Hey, I am thanks everyone for being here. I'm Brian Mullan, the restaurant analyst at Piper Sandler. Very happy to have Mitch Reback, CFO of Sweetgreen. Mitch, thanks for being here. Maybe we'll just start with this because it's topical. There's some legislative news or news around some potential legislation in California, so on the wage side. Maybe you could just speak to how many stores does Sweetgreen have in California, what's the mix? And it looks like wages might go to $20 an hour. So to the degree you're able to talk about what it looks like for Sweetgreen in California.
First of all, Brian, thank you very much for having us at your conference today. Appreciate being here. Now, let me just make a few quick comments on the California legislation that recently passed on wages. Sweetgreen, Sweetgreen has approximately 20% of our stores in California. At this point in time, many of our team members are close to or above $20 an hour. When we did a very quick modeling, we think the implication on the business is roughly around a 2% price increase to offset the wage. We feel very, very fortunate, given our footprint and where we're located in California and who our customers are, that we actually have the capacity to pass the wage increase on by way of price.
Okay, thank you. That's actually very helpful. So then just kind of moving past that, you know, so for this year, we've got a Restaurant Level Margin guidance of 16%-18%. You know, I think the company is maintaining that 20% is a target over the long term, is my understanding. So this might be the question I get the most from investors. You know, what's the path from 17%-18% up to 20%? How long is the path to get there? And is there an area or two that you're most confident in behind that?
Yeah, thanks, Brian. Let me first say, in the second quarter, our margin was 20.4%, so we were very, very pleased to get above that 20% threshold. We do see 20% as kind of a benchmark, and we have a high degree of confidence that we're going to get to that level on a sustainable basis. When we look at it, we really see it anchored in at least 4 big buckets. First one I should point out is, at the beginning of this year, we put in place our regional general manager approach, empowering a regional manager to have control over an area of the field.
And what we find is when we empower people and we provide them with incentives, that they actually do a pretty good job at driving up the margins, and that's part of the reason the second quarter was so strong. We continue to see improvements in labor deployment. We talked about on our last earnings call, that we now have our head coaches spending time on the front lines. This has a lot of benefits, not the least of which is the head coaches get closer to our customer, but it also took a little weight, wage pressure off the labor line. Cost of goods, we continue to see, given how we source and cook, tremendous advantages as we densify markets and gain scale. We see advantages both in our sourcing and distribution coming out of the cost of goods line.
The second quarter, we saw zero inflation in cost of goods, which also was a help on the quarter. And I would add that the other two big areas for us are that we do see growth in the top line coming from our attachments, Sweetpass, which I'm sure we'll talk about in a few minutes, and really our new launching of plates coming up in the fall. We think all these things will add volume, which, of course, gets more leverage on the box, drives up margins. And finally, the area of other expenses, Sweetgreen runs a little heavy compared to other people in occupancy. That's just a virtue of the fact of where our footprint is in urban centers. As we begin to continue our expansion into suburbs, we see the occupancy line declining.
When we look out over the next few years in all of our modeling, we comfortably see a 20% sustainable margin without any benefit from the IK.
Okay, thank you. Thank you for all that. It's very helpful. It's more on the COGS side, but could you just explain what is upstreaming, and is there an upstreaming opportunity? Because that is probably the one I get the most questions on.
Yeah.
How big could that be?
So in each one of our stores, we scratch cook, and we essentially scratch cook everything in the store. And up until recently, we, for example, made all of our dressings in every store. We've upstreamed our dressings, which is we've taken them out of the store and moved them into a centralized place where we will make them for kind of a region like Manhattan. Then in doing that, we see tremendous efficiencies. Obviously, it allows for greater mechanization, allows for, over time, lower cost of goods, but most importantly, it takes really a lot of the burden off the labor in the store and allows us to operate with a little bit less labor. And frankly, a lot of those jobs are jobs that people really have complained about.
Making a dressing, another example, would be the de-stemming and washing of kale is extremely labor-intensive. We believe over time, we have an opportunity for a lot of upstreaming that will have a lot of benefits, both on the COGS line and the labor line in the store.
Is it right to think over the next couple of years, we'll just see incrementally more items upstreamed? Is that kind of the right way rather than-
Exactly, yeah.
Yeah. Okay. And so just wanna kind of segue into Infinite Kitchen, which is the location right now in Naperville. There's some automated makeline. You know, you shared some really exciting stats on the last call about the throughput capability, the RLM potential. You know, we know you're gonna be opening another location later this year in Huntington Beach. My understanding is the equipment in those two locations were made by the Sweetgreen automation team, pretty intensive. So just maybe could you speak to that store, what you're seeing, and then maybe just help us understand where you are with potentially finding contract manufacturing as a solution to bring the cost down on that.
