Hey, thank you everyone for joining. My name is Brian Mullan. I am the restaurant and food distribution analyst at Piper Sandler. Very happy to have Mitch Reback, CFO of Sweetgreen. Thank you, Mitch, for being here. Maybe just to start, you were asked a question last week at another event about your guidance, some of the assumptions underlying that. You know, I think there was some confusion around whether you were simply re-explaining your assumptions from the recent earnings call, or whether you were actually indicating some sort of recent slowdown in the business. So maybe we could just start, if you want to clarify any comments and if you feel good about the guidance.
Well, first, thank you, Brian, very much for having us at your conference in Nashville. Sweetgreen had a very strong first half, and off of the strength of the first half, we increased our guidance, and we stand behind the guidance. What was articulated at the meeting was there are a number of things the company directly controls: our menu, our marketing, our operations, where we open new stores. We feel very good about our internal execution. There are a number of things that are outside of our control, and to the best of our ability, we build these things into our guidance, and those things have been built in, and we stand behind the guidance.
Understood. Thank you for that, so thank you for that. Just with the Infinite Kitchen, wanted to talk about some of the retrofit locations. You know, Penn Plaza in New York is open. It's early, but you said it's off to a good start. You know, on the earnings call, you said you're seeing some of the highest throughput levels that you've seen at that store. So could you just expand upon that? Was that a very throughput-constrained store previously? And then, you know, if so, is it kind of the Monday through Thursday or Monday through Friday lunchtime? Is that how we should think about when you're really seeing the throughput increase?
Yeah. So, Penn Plaza was our first retrofit store. Today in Montvale, New Jersey, we opened our fifth IK store, so we have five of them running right now. In addition to Penn Plaza, we do plan to do one to two more retrofits in the back half of the year. One of them will be at Willis Tower in Chicago. Penn Plaza was an urban store in Manhattan, and at lunchtime, was somewhat constrained. On our second day, in a 30-minute period on a Tuesday, I think, between 12:00 PM and 12:30 PM, Penn Plaza did produce 200 bowls, with an average order time of around three and a half minutes. The goal of the IK is approximately 500 bowls an hour, with speed of service between three and five minutes, and again, with perfect portioning and accuracy.
Okay, thank you for that. And then, you know, one of the other interesting threads from that earnings call, or at least I thought was an interesting thread, was just the comment that as the consumer learns about and understands how fast the experience is, you just referenced, I think you said it's three and a half minutes in that store, you know, that could actually boost traffic over time. You know, I thought it was interesting because, you know, it's one thing to go to a Sweetgreen, see the line, somebody walks away. That's an obvious way you could increase traffic at Sweetgreen if you gain that transaction. But it sounds like what you're actually talking about is just potentially also a consumer behavior change. If they come and it's quick, they come more often. So, am I thinking about that right?
Is that something that you're excited about, too, the behavior change? And is that something you think you'd be able to measure over time?
We have a number of stores, and particularly our urban stores at lunchtime, that are very, very busy, and we see the lines honestly as a kind of point of friction in the, in the kind of speed of service model. As customers get used to an IK store, they'll know the store is faster. We believe that there's two benefits to that directly. One is the walkaway factor when you're coming into a Sweetgreen and you see the line or you're in the line and you jump out, and like I said, at Penn Plaza, we're doing it in about three and a half minutes. That's an improvement from somewhere between 10 and 15 minutes before the IK.
The other big factor is we think sometimes people will say to each other, "Let's go to Sweetgreen for lunch," and someone can say, "I don't have enough time." As they get used to the fact that it's faster, I think it will build more volume in the store. We do see speed and throughput as directly correlated to increasing the volume in a store.
Okay, very good. Thank you. And then that machine in Penn Plaza, I think that's the first one delivered by a contract manufacturer. You said it was on time and target in terms of cost. You know, you have shared what those machines are costing today, but I believe over time, that could come down with scale. So what does that path look like in terms of achieving some of the economies of scale, specifically on ordering the machine from the manufacturer? How many units would you need to start ordering? Or if you don't want to give that exactly, like, what does the curve look like over time?
