Sweetgreen, Inc. (NYSE:SG) Q1 2024 Earnings Call Transcript May 9, 2024
Sweetgreen, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Katherine, I will be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen Incorporated First Quarter 2024 Earnings Call. All lines have been placed on me to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. To ensure that we can accommodate as many participants as possible, we kindly request that each participant limit themselves to one question and one follow-up question. [Operator Instructions] Thank you. I would now like to turn the call over to Rebecca Nounou, VP, Head of Investor Relations. Please go ahead.
Rebecca Nounou: Thank you, and good afternoon, everyone. Here with me today are Jonathan Neman, Co-Founder and Chief Executive Officer; and Mitch Reback, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release is available on our website at investor.sweetgreen.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-Q 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 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 US GAAP measure can be found in this afternoon’s press release available on our IR website. With that, it’s my pleasure to turn the call over to Jonathan to kick things off.
Jonathan Neman: The momentum Sweetgreen had at the end of 2023 is continuing to build as we begin 2024. With the focus on guest experience, we are driving growth and adjusted EBITDA profitability exceeding the high end of our first quarter guidance. Our strategy is working. We have a strong foundation to build on and multiple levers to drive long-term capital efficient growth. The results today wouldn’t be possible without the hard work of our team members. I want to take a moment to extend my gratitude to each of them for their unrelenting passion to further our mission of connecting people to real food. We reported sales of $157.9 million, representing 26% year-over-year growth. Same-store sales were 5%. Total digital sales represented 59% of our total first quarter revenue with 56% of those sales coming via our own digital channels.
Restaurant-level margin for the first quarter was 18.1%, expanding over 400 basis points year-over-year, making this one of the highest first quarter restaurant level margin performances in the company’s history. Restaurant-level profit for the first quarter was $28.5 million, a nearly 70% increase from a year ago. Additionally, we generated positive adjusted EBITDA for the quarter. As I shared on our last call, our strategies are simple: one, continue building our brand by creating great products and guest experiences; and two, expand our connection to guests by building and operating great restaurants. Over the past 1.5 years, we’ve been focused on these strategic priorities to improve our financial model with the goal of driving both revenue growth and profitability.
Our Q1 results demonstrated revenue growth, expanded margins and adjusted EBITDA profitable growth. Let me share some of the highlights from this quarter. During the first quarter, we opened six new restaurants, including two of these in a new market, Seattle. We also opened restaurants in San Francisco, Miami, Denver and Austin. Our Q1 2024 cohort of new restaurant openings, have an average weekly revenue, already outpacing the existing fleet average. Building on the momentum of the Totem Lake opening, which has quickly become one of our top-performing restaurants, the South Lake Union location in Seattle, had one of the strongest opening weeks in the company’s recent history. Both restaurants are operating at volumes akin to our large urban restaurants.
Openings like these, demonstrate that our brand has significantly greater reach than our current physical footprint, and that there is massive white space for our category defining concept. We remain pleased with the performance of our two Infinite Kitchens. At the end of the first quarter, the two Infinite Kitchens located in suburban trade areas are tracking to an average year, one average unit volume of $2.6 million, and they delivered an average first quarter margin of 28%, 10 points above the fleet average, giving us confidence in our go-forward deployment strategy. They also continue to demonstrate additional benefits to our operating model, such as faster throughput, better order accuracy, portion in consistency and substantially lower team member turnover.
Additionally, we continue to see higher average checks than the markets they operate in. In 2024, we remain on track to open approximately seven new Infinite Kitchen restaurants as well as retrofit three to four large urban restaurants with the Infinite Kitchen. Our first retrofit will be in New York City this summer. In 2025, we plan to deploy an increasing number of new restaurants powered by the Infinite Kitchen. As we build our future real estate pipeline, we see tremendous white space opportunities across the United States in both new and existing markets. Starting next year, we plan to return to a growth rate of 15% to 20% new unit growth per year with 2025 being at the lower end of this range and 2026 and beyond targeting the upper end of the range.
