Q3 2022 Sweetgreen Inc Earnings Call
Payable farmers producers and distribution partners with.
We share a network of partners that supply some of the most highly regarded restaurants in the United States.
Fast majority of what we sources local organic and our passionate team members make food from scratch every day in each restaurant. This.
Create the difference that our customers can take.
We have a bold priced under $10 in all our markets and we've held our core menu price flat since the beginning of the year, while the majority of our industry has raised prices more than once this year.
Turning to our two plus years in the pandemic, we drove best in class digital acquisition and sale, while simplifying our operating model.
We continue to deliver value through technology by meeting customers wherever they are leaving technology shouldnt enhance the human experience not replace it.
Now that the world is opening up.
Going back to basics relaunching, the playbook that we call intimacy at scale that helps us build the best in class brand over the past 15 years.
I'd like to highlight a few of the ways, we built intimacy at scale.
First we take a local approach to building community connections with local chefs farmers' markets artist community partners and creators so that with every opening we come and authentic part of the community.
Two we create a great experience in our restaurants and have begun to retrain our team members with a focus on customer hospitality.
Add the sweet touch, it's one of our core values and it's how we delight our customers with every interaction we have with them.
<unk>, we offer fast service without compromising freshness by focusing on improving throughput through refining our labor model and training. We believe we can drive incremental transactions and better customer satisfaction.
In addition to driving operational excellence and reintroducing our intimacy at scale playbook, we are committed to driving long term sustainable growth and becoming a profitable national brand, even with the increasing uncertainty of the macro environment.
As a reminder, our strategy has four pillars, one expand and evolve our footprint in new and existing markets to connect more communities to real food to enhance our digital experience with a focus on one digital relationships, allowing us to add new customer channels drive frequency and increase restaurant volume.
Three solidify our brand as the industry leader and inspire consumers to live healthier lives through re imagining fast food and four create five star team member experiences and make sweet green the employer of choice.
Let me share a few highlights from the quarter on each of these pillars, starting with our footprint.
In Q3, we opened 10 restaurants, ending the quarter with 176 restaurants late in the quarter and into Q4, we opened five restaurants in the upper Midwest, Minneapolis, Detroit and Indianapolis.
Launched these new markets, we collaborated with local artist small businesses Influencers and chest. Thanks to our intimacy at scale playbook. While early these stores are exceeding expectations and tracking to an average <unk> above $3 million.
We have however, small cluster of southeast restaurants that are underperforming to our standards.
These restaurants opened during the pandemic and as a result, we were not able to execute our playbook. We have begun the process of re energizing these restaurants and community connection.
We are starting to see positive responses and week on week revenue growth. We're confident in these markets as we have nearby restaurants that are that are already meeting or exceeding expectations.
Last month, we opened our first digital only pick up kitchen in the Mount Vernon area of Washington, D C, which was a relocation of our city Vista restaurant nearby.
Customers have been receptive in the store was filled with new customers downloading our app to experience the new model.
You should pick up kitchen has the potential to unlock additional markets with smaller square footage needs lower build out cost and improve return on invested capital.
Our Mount Vernon restaurants will provide learnings for our future restaurants powered by the Internet kitchen.
As you know we acquired sites the restaurant powered by automation technology last year.
We're in Boston, a few weeks ago visiting the team I cannot be more excited with the progress they've made.
We can share that we will be opening two restaurants sometime next year that will feature our automated production line, we call the Internet kitchen. These.
These restaurants will serve our food with even better quality perfect cautioning faster speed and will create a more consistent customer experience all while elevating the role of our team members.
We're confident that automation will play a major role in elevating the experience for customers and team members, but will also help us create a more profitable and scalable model. We look forward to sharing more about this transformative technology with you in future calls.
Next week, we will be opening our first pull through in Schaumburg, Illinois.
With 60% of sales coming from digital channels, we are well positioned to have another profitable and scalable format in our toolkit as we look to connect more people to real food.
Enhancing our digital experience with a focus on owned relationships continues to be a priority for us.
We believe the launch of a loyalty program in 2023 will lead to customer increment holiday and engagement and is especially important to have in this recessionary environment.
As a reminder, our Sui pass subscription trial in Q1 saw Sui pass users placed an additional five orders on average during their 30 day trial, almost tripling their frequency and more than doubling their spend as compared to the average monthly frequency in Q4 of 2021.
In July we launched our rewards and challenges feature with an aim to drive frequency and spend through a cohort it game aside experience.
Looking back on a 90 day period customers, who opted into at least one of our digital challenges doubled their frequency and spend as compared to digital customers, who did not opt into a challenge.
We will continue to test and implement new challenges throughout Q4, as we iterate and learn towards a new loyalty program.
Both <unk> and rewards and challenges, we're piloted its potential components of our future loyalty program given.
Given the level of customer engagement with both pilots, we believe our program will strongly resonate and be a powerful growth lever later next year.
We continue to focus on the growth and profitability of our <unk> channels as offices return. In addition to outpost. We are in the early stages of rapidly growing a new catering channel.