Yeah. We get a lot of questions about the IK as well. So we have one store open in Naperville. The IK is our automated assembly. We said about Sweetgreen is about half of our labor is involved in assembly, and the IK automates about 70% of that half. So it's a meaningful number on the labor line. What we're finding in Naperville is, one, our customers really love the IK. What the customer loves about the IK is there's a much greater consistency in the product, and that the product is much, much quicker. I was there at a very busy lunch, and it took about 3 minutes in order to get my salad. So it's faster, and it's more consistent. Team members love the IK. It's a much easier store to operate in. It's cleaner, it's quieter, and the roles are a lot easier.
Working the front line is actually kind of a challenging position in Sweetgreen. Over time, we're pretty convinced that the investors are gonna love the IK because the return on capital will be accretive to the business. The way we look at it, it's really a win for the customer, it's a win for the team member, it's a win for the investor, and we're very pleased with what we're seeing. We did disclose that in June, which was the first full month of Naperville. The store had a 26% restaurant level margin, which for a new store, is pretty good.
Yes, and I believe you said over time, it could even be higher, which was, you know, a comment that I think caught the attention of a lot of investors. You know, it begs the question, are there inefficiencies in the store now because it's so new, such that you know, or any additional color around why, you know, why it could be even higher?
Well, even with the IK, I would say it always takes a few months in a store to get the labor optimized. So you'll see greater labor optimization as we go through the next couple of months.
Okay. So another question we get a lot, you know, I think a lot of investors have visited Sweetgreen in an urban setting. There's a line out the door. IK solves for throughput. It's, it's not hard to conceptualize higher volumes in the restaurant. In a suburban setting, is there really a need for higher throughput? Is throughput an issue? And can the IK We understand the margins will be higher, but can it actually help on the revenue and the AUVs in a suburban setting?
We think the answer to that is yes, that the IK faster throughput will generate higher AUVs. We believe, you know, if you look at a typical Sweetgreen, there is clearly a walkaway factor at the lunchtime rush, and that the IK solves for a big portion of that. So we do believe it will lead to higher AUVs over time. I think what I would say is, when we examine the IK, we separate the benefits in the first order and second order. The first order is obvious. It's the labor savings. It's pretty obvious to quantify it, and you know exactly what the labor movement is. Second order would be the higher AUV really coming out of the store for throughput and probably higher frequency because of consistency of the product, as well as the need for less hiring and less training.
You know, training is very expensive in a store. Hire a few people, fewer people, have lower turnover, get less training over time. So we think the second-order benefits are pretty significant.
That's great. And then just kind of tying it all together, kind of last one on this IK, taking a couple pieces. You're working on contract manufacturing. There's, there's no solution announced. You know, we do have a unit growth guidance for next year. It's going to be no more than this year. You know, how do you want investors thinking about as, as you dual track, negotiating for contract manufacturing, building a pipeline? And, you know, I don't know that you've said how many in 2024 will be IK. My understanding, it probably won't be the majority or anything close to the majority next year. But how are you going to manage this?
Is 2025 a year where if things go right, the IK could be deployed more meaningfully?
Yeah. I think you've got it exactly right. You know, we have a real estate pipeline for 2024, I should say, not 100% complete at this point, and we're in discussions with contract manufacturers for the IK. And what we're attempting to do is get these two parallel paths to get aligned so that we can deploy the IK more broadly in 2024. We think that's real important. It's real important for us because we'll learn a lot more, and we want to really kind of prove it out in different markets, different geographies, different types of stores. So we're working on that. To the extent we go forward and this is successful, we have every reason to believe it will be, look for a higher percentage of new stores in 2025 than 2024.
Perfect. Understood. I'm just going to pivot here. You mentioned loyalty earlier. You're right, I was going to ask about loyalty. Just a question on loyalty, the new Sweetpass program. Just remind us, you know, when that relaunched this year, what you've seen so far, you know, how you've thought about that when you gave guidance perspective. You know, are you building anything from that or not? To the degree you could talk, I do think it had a bit of a negative impact on mix in Q2. Is that something we should think about in Q3 and Q4? Finally, I know this is very long-winded, and I'm sorry, but just, you know, your degree of optimism that beyond this year, this is going to be a transaction driver.
Okay.
Yes.