Yeah. We see the manufacturing of the IK in three distinct phases. Phase one was the first two units that was installed in Naperville, outside of Chicago, and Huntington Beach, outside of Los Angeles. These two IK's were by hand, by our SPYCE team in their lab. The second phase is where we sit today. We kind of refer to it as the ICU of manufacturing. It's kind of being built by hand at a contract manufacturer as the tribal knowledge passes from the SPYCE team into a manufacturing phase. We are in that phase today. Phase three is when we exit this phase and get everything documented, blueprinted, and photographed and move it into a more mass production phase. We don't know exactly when that happens, but you know, at that phase, we believe the cost of the units will come down.
You know, inherently in the IK, there are kind of two underlying assumptions are one, that the cost of the IK will come down as the units go up and the knowledge around manufacturing increases. And number two, the cost of labor is going to go up over the duration of the machine. So that seven-point margin benefit that we're seeing year one will only increase as the years go on.
Understood. Thank you. And the last one on the retrofits, I promise, but you've got Penn Plaza done, Willis Tower. You know, how does that inform your plans of what you might wanna retrofit next year, and how many? And I ask in the context of your new unit development pipeline is set to be somewhere around 15%, but what we don't know is how you're thinking about on top of that retrofit. So how are you thinking about that, and do you think you're capital constrained in any way as you evaluate all this, or no?
Yeah. We don't feel as though the business in any way is capital constrained. We have more than sufficient capital. What we've disclosed is that in twenty twenty-four, this year, approximately 50% of the new stores in the back half of the year will have IK's. That number should increase in twenty twenty-five on new stores. There'll be at least two retrofits in the back half of 2024 . We're working on the retrofit, kind of guidelines for twenty twenty-five. It certainly will be a number, and we see retrofits as a core part of our strategy in deploying the IK. In particular, we're focusing on urban high-volume stores, where we think we have a bigger kind of throughput unlock and, quite frankly, probably higher margin.
You know, when we think about the IK, one of the core values of Sweetgreen is win, win, win. And the IK, for us, has a big win for the customer. The customer can get in and out of Sweetgreen in a much, much faster speed of service, call it three and a half to five minutes, with perfect bowls and perfect portioning. That's a big win for the customer. The team member loves it. And as we disclosed in our Naperville store, having approximately 50% lower turnover in Naperville as a similar Sweetgreen would have at this stage. And we think it's a big win for the investor because there's quite a lot of margin coming out of it. So we actually see the IK as a massive unlock for both the customer, team member, and the investor.
You know, our goal is to deploy them broadly and rapidly.
Okay, thank you. Just gonna pivot over to recent sales trends, some of the drivers of late. Wanna talk about some of the term emerging markets you've used, called out strength in the Southeast and Texas, and I think the Midwest for a couple of quarters now. Maybe there was a slow start in some markets, maybe some stores are now actually outcomping the system, which is very encouraging for a number of reasons. But, you know, do we have that about right? And then, two, is that something you'd expect to continue for a while, or is that something that maybe you would anniversary that trend at some point, investors should be aware of?
Yeah. Thanks for the question. In our new markets, and I'm gonna kind of articulate them, is Florida, Atlanta, Texas, and the Upper Midwest. These markets are the fastest-comping markets in Sweetgreen, and posting really significant numbers. They have been all year long. These markets largely opened in kind of that post-pandemic overhang, and as the world has kind of settled down, we've been able to kind of attract more customers, develop the brand, and have faster speed going through the stores, and these stores really have been growing very, very nicely. And it's really, really important for us because we have a very small footprint in these markets. For example, I think Texas, for us, has 18 stores spread out between Dallas, Houston, Austin, and one in San Antonio. So we have a very, very small footprint.
So seeing these stores grow as rapidly as they are, it gives us a lot of kind of encouragement towards opening up more stores in these markets and really broadening our TAM. And what we have found historically is, as we've opened up more stores in these markets, it's built the brand faster and had this flywheel spin, spin much quicker. So it's very important for us, and we're very, very pleased with the performance down there.