Begun piloting catering 20 select stores with promising initial results.
Average order values to date exceed $500 and weekly sales have tripled from start to end of Q3.
Over the coming months, we will add additional market to our pilot and begin marketing activity to drive awareness, we see real growth opportunities with outposts and catering as return to office trend upward and group gatherings increase.
Our brand's mission is to expand access to real food, we expand access by adding channels, expanding our footprint and broadening our menu.
Yesterday, we launched a Christy Rice Street dessert nationwide. It's our version of the beloved classic treat that honors our food ethos as it is free of highly processed preservative and any refined our hidden sugar.
We created this treat with our chef and residents Malcolm living within the second renown pastry shop, who has worked at restaurants such as per Se in Noma five time winner of the tidal world's best restaurants.
Cross, California, we're also testing new hardware offerings grain Bolton place.
Test features our delicious new protein currently in testing organic Turkey, meat balls, which have 60% less carbon emissions than traditional nipple.
Finally, starting this Thursday, we will be testing our first ever plant based protein meeting at our Culver City food that can address customer desire for a high protein vegan option.
For one month customers can try this nutrient rich nutrient rich mushroom route protein in their bowls or ordered a new MISO medieval.
We are proud to be working with a partner who shares our goal of creating a positive sustainable impact on the planet.
Our team members power, our mission and build the brand with each customer interaction, we continue to innovate to make their jobs easier as well as invest in training and development.
This leads not only to increase employee satisfaction, but also better run restaurants.
Given a number of factors, namely a historically tight labor market there are opportunities to improve stacking across many of our restaurants.
While recruiting has becomes somewhat easier than earlier in the year and we remain 95% staff.
<unk> have had an impact on throughput and operating hours in many locations.
Our data shows that employees, who are scheduled to work 30 hours or more callout less and have higher tenure than those who.
Who are scheduled to work fewer hours in response, we are working to shift our staffing models.
Yeah.
On the hiring front, we launched a new applicant tracking system. This quarter the rollout of our new Ats has reduced our time to hire by almost half.
While we have seen the hiring environment get easier in this industry demand for talent is still high.
Training remains critical to our success in implementing our intimacy at scale playbook, especially at the majority of team members joined during the pandemic when we had to switch to digital only operation.
We've refocused our training on customer hospitality as the world opens back up.
We continue to leverage automation and digital tools to free up time, so our employees can do what they do best connecting with our customers.
This includes our newly rolled out proprietary cold prep tool, which uses machine learning to generate a list of what youre prepare and how much by incorporating multiple data points in a real time algorithms to predict future consumption of ingredients.
Early feedback from our teams is overwhelmingly positive.
We are in the early innings of creating and defining a category of healthy convenient and delicious food, we have tremendous white space across the U S. A national brand with a cult like following and a proven playbook, we are well capitalized and continue to have a relentless focus on financial discipline, while enabling us to invest in growth to drive our business for.
The long term.
Want to thank the whole suite green team for their work and commitment to our mission of connecting people to real food one customer at a time now.
Now I will hand, it over to Mitch to review our Q3 financial results. Thank you Jonathan and good afternoon, everyone.
Total revenue for the quarter was $124 million up from $95 8 million in the third quarter of 2021 growing 29% year over year. This includes same store sales growth of 6%, reflecting a price increase of 6% taken in January 2022. Since then we have not taken a broad man.
New price increase as stated previously if our cost of goods and labor as a percent of revenue stayed in line with 2021, we do not anticipate any further price moves in 2022.
Average unit volume was $2 9 million up from $2 5 million in Q3 2021.
Digital revenue in Q3 was 60% of total revenue and our own digital revenue that is a transaction made under sweet Green Apple website was 40% of revenue Q3 total digital dollars grew 22% year over year.
We opened 10, new restaurants, this quarter ending the quarter with 176. The majority of these restaurants opened in the second half of Q3, we remain on track to achieve our guidance of at least 35, new restaurants. This year to date, we've opened 33 restaurants for a total of 182 restaurants during the fourth.
Quarter, we made the decision to close one restaurant in Texas.
Restaurant level margins in the third quarter were 16% up from 14% in the third quarter of 2021.
For a reconciliation of restaurant level margin to comparable GAAP figures. Please refer to the earnings release.
Food beverage and packaging costs for 28% of revenue, which is consistent with the comparable period in 2021.
Percentage of sales, we continue to expect that our food beverage and packaging costs for 2022 will be in line with full year, 2021, which was 28% of revenue.
As we mentioned on earlier calls we have seen inflationary pressures build into the second half of 2022 and expect further impacts due to recent weather disruptions impacting tomatoes and roaming in Q4.
Labor and related costs were 31% of revenue an improvement of over 100 basis points from the comparable period in 2021. This margin improvement year over year was the result of price increases and the simplification of our operating model. We continue to expect that labor and related costs as a percentage of <unk>.
Revenue will be in line with or slightly better than full year, 2021, which was 32% of revenue.
<unk> related expenses were 14% of revenue an improvement of 100 basis points from the third quarter. In 2021. This improvement is primarily due to the impact of menu price increases our G&A expense for the quarter was $41 4 million compared to $28 9 million in Q3 2021.
