We're absolutely thrilled to welcome Sweetgreen back to our 2024 consumer conference. At Oppenheimer, we have an outperform rating on the stock, and we made Sweetgreen one of our top picks at the beginning of 2024. In a nutshell, we believe Sweetgreen represents a unique opportunity to own a generational growth story at the intersection of powerful shifts in consumer trends. The company's armed with unique sales and margin drivers for a model that carries very attractive unit economics, scalable growth, and disruptive technology. We continue to believe the market underappreciates the longer-term earnings power of the company. We're incredibly pleased to be joined by Founder and Chief Executive Officer, Jonathan Neman, as well as the company's Chief Financial Officer, Mitch Reback. Thank you both for participating in our conference. We greatly appreciate your time.
Thanks so much for having us.
Thank you, Brian.
It's a pleasure, pleasure to be here.
Great. Well, I'm gonna start out by talking about some of the top-line momentum you've seen recently. Your business started to rekindle some top-line strength towards the end of 2023, and this momentum carried into 2024, as we saw with your first quarter and your second quarter guidance. I realize there's a lot of factors driving the improvements in the top line of the business, but can you unpack what you see as the most impactful drivers for the improved same-store sales performance that underpins your guidance for 2024 for 4%-6% same-store sales growth?
Absolutely. So I think there's a few things that we have really working with for us and where we're seeing some momentum. So first and foremost is around menu innovation. So about six months ago, we introduced a new category for Sweetgreen called Protein Plates. The idea there was to bring that same Sweetgreen quality of food, both from a sourcing and cooking perspective, but move beyond the salad, and so to have hot, hearty, craveable, and nutritious food. And so we introduced that last October. We've seen a lot of momentum, not just on the core business, but we're seeing a lot of growth at dinner and weekends. We're seeing more. You know, a lot of success in broadening our consumer with that. So I'll say it's been a really positive launch for us that we're gonna continue to build on.
Building on that, we just introduced steak, so we're about a month into our steak launch. Again, in the spirit of the Sweetgreen ethos, it's a grass-fed, pasture-raised steaks, a product we're really proud of that is just really, really delicious. With that, we're seeing a really nice mix of steak within the menu, and we're seeing a lot of adoption, especially in the places we were hoping to, in a lot of the newer markets, places like the South, where we're looking to broaden our customer demographics. One of the things on steak is there should be a positive margin and mix impact, given the pricing of that. Next, I'll move to a lot of the work we've done from a operations perspective.
I wanna highlight a lot of the work we're doing around throughput. I'd say we're still in early days around what we think we can do around throughput, but some moves we've made around labor deployment, how we train our teams, better stability of our head coaches, leading to more productivity of our teams, have all led to some throughput gains, which we think we're gonna continue to build on. With that, a huge focus on hospitality. We've talked a lot about, you know, this for the past two years, is post-COVID, you know, people coming back into restaurants. How do we bring. You know, the theme of our year is unleashing the Sweetgreen magic, and that Sweetgreen magic is this idea of intimacy at scale.
So how do we create that human touch and that great, hospitable, fast, fresh, and friendly experience in every single one of our restaurants? And then last, we've taken a new approach to marketing. You know, I, you know, I think we've, we've really improved our, our integrated marketing, including an increase in ad spend, which has led to us acquiring more customers, and kind of being more top of mind. So lot of, lot of good things starting to work for us as a brand.
That's a great overview. In the same vein, the sales performance at your new units, those stores that are not in the comp base, have also showed measurable improvement lately, and it's actually turned into a tailwind for your overall revenue performance. Can you maybe also unpack the biggest drivers of the improved sales performance in these new unit openings? They used to be a little more challenged. How does that inform you about your new unit opening strategies moving forward over the next couple of years?
Sure. So, you know, this is a huge focus for the brand, as we think there's just immense runway ahead of us. You know, we're so small versus where we can be, so how we develop the brand in terms of opening new stores and expanding our formats will be critical. I think that we've done a few things right. One is we've adjusted. I think we've learned a lot about our real estate strategy and where we go in picking better locations. It's actually something the company historically has always been great at, with a bit of an air pocket during COVID as the world changed.
