Q2 2023 Sweetgreen Inc Earnings Call
Good day, everyone and welcome to the Sweet Green second quarter 2023 earnings call. Today's call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star one on your telephone keypad to remove yourself from the queue at Star one again.
Hello, everyone a chance to ask a question we ask that you. Please limit yourself to one question I would now like to turn the conference over to Rebecca <unk> head of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone here with me today are Jonathan Neiman co founder and Chief Executive Officer, and Mitre back Chief Financial Officer.
Before we begin we have a couple of reminders.
Our earnings release is available on our website at Investor <unk> see Green Dot 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 today and we assume no obligation to <unk>.
Publicly update or revise our forward looking statements.
Additionally, we will be discussing certain non-GAAP financial measures, which 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 afternoons press release available on our IR website with that it's my pleasure to turn the call over to Jonathan.
Things off.
Thank you Rebecca and good afternoon, everyone.
I've shared before that I believe times like this create opportunities for companies with great brands large addressable market and loyal customers, great businesses has to be and company balancing growth and profitability.
The second quarter, we put our words into action generating 22% year over year revenue growth delivering a restaurant level profit margin of 24% and adjusted EBITDA of $3 $3 million, our first quarter of positive adjusted EBITDA as a public company.
This milestone demonstrates our commitment to disciplined capital efficient growth.
I want to extend my gratitude to every sweet Green team member for their hard work and dedication in delivering these results.
We reported second quarter revenue of $162 $5 billion representing.
Representing 22% year over year growth and same store sales growth of 3% or so.
Same store sales growth was driven by an increase in price and traffic with a partial offset for mix.
Total digital sales represented 59% of our Q2 revenue with approximately two thirds of those sales coming from our own digital channels. We continue to work every day to improve our operations.
Restaurant level margin of 24% in the second quarter was the result of strong operational execution and our cross functional focus to identify a wide range of process optimization.
This includes better labor deployment as well as improvements in supply chain sourcing, which we see continuing into future quarters, we remain committed to identifying additional opportunity to enhance our restaurant margins. We bounced strong revenue growth and restaurant level profit performance with a focus on cost discipline that yielded a reduction in both app.
Absolute and relative G&A expenses, when compared to the prior year.
Our second quarter G&A expense of $44 million is down $11 4 million or 22% from the $51 8 million a year ago, we continue to gain operating leverage as we sharpen our allocation framework to increase the flow through of each incremental dollar of revenue we generate.
As we've discussed in the past we operate with four strategic priorities, which are the basis for driving strong top line growth customer acquisition and loyalty and profitability our strategic priorities are one.
Spanning evolve our footprint in new and existing markets to connect more communities to real food to build our brand and digital experience as the industry leader, allowing us to add new customer channels drive frequency and increase restaurant volume and margins three reinforce our commitment to crave ability and inspire consumers.
To live healthier lives through re imaging fast food for run great restaurants, with a people first culture focused on developing talent for our future growth now.
Now, let me provide an update on each of these priorities and.
In the second quarter, we opened 10, new restaurants, ending the quarter with a total of 205 restaurants.
During the quarter, we opened our first restaurants in Cranston, Rhode Island in San Antonio, Texas.
Since the quarter ended we've opened an additional seven restaurants, including our first restaurants in Milwaukee and the Orange County, well.
While early we are pleased with the class of 2023 openings.
<unk> has always been a significant innovator in the industry and the launch of our first automated production line, we call. The <unk> infinite kitchen is the latest example.
Since launching on May 10th Naperville, Illinois, we've been pleased with the performance of the restaurant and how it has enhanced the sweet touch we've seen a more consistent customer experience and faster throughput, all while making our team members' jobs easier and more dynamic.
June represented the first full month of operation while early the infinite kitchen has demonstrated several significant benefits to our operating model.
First we saw significantly faster throughput today, the <unk> infinite kitchen has the capability to produce between 400, 500 bulls plates and size and our 50% more than our restaurants front end digital make lines combined.
Second our customers tell us it's a better in store experience customers know when they order their meal they will get it in under five minutes with consistent portion and accuracy. We believe that this speed of service and consistency is contributing to the infinite kitchens over performance on both the top and bottom line another benefit of faster through.
But it is noticeably less congestion in the restaurant, allowing team members to spend more time with customers.
Third it has been easier to hire and retain team members. We hired one third fewer team members than a typical new restaurant with similar volume in Naperville has experienced considerably less turnover.