We continue to execute our culinary road map to broaden our menu, drive menu innovation, traffic, mix and check. Protein plates continue to over-index at dinner and as well in the Southeast and Texas markets. In February, we launched a test of our Caramelized Garlic Stake across the Boston market. Our Caramelized Garlic Stake features ender cuts of grassfed steak, seasoned with the garlic spice blend, expertly roasted and finish in a blend of all of oil and herbs. Guests can order stake in any of our Chef-Crafted Entrée, including The Steakhouse Chopped and The Steakhouse Chopped plate as well as have the option to add the new protein on any existing or custom item. During our testing phase in Boston, we saw Caramelized Garlic stake become a dinner time favorite, with stake included in nearly one in five dinner orders.
Having successfully completed our market test process and exceeding our internal expectations, we launched Stake Fleet-Wide this past Tuesday. As we innovates our menu, we’ve always believed in listening to our customers to deliver more of what our guests want. Incorporating stake into our menu provides customers with something they’ve been seeking for years, with a deep commitment to sustainable practices, finding the sweetening way to source stake in our restaurants to time. We are proud to introduce 100% grass-fed, pasture-raised steak from ranches who align with our commitment to high-quality, nourishing ingredients and high sourcing standards. Turning to operations. At Sweetgreen, our people are the most important ingredient to running great restaurants.
They are on the front lines connecting guests to our mission by serving real food, sourced from local farmers and prepared in-house daily. Our organization is rallied around prioritizing the guest experience and driving throughput. We’ve aligned our incentives around these priorities, including bonuses for our head coaches and tipping for our team members. As a result of the investments we are making in our talent and culture, our turnover is 19 points lower than it was in the first quarter of 2023 and has stabilized at the lowest level we’ve seen since prior to COVID. Our 90-day retention is 10 points higher compared to the first quarter of 2023. Over 50% of our Head Coach’s are internal promotions. And as we move forward, our goal is to increase this percentage.
As we plan to ramp our restaurant openings in the years to come, we have a strong pipeline of future Head Coaches and are excited about the growth opportunities for all of our team members. We remain focused on capturing additional urban lunch time demand, where we know we have a walkaway factor. We have made meaningful progress over the last few quarters with improvements in labor scheduling and having Head Coaches spend more time on the floor with customers. Over the coming quarters, there are opportunities for further labor deployment improvements by reducing time on routine in-restaurant tasks and improving deployment across all dayparts. Across the organization, we remain focused on hospitality and operating great restaurants, leading to growth and expanding margins.
Today’s consumer is increasingly selective with how they spend their discretionary income. Customers are choosing Sweetgreen, given our mission-driven brand, unparalleled quality of our product and the value we offer with our menu innovation. Our commitment to sourcing permeates every aspect of our menu. We partner with farmers we know in trust, ensuring the highest quality ingredients and scratch cook every day in each of our restaurants. This dedication is our promise to guests. The positive results both on the top line and our restaurant level profitability is evidence that the investments we are making in our people, our operations and financial model are the right one. I’m very proud of what our team has accomplished together. You see their accomplishments in the financial results today and also in the experience in our restaurants through their exceptional hospitality and high-quality food we serve.
Looking ahead, we have a massive opportunity to bring real food to more communities and disrupt the industry with the rollout of the Infinite Kitchen. We are building a durable business and shaping a healthier future for the next generation. Now I will turn over the call to Mitch to review our financial results in further detail.
Mitch Reback: Thank you, Jonathan, and good afternoon, everyone. As you just heard from Jonathan, the first quarter demonstrated that the groundwork related in 2023 is driving strong momentum across the business. Total revenue for the first quarter was $157.9 million, up from $125.1 million in the first quarter of 2023, only 26% year-over-year. For the first quarter, same-store sales grew 5% year-over-year. This consisted of a 5% benefit from menu prices and flat traffic mix. Same-store sales sequentially improved each month within the quarter. Our Q1 traffic was impacted both by January weather and the inclusion of two additional holidays in the quarter. Our average unit volume in the first quarter was $2.9 million. Restaurant level profit margin in the first quarter was 18.1% compared to 13.5% a year ago.