But I think we're back to choosing really, really great sites, and I think the brand, the, you know, the brand gives us license to take top real estate, and we have a really good approach, an art and science approach of understanding where to go and how to sequence those restaurants. Second, I'd say, there's how we operate our pre-opening strategy around staffing has changed and improved significantly. So making sure that we bring the right leader that has been promoted from within, understands our team, our, our culture, and our operation to lead that new restaurant, has been a big thing, and how we staff and train them has adjusted.
And we've also changed how we market, when we open a new store, with both a mix of our community marketing, which we've brought back, which really works for us, as well as some more and more traditional, both digital and you know, integrated out-of-home marketing. So seeing a lot of success there, which, again, gives us a lot of confidence as we look to re-accelerate our pipeline. We do see a lot of opportunity in experimenting with more formats. As you know, we have two Infinite Kitchen restaurants. We have one Sweetlane store. We have one Pickup Kitchen. We've seen success in all of these formats, so over the next few years, you'll see us build upon those and continue to develop those. We think drive-through is gonna be a really big opportunity for us, as is Pickup Kitchens.
As we look forward, we also see, one of the, I think, the insights is, you know, we're now in about 20 cities, 20 major markets and success across all markets. I think what we're seeing is more opportunity in places where the markets we are in, both newer markets that, you know, we've just gone in in the past couple of years, which are starting, you know, really starting to ramp, shows how much more white space there is. But even in markets that, you know, are more mature, realizing that given the frequency of the brand, there is a ton of white space to continue to densify.
So you'll see us, really kind of going back to even places like, you know, Boston, New York, where we have stores, but we see a ton more opportunity, and again, with the success we've had in the suburbs, continuing to follow our customers home.
Great. I wanna double-click on same-store sales so far this year. Your same-store sales in the first quarter were up 5%, really strong, given how tough that quarter was for most restaurants. And then as we went into 2Q, at the timing of your earnings call in May, you said that trends were slightly above the top end of the 4%-6% full-year guidance range, so accelerating trends. I think there was some conservatism that you suggested maybe that was in the full-year guide because the past couple summers, you've seen this post-Memorial Day headwind to your sales, just as people have come out of COVID.
I'm not asking for clarification on guidance or anything, but is this a behavior that you expect to continue, or could this finally be the year where, where maybe we go back to normal as it relates to summer travel and how that impacts your business?
You know, it's a really interesting question, Brian, and I kind of smile at, like, what is normal today around holidays, summer, and return to office, you know? I think all we can say is that we're comfortable with the guide we gave, 4-6. We're relatively happy with the 5% growth in the first quarter. And as we talked on the call, that there's strong growth that built sequentially each month in that quarter, and we feel pretty good with the annual guide at this point.
Great, and I wanna talk a little bit more about steak. There's obviously a lot of new sales catalysts at Sweetgreen that are exciting, but the first-ever rollout of your Caramelized Garlic Steak, which occurred on May 7th, it does follow the successful launch of the Protein Plates last year. And I know steak was a big void in your menu that you've now filled. And now that we're, you know, a little further along into the steak rollout, are there any incremental learnings, now that the nationwide launch is more in a month out, that you can share with us, and any surprises?
You know, beyond what I said, I think we're really excited about it. I think what it's done is, you know, at first, it's about a month in, so we're still learning a ton. But with the feedback from consumers has been fantastic. We know that there's a huge segment of fast casual consumers that don't even consider a brand without a meat option. So we were excited to bring that meat option, but do it in a Sweetgreen way, given the sourcing and how we've cooked it in extra virgin olive oil. You know, I think we're seeing a lot of great trial with it, which we've talked a lot about.
So, you know, our test in Boston, which we talked about in our last earnings call, saw about one in five orders include steak, so really nice adoption. It's gonna be really interesting to see where frequency goes. I think the other thing I'd add is, you know, we've always known that dinner is a big opportunity for Sweetgreen, and we're really starting to see some nice momentum at dinner, which is a really good sign as we continue to develop more restaurants in suburban neighborhoods, where dinner is a huge part of that business. And I think, again, back to the TAM question, we wanna have thousands and thousands of stores around the country. We want a menu that, you know, broadens our consumer base, and steak is one step in that direction.