This $4 $5 million increase in G&A is primarily attributable to a $14 6 million increase in stock based compensation expense, an increase of $1 2 million and public company expenses and a $300000 increase in our investment in space. This was primarily offset by a decrease in salary and benefits.
Due to the timing of the Spice acquisition in Q3 2021, the change in Spice cost was minimal for the quarter.
Excluding these items G&A for the quarter was $20 2 million compared to $23 $7 million in the comparable period. In 2021. This was a 15% improvement as revenues increased 29%. We expect that we will continue to gain meaningful leverage in our G&A, which is critical for our path to profitability.
<unk>.
Our net loss for the quarter was $47 4 million compared with $30 1 million in comparable period of 2021.
Change was primarily attributable to a $14 6 million increase in stock based compensation and an $11 1 million of restructuring charges taken in the current quarter, partially offset by the increase in revenue and restaurant level profit noted above.
EBITDA for the quarter was a loss of $6 8 million narrowing the year over year quarterly loss from $14 1 million. This improvement is a result of higher sales improved restaurant level margins and leverage in G&A, excluding stock based compensation.
As disclosed on our last call, we took steps to manage our corporate overhead costs in the third quarter, we incurred pre tax restructuring charges of approximately $11 million related to moving to a smaller office and reducing our support center staff by approximately 5%.
We ended the third quarter with a cash balance of $381 million, we have a strong capital position that allows us to continue to expand our mission and provide us with flexibility during these uncertain times.
I would like to make a few comments now on our third quarter sales.
First the post memorial day trends persisted throughout the quarter and into October .
Second we saw an unusually high volume of store closures due to callouts in repair and maintenance issues affecting some high volume stores.
Third we have a small cluster of restaurants into southeast to open during the pandemic ramping slower than expected.
We are revisiting these stores with our intimacy at scale playbook, we have long term confidence in these stores and markets.
Are these trends, we expect to be at the lower end of our guidance. We gave in August with the possibility of our top line being a little short.
The external operating environment continues to be challenging in the world, It's hard to predict right now.
The macroeconomic environment grows increasingly uncertain, we are focused on doing what's best for the company over the long run. We believe we have the right long term strategy to scale, our mission of connecting people to real food and created an enduring brand. We are committed to driving sales elevating our customer experience and maintaining.
Disciplined approach to margins and G&A to drive the company's path to profitability with that I'll turn the call back to the operator to start the Q&A.
Thank you Mr Reback, ladies and gentlemen at this time. So do you have any questions since progressed star one and if you do you find that your question has already been addressed you can remove yourself from the queue by pressing star one again.
Our first question this afternoon from Johnny Banco Jpmorgan.
Hi, Thank you very much can you hear me.
Yes, Ron Alright, yes, hi, sorry about that.
We had a little powered burst outside tax lots my phone and I had to go to myself and so.
We're going to we're going to have a big storm I guess in the next day sorry about that.
So the question really is on new.
New unit volumes and listen its a calculation that we can do perfectly from our seat, but we can try based on last year's average weekly sales and same store sales, but that was a place.
In the model that did seem more so than even the comps seem to explain most of the shortfall in the revenue relative to our expectations. So I guess I wanted you to address did you see that as well I mean is there anything happening is there more than a handful of new stores that have opened that had weaker end.
What would characterize I guess the stores that have been slower versus the stores.
That are better and.
Talk about initiatives, you know and I think you've talked about intimacy at scale, but can you talk about the different initiatives that you may have.
To bring the lower performing stores at least up closer to the system average and correct what may or may not be.
Starting.
Sure Hey, John just waiting to hear from you. So so to your point, we do have a cluster of stores, mostly isolated in the southeast where we have seen a slower start.
We mentioned on prior calls about some some stores, which we had signed right before the pandemic or at the onset of the pandemic really not anticipating the changes to the demographics and the shifts in traffic the combination of that as well as not being able to run our classic playbook, which really has to do while so much of our business is digital.
A huge portion of it is that frontline business of <unk>.
Really bringing guests in educating them about sweet green, giving them that first.
That incredible first trial and bringing them back and then on top of that part of our playbook has always been how we engage with our communities.
There is a cluster of stores opened in the in the kind of right in the middle of the pandemic, where we weren't able to execute this playbook and that's really where we're seeing most of the problem.
As the pandemic started to wane and if you look at the past opening specifically the ones in the upper Midwest they've been incredibly successful and I don't think we're pretty confident that this is much less to do with the real estate of the market because all of the market, where we have problems stores. We have very successful stores. It really has to do with our go to.
Market and how you execute executed that playbook. So as we mentioned on the call. We've really begun to reengage on that play playbook and are seeing some really nice results as well as using that playbook on new stores.
I will also just talk a little bit about some of the challenges being the labor environment, which we've now seen a lot of.
Easing in the labor environment, but.
In the depths of the pandemic that made a lot of the customer experience that we expect challenging also say, we're very very focused on just.