Yeah. So let me kind of start at the end point. We believe loyalty programs are successful at driving transaction. We believe that the kind of the higher frequency product and the co-product that the greater customer love, the more successful the loyalty program will be. So we're very confident in the loyalty program for Sweetgreen, kind of at a conceptual level. I should say we had one that we stopped in May 2020, which was essentially, buy 10, get 1 free. Our customers loved it, but we didn't think it really built any frequency or did a lot for the business. So we're very confident on a loyalty program. The Sweetpass Plus went live April 24th, so it's really just been a few months. It's only available digitally. You cannot, at this point, earn or redeem on the front line.
We're working on that and should have that deployed in the next few months. The overall goal of the program is to take kind of the middle cohort of Sweetgreen. So we have a very, very super user group, right? We have a big, big middle. is to take the big, big middle and move them up one or two purchases per month. We're very confident that that'll happen over time.
Okay, that's great. You know, moving, moving along, you know, segue some-- so you've made some new hires, the head of marketing, head of culinary. Seems like, you know, they have some good background. If you could just expand on w- why was there a need or what was the need, and why did you choose these folks, and what they bring to the table?
Yeah. Thanks. So we hired two people. We hired a head of marketing, Michael joined us. He was just formerly, I think, the senior director at Chipotle. And we hired Chad as the culinary head. We're really looking to do is broaden our menu a little bit and then market that to new customers and to help broaden our reach a little bit. I think both of them came in with excellent backgrounds to help us do that. We're very, very pleased with where we're going with them, and we're happy to have them on board.
Okay. You know, we've talked about the IK. There's also another format, Sweetlane, Sweetlane. There's not a lot of them now, but we had the opportunity to visit it in Illinois. We thought it was great. It's early, one location open. But could you just give us a sense from an underwriting perspective? You know, what are you targeting with the Sweetlane? Is it more expensive to build? Do you think you get higher AUVs there? Just talk about the benefits and how do you see that being a part of the pipeline going forward?
We have one Sweetlane open. It's in Schaumburg, Illinois. It's interesting, we have the Sweetlane in Schaumburg, and we have the IK in Naperville.
Yes.
It looks like a very, Chicago suburb-focused innovation center. We're very happy in Schaumburg. In the underwriting, what we really targeted were slightly higher AUVs, slightly higher build out, pretty much accretive, slightly accretive return on capital. What we're finding is we're obtaining those metrics. I think the interesting thing in Schaumburg is that we find that the volume is more consistent in weather. When the weather is bad and other stores kind of have volume fall, Schaumburg holds steady. We're very happy with it. We are looking to add more Sweetlane locations throughout the fleet, where we can find them and deploy them.
Are you seeing the competition for that real estate much different than the competition you see when you go look for other formats, just given the trend, or you're not noticing that?
I would say it's slightly more competitive. I mean, it's no secret that everybody's seeing slightly better metrics and gravitating towards them.
Okay, but you feel good about the model?
Yeah. Oh, feel very good about the model.
Okay. And then, you know, one question that comes up sometimes, the class of 2022 stores, I think some are great. I think some maybe there are some areas where you didn't get off to the start you had hoped. Could you just remind those who aren't as familiar, what those areas were? Update us on any progress, you know, are things starting to turn.
Mm-hmm.
And then how does that experience most importantly, because of how much growth is ahead, you know, how does that inform your development approach going forward, if there was any learnings?
Yeah. You know, I think the biggest issue we had with the class of 2022, was that most, if not all, of those stores were pro forma pre-pandemic. They opened up really in the depths of the pandemic, and when they opened up, they opened up with absolutely zero marketing, nothing done on the ground. And, and that happened, many of those stores opened slowly. When we look at those stores, we have a high degree of confidence in them. What we're starting to see is, it's a longer ramp period than we would have expected. The stores that we're opening now, we're opening up with kind of our game plan of on-the-ground marketing ahead of time. We find that these stores are opening up at a much stronger pace than that class of 2022.
When we look out at it, it's interesting that, you know, one of the groups that I spoke about, I think on the second quarter of 2022 call, was the Atlanta stores, right? I believe we have four stores in Atlanta that were very, very slow out the get-go. The past six months, those stores are the fastest-growing market in the country, country for us. So we think it's largely a matter of time at this point.
That's actually quite encouraging to hear. So that's an area you still believe in, that you would, over time, wanna, wanna add to?
Yeah.
Given
Yeah. You know, I, I think when people ask me, like, "What did you learn?" I kind of think two things. One, if you ever have another pandemic, slow down the real estate.
Yeah, yeah. Not to beat a dead horse. Is there any other area of the country that you would? Thank you for giving the Atlanta example. Or was that really the one on that conference call that you were referencing?
Well, Atlanta was clearly the one that has turned the fastest, and the sharpest. You know, it was absolutely one that a year ago, I was probably the most concerned about.