I think what we're learning is how much the menu can work for us, so expect to see more innovation from a menu perspective, where we can continue to use our ethos to drive us, but also listen to consumers and bring, give them things that they really want and crave.
You know, part of it, Brian, is almost an early misunderstanding of Sweetgreen as a salad company, as opposed to a company that stood for sourcing and quality. What you're seeing is the company kind of positioned itself around sourcing and quality, and the customer really embracing that, so we're really happy with the response.
Yeah, and I think that's really important. You know, for us, when we started the brand, it was very intentionally, "Let's start with salads," but the brand is not based off of salads. The brand is based off of this ethos around our sourcing and how we make the food and generally around the brand and experience. One of the things that we're excited about is, as we really kind of broaden the brand positioning, broaden the experience in the menu, we now have an offering, and we're gonna move to an offering that, you know, really can meet so many different taste profiles. Where many of our fast casual competitors kind of play in a pretty narrow taste profile, we can offer pretty much any sort of taste profile with the promise of the quality we have.
With that, I think can allow for a lot of customization and personalization around the menu, and just a ton of frequency. It just gives us a lot, you know, gives us a lot of confidence in the white space opportunity ahead.
Great. I'm sure there are a lot of customers in the audience that are happy to hear that. And another big potential driver moving forward is you're working to make your loyalty program more impactful, and you're making operational improvements in the stores with the help of your new CEO, and you're stepping up marketing as well. Between loyalty, better operations, and improved marketing, how would you prioritize these as maybe having the biggest opportunity to impact the business moving forward?
I'd say the key to the business is what happens in restaurants, always. So I have a saying here that, you know, all the answers are in the restaurant, and, you know, we serve one customer at a time. So I always, you know, I like to first thank our team members and our head coaches that deliver the Sweetgreen promise every day. I think if we're executing consistently, you know, despite all of the other things we can do from a marketing perspective or loyalty perspective, that's the core, the heart of the business. You know, we have a product that is very habitual, and most of our growth, you know, for the past 17 years, has been word of mouth. So running a.
You know, it's about creating a great experience and, and having people enjoy it, come back, and tell friends. So I'd start with that, and I think that'll always be the key focus. I think there is a lot of opportunity to continue to optimize both how we market from a loyalty perspective, as well as the general, you know, what the other sort of advertising we do. I think loyalty, we are very well positioned for. You know, we have a huge percentage of our sales that are digital. We have a highly frequent consumer base. We have a brand that people love and trust, and I think with the right loyalty program, we can drive both a lot of incrementality and frequency, but also use it to bring in more customers.
So, it's exciting to see the results we have today without a loyalty program that's really working for us, and, you know, I've seen the new program. It's built off of a lot of the foundational investments we've already made. But I think it's gonna be a really exciting program that our consumers are gonna love, and that are gonna start to drive some nice financial results for us.
Great. Let's move to restaurant margins. For a company-owned business model like yours, restaurant margins are important, and they've been very impressive lately. Restaurant margins in the first quarter were up 460 basis points. You raised your restaurant margin guidance for 2024, now 18.5%-20%, which also represents strong expansion on top of strong expansion last year. And this is really prior to any benefits of Infinite Kitchens, which we're obviously gonna get to in a bit. I know labor productivity's been a big piece of the puzzle here. Mitch or Jonathan, can you walk through what you are seeing as the biggest drivers to these improving margins, particularly this year?
Well, you know, Brian, we've said for a while that we think we have a lot of expansion opportunities in our restaurant-level margins, and we continue to see that going forward. We're pleased with the guide of 18.5%-20%. We've been happy with where the margins have been running. One of the opportunities we see is in labor. That's largely around labor scheduling and labor deployment, and scheduling and deployment not only affect the labor, but affect the throughput that we spoke about earlier, which drives the same-store sales, which, of course, improves the margins. We see that as a big opportunity with a lot of growth and expansion in front of us.