Execution, one customer at a time and we think in our history. We've proven that once people try sweet green they are very sticky and so when stores start start a little bit floor. We've always we've always proven that we're able to ramp these stores when we focus on them.
Hey, John It's Mitch Hello.
It's interesting when we look at the modeling for both the class of 2021 in the class of 2022, we continue to see there a year or two volume averaging $2 8 million target that we gave at the time of the IPO. So while there have been some stores that have all been softer than we would have liked we have.
On the offset in many stores that are opened stronger.
Thank you guys.
Thank you well go next now to Andrew Charles with Cowen.
Okay.
Great. Thanks.
Could you guys to expand a little bit more about the slowdown in may sustaining through through October return to office data looked like it improved a bit post labor day, but.
Perhaps wasn't as robust as you guys think your original guidance. So what else would you kind of attributed to I mean, how much. This is more of a macro versus how much is more the southeast dragging nonperformance in just some challenges on the staffing side, what labor side excuse me.
Yeah, Hey, Andrew good to hear from you.
I'll start and I'll, let Mitch kind of fill that I'd say, it's a combination of a lot of macro effects. You know a lot of the stuff we talked about in the last call I'm around the slowdown in sales post Memorial day things things that we saw around heightened summer travel erratic returned to office and just general different in different traffic trends, even on the office while we've.
<unk> seen an increase on certain days Mondays and Fridays are definitely not the same so traffic patterns are erratic across the board, but beyond that I think.
There is some on the execution side.
Talked about the world our World was all digital during Covid and the frontline was the fastest growing channel for us this year, both year over year and quarter over quarter and as most of our team members are really new to sweet green they've never experienced the sweet green have lines out the door and the throughput that we're used to so we're in a lot.
The weighted maybe say caught off guard by that and in our throughput and customer service really not where we expected it to be that's been a huge focus over the past couple of months and I can say that we've already seen some green shoots as we focused on that customer and on that throughput. We're starting to see some really nice gains there, but again again I would say definitely.
Definitely the macro is not making things easier, but some execution side on execution stuff on our side as well.
Sure Andrew.
Let me just build a little bit on Jon's comments as we said on the call in August what we saw happen Post Memorial day was very unusual in our business.
As a general rule Sweet Green strengthened during the summer and slows down during the fall historically Monday was our strongest.
Followed by the end of the week, what we've seen coming out of the pandemic or whatever we call. The phase we're currently in.
Some of the consumer patterns have been very different than they were prior to the pandemic. So John talked about Monday, and Friday, essentially being almost an extension of weekends in the urban stores, but in addition to which what we saw was the summer slowdown we felt part of that was travel part of that maybe due to COVID-19. It's possible part of that's due to.
The macro environment, what's very interesting is as we approached hall and hit November the business reignited. The same store sales began to grow double digits again again counter to the historical pattern.
Okay and then.
Maybe just a follow up question. How are you just given the sales environment you recognize that November has shown some improvement, but it's only been seven or eight days. So obviously you don't get too far ahead of yourself, but can you talk about your feeling your ambitions to turn profitable in first half 2024 now versus on the prior earnings call.
Okay.
So I think that is very very important topic and it's one that we spend a tremendous amount of time on is sweet Green I would say in the current environment our path to profitability is actually more important not less important than it was and its one that were more focused on than ever the path to profitability for us as a realm.
Still the simple model and opening new stores that are successful so.
<unk>, our restaurant level margins through good control at the store level and leveraging our G&A expense and we are completely focused on this and we will continue to restrict out in 2023, our losses will narrow significantly and the company will be profitable on an adjusted EBITDA basis in the first half of 2020.
Four.
Okay got it so still on track Super.
Good morning.
Great. Thanks, I was just talking about.
Let's say one quick buildup.
While the sales may have been a little lighter than we wanted in Q3, we were especially happy that the adjusted EBITDA came in significantly better than the modeling and at the restaurant level margins were strong in Q3.
That's helpful. Thanks, and just one maybe follow up question on that can you talk about your thinking around the sales and margin impact for the upcoming loyalty program. In particular, how this is going to help enhance your path to profitability is obviously there is a portion of this where youre, giving away more food for free.
Okay.
Well I think what I would say about that is you are correct that the margin on that marginal sales through loyalty would be at a lower rate than historical where really driving incremental <unk> of the volume to kind of get the <unk> backed up and gain more leverage around <unk>.
So we believe that it will add both to the top line down to the bottom line, although at a lower margin.
Very good thanks, I appreciate the time.
Thank you we'll go next to Jared Garber of Goldman Sachs.
Great. Thanks for taking my question.
Wanted to come back just maybe some comments.
But you had made last quarter around.
Worked with working with your sort of landlords and some of the urban markets that I think.
We are open to the units that were open during the pandemic and maybe.
At the current moment or not necessarily best performers were performing to the same extent that you've thought on the top line. So can you give us any update on what those conversations with some of those landlords have been Mike.
Thank you John for the question.
Let me first say that you are correct in that.
The.
Deep central business district fees, particularly in Midtown Manhattan have not returned to anywhere close to their 2019 levels.