We do not plan to disclose this metric quarterly the restaurant level margin for Naperville in June was 26% significantly higher than any new restaurant opening in its first month.
As the restaurant continues to ramp we see additional opportunities to significantly improve the margin.
We expect our second infinite kitchen will be live at the end of this year in Huntington Beach, California.
We are optimistic about the future of the infinite kitchen as we integrate this format into our pipeline.
We continue to connect with our customers through our brand moments and digital experiences streetpass, our loyalty program that launched at the end of April is steadily growing and membership and driving incremental <unk>.
Overtime, we believe that free pass we will have a significant impact on unit economics.
We also continued to see strength in our developing channels, creating more brand moments for us our BTB channel consisting of outposts in catering more than doubled year over year in the second quarter.
We continue to invest in these channels because they provide opportunities for significant incremental orders from new and existing customers.
Always we are committed to evolving our menu with fresh healthy delicious and craveable food our menu strategy strives to attract new customers engage our loyal guests and drive additional day parts and occasions.
On Tuesday June 13, we released our early summer menu, starting the fan favorite teaching Gucci salad backed by popular demand. The early summer menu also includes our barbecue chicken salad as well as the chicken teriyaki bowls, a twist untary Aki by adding a creamy nutty flavor with the addition of tahini.
So the barbecue sauce in our barbecue chicken salad, we teamed up with two time World Barbecue champion Charlie Mckenna.
And true Sweet Greenstein, our barbecue sauce contains no refined sugar or preservatives.
Blowing the success of the chicken and Chipotle Pepper Bowl, we're continuing our strategy to add heartier flavor full options to our menu in order to broaden our offering we.
We are incredibly happy with customer reception to our drinks and desserts and have some additional new products launching later this year.
As we continue to focus on evolving our day parts, we will be launching some new warm menu items in time for the winter months.
Running great restaurants is the foundational element to making our business thrive. The changes we have made over the past several months have resulted in more efficient restaurants, creating great experiences for both our customers and team members.
This is evidenced by our margin improvement.
At the beginning of the year, we introduced a new operating structure with our regional general manager model to create more empowerment at the restaurant level that our teams closer to our customers and reduce support center expenses related to field oversight.
Subsequently in the spring, we empowered our head coaches to spend more time on the floor coaching our teams and engaging with our customers. Our kpis continue to show improvement across frontline throughput lower turnover and improved 90 day retention metrics.
As a result, we've seen a 285 basis point improvement in labor from the first quarter.
We continue to offer a great employee value proposition, which includes attractive wages and benefits training and development to foster lifelong skills and a clear path to advance their careers.
In a few weeks, we will be starting our digital and in store trial kicking across our northern California restaurants.
By the end of the year, we will launch chipping across the fleet, which we believe will improve team member turnover and in turn create a better overall customer experience.
<unk> as a category leader at the forefront of redefining fast food and we are only at the beginning of our growth journey when the world changes around us very quickly we rose to the challenge we remain relentlessly focused on continuous operational improvement all while delivering exceptional service to our customers to drive ongoing strength.
As we move forward, we aim to continue to build on the adjusted EBITDA profitability. We delivered in what was a seminal quarter for Sweet Green as we further our mission of building healthier communities by connecting people to real food.
My co founders and I collectively remain the largest shareholder of the company and we treat every dollar as though were our own.
Our disciplined approach toward investment has been crucial to our strategy and we see our approach paying off.
Results today would not have been possible without the talented and dedicated team members in our restaurants and in our support center I'm incredibly proud of this team and the results. We delivered now I'll turn it over to Mitch to walk through the quarter's financials in further detail.
Thank you Jonathan and good afternoon, everyone.
Total revenue for the second quarter was $152 5 million up from $124 9 million in the second quarter of 2022 growing 22% year over year.
Same store sales grew at 3%. This consisted of 4% to price a 2% increase in traffic offset by 3% and mix. The mix offset is largely attributable to the early investments made in sweet path as well as channel movement into the frontline and pickup from native delivery.
Our average unit volume in the second quarter was $2 9 million.
The second quarter, we delivered $3 3 million profit.
Justice EBITDA basis, an improvement of $11 1 billion from the second quarter of 2020 to loss of $7 8 million.
Our second quarter revenue increase of 28 million year over year was a significant driver of the $11 1 million increase in adjusted EBITDA, a 40% flow through to the bottom line.