We also know that the way we source our product and our cost of goods long term, as the company gains scale, our cost of goods come down. So as we obtain greater scale in markets, we do see improvement in cost of goods, and we think those trends are gonna continue. I also want to go to kind of the non, you know, prime areas, and particularly the area of occupancy. Our occupancy runs higher than a lot of our competitors because we have such a large urban footprint, which has higher occupancy expense. As the company's expanded to new markets, in particular into the suburbs, and we're real happy with that expansion, what we see is our occupancy coming down and continuing to drift down. We think that is a long-term trend that'll work in our margin favor for the next several years.
So we see a lot of opportunity on margin expansion, and as you commented, this is without the deployment of the Infinite Kitchen. The IK we see as additive to this.
Let's talk about Infinite Kitchens. You know, Infinite Kitchens, for those that don't know, is a disruptive and transformative technology that equips the stores at Sweetgreen with a very high degree of automation. You have two of these open today, both in suburban trade areas, and on the last earnings call, you said that these two stores are doing around 28% restaurant margins or 1000 basis points above the system average, and that's with AUVs that are below the system average. Really incredible margins at these automated stores. Can you help the audience better understand exactly how you're able to achieve this level of profitability on below average sales volumes versus the system? How does the magic happen here in an Infinite Kitchen store?
Well, what the Infinite Kitchen really does, in simple terms, is it automates the assembly process, the vast majority of the assembly of a Sweetgreen product. It doesn't change the prep, and certainly makes no changes to the quality or the sourcing. It's simply the assembly. But by automating the assembly, what we find is we have much faster throughput, we have greater consistency. Our customer tells us a higher quality product because of the way it's maintained in the cylinders, and it does it with considerably less labor. So what we're finding is just great improvements in the labor savings, in addition to faster throughput. Over the long run, we've got a lot of second-order benefits around hiring fewer people, a lot lower training costs, replacement costs of people.
We're just very happy with the performance of the two IKs, and the numbers we gave on the first quarter call just continue on. So we're very pleased with the performance and look forward to greater deployment in the upcoming months.
Yeah, and as we go into the second half of this year, you are indeed going to deploying the rollout of these Infinite Kitchens more aggressively into new store builds, as well as some retrofits. Do you believe that the urban stores or stores with, say, higher sales volume than the average could see even higher margin benefits from this technology? How are you thinking about how you deploy Infinite Kitchens into higher volume stores?
I think it's a really interesting opportunity, and probably the area that we're most curious to learn about is what does the faster throughput translate to higher volume. And, you know, when people ask about the two stores we have running in Huntington Beach and Naperville, as you pointed out, they're really kind of new markets, newish markets and suburban locations. And the retrofits will be in urban areas where we'll have perfect information around how the store ran pre-IK and post-IK. And we're very curious to know what happens to the revenue. Obviously, the, what should I say? The profitability on any incremental revenue is very high, given that it's done with very little to no labor. So it'd be very interesting to see how an urban store performs with an IK.
Right. And bigger picture, at around 230 units today, the opportunity for growth for Sweetgreen through store expansion remains massive, and it remains core to the long-term investment story. You've talked about growing units at a 15%-20% algorithm, with 2025 kind of being at that 15% range, and in 2026 moving closer to that 20% unit growth range. Can you just talk about what drives your confidence in successfully achieving this type of growth? What makes you so confident in your pipeline?
Well, I think, you know, I think where I would first start off, Brian, is that we see success in all markets we're in. So the company is successful every place we've played, and we're very confident about the TAM in front of us in new markets. We know a number of markets that we've gone into, and we spoke a little bit about Seattle being our newest market, that are opening at volumes that are deep urban store, high volume, really exceeding our expectations. That continues to perform and give us confidence where we're headed. I think when we look at it, we just feel very confident in the TAM and in the markets and in the customer reaction that we see, and in our ability to model and lay down stores, successfully.
As it relates.