While they are growing and it's continuing to grow they are certainly off the mark they were at before the profitability of these stores has been impacted.
By several margin points, the offset has been 100% of the occupancy line. We are in discussions with a number of landlords and modifying our leases are in.
In order to kind of accommodate that structure. The attempt is to move more of those leases from fixed rent.
Percentage rent with a breakpoint per level in 2019, and we have had some success in that area.
Great. Thanks, that's helpful and then.
As it relates to.
The unit growth I mean, obviously impressive to see you guys maintain that unit growth guidance throughout the year. Despite all the macro pressures and we've seen several companies kind of ratchet down their unit growth expectations for the year, but wanted to get a sense of how we should be thinking about.
Unit growth into next year.
How comfortable you feel with the original guidance that you laid out during the IPO.
Hey, guys. Good to hear from you. So we're on track for at least 35% this year might exceed that by a couple of stores depending on how the how the year ends up we have 43 leases signed for 2023 already so we're kind of still targeting the way we think about it as a.
The cumulative between 22 and 23 stores with modeled 85, and we're on track for $80 to 85 at least so we feel pretty good about the development targets.
On top of that so.
So first of all kudos to our development team in this incredibly incredibly challenging environment.
B.
The.
The number of stores, we have been very focused on the quality of real estate and the sequencing.
This year was it was a year of going wide opening a lot of new markets and anyone in our business now is opening a new market is a lot harder than more stores in existing markets as well as a lot more risk. Luckily these new markets have done well for us and what we're doing next year is on our path to profitability, we will be focusing on more stores in existing markets.
And just not not going as wide going deeper where we know it works and feel really good and confident about about the pipeline that we have.
We also mentioned.
Some work on the new formats.
We launched our pickup only kitchen couple of weeks ago, and <unk> been doing exceptionally well.
Gives us a little bit of a tape.
A.
Taste of things to come as we as we get closer to our automated kitchen, what we're calling the internet kitchen.
Next week, we're Super excited finally, opening our first drive thru or pull through concept outside of Chicago. So some exciting stuff on the development front and we're just getting better at how we build these restaurants and feel really good about about the real estate in the pipeline.
Great. Thanks, John .
Of course.
Yeah.
Thank you we'll go next to Matt <unk> of William Blair.
Hi, good afternoon.
But back to your revenue guidance have you seen any.
We can in the suburban historically.
And then on the other side of the coin I guess or.
The urban stores.
Rebounding still more or less as you anticipated.
Sluggish because you would expect that given the improvement in office occupancy.
Yeah.
Thank you Matt.
Yes, I would say that some of the trends that we've seen as sweet things have been a lot of what others have.
You have seen.
Got it faster same store sales growth in the urban markets in the third quarter.
Suburban markets suburban market basically.
<unk>.
Markets have grown about 12%.
Okay. Thanks.
And then just looking at the <unk>.
Comp guidance for the full year.
It implies a pretty wide range.
Comps for the fourth quarter. So could you be more specific in how October when same store sales was and what exactly are the embedded expectations for the fourth quarter comp.
But what I would say just reiterate I believe what we said earlier is October pretty much was fine with that.
Happening post Memorial day, I think of it as kind of the summer Ah maybe it's the summer doldrums, and then to be a rock burst.
Okay.
Hi.
Okay.
Okay got it thanks very much.
Thank you well go next to John Glass at Morgan Stanley .
Thanks, Thanks, very much I guess I'd like to again follow up on just sort of what youre seeing in terms of trends mentioned John .
What is is it possible to quantify what the impact of the store closures and reduced operating hours or how meaningful was that versus just sort of reduced overall demand.
And I think last quarter, you have a lot of customer data right in terms of frequency bands of high frequency low frequency customers is there any new insights from that data on what's changed is that your high frequency customers just drop the visit or you are losing some new incremental newer customers. What does that tell you versus what you saw last quarter.
Hey, John good to hear from you.
So I'll answer the second part of the question I'll, let Mitch talk about the closures piece. So in terms of the customer trend, it's actually interesting and it speaks to our intimacy. It scaled playbook do you think about tweaking traditionally we would acquire the majority of our biggest acquisition lever within our frontline. So it's the variety of our front lines and people working together.
And kind of walking by driving by coming in trying Sweden for the first time a lot through community efforts in the mobility that we saw.
Throughout Covid, obviously that really went away we got very good at digital acquisition. So digital became a primary acquisition driver for us.
To answer your question directly we actually have seen very steady frequency trends in call. It like what we how we how we measure frequency or annual spend our quarterly spend has actually remained.
He actually has seen some increases as we rolled out rewards and challenges.
It's been more from an acquisition perspective, and that's why I speak to this playbook around community a lot of the things that we used to do.
Covid around acquiring new customers, we're kind of shut off shutdown during COVID-19 and so it took us a little.
To be honest, we probably reacted a little bit slow in bringing some of that back but as we brought it back recently, we've seen acquisition tick up.
So retention flat slightly up with rewards and challenges and we saw we saw kind of a drop in new customer acquisition and we've seen that energize recently.