We opened 10, new restaurants this quarter for a total of 19 net new restaurants in the first half of 2023, we ended the quarter with 205 restaurants, we remain on track to achieve our guidance of at least 30 to 35 net new restaurants this year.
Restaurant level profit margin in the second quarter was 24% a 185 basis point improvement from the second quarter of 2022.
We delivered a 24 margin with 40% of our fleet under two years old.
Restaurant level profit for the second quarter was $31 1 million up $7 9 million from a year ago.
For a reconciliation of restaurant level margin to comparable GAAP figures. Please refer to the earnings release.
Food beverage and packaging costs were 27% of revenue for the quarter consistent with the second quarter of 2022, and showing sequential improvement of approximately 160 basis points since Q1.
Labor and related costs were 29% of revenue for the second quarter down 100 basis points from the comparable period in 2022, and showing sequential improvement of 285 basis points since Q1.
This improvement is primarily attributable to head coach schedule optimization, we implemented in the spring.
Restaurants are fully staffed and we remain pleased with the quality of talent, we are able to attract additionally, we've seen an easing of wage pressures.
Occupancy and related expenses were 9% of revenue consistent with the second quarter of 2022.
General and administrative expense was $40 4 million or 26% of revenue for the second quarter of 2023 as compared to a $51 8 million or 41% of revenue in the prior year period.
The decrease in general and administrative expense was primarily due to an $8 $8 million decrease in stock based compensation expense as well as a reduction in spend across the support center.
During the second quarter, our G&A expense, excluding stock based comp was 9% lower than the second quarter of 2022.
Our net loss for the quarter was $27 3 million compared to a loss of $40 5 million in the prior year period.
$13 2 million improvement in net loss is primarily due to a $7 9 million increase in our restaurant level profit a.
$2 7 million increase in interest income as well as a decrease in G&A as previously discussed.
These decreases in expense for partially offset by a noncash restructuring charge associated with our former Sweet Green support center and an increase in depreciation and amortization associated with traditional restaurants.
Adjusted EBITDA, which excludes stock based compensation and certain other adjustments was $3 3 million for the second quarter of 2023 as compared to a loss of $7 8 billion in the prior year period. This $11 1 billion improvement was primarily due to an increase in restaurant level profit.
And a decrease in general and administrative expenses as described previously.
Last year, we made a commitment that we would be very close to a breakeven year in 2023 on an adjusted EBITDA basis in 2024 be adjusted EBITDA profitable on a full year basis, we remain relentless pursuit to achieve these goals.
Halfway through the year, our adjusted EBITDA is a loss of $3 4 million compared to a loss last year. At this time of $24 8 million, a 21 4 million improvement year over year.
We ended the quarter with a cash balance of just over $280 million and generated positive operating cash flow during the second quarter.
In light of our second quarter results, our fiscal 2023 guidance now reflects a higher restaurant level margin and a lower adjusted EBITDA loss.
30% to 35, net new restaurant openings revenue ranging from 575 million to $595 million same store sales growth between 2% and 6% rest.
Restaurant level margins between 16% and 18% and an adjusted EBITDA loss between $10 million and zero.
We see pathways for further margin expansion and our unrelenting in our search to find efficiencies in G&A.
We are keenly focused on continuing to be a high revenue growth company, and becoming both profitable and cash flow positive.
With that I'll turn the call back to the operator to start Q&A.
Thank you.
Ask a question on the phone lines today. It is star one on your telephone keypad. As a reminder, also please limit yourself to one question, we'll take our first question from Sharon Zackfia with William Blair.
Hi, Good afternoon, I wanted to just touch base on the Internet kitchen et cetera.
Restaurant level margins were pretty impressive.
I also assume having been there it costs more to build so I'm curious.
Kind of how is the ROI markets or how you expect this to last for Naperville, and then as you think about development is really not worth in a kitchen.
I mean, they cost more how do you.
And if I adjust your development, whereas if you need to in order to kind of extend the runway of the casting.
Sure and good to hear from you and Im glad youre able to checkout the infinite kitchen in person. So what I'd say is we're.
So far we're really pleased with the results we're seeing as I mentioned in the prepared remarks, I think first and foremost really excited about the experience we're delivering to customers. We're getting a lot of positive feedback on everything from the theater of the food really showing the scratch cooking the hospitality the speed of service and the portion of the purchase portion and accuracy. So.
