s my pleasure to turn the call over to Jonathan to kick things off.

[Jonathan Neman:]

Thank you, Rebecca, and good afternoon, everyone. I want to start with a moment of gratitude and thank our restaurant teams for how they continue to deliver a win-win-win for our customers, communities and stakeholders. I also want to give a shout out to the more than 200 sustainable farmers, producers and distribution partners who supply us with fresh, local and organic ingredients every day. Our differentiated and local supply chain is built on long-term partnerships that have continued to allow us to serve delicious, sustainable and healthy meals amid global supply chain sheets. Our sourcing approach is core to our food ethos and key to supporting the long-term growth and health and the planning, our communities and our business. We are pleased to report another quarter of strong results. In the first quarter, we reported sales of $102.6 million, representing a 67% year-over-year growth, fueled by same-store sales growth of 35%. Total digital sales represented 66% of our Q1 total revenue with approximately two-thirds of those sales coming via our own digital channels. Average unit volumes grew to $2.8 million, up from $2.1 million last year and profitability improved. Restaurant-level margins were 13% for the quarter. Our operators did an incredible job leading their teams through COVID-driven turbulence and managing our restaurants efficiently. Our team remains focused on executing our vision to redefine fast food. Our four strategic objectives to achieve our vision include

[Mitch Reback:]

Thank you, Jonathan, and good afternoon, everyone. I’m pleased with our first quarter results. Total revenue in the first quarter reached $102.6 million, up from $61.4 million in the first quarter of 2021, growing 67% year-over-year. This growth was primarily driven by same-store sales growth of 35%, consisting of a 25% increase in transactions and mix and a benefit from price increases of 10%, of which approximately 6% was taken in January 2022 and 4% in the first quarter of 2021. Like most businesses, during the beginning of the quarter, we saw a significant impact from Omicron. The impact was felt across many areas, including lower demand, reduced staffing and in some cases, temporarily leading to limited operating hours and reduced line capacity. Even with the impact of Omicron, our average unit volume grew to $2.8 million, up from $2.1 million in Q1 2021. Our AUVs now exceed our Q1 2019 pre-pandemic level of $2.7 million. Digital revenue in Q1 was 66% of total revenue and our owned digital revenue that is transactions made on the Sweetgreen app or website was 43% of revenue. Q1 total digital dollars grew 44% year-over-year. We opened eight new restaurants this quarter, up from one in the first quarter of 2021. We opened one new market, San Diego, with a very strong opening in Carlsbad. We are now on track to open at least an additional 27 new restaurants this year in both new and existing markets. We continue to be pleased with our performance of our suburban and residential new openings, giving us confidence in our suburban and residential focused development pipeline. Restaurant margins improved throughout the quarter as volumes recovered from the impact of Omicron. Restaurant-level margins in the first quarter were 13%, rebounding from 3% in 2021. The margin improvement was largely the result of sales leverage, the impact of our price increases and the reduction of our discount line. These factors led to an improvement across all major line items, food and beverage, labor, occupancy and other costs. For a reconciliation of restaurant-level margin to comparable GAAP figures, please refer to the earnings release. Food, beverage and packaging costs were 26% of revenue, an improvement of 200 basis points in 2021. We expect cost and inflationary pressures to increase throughout the remainder of 2022. We continue to believe that as a percent of sales, our food, beverage and packaging costs for 2022 will be in line with 20211. Labor and related costs were 33% of revenue, an improvement of 300 basis points from 2021. This margin improvement resulted from greater sales leverage and simplification of our operating model. During the quarter, we increased the average wage rate 4% to just under $17 an hour. Additionally, we concluded our first quarter retention bonus program in January, and I’m pleased to say 88% of team members who receive the bonus are still with us. We also saw a steady improvement in team member applicant flow. By the end of the first quarter, our stores were 95% staffed. We expect labor-related costs as a percent of revenue to be in line with 2021. Occupancy and related expenses were 14% of revenue, an improvement of 200 basis points from 2021. This improvement is the result of sales leverage from higher volumes. Our general and administrative expense for the quarter was $49.7 million compared to $23.4 million in Q1 2021. This $26.3 million increase in G&A is primarily attributable to a $21 million increase in stock-based compensation expense, $1.6 million of spice-related costs and $1.3 million in public company expenses. Excluding these items, G&A for the quarter was $24.2 million compared to $21.7 million in 2021. This was an 11% increase compared to a revenue increase of 67%. We believe we will continue to experience meaningful leverage in G&A, excluding stock-based compensation, spice and public company expenses as we move forward. Our net loss for the quarter was $49.2 million compared to $30 million in 2021. This change is primarily attributable to a $21 million increase in stock-based compensation. Adjusted EBITDA for the quarter was a loss of $16.5 million, narrowing the year-over-year quarterly loss by $4.5 million. This improvement is the result of higher sales and improved restaurant level margins. For a reconciliation of adjusted EBITDA to comparable GAAP figures, please refer to our earnings release. Turning to guidance and our outlook. We are reiterating our recently provided 2022 fiscal year guidance, at least 35 new restaurant openings, revenue ranging from $515 million to $535 million, same-store sales growth between 20% and 26%, restaurant-level margins of 16% to 17% and adjusted EBITDA between a loss of $40 million to a loss of $33 million. The path to recovery has been neither linear nor consistent. We continue to see variability in our customer traffic patterns. While there are short-term challenges in the operating environment, we are focused on building the company for the long-term. The strength of our brand, product, digital platform and team gives us confidence in reaching our goal of 1,000 restaurants across the United States by the end of the decade. With our expanding restaurant-level profits and disciplined approach to G&A, we continue to make steady progress on our path to profitability. We are well equipped and keenly focused on growing a profitable business. With that, I’ll turn the call back to the operator to start Q&A.