Hey, John .
Let me break the question about store closures into two general groups. We had a number of store outages caused by Labour callouts impacting things like line time store operating hours are back lines operating and general R&M issues frankly, it's probably was the highest the company's ever.
<unk>. In addition to that we had three significant store closures highlighted of course by our Grand Central New York store that was closed for about half the quarter due to a landlord problems. So collectively they all made up kind of been a pretty significant number in the quarter. We have seen them begin to dissipate just remove.
Looking to the fourth quarter.
Can I just follow up one can you quantify what that impact was thats. What I was trying to get at is how big is that from a from a comp drag.
And as a follow up Mitch unrelated follow up last quarter, you talked about some of the class a 'twenty one like in New York stores, maybe does it again you would have done it again just because.
Now we're talking about the southeast.
How is the class of 2000 and winning those New York store does that continue to be a drag is it worse is it better and that we are introducing a new element. Some of these southeast stores I just want to understand.
What we talked about last quarter in terms of the New York stores being sort of software to open.
Okay, John So let me say the <unk>.
The closure number you got to get specific was probably in the neighborhood of $1 5 million in the quarter.
In terms of the class a 'twenty one as I said as an average class is on track to our aggregate metrics. Some of those New York stores that are called out have begun to grow and grow pretty significantly for example, spring and Hudson and the World Trade Center really confining most of the kind of challenged market stores the southeast corridor.
Sure.
Yeah, Jonathan we haven't we've been yes.
That 21 has begun to ramp.
Steve.
The model that we have is once customers try it they end up being really sticky and so some source take hit right away in some stores take a little bit longer, but we know once we get people to try the food and give them a great experience.
The stores built in so we've seen some nice improvement on that class of 'twenty one.
Thank you.
Yes.
Thank you we'll go next to Brian Bittner Oppenheimer.
Thanks.
Just first question is on pricing Jonathan you said in your prepared remarks.
That you've held your core menu price flat since the beginning of the year I think your last price increase was in January that's obviously very unique and this time we are in so can you just.
Elaborate on how you are strategically thinking about pricing moving into 2023, especially since you kind of said some costs have stiffened lately and Mitch can you just help us understand how we should expect the price factor in the model to play out in fourth fourth quarter and throughout 2023, and then I have a follow up.
Yes.
As I mentioned in my remarks, we did hold price since January and I, just want to take a moment on the price value suite offers because they're doing some things I think we all know this but I just want to reiterate this weekend sources most of our vast majority of our food locally and from organic partners really from some of the same sources that many of the best restaurants in the world and the.
Country used on top of that we make the food from scratch every single day, so youre getting a very very high quality product for the price that you're paying and as our competitors have continued to take price the relative value. We offer. We believe is improving the reason we haven't taken price partially our menu more plant based has had less.
Commodity pressure, although we've seen some.
Definitely commodity pressure and we do expect to see some more.
Much less than our competitors and we saw this as an opportunity to take some share.
As more and more people take price, we do expect the environment for consumers.
Get more challenging and we have a lot of ways just saw an opportunity I talked about customer acquisition being an opportunity for us to hold our price and continue to take share. We do expect to have to take some price next year, but we're really judicious in how we use that and in this environment want to make sure that we offer the right value one of the things that we've begun to see.
And we think there is an opportunity in this environment as a trade down.
The consumers that we have.
And what they value from the places that they go we see an opportunity for many people actually in this in this recessionary environment to be trading down for something like sweet cream.
Okay.
Brian just following up on your question there is no change in our pricing in the fourth quarter. So we will look exactly like it did in the third.
Correcting our last price movements at the beginning of 2022 and that's the only price change for the year.
Okay.
And I think I heard you correctly in your prepared remarks, so I'm sorry. If this is off base, but I think you said a couple of stores next year, we will we will have the space technology.
And if that's the case I'm just curious how much of this these stores' product, making capabilities will actually be automated.
The stores that are going to have the space technology and how important is the success of these stores.
In your overall thinking regarding the ability to scale this automation across your asset base moving forward.
Yeah, Let me, let me tell you a little bit about about this technology and what we're calling this in this new format is the infinite kitchen. So we're super excited about it we've had a belief that automation would be can be transformative for the restaurant business and specifically our model and we see a lot of advantages.
Talking about the customer.
The customer gets is the throughput gains are significant.
We're talking about many times the throughput of our of our current line on top of that you know some of the biggest detractors we have today around accuracy portion of <unk>.
As you would expect a machine makes these things perfectly.
We also are really excited about what this does for the team member experience. We spent a lot of time thinking about how we designed this technology in the store really to be.
Designed around elevating the human experience in that team member experience and our team members are super excited about bringing this technology into their restaurants and working side by side.
On top of that it definitely transformational from a model perspective, a financial perspective.
If you look at our restaurants about half of our half of our labor are variable labor in the restaurants is in terms of his production or assembly and infinite kitchen takes the majority of that.
To be clear I mentioned, our Mount Vernon pickup kitchen, and why we're excited around that being kind of a test towards infinite kitchen, because for us the infinite kitchen. The automated assembly will prepare all orders it's not.