Okay, thank you. And then the topic of menu innovation, you know, the Caramelized Garlic Steak, it's been very successful between the Protein Plates, adding steak. You know, you've talked about the dinner daypart. Well, I should back up. I think the dinner daypart is about 40% of sales. With the Protein Plates, the steak, and what's to come, you know, is that a daypart that you believe that can keep growing at Sweetgreen? Could that ever reach 50%? Are there any impediments to that, that we should think about?
Yeah. And we're really happy with the growth that we're seeing, as a result of the Protein Plates and the Garlic Steak. Dinner is up to 40%, and it's actually a pretty good number for us when you think about, some of our urban lunchtime-only stores, you know, like Rock Center. So a 40%, kind of dinner mix is pretty good for us right now. We do believe over time that there's the potential to get to a 50-50 mix, particularly as we continue to open up more stores outside of the deep urban pockets and into more suburban markets, where we do have higher dinner part.
Do you see a higher dinner mix-
Yeah.
in suburban, like, right away?
Yeah.
Yeah, okay. You know, I think sticking with menu innovation, you know, on the last call, it was kinda said, we're gonna see a lot of menu innovation from Sweetgreen over the next year or so. There was some discussion about an opportunity with beverages, treat occasions. So anything you could elaborate on there? You know, what are some of the insights leading you to know or to believe, or the team to believe, that you could grow attachment sales at Sweetgreen?
You know, we've always seen Sweetgreen as kind of building a different type of model in fast casual, and a lot of that comes from our unique supply chain, where we're able to source directly from farmers we know and partners we trust. And we think that that sourcing gives us a higher quality product that our customers taste the difference. We've never really seen it as just a salad place. And part of the marketing campaign that we ran was, you know, you don't need to be a salad person to be a Sweetgreen person. And what we've seen is, you know, really great response from our customers around protein plates and garlic steak, and that that broadening of the definition has been really, you know, important to us and something that we've always believed is there.
We know we have a big, big opportunity in drinks and attachments. We've seen great response. We've kind of, if you will, dabbled in it, and we know that everyone in the industry has kind of a much larger percent of their business coming through it. So we will be moving more aggressively through drinks and attachments in the next few years and really continuing to broaden out our menu.
Do you think the approach would be test a few things in a few markets, see how it goes and roll out? Or do you think it sounds like you have conviction in the opportunity, so is it maybe the work's done, and it would be more of just a rollout we could see?
I think it's a little bit of each, to tell you the truth. You know, right now, we have some frozen drinks that we're testing in two stores in Los Angeles, and we're very, very happy with how they're performing. So I think in certain instances, there'll be a test-and-learn period, and I think another. For example, on the garlic steak, we did first launch Boston market, and I think, you know, in Boston for a period of time and then rolled it nationally.
Okay. And then, you know, marketing, you know, you've talked about on the last call, making some investments in talent around the marketing team. You also talked about moving to more, you know, out of home spending, showing strong results. At the same time, you know, you're not at a place where you can effectively do national marketing yet. You know, I think Jonathan, on the call, said you're probably a few years away from that, just given the size. So guess the question is, between now and then, you know, is marketing an opportunity at Sweetgreen to help grow traffic and sales over the next couple of years to bridge the gap to when you're bigger?
Yeah. I think, you know, if you look back historically, the marketing has largely been digital, and a lot of that has been through our own app, which really talks to our existing customers. What you really kind of seen unfold is what I will call the broadening of Sweetgreen. You kind of see that a little bit in our footprint as we move to more new markets, move to suburbs out of urban locations. We talked a little bit a minute ago about the broadening of the menu, and along with that, you're seeing a broadening of the marketing program.
More out of home, a little bit of radio, more billboards, the tagline, "You don't need to be a salad person to be a Sweetgreen person." And what we're finding is all of these strategies are working together and driving up a lot of traffic for us and bringing in new customers. So we'll see more marketing dollars spent and more of it spent in broader methods, including out of home. And, we're very happy with the results that we're seeing, and we'll continue to do that.