This is greater than a 400 basis point improvement from the first quarter of 2023. Our restaurant level margin of 18.1% was the result of several factors, including strong revenue growth and margin improvement in our new restaurants. The restaurants that are excluded from our comparable restaurant base that is the non-comp in restaurants had substantial restaurant level profit margin expansion from the first quarter of 2023 and collectively had a margin that was close to the fleet average of 18.1%. Additionally, we saw some of our fastest sales growth in our newest markets. In particular, our new Southeast markets collectively grew double-digits as they continue to accelerate their ramp. We also expanded margins across our legacy markets as a result of disciplined labor scheduling and having head coach to spend more time on the floor to improve both hospitality and guest throughput.
We continue to focus on margin expansion across our portfolio of restaurants. Our fleet-wide restaurant level margin on a trailing 12-month basis is 18.5%. Restaurant level profit for the first quarter was $28.5 million, a nearly 70% increase from a year ago. For a reconciliation of restaurant-level margin to comparable GAAP figures, please refer to the earnings release. In the first quarter of 2024, we opened six restaurants, including two in Seattle, South Lake Union and Totem Lake, ending the quarter with a total of 227 restaurants. In 2024, we anticipate opening between 23 and 27 new restaurants, approximately seven of which will contain the Infinite Kitchen. Our new restaurant openings are weighted toward the back half of the year. As Jonathan mentioned earlier, in 2025, we plan on a unit growth around 15%, accelerating towards 20% in 2026.
We’re pleased with the early reads from the Infinite Kitchen and our results in new markets, giving us confidence that we have the opportunity to capture the considerable white space both in existing and new markets. Food, beverage and packaging costs were 28% of revenue for the quarter, an 80 basis point improvement over year-over-year. This improvement was primarily due to menu price increases. Labor and related expenses were 29% of revenue for the first quarter, a 240 basis point improvement year-over-year. This improvement is primarily attributable to menu price increases and improvement in labor optimization. Occupancy and related expenses were 9% of revenue, a 95 basis point improvement year-over-year. General and administrative expenses were $36.9 million or 23% of revenue for the first quarter of 2024 as compared to $34.9 million or 28% of revenue in the prior year period.
This increase in general and administrative expenses was primarily due to a $5.1 million benefit received in fiscal year 2023 from the employee retention tax credit that was partially offset by a $4.6 million decrease in stock-based compensation expense. We continue to demonstrate operational leverage in the support center in the first quarter. Excluding the one-time benefit of the 2023 retention credit of $5.1 million, our support center costs grew 6% year-over-year as sales grew 26%. Our net loss for the quarter was $26.1 million compared to a loss of $33.7 million in the prior year period. The $7.6 million improvement in net loss is primarily due to an $11.6 million increase in our restaurant level profit and a $1.9 million decrease in pre-opening costs.
The increase in our restaurant level profit and the decrease in pre-opening costs were partially offset by an increase in other expenses related to the change in fair value of our contingent consideration from our acquisition of Spyce, increases in general and administrative expenses as described previously, as well as an increase in depreciation and amortization associated with additional restaurants. Adjusted EBITDA, which excludes stock-based compensation expense and certain other adjustments, was $113,000 million for the first quarter, an improvement of $6.8 million from the first quarter of 2023. Adjusting for the one-time employment credit in the first quarter of 2023. The Adjusting for the onetime employment credit in the first quarter of 2023, our adjusted EBITDA year-over-year improvement was $11.9 million.
We ended the quarter with a cash balance of $244 million. Now turning to guidance. For the fiscal year 2024, we updated our guidance to reflect the strength of the first quarter, 23 to 27 net new restaurant openings. Revenue ranging from $660 million to $675 million, same-store sales growth between 4% and 6%; restaurant level margin between 18.5% and 20% and adjusted EBITDA between $10 million to $19 million. In closing, we saw strong revenue growth of 26%, expanded restaurant-level margins by over 400 basis points and delivered positive adjusted EBITDA of $113,000. Looking ahead, Sweetgreen remains committed to innovation, including expanding our menu offering and deploying the infinite kitchen. These initiatives, together with our focus on running great restaurants are poised to drive traffic, create better customer and team member experiences as well as unlocking long-term value for our shareholders.
Our unwavering focus on sustainable profitable growth, coupled with a healthy balance sheet positions us well for the opportunities that lie ahead. With that, I’ll turn the call back to the operator to start Q&A.
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