In those stores, we don't envision a frontline and our secondary make line. So it is what it would be 100% of our orders were excited for these pilots early we got to test. These we got a not only test the technology, but also the customer and team member experience and perfected, but we're feeling pretty confident about it and think it will be transformational for the brand and really for the <unk>.
Industry in 'twenty, four we should see.
She is beginning to roll these out given that Theyre successful next year and to be clear. These will be two new builds they won't they won't be retrofits will be opening two new stores with this technology.
And those two stores are in 23 right.
Correct.
Okay. Thanks, Thanks for that appreciate it guys.
Sure.
And we'll go next to Jon Tower at city.
Great. Thanks for taking the questions just a few if I may I'm curious.
Significant shifts but sequentially digital revenue.
Digital mix as a percentage of revenue did slips a quarter over quarter and year over year.
I know during the period you ran this summer rewards program at least for part of the quarter. So I'm curious if.
If you could delve into what's happening here, maybe why it slipped modestly in the period.
Yes, it's really the frontline coming back we see that as a good thing I actually hope in future quarters, you seem more frontline traffic because that's a great customer acquisition driver for us. So we actually expect and hope to see more more customers coming experiencing us through our frontline and then converting them over to digital so it's really just.
It's a shift and it's really that the denominator got bigger, but you have that that frontline that's grown.
So I'll say it we encourage that to happen.
Okay.
And then going over back to the I hate to beat a dead horse, but going back to the unit growth discussion I'm just curious.
It does seem like obviously the businesses is under quite a bit of pressure right now.
And there's a number of different reasons for it so why not consider concentrating some of the growth next year on those markets that are going to be the most profitable which might come at the expense of total.
New store growth rate.
Knowing that those stores that you're opening are going to be more profitable.
And or higher volumes and more profitable than historically.
Curious, okay got it got it.
You hit it right on how important it is to you.
Earlier question, when I talked about the pipeline and our focus on fewer markets. It's exactly that so this year, we went to a lot of new markets and test it out some demographics and areas that we're in a lot of ways new to us in building the brand and 23, you will see us focus much more on markets.
Where we know it works, it's a proven model really reducing the risk from our pipeline. So what you said is exactly what is happening.
Right, but does that translate into potentially smaller number of stores relative to the 40% plus growth rate.
The honest truth is the pipeline was bigger and bigger.
Bigger than that and we're now kind of like <unk>.
Focused it to be on you were still hitting the numbers with that focus with that focus.
Focus on those markets and areas, where we have the high confidence so.
You could you can kind of get the.
The point that it would have maybe been bigger if if we're willing to take more risk, but really focused on on driving profitable growth right now.
Got it and then on the input of kitchen stores that Youre contemplating are going to open next year are those going to be digital only or are they also counter service frontline.
So we haven't really shared much on the experience, but we want to make sure customers. What I can say is we want to make sure customers can order multiple different ways and we know everybody who doesn't want to order digitally. So there will be some way for people to order in store, we think as.
As I've mentioned today, it number of times that human experience and adding that sweet touches super important. So even today. If you go into you go into our new digital only store, it's maybe deceiving to say digital only because there's a very high touch concierge experience. When you go in and ability to order from a human as well so I imagine some sort of concierge.
Ordering plus digital and kiosks being part being part of that experience.
Got it and last one from me commodity inflation in the quarter and I don't know if you guys had mentioned in the call yet, but you Havent might give me an update.
Now what we really have seen there's no significant change from the run rate throughout the whole year, where we expect it to average for the year of approximately 6% in line with our price increase taken in January .
Awesome. Thank you very much for the time.
Okay.
And we'll go next now to Katherine Griffin of Bank of America.
Hi, Thanks for taking my question. So first I just wanted to drill into this.
Callouts issue a little bit further so number one can you just remind us again kind of why the callouts were higher and third quarter than you were expecting and then as a follow up to that.
I believe seeking ran for one week one.
In one week long promotion for $10 harvests, both I'm just curious given some of the staffing challenges you're facing why why choose to do a promotion at that time.
Yes, I can take that so in terms of the staffing.
What I'll say is we have.
During the quarter Q2, we had a lot of new team members and our shift during the pandemic our staffing mix moved to be more part time than we were used to what we saw in this challenging labor environment and with a more of a more of a part time mix. We saw more callout with that in markets, where we have a higher filter markets and stores at a higher full time.
Next we have seen that minimize significantly so there's a huge focus for us on how we shift the mix to be more full time. You know you want you want people were sweet Green as your primary replacing one place of work and when that happens and there is a career.
You are more committed to the job.
And so.
Our staffing levels are actually quite good it's really just getting the mix right and getting some more tenure under our belts with these team members as the world opens up and they get used to our Omnichannel model.
And the high the high volumes, we do so.
So.
Really that.
Callout issue, we believe we will be really addressed by shifting the mix to be more full time in terms of the $10 promo.
We've actually like I said risk that we're staffed and we were ready so a lot of the challenges we were referring to or.