Okay, thanks. I just wanted to ask about the consumer and menu pricing. Maybe remind. I think at the moment, it's running about 4%, if we have that right. And then, you know, even though this is how we started the call, the conversation, even though you're not really seeing the signs of consumer softness in your business, you are being mindful of the external environment around you. So with all that in mind, you know, do you think the industry can take any menu pricing next year? And then do you think Sweetgreen, how will you. I know it's early, but how might you plan to approach it? Or just, if you don't want to give that, like, how fluid is that decision-making process as we.
Yeah. I think what I'd first off and say is, most of the pricing decisions in the industry are cost-based, and if you look back over the past few years, a period of really rapid inflation, a lot of that on supply chain, a lot of that on labor, and that pushed a lot of the pricing up. Sweetgreen, we are very fortunate. We experienced a lot less cost pressure than most people in the industry, and that allowed us to take a lot less price, and therefore, the price differential really narrowed between us and a number of other fast casual players. That's something we're actually happy with. We do have 4% of price right now rolling through the business.
When we look out, really what we see is continuing to see less cost pressure, and I think as a result of that, you're going to see a great moderation in the amount of price certainly that we'll take in 2025. We have not set our pricing policy at all yet, and, as we do, we'll certainly give an update on that, but probably sometime, you know, down the road.
Okay, thank you. We're going to switch over to operations, the margin discussion. I think a good place to start would be just big picture. Your COO, Rossann Williams, she's been with the company for about seven months now. Maybe could you just talk about what kind of influence she's been able to have thus far, how you see that evolving from here in terms of her top priorities in the role?
Yeah. Yeah, Rossann's been with us about seven months. Terrific person, lot of experience in the industry, spent a lot of time at Starbucks. We're thrilled to have Rossann with us on the team. Rossann directly oversees three big areas in the business. Number one is operations, and in operations, it's really her goals are pretty direct and simple. It's driving comp and margin. And she's a great operator with lots of experience and doing a wonderful job there. She oversees the supply chain, and the third area is development. And in development, it's pretty simple and pretty standard. It's speeding up the pipeline and lowering build-out costs.
And she recently brought in Chris Tarrant as our CDO, and Chris and Rossann have worked together in the past, and Chris is a terrific addition to the team, and we feel pretty confident that the pipeline is going to speed up and our costs are going to come down.
Okay, thank you. And then just specific to restaurant-level margins, you know, at least my interpretation, Mitch, on the last call, you basically said, "We can continue to grow restaurant-level margins year-over-year for a couple of years, probably, you know, outside of the Infinite Kitchen. You know, maybe not every quarter, but on an annual basis, is how I interpreted what you were saying. You also talked about a couple areas. I was hoping we could run through those. You know, labor is one. There's already been so much progress you've made on labor. You know, why is there still room for more? And what is the team focused on from here, labor-wise, you know, again, outside of the Infinite Kitchen impact?
Yeah. We see a lot of opportunity in the years ahead to continue to drive up our restaurant-level margins, and that's absent the IK deployment. And I would say in the big, you know, kind of at a high level, it comes in three areas. One, we have a lot more opportunity in labor, and that's gonna come out of labor scheduling and labor deployment, and we just see a lot more room to improve in that area. Our cost of goods has a lot more room. Frankly, in our cost of goods, it's almost directly related to how big we are in a market. The larger the market gets, the lower our cost of goods gets as we get the benefit of scale, and we get much greater efficiencies, particularly in distribution. Right now, we have a number of very, very small markets.
We talked about the Southeast, we have Colorado, the Upper Midwest. These markets all have much higher cost of goods. So we see great opportunity as we build out those markets to continue to see our costs come down, and you know, the third area that we spent a lot of time discussing is occupancy. The occupancy at Sweetgreen runs higher than the industry, and that's directly related to the footprint. As our footprint's been more urban concentrated, it has higher occupancy. As the company continues to expand our footprint and expand it in these other markets, our occupancy continues to come down, and I think that will just kind of march on down in almost a linear fashion to how we deploy the footprint, you know, and get that more in line with competition.