Does solve a lot of customer experience challenges that exist in the restaurant industry and so I think that was a huge proof point for it of course, we also expect it expect it to have an economic financial gain in terms of margin expansion and overall improve.
Improving our returns on capital to your point, Yes of course, the machines I do have an incremental investment, but we believe.
We actually know that they will they will deliver an accretive return on capital anywhere we put them, we're not guiding today around how much needed actually cost, but we will only be deploying them, where we will see an incremental accretive return on capital, which we expect to see given the early results and just a reminder, what we saw in <unk>.
In Naperville. It was just our first month as you would expect in most restaurants, we expect a ramping period. So we do expect the stabilized margin to be north of where it was in its first months.
Okay.
And we'll take our next question from Katherine Griffin with Bank of America.
Hi, Thanks for taking the question.
I was hoping either metro John if you could just speak to the cadence monthly in the quarter or sort of what you saw in terms of traffic trends.
In the second quarter that'd be helpful. Thank you.
Hey, Catherine Thank you for the question.
So we're somewhat consistent traffic patterns during the quarter.
Really across the fleet.
We came into the third quarter over second observation, we saw a slowdown during the July 4th weekend, and then it picked back up to be more consistent with the second quarter.
Okay.
And we will take our next question from John <unk> with Jpmorgan.
Hi, Thank you in your prepared remarks, you mentioned.
Some of the second quarter margin improvement was due at least partially to I think I wrote down supply chain sourcing.
I was hoping that if we could just elaborate on that topic broadly I mean, what that specifically means is it just in terms of how you are consolidating some suppliers and how you're handling the physical distribution or are you embarking on you're kind of considering how youre allocating some cost that youre currently duplicating within each.
Door to potentially using are leaning a little bit more on your supply chain in terms of bringing in some value added products into the store to make them in fact easier and more efficient to run.
Okay.
John you hit it pretty much pretty accurately so the supply so the margin.
The margin leverage that we saw was a combination of labor and Cogs savings on the Cogs side. It was it was really due to a lot of supply chain sourcing around economies of scale and content contract pricing that we're able to lock in as well as as you mentioned upstream in the upstream it actually doesn't help your Cogs. It helps your labor actually spur.
A little bit more on bringing certain things in a different way to reduce the labor load inside of the restaurants, but the balance is the.
The balance is the higher margin easier to run restaurants. So we did not reduce the quality of any of the food in doing so it was more just consolidation of certain distribution logistics as well as contract pricing and so just huge shot out to our supply chain and procurement team on delivering on an awesome quarter and as we mentioned on the prepared remarks, we do expect these savings to continue.
<unk>.
And could you elaborate a little bit more on upstream ing.
Like what you've already maybe put into the stores and what you may see going forward, how big of an opportunity that might be.
Yeah, absolutely as you know.
Sweet Green really pride ourselves on our on our sourcing as well as our scratch cooking model. However, we do see opportunities to simplify the labor model inside restaurants by taking certain items that we think we can improve the quality and consistency in upstream and so you've seen in past years doing things like parmesan, Chris as an example.
What we're doing what we've begun doing this year is upstream in a number of our dressing.
So we have not all of our dressing but a number of our dressing that are now upstream ones that don't have any pressure and then we think the ones that really the herbs you still want to do in restaurants, because you want it we want that flavor to come out, but a number of the ones that don't do not have that we still use the same quality of ingredient. That's what took us so long to do same store same quality brought.
<unk> brought in fresh to the restaurants, but it removes the ability they need to do that in stores.
As we've talked about before we're very careful on what we touch around around our food ethos and so we test things, we're very careful about what what things we change because we know people love about us is the quality that we bring and so we do expect to do more things, but we will do them very carefully over time.
Understood. Thank you.
Thanks, John .
We'll take our next question from Chris <unk> with RBC capital markets.
Yes.
Hi, Thanks for taking the question. So can you expand maybe a bit more on the updated restaurant level margin guidance and how we should think about margins here for the balance of the year. I know there is typically a good bit of seasonality with respect to the top line and margins.
But could you just maybe walk us through some of the puts and takes around the restaurant margins here going forward, including your cost inflation outlook from here.
<unk>.
Yeah.
Hey, Chris Thank you for the question.
As you saw in the guidance, we increased our restaurant level margin.