Hang on. That is. You know, when we started the company, it, part of it was based off of, you know, a long-term trend we've been seeing, is every day, more people wake up and wanna, want, care more about what food they put into their body. And I think that, that trend is only continuing. I think it's only intensifying as people understand more about the importance and the connection between food and health. And so, you know, at the core of the business, there's so much of this is this mission of connecting more people to real food, and each generation, I think, cares more and more about that. So, you know, I think we're, there's, you know, we're on this, you know, riding, I think, a few large tailwinds.
One is people care more about the food they want and they put in their body and wanna eat healthier. I think the, you know, fast casual has been a, you know, a huge growth within the food sector. This price point of a higher quality meal that people, many casual diners are trading down to, or many fast, you know, fast food QSR are trading up to, is a second tailwind. And then, of course, all the, you know, the digital tailwind of more and more people want this convenience and frictionless experience, and kind of Sweetgreen is well situated. So kind of, you know, intentionally situated in the middle of these three mega trends that I think are only gonna continue over the next 10, 20 years.
I mean, you, you probably just answered. That was probably the answer to this next question, but I'm gonna give you a chance to, to see how you answer it anyway. I mean.
Right.
What is your, what is your message to investors that just remain skeptical that the Sweetgreen brand can thrive in any market? I continue to hear a lot of skepticism around that bull case as I speak to investors. You, you remain in a position, Jonathan, where you are pioneering a new category. So by default, it just remains an investor debate. Is there anything you'd add to, to message to those investors?
No, I'm gonna jump in, Brian, and tell you that it's a question I've heard forever. But in 2019, pre-pandemic, the AUVs in the company were $3 million. Company had less than half the number of stores we have today. It was 75% urban, and in many, many fewer markets. We go through the pandemic, we go through the disruptions of the post-pandemic, and we wake up today. Today, the company's AUVs are pretty much $2.9 million, so I'd call it pretty much flat with where it was in 2019, and the footprint is dramatically different. It's 50% urban, 50% suburban, opened up many, many new markets and spread to many new geographies, including the Pacific Northwest, the Upper Midwest, the Southeast, Florida, Texas, and the AUVs hold.
I think to those who are skeptical of the TAM, I think you have to look at how the company manages to hold its metrics and hold its AUV and improve its margins if it wasn't working in the new markets.
That, that's helpful, Mitch. You know, just going back to digital, outside of the pizza delivery category, I believe Sweetgreen has the highest digital sales penetration out of anybody, 59%, almost 60%. Clearly, very impressive statistics. I know getting a loyalty program that is accretive represents a future tailwind, but what does having this strong of a digital installed base help you achieve in the future?
Well, I think it becomes a very effective marketing channel for us. By having that direct relationship with consumers, we can communicate with them directly, we can personalize their experience, and over time, there's a lot we can do within that digital experience to continue to drive that frequency. So we've talked, you know, a lot about, you know, whether it's loyalty, whether it's how we better engage our promo engine, whether it's the actual, where we go take the food, the experience from a more personalized menu perspective is something we've talked a lot about, and how do we build other social elements and other kind of features within that digital experience that make it even stickier? That huge install base is a massive, massive advantage to us.
I think one of the things that enables that for us is this first principles approach we took on designing the experience. So it wasn't, you know, "Here's Sweetgreen, how do we bolt on a digital experience?" It's, "What's the omni-channel digital experience? What does the store look like, and what does the digital experience look like together?" We're taking a very similar thought process around how we integrate automation into the experience, which is not a point solution that fits into what we have, but a first principles approach of how does automation work in this omni-channel experience that we are building?
So, I think that thought process, and I think we've been at a huge advantage in when we were started and being, you know, taking that digitally native approach from the beginning, which has been a huge advantage for us.
One of the conversation topics in the industry has been price, particularly as we went through that period of hyper food cost inflation. And, you know, you guys actually didn't feel the same amount of food cost inflation others did, and one of the benefits of that is you took less price than most of the competition. Do you have any evidence internally, through your own data and your own insights, that your value perception scores have improved relative to the competition?