I think when you look at it together, this will continue to drive up the margins at the restaurant level for an existing classic Sweetgreen. Overlay an IK, you begin to pick up somewhere between seven, eight, nine margin points on that store. So we see considerable room to expand the margins in the years to come.
Okay, thank you. And you touched on occupancy. Just a quick follow-up. You know, it sounds like as you go more suburban, that's just a natural, you know, the math, the mix tailwind you're going to see. Is there a rule of thumb on a suburban deal versus an urban deal on rent? Or just if you don't want to give that, you know, maybe, is there an opportunity, because you will still open urban stores. Can you get better rent deals, or is that an area you can do better on urban going forward?
I think what I would say is, you know, the key metric we use at Sweetgreen in deploying our real estate is return on capital. And wherever we have the sufficient return on capital, we'll open a store. So we're perfectly fine continuing to infill in urban markets that have the right return on capital, and we're certainly open to, you know, continuing to grow in new markets and open them up in suburbs based upon the return on capital. So it really is not a decision about urban, suburban, or new market or infill, as much as it is, where is the return on capital?
Okay. And then just shifting over to development, the time we have left. I mean, you did already reference when I asked about Rossann, new Chief Development Officer. You worked with her in the past, but maybe just talk about what Chris brings to the table and what his initial priorities would be, priorities are gonna be. Sounds like he'll be working with Rossann. You know, it seems like your 2025 pipeline is already set, but where could he maybe start to make his mark or have an influence in the company?
Yeah. Chris is a very, very experienced CDO, something that we really, really wanted. Very well connected in the industry, very well connected with brokers, and we believe that that gives us the opportunity to considerably speed up the development cycle in the business. Very good at construction and lowering build-out costs. His key areas of focus are speeding up development, driving down build-out costs, and we feel very confident in where we're going, and we're really, really happy to have Chris on the team. He's been there. I should point out, he's been with us now two weeks.
Understood. Okay.
But he's been very busy.
You know, sticking with development, maybe could you talk a little bit about the SweetLane format? You know, I was fortunate to be able to visit the-
Yeah
-the one in Illinois, but are you pleased with it? Does that start to play a bigger role in the future of Sweetgreen? Is there any reason there couldn't be, one day, a SweetLane format with an Infinite Kitchen inside it? Like, is this-- are you thinking about all these things?
Yeah, we have one SweetLane right now, and that's in Schaumburg, Illinois, and like many people in the industry, we're very, very happy with the SweetLane. One of the things that we find, particularly in Illinois, is that it holds up much better in weather, but we're very pleased with it. We do look to deploy more SweetLanes. We are actively looking for real estate where we can deploy it, and we will be deploying a SweetLane with an IK, and we think it's going to be a very interesting opportunity because with the speed of service, you'll be able to customize it right as you pull in and get a perfectly custom product, you know, pretty quickly in the SweetLane.
So we think that's gonna be a unique opportunity for us and, probably a pretty big unlock, particularly in some of these suburban markets.
That's good stuff. And then, you know, just a question on the Infinite Kitchen. You know, on the last earnings slide, I believe I heard you say there could be applications outside of the core bowl application as well. Could you just elaborate on that? I was curious about what that comment meant, and was that more for your own internal operations inside the store, or was this a discussion on monetizing this technology externally? I just wasn't sure what that meant.
Yeah. We've had a number of questions around: Where does the IK go? Does it have broader application? Does it have application throughout the industry? Let me say, we believe the IK has a lot of broad applications. We think it has applications in other type of products. We think it could have applications for other companies, frankly, doing similar products to us. At this point in time, the company is really focused on deploying the IK at Sweetgreen, but we are kind of conscious that it has broader application, longer term, for other people, and it's probably something down the road that we will explore.
Okay. Thank you, Mitch. Well, we've got 30 seconds left. I'll just turn it to you if you had any-
Thank you very much. Thank you very much for having us. It's always great to be with you, Brian.
Thank you for doing it. Okay.
Thank you.