From 15 to 17 to 16% to 18% that was really reflective of some of the actions that we saw in the second quarter, becoming permanent throughout the rest of the year and John talked a little bit about the changes made in labor and the cost of goods and sourcing.
Seeing an inflation essentially in the second quarter was very very little to no inflation in <unk>.
Both commodities and age and in labor and we expect much of these trends to continue on through the back half of the year.
Those are the factors that really led to the improvement in the margin and we see that largely being sustained out into the future.
Okay got it thank you so much.
Okay. Your next question is from John power with Citi.
Hey, its actually.
Karen on for John This evening.
So I think your comment about the dynamics of price mix in the quarter. It sounds like maybe we're at the point or at least in the second quarter were Sui pass with like net net a little bit of a net comp headwind in terms of giving the discount but not seeing the full benefit of potential frequency.
He says or even new people coming into the brand. So could you kind of comment on what does the underlying dynamics are when do you think it becomes accretive and if there's anything else to kind of help frame. The scope of the program at this point in terms of membership percentage of sales or anything like that.
Yeah, absolutely. So we launched <unk> pass about three months ago, and you've kind of got it right. The early parts of the launch was really about.
The launch in and Theres a lot of cost around the discount line in terms of the launch of the program. We are really pleased with the early success of the program really both parts and the Sui pass and the Street pass plus piece and seeing specifically on the membership on the street plus plus piece we're seeing.
Pretty healthy mix of low frequency users that are joining the program and seeing really healthy incrementals out of that group.
We guided to.
We first launched it three pads was going to be a program that launches. It takes a bit of time to build as we build the membership base and I'd say the last thing is the launch was while we launched it it was in some ways a pilot given the fact that it's only a digital program today. So it doesn't mean, our biggest channel in our fastest growing channel right now is our in store business.
And C pass today does not work in store really happy to report that in the next few months, we will be unlocking the ability to use use both earn and redeem all suite has functionality and restaurants, which we think is going to be super accretive in terms of the value of the program, especially if you consider the fact that most of our new.
<unk> come through the through our stores to start so if we think about Sui pass as a channel to acquire acquire and hold new customers as well as as well as drive frequency of our lower frequency guests that in store unlock is really important so look forward to sharing more on that once we have the full feature set last year and we have a little bit more time under our belt.
Awesome. Thank you.
Okay.
We will take our next question from Andrew Charles with TD Cowen.
Great. Thank you two separate question Mitch.
Mitch just following up on an earlier question and I appreciate all the details around the kitchen, but what's the level of normal margin inefficiencies during restaurants first month of operation I'm trying to better stand what could be a normalized level of margins from AK once new store inefficiencies Aside and then just my second question was just on development guidance year to date.
We opened 26.
Relative to the guidance for 30 to 35.
Just kind of curious when you usually its a <unk> way with the development. So.
What's changing that dynamic in 2023, unless it's just conservatism.
Thank you Andrew for the questions.
We've really never given our first month margin on typically on new stores, but it would be safe to assume that they are really below the company average so the naperville 'twenty six but really.
A number that would compare to a number that's well below 20% in the quarter differently Naperville was considerably higher than any first month for our stores operation.
The second question.
On our development.
Whether there was a degree of conservatism in it.
The guide that we're sticking with this 30% 35 net new restaurants.
We are trying our best to open restaurants as fast as a return and we're very pleased with the results of the class of 2023.
Okay.
Thank you.
Okay.
And we'll take our next question from Brian Mullan with Piper Sandler.
Hey, Thanks, just to follow up on the entire kitchen I just is there anything in naperville store that you'd like to see fixed or improve before you would be willing to deploy it more broadly whether that be around how it functions or just the cost of deploying it really just trying to understand if you're at the point, where you think it could be a material part of the new unit pipeline.
As early as next year or do you want investors to think it could take a bit longer than that before it's deployed more broadly.
Okay.
Overall, we're really pleased as.
As I mentioned on previous calls we were very we had a lot of confidence in the technology itself is we've been we've been running within our lab setting for a very long time, a lot of what we were really understanding was the overall experiencing what are both the first order and second order improvements that we see within that experience.
Today, It really what we're just looking for some more time.
Only been a couple of months of being open so we'd like a little bit more time to see how.
How customers feel about it how team members feel about it and how to how we can best continued to deploy it but we do expect for it to be part of our development pipeline in 2024, and as we mentioned we will be opening a second unit at the end of this year.
Thank you.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Okay.
Yeah.
Yeah.