Persistent throughout Q3, and a little bit in October , but we feel like our operations have gotten to a much better place.
Getting into November and we saw an opportunity to really just re engage.
Some lapsed users and bring to give people a little.
Little pulse of value in this environment and it's very early we're still we're still understanding the results, but it seems that the results are very promising in terms of what it did for re engaging users and customer acquisition, so pretty pretty excited about the promo and huge thanks to the whole team for making that happen.
One reason just because of the harvest Bowl is not only our best seller, we find that when people try to harvest bold, they're most likely to come back we call. It our stickiest if the stickiest ball, we have so not only that it didn't have the nice results.
Last week, but but we expect there to be some nice residual results coming from that promotion.
Got it. Thank you and then John I, just wanted to follow up on something I want to make sure I heard you right and I believe you said you expect there could be some trade down and to see green. So can you just talk about number one sort of where those customers would be coming from and then alternatively, what is the risk of customary as that.
Today trading out front of it green.
Yes, we've seen it we've seen it across the industry in these environments where fast.
Dining fine dining people deciding they still want a high quality healthy meal, but they may be you don't want to spend $100 for dinner and they want to spend 25 or $30 channel for a couple and so we've seen some opportunities and engaging customers there listen in terms of.
Consumers.
Consumers tightened their belts in this environment.
We're not we're expecting some of that I mean, I think it's pretty clear, we're entering some software in or entering some sort of recession.
But what's important for us is to really focus on our price value and what we offer we have a bowl under $10 in every market. We all our food is a local and organic made from scratch really delicious changes seasonally and I think customers really value that on top of that we have a loyalty program being launched next year, which we.
We think will be a huge driver for us it's something that we've historically had.
The history of Sweet Green and over during the pandemic, we've been piloting new new ways to improve it to essentially been running without a loyalty program also say in this recessionary environment, we think that'll be very important for us and a huge growth driver.
Great. Thank you.
Thank you we'll go next to Chris Carroll of RBC capital.
Hi, Thanks for taking the questions.
Following up on the $10 Harvest Bowl promotion I know you mentioned, you're still evaluating the promotion.
Do you anticipate leveraging price point promotions going forward.
More just given the positive results you just mentioned or was this just very targeted and tactical for this point in time.
I'd say in this environment, we're always testing things.
We're always testing ways to drive traffic and just making sure that it's margin positive at the end of the day. So we are evaluating the results. It seems like it worked out really well and if it does we'll play with different different different ways to acquire customers.
And create some buzz in our markets. So.
I would expect us.
If it if it proves out that it worked in the numbers come in as we expect to do some more things like this.
Got it Okay and then.
Mitch on just margins for the <unk>. It seems like just based on quickly plugging in the full year guidance commentary into a model that would suggest a meaningful step down sequentially in margins from the <unk> to the <unk> if I have that correct I presume this is largely.
Due in part to seasonality, which we haven't really seen as much of over the past couple of years.
But is there anything else, we should think about with respect to <unk> margin specifically.
No the fourth quarter margin traditionally has been a low margin for sweet green largely built around the holiday schedule in winter time.
So there is really nothing else going through it.
Okay got it and then.
Just last one on the automated kitchen technology.
Jonathan you mentioned that the stores featuring the technology will be new builds for next year, but how are you thinking about opportunities to retrofit existing stores with the technology.
Yes.
We haven't gotten there yet.
Beauty I think for us at our.
Scale and our size is and I call. During this like Goldilocks size, we're big enough, where we can invest in technology and our transformation transformative technology like this but small enough where.
Most of our growth is in front of us and so while I do think the technology could work in a retrofit where we're very well positioned.
In terms of doing focusing on new builds and we believe that really.
Integrating this technology into the experience and thinking about it in a holistic way is the way. We believe this will be deployed best and so we're really well positioned for that.
Alright, great. Thank you.
And ladies and gentlemen that is all the questions. We have this afternoon, Mr. Lehman I'd like to turn things back to you for any closing comments.
Thank you so much yeah I just wanted to close up you know I've been spending a lot of time in the field with our restaurants with our restaurant leaders meeting customers talking to team members and I got to say I can't come back very energized about our intimacy at scale playbook, we learned a lot throughout the pandemic and we've tightened up our model in terms of how we operate but.
Now, we're getting back to basics and how we connected communities and how we add the sweet touch one customer at a time. So we're really excited about the year ahead, we have a robust pipeline of <unk>. We have two infinite kitchens plan, which I think are going to be really interesting to learn from we're going to be introducing our loyalty program and we have a lot of exciting stuff on the menu side, including some core tests going.
On from a Hardie perspective.
So all to say.
You know challenging environment, but excited about the progress we made and really excited about the prospects looking out into 'twenty three and beyond.
Lastly, just want to thank everyone for your time on today's call and for joining us on this journey.
See you all soon.
Thank you Mr. Newman, ladies and gentlemen that will conclude Sweet Dreams Q3, 2022 earnings conference call I would like to thank you all so much for joining us and wish you all a great remainder of your day Goodbye.