[Operator:]

Thank you, sir. [Operator Instructions] We’ll go first to Sharon Zackfia, William Blair.

[Sharon Zackfia:]

Hi, good afternoon. I did not expect to be first. So thank you for that usually as these are last. So you sound kind of unusually confident about your new unit pipeline for 2022. I mean we’re hearing a lot of companies talk about permitting delays and so on. So can you kind of help us understand what kind of cushion you’ve embedded in that guidance for 2022 for at least 35 locations. And then separately but related, where are new unit costs likely to end up this year? And how do these new formats like sweetlane or the pickup kitchen kind of compare in terms of what you would expect to build out cost?

[Jonathan Neman:]

Yes. Hi, Sharon. I’m happy to take that question. So from a new unit pipeline, there’s a lot of confidence in the 35 store guidance that we’ve given. While it’s been a very challenging environment, we’ve been ramping up development in our pipeline over the past couple of years and have a – I’d say we just have a pretty deep pipeline that gives us the confidence to our permitting is hard. And a lot of the costs around construction continue to be challenged. Our team has done an incredible job, which gives us the confidence to keep that guidance. In terms of costs, we have seen some inflation, but again we are able to plan ahead with a lot of mass buying and procurement here. So we’re seeing new unit inflation in the mid-single digits compared to an industry that seem probably somewhere in the team. So we feel pretty good about that. And with that, are able to maintain the return on capital that we’ve guided to. As it relates to the new store innovations, both sweetlane and what we’re calling our pickup kitchen, I’d say those are both the very early pilots. So we’re testing those really to understand both the consumer experience, the team member experience and of course, ultimately, the return on capital. But we do expect those to meet or exceed our current return on capital. We wouldn’t roll them out if they didn’t meet our threshold. So we do, like you’ve seen with the rest of the industry with sweetlane, we’ve seen a lot of excitement around that convenience factor. And we think given the digital penetration we have, we’ll perform very well. And again, we see, given the digital penetration, that pickup channel should be a great way for us to infill and create more convenience.

[Sharon Zackfia:]

Thank you.

[Operator:]

Next we’ll hear from Andrew Charles, Cowen.

[Andrew Charles:]

Great. Thanks, guys, and thanks for the positive updates. It was great to see you guys beat your guidance across the board in 1Q, but just wanted to ask about the rationale for keeping 2022 guidance intact. Is this just conservatism? And you point the investment community is having confidence in the high end of guidance? Or is there something you’re seeing in 2Q trends that led you to decide not to raise the guidance range?

[Mitch Reback:]

Hey Andrew, thank you very much for the question. I think it’s a great question and I can’t spent a lot of time reflecting on the question. And let me say, we’re seeing nothing recently that would have paused just to change the guidance to have any more optimism, more conservatism. The way we look at the business, the factors we control on the inside, we’re very, very happy with. We’re very happy with the restaurant operations. The restaurant level margins, the disciplined and rigorous approach we’ve had on G&A and are really the shrinking losses that the company has. What causes us a little bit of concern, quite frankly, are the external factors. Frankly, many of the things we read from the analysts. So as we look at the outside world, we see it taking as we look at our inside, we see the execution steadily improving. And as we’ve added the two together, we thought the best pathway for us at this point was to hold the guidance that we gave really about eight weeks ago.