Yeah, absolutely. So I think to your point, you know, we've actually seen our relative price advantage get better over the past few years. As our competitors have taken, in some cases, up to 30 points in price, of course, we've had to take some price as well to cover a lot of the labor inflation that we've seen and some of the commodity inflation. If you look at, you know, what we're seeing in many of the markets we're in, you know, we are spitting distance within a lot of our larger fast casual competitors, think of like a Chipotle, where we do serve a product with a, you know, much higher quality from a supply chain perspective and are made from scratch and from a healthful nature. So, you know, we're kind of competing there.
If you look at QSR, they've taken so much price that there was, you know, a report came out two weeks ago that, you know, the price between a Sweetgreen and QSR is, like, $2.60 different. So you're kind of getting to this place where you're like, do I, you know, do I. You're equally convenient, equally delicious, and two dollar, you know, two dollars and change more, I think you're seeing a lot of people actually trade up for fast casual, and in some cases, even trade down, especially with our dinner offering from, like, casual dining into this fast casual experience. So, you know, we feel, you know, we're still very careful around price. You know, I know the consumer has tight you know, definitely feeling in some places.
We wanna make sure we provide a lot of value for what we do. But I think, you know, when you think of, again, with our Protein Plates at dinner for around $15, to have a hearty, fresh-cooked dinner is incredible value in today's market. So I think consumers are really feeling that, and our data's showing that.
No, and you're right, the QSR industry has taken a lot of price, and the lower-end consumer has been a lot choppier lately, and it's forcing a lot of these QSR players to try to find a way to put more value on the menu and recapture that lower-end consumer. How do you think about how Sweetgreen is positioned in the current environment, where the lower-end consumer is struggling and where, you know, lower-end QSRs are gonna try to go into this value-infused environment? How is Sweetgreen positioned to perform in that type of backdrop?
You know, I think, Brian, what we would say is, we think we deliver a pretty high value to our customer. We've been, as you pointed out, and John has, pretty moderate in our price moves. We took a price move in February of this year, don't plan any additional price actions for the rest of the year, and just think that our focus is upon providing a very high quality, hospitable environment where our customers can come frequently with a lot of convenience, and we think we are able to deliver against that promise.
And we only have a couple more minutes, so probably only a couple more questions. On the unit growth outlook, again, 15%-20% is a best-in-class unit growth algorithm. Is this kind of a near to medium term outlook or target, or is this the type of algorithm you wanna maintain until you, you know, say, get to 1,000 stores or even more than 1,000 stores? How are you thinking about the pipeline over many years of growth?
Yeah, I think, I think it's, it's kind of the sustainable algorithm for us. You know, we talked about is next year it'll be on the lower end of that range, but as we've built out these markets and, you know, unlocked that brand awareness, and more, most importantly, have the leadership and people pipeline in place, we think that that algorithm is the right algorithm, you know, for the medium to, you know, I don't know, there, a lot of big numbers hit you at some point, so I don't wanna say when that blows up, but, but, but for the foreseeable future, we think that is the right, the, the correct growth algorithm.
Great. And, you know, your balance sheet and cash flow don't get a lot of, there's not a lot of conversation. They, they don't get a lot of play, but the balance sheet at Sweetgreen is rock solid, no debt, about $340 million in cash. And at the same time, the model's not positive free cash flow yet, but is there, is there a scenario where you feel like, you'll need more capital to maintain this type of growth? Or, or do you believe that the business can be a fully self-funding business as you continue to grow and as you implement the technology investments?
Yeah, Brian, we really haven't commented on when the company turns free cash flow positive or our long-term needs, but we feel very, very comfortable with the strength of our balance sheet, the capital position of the company, and as you pointed out, that we have no debt and have access to our credit facilities. So we feel very comfortable with where we're at right now.
Great. Well, that's a great, great moment to end. I wanna take this time and say thank you to Jonathan and Mitch for joining us from Sweetgreen. Again, Sweetgreen's a top pick at Oppenheimer and continues to be for the remainder of 2024. Thanks for your participation in our conference. Thank you so much for our time, your time. We greatly appreciate it, guys.
Thank you so much.
Thank you.
Thanks for having us, Brian.