Okay. You know, maybe could you just talk about Outpost? You know, remind everyone what that is, what's the history of that at Sweetgreen? You know, how do you see that business growing in the years to come? And if you'd like to layer in anything on catering?
Catering
as a part of it, that would be great.
Yeah. Our Outpost model is essentially a part of our B2B strategy, and it's where our customers can order on their app by a certain time, and we make one delivery into, call it an office, where we set up a shelf. Outpost in 2019 was the fastest-growing piece of Sweetgreen. In fact, in many markets, we were capacity constrained. Obviously, in the pandemic, that volume declined tremendously, and we switched it and basically set up outposts in hospitals that were servicing COVID patients. Right now, we find outposts coming back very, very strongly, more strongly in urban centers, and we've backed that up a little bit this year with a large format catering program. We think over time, the B2B channel will continue to be very, very successful and very large for us.
Does that catering take place 100% through those Outpost locations, or do you
No, no, no, that's totally separate.
Okay.
So you can have an Outpost, but you can also have catering. So we do large format catering to different, different locations.
Okay. Again, we just talked about a new marketing hire. How much does Sweetgreen or how do you think about marketing spend at Sweetgreen? How much typically as a percentage of sales? And, you know, I know it's early, and this wouldn't be over the near term, but you do have growth ambitions. You know, have you ever discussed internally at what point national marketing could make sense, and just-- or is it just too early? Just any thoughts on that as a sales driver in the future?
Yeah. I would say that, you know, Sweetgreen has really historically relied on local marketing, you know, close to the store, community marketing, and we've been very successful with that. We think that's helped us kind of build the high customer love that we enjoy as a brand. We do think about national marketing. We don't think we're anywhere close to that scale. We have approximately 220 stores today. I do think over time, you will see more national marketing. As we look out over the next few years, I think I would say that we do see ourselves as a, you know, under-marketed business, where we have just a wealth of opportunity to drive more marketing and drive more consumer acceptance and, you know, of the brand.
Okay, and then back to development in the long... You were talking about growth, the opportunity. I think at the time of the IPO, you identified 1,000 locations as kind of a target, maybe 10 years down the line. You know, is that kind of where you think Sweetgreen is at maturity in the U.S., 1,000? Or is
Or was that just a point in time, and you believe the opportunity could be, could be much greater?
No, we think the opportunity is much greater. We think the TAM is there. We feel very, very good and comfortable with the TAM. And, you know, one of the things that we feel very comfortable about is the fact that our AUVs have a high degree of consistency across all of our markets. So we see the customer acceptance of Sweetgreen pretty broad. I think the 1,000 stores was just kind of thrown out there as a kind of a marker, not an end point at all on the journey.
Great. That's great.
Yeah.
At this point, I want to see if there's any questions for Mitch. Anyone in the audience have anything? Okay. Yes?
I wanna y ou mentioned the stable AUVs across the portfolio of restaurants. Can you maybe speak to some commonalities amongst the lower AUV restaurants, things that maybe they share in common?
I would probably say the lower AUV restaurants tend to be the more recent stores in the AUV denomination. So think of that, you have to be in the store for a year. So stores that opened two years ago, roughly, and some stores in new markets. What we find is generally they are the fastest growing, but may open a little slower, particularly those that came through with the pandemic.
Okay, thank you. You know, Mitch, I'm going to ask a final one, just bring it back to the IK. If we were just allow ourselves to think of the optimistic case, you know, you get the contract manufacturing down, it's well accepted. There's a lot of margin the company can have from that. Internally, how do you think about letting some of that—do you want to let all of the margin fall to the bottom line over time, or do you think you could let some of it fall to the bottom line, and maybe use that to not raise price for a period of time, improve the consumer value proposition? Not that it's not a good one now, but how do you think about that strategically over the next, really, five, ten years?
You know, Brian, one of the things that appealed to us about the IK was it opened up so many multiple pathways for us. You know, some people said, "We can easily see this in a high-volume New York store," and other people said the opposite: "We can easily see this in a low-volume suburban market because you don't need to hire a lot of people." Some people said: "We can see this being vastly margin accretive to the business." Other people said: "We can see you cutting your prices several dollars per item and completely growing market share." And the answer from the company, as we see it, is opening so many multiple pathways, that that's one of the things that we really liked and was attracted to the project for.
That was part of the investment case at the time
Yeah.
you know, not to put words in your mouth, you still feel that way today?
Yeah, pretty much so.
Yeah.
Yeah.
Okay, well, I think that's a good place to end it. I want to thank you for doing this.