[Andrew Charles:]

Okay. I appreciate the cautious optimism. That’s helpful. Just a follow-up. With the rebound in urban mobility post Omicron in February, March and even in April, are you seeing any sales transfer from suburban to urban markets as commuters kind of intensify the return to office? Maybe one way to look at it is the growth in sales volumes after Omicron in January, grew the similar cliff between central business interest in suburban locations.

[Mitch Reback:]

No, Andrew, I’ll tell you, as our urban stores have recovered, we have seen no change in the suburban stores. We’re really encouraged by that trend.

[Andrew Charles:]

Super. Thanks, guys. I’ll pass it off.

[Operator:]

John Ivankoe from JPMorgan has the next question.

[John Ivankoe:]

Hi, thank you. Thanks for the comments. I guess, on the first quarter of 2022 openings, I guess, being in line or ahead of expectations, particularly in the new market like San Diego. But can we go back and review the 2021 class, can you talk about the performance of what you’ve seen in either suburban and residential areas. And if it’s possible to maybe highlight how some of the performance as we stand in May of 2022 have been for some of the newer markets that you opened in 2021. And if there’s any information that you gleaned from the success or lack thereof in some of those openings over the past eight quarters – six or eight quarters or so?

[Mitch Reback:]

John, thanks for the question. It’s an interesting question. And what we found with our new stores from the class of 2021 as they perform almost exactly like the rest of the fleet, which means it’s really proportional to where the pin is dropped. The suburban stores continued to outperform our pro forma model. The urban stores lagged slightly behind it and it’s almost in keeping with the whole portfolio. What we found with the new markets is some of the new markets have been exceptionally good performers for us, most notably would be Colorado, for example, and Florida. A market like Texas has lagged a little bit, which is really just the latest to where the pins got dropped in urban centers.

[John Ivankoe:]

Okay. And in terms of informing what you see going forward, I mean, dropping of pin doesn’t necessarily mean that you get it to the 99.999% accuracy. So how is the experience that you have in the marketplace over the last number of quarters, perhaps influencing some of your site strategy, excuse me, as you begin to think about 2023 and 2024 openings.

[Mitch Reback:]

Yes. I’ll give you an example of how that’s impacting the 2022 openings. 90% of our pipeline is suburban focused for 2022. And what we’re finding is that the results continue to get better in those markets and in that category, we continue to have our capital flow into it to the higher return markets.

[John Ivankoe:]

And I know – one of – I guess the discussion points as part of the IPO, when we talk about suburban as you presumably need to have frequency as you’re drawing customers from a wider area. So can you talk about, I guess, the demographics that may differ or in fact, even be similar to the urban consumer. I mean, I guess, how is the consumer base of Sweetgreen changing as you go from urban and suburban. Are you seeing wealthier customers come more often? Or are you seeing a broader customer coming less often? I mean how is that actually shifting relative to, I guess, the experience that the brand was built on?

[Jonathan Neman:]

Yes. John, it’s Jonathan here. So we are seeing really a broadening of our consumer, and that’s been very intentional. You see it in a lot of the brand positioning, what we’re doing with our menu as well as with our channels and the more convenience we’re driving. So one of the really strong parts of our suburban footprint has been our delivery channel, both on marketplace and are native. And so overall, just broadening demographics for our consumer and will give us a lot of confidence to continue our development there.

[John Ivankoe:]

Thank you.

[Operator:]

And next up we’ll hear from John Glass.

[John Glass:]

Own digital channels, the mix between your own digital and total digital hasn’t really changed that much over the last few quarters. I understand your overall volumes are higher. So what moves – what are you doing intentionally to move the mix higher own digital. And I assume part of that is you’re going to maybe talk about loyalty in some of those programs. When – is this a testing year in 2023 as a launch year? How long does it, I think take, I guess, is the question to sort of get through what you’re working on where you can be system-wide on a program that might improve the own digital mix. Thanks.

[Jonathan Neman:]

Yes. So I’m going to take that in two parts. First, around own digital. We’ve been very – the reason we share that number is something we’re very intentional and focused on and driving. And we want to make the Sweetgreen at the best place to order Sweetgreen. So we do a lot today to drive that. That includes a better ordering experience. A broader menu, better value. We’ve done a lot. We did a lot in the last quarter around improving the delivery experience specifically. So today, on the Sweetgreen app, as an example, you have a delivery rate to 10 miles or on our marketplace, it’s about half that. We’ve done a lot to improve our speed of delivery. We’ve done a lot just to improve the satisfaction of that channel. So again, we’re going to continue to make our own channel a better place to order Sweetgreen. As it relates to loyalty, as you mentioned in the remarks, we think it’s a really big opportunity for us. We think the opportunity is big because one, it’s a brand with a lot of habituation and frequency largely due to the menu and the fact that you can see it every day; two, the high digital penetration. So we think there’s a really unique opportunity to do something special as it relates to loyalty. And you can kind of see the parts coming together. And you said it right. This year is really a testing piloting year, leading to 2023, which will be more of a launch year. So we did – we tested Sweetpass, as we mentioned, they’re very successful, really encouraged by the results. And then later this summer, we’re launching digital challenging, which is more around personalized CRM. So we’re really excited to see what that does. You can imagine loyalty being almost a combination of the two, or you have a personalized CRM component for everyone and then for those users that want to sign up to Sweetpass, you have that component as well.

[John Glass:]

Can you just remind us exactly, how you get a large part when you stopped it? Was it – can you just remind us why you didn’t like that one? Or what was it to include? Was it not advanced like you’re talking about right now? Why do you discontinued that?

[Jonathan Neman:]

Yes. That’s exactly right. It was really a discount program. So it wasn’t personalized in nature and we didn’t find it seeing that consumers loved it, it was and didn’t do much for the company, to be honest. So we sell a way to create something that was more delightful for our consumers and a real win-win-win. And that’s something that really make the company. So we really – we’re really happy we did that lot of painful for a moment, it clears the deck for us to come up with something really special. And we think this loyalty program will not only be a really big sales driver for us, but it will be something that consumers really love and will continue to drive our digital penetration and leadership.

[John Glass:]

Thank you.

[Operator:]

Next up, we’ll hear from Jared Garber, Goldman Sachs. Just a minute everyone. Mr. Garber, your line is open.

[Jared Garber:]

Can you hear me?

[Operator:]

Yes.

[Jonathan Neman:]

Yes.

[Jared Garber:]

Okay, great. Maybe two questions. I’m sorry if I missed this on the first one. Jon or Mitch can you give an update on outpost? I know there’s been a big push to kind of reaccelerate that program as the urban environment starts to normalize. But if you could just give us an update there on maybe how many new outpost you opened in the quarter or where you are sitting now at the end of the quarter or in the second quarter here? And then two, I just wanted to get a sense of the announcement with the partnership with Devin Booker, obviously, was really cool for us to see. Just wanted to get a sense of why maybe he was the right partner and if that’s a strategy to maybe bring in some different kind of consumers to the brand. Thanks.

[Jonathan Neman:]

Hi, Jared. So in terms of outpost, we ended the quarter with 579 outposts. So we added almost 100 outposts in the quarter. And as the world has opened up and people are getting back to work, we’re seeing a lot of excitement from businesses really wanting to bring Sweetgreen in as an amenity. So still very, very early in that recovery. And as people get back to their normal routine, but we’re pretty encouraged by the number of sign-ups and the acceleration of businesses signing up to have outposts. As it relates to the brand campaign and launch on Monday, really excited about it. And really it speaks to our greater vision of redefining fast food. And a lot of that is about changing the way people think about food. And for us, this is about sports and brand sponsorships and partnerships. For so long, you had fast food brands and brands that really these athletes were not actually eating, they were promoting them. And we – we’re trying to support this paradigm shift around people like Devin, who actually eat Sweetgreen, use it to fuel their lifestyle, partnering with brands like Sweetgreen to support healthier eating. So just in terms of where it could go in the future, it’s not just Devin. Right now, it’s Devin and Naomi, we brought back Naomi. You can expect over the years for us to continue to lead the culture, to tell stories about the future of food.

[Jared Garber:]

Great. Thanks so much.

[Operator:]

And next up we’ll hear from Brian Bittner, Oppenheimer.

[Brian Bittner:]

Thanks. Thank you for all the updates. As we dive into the results this quarter, it’s hard not to notice how impressive the restaurant level margins were particularly on the COGS line, where you leveraged margins, no one’s really leveraging that line item. You leveraged them about 170 basis points year-over-year. And I know you said, Mitch, that for the full year, you do expect COGS margins to be more in line with last year. But I guess the question is, can you unpack those assumptions behind that outlook just given how strong the first quarter was, it seems like you have strong pricing out there. It seems like you have a food basket that is not growing as passed on the cost side as your peers. So any more color you can give on how to think about that line item relative to first quarter.

[Mitch Reback:]

Thank you, Brian. It’s really, really good and important question in this time. What I would say is we have to remind everybody that we have a very planned forward menu. And it’s a plant-forward menu that’s locally sourced. And in the environment that we’re in, those have been two really, really significant advantages for us. Finally, we have about 88% of our food is under contract, where we have long-term relationships with our suppliers and farmers, many of which have held to those contract pricing during the first quarter. When we look out right now what we see is pressure in our cost. We see it really specifically in chicken, avocado, sunflower oil and distribution. And knowing that those pressures are going to build throughout the year is what led me to stick to the guidance of rev – past the 28% of revenue versus the 26% of revenue than it was in the first quarter. So essentially, the first quarter, if you do the math, saw virtually no inflationary pressures against the 6% price increase, and we see some of that reversing in the next three quarters.

[Brian Bittner:]

That makes sense. And just a quick follow-up to that is on the pricing. Your pricing is not that different from your peers. Everyone is taking price, but I’d love to know what your own analysis says about customer resistance or lack thereof to your recent pricing actions? And what does your research tell you about your pricing power into the future if you need it?

[Mitch Reback:]

So obviously, we’ve seen really no signs of any resistance to the price increase. We talked a little bit about this in our last call, we historically have not seen much resistance. We believe our customers understand the cost of real food and freshly prepared food. What I would say is when we said in the last call that we were open a further price increase if we saw inflationary pressures build. At this point in time, we don’t see a need for that in 2022. We think we’re probably okay with where we’re at.

[Brian Bittner:]

Great. Thank you.

[Operator:]

Next up is Chris Carril, RBC Capital Markets.

[Chris Carril:]

Hi, thanks for the question. Just following up on earlier comments around execution. I wanted to ask about capacity and throughput. Just given AUVs are continuing on the upward steady trend here, and are up to $2.8 million now. Just curious to hear more about throughput levels, particularly in the front line, just given digital mix is remaining strong here.

[Jonathan Neman:]

Yes, absolutely. Hi, Chris. So something that we think a lot about both cap capacity and throughput and very early on in Sweetgreen trajectory, we understood that digital revenue is going to be a huge part of huge part of our growth. So we’ve intentionally built a lot of additional capacity in all of our restaurants. So we feel, especially on the digital side, very well prepared for any increases on digital revenue. As you continue, line has definitely not made it back to pre-COVID levels. So we’ve actually had a number of throughput initiatives that we’re going to share on the front line in the future quarter. But we feel like there’s a lot of room to grow on the front line still and a number of throughput initiatives as that comes back.

[Chris Carril:]

Great. Thank you.

[Operator:]

And next, we’ll go to Teddy Farley, Citi.

[Teddy Farley:]

Hi, thanks for taking the question. I was just curious if you’ve been seeing any distinct differences in either day part or day week. Thank you.

[Mitch Reback:]

Hi Teddy, nice to meet you. This is Mitch. I would say, when we said that the recovery has been neither linear nor consistent, that would be an interesting example. In Sweetgreen’s history pre-pandemic, Monday was always the biggest day of the week, Tuesday was a big day. And as the week went through, the volume began to taper down. What we now find is the business is stronger Tuesday, Wednesday, Thursday and in particular, in the urban locations. So as people have changed their work patterns, we’re seeing a change in the pattern in our business. In terms of daypart, we’ve not really seen a significant change in the daypart mix in the business.

[Teddy Farley:]

Awesome. Thank you.

[Operator:]

And everyone, that does conclude the question-and-answer session. At this time, I would like to hand the conference over to Mr. Jonathan Neman for any additional or closing remarks.

[Jonathan Neman:]

Thank you so much. I just want to thank everyone for your time here. While it was a really great quarter that we’re proud of, we’re more excited than ever about our long-term vision of redefining fast food and our mission of connecting people to real food. Again, I want to thank all of our restaurant teams, head coaches and our Sweetgreen support center for their tireless work. It’s been a lot of hardworking together and we’re excited about what we’re going to build together. Thank you guys so much.

[Operator:]

Everyone, that does conclude today’s conference. We would like to thank you all for your participation today. You may now disconnect.