Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen Inc., Fourth Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. Rebecca Nounou. Please go ahead.

Thank you and good afternoon everyone. Here with me today are Jonathan Neman, Co-Founder and CEO; and Mitch Reback, CFO. Before we begin, we have a couple of reminders. We issued our earnings press release for the fiscal quarter ended December 26, 2021 after the market closed today, and we will file our Form 10-K for the fiscal year ended December 26, 2021 in the upcoming days. These documents are available and will be made available on our Investor Relations website. During this call, we will be making comments of our forward-looking nature, including statements regarding our financial outlook for the first quarter, and for the full fiscal year 2022. Our expectations regarding financial and business trends, our growth strategy and business aspirations and our expectations regarding the impact of the COVID-19 pandemic on our business each as more fully described in our earnings release. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information of these risks, please review the Company's SEC filings, including the section titled risk factors in the prospectus filed by the Company in connection with its initial public offering and our upcoming form 10-K. These forward-looking statements are based on management's current business and market expectations. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon's press release, which is available on our Investor Relations website. With that, it's my pleasure to turn the call over to Jonathan to kick things off.

Thank you, Rebecca, and good afternoon, everyone. We're excited to be with you here today as we begin our journey as a public company. We can quick start a meeting this Sweetgreen by sharing what we call a moment of gratitude. I'd like to do that here and offer my thanks to our team members as well as our network of more than 200 sustainable farmers and suppliers, who partner with us every day to power ambition of building healthier communities by connecting people to real food. Their passion and purpose has been instrumental in helping us deliver a strong financial performance in our first quarter as a public company. 2021 was a record year for Sweetgreen with revenue of $340 million, an increase of 54% from fiscal year 2020. Our performance demonstrates the strength of our business, and we believe we are well positioned to create long-term sustainable shareholder value. Given this is our first earnings call, I'll begin with our long-term vision. By Nicolas, Nathaniel and I opened the first weekly restaurants in 2007. We were three college students who are simply looking for a healthier way to eat. We saw an opportunity to create a business for quality would never sacrifice for convenience. Throughout our journey, we remain committed to this long-term vision to redefine fast-food globally. Our goal is to be as ubiquitous as traditional fast food, but with the transparency and quality that consumers increasingly expect. We believe we are well positioned to be the category-defining food brand of our generation. We sit at the intersection of powerful consumer trends, a greater focus on health and wellness, a connection to purpose driven brands, and a rapid adoption of digital connectivity. Study show that nearly two-thirds of Americans want to eat healthier and nearly half of…

Thank you all for joining us today. I'm excited to be here with you for our first earnings call. The IPO in November marked a major milestone for Sweetgreen as we enter our next growth phase. I want to begin by thanking the financial community and our investors for their support. We are well capitalized to execute on our long-term strategic priorities. We're happy to report strong fourth quarter results even with the continuing impact of COVID-19. Total revenue in the fourth quarter reached 96.4 million, up from 59.2 million in the fourth quarter of 2020, growing 63% year-over-year. This growth is primarily driven by same store sales growth as 36%, of which our transactions and mix was 32% at a price increase of just under 4%. For the fourth quarter, our digital mix was 65% of total revenue and our own digital revenue. That is transactions made on the Sweetgreen app or website was 43% of revenue. With every home digital purchase, we understand who our customer is, when and where they visit us. We are able to leverage data for personalized marketing resulting in higher customer frequency and higher average order value. Our digital revenue as a percentage of total revenue felt slightly given the positive growth of our frontline channel, which review is healthy for our overall business. As our industry volume has continued to recover from COVID to 2021, we are very pleased with the stickiness of our delivery business. During the fourth quarter, we opened 10 new restaurants up from four in the fourth quarter of 2020. This is our year-end call, we wanted to reflect on how the class of 2021 performed. In total, we opened 31 restaurants in 2021, 13 of these stores are urban and 18 are suburban and residential. We opened…

[Operator Instructions] Your first question comes from the Jared Garber with Goldman Sachs. Your line is open.

Hi. Thanks for taking the question and congrats on a strong quarter specifically related to some of the Omicron headwinds. I wanted to get a sense, Mitch, you guided to basically in line unit growth next year in 2022. I think the fourth quarter came in just slightly ahead of where you expecting a couple months ago. Can you talks some of the headwinds that you are seeing or laps there off in terms of supply chains opening those new restaurants? We have obviously heard a lot about and labor and staffing challenges, as it relates to opening. So, just want to get a sense of your comfort and confidence in that number for '22? Thanks.

Jared, it's Jonathan. So as you noted, we've definitely seen some challenges as related to new openings from a construction and labor perspective. But having said that, we feel very confident in the guidance of at least 35 new stores. So I want to give a huge hats off to our real estate and development teams, really building a healthy pipeline of just iconic locations. And for us, it's about optionality as we've opened more and more market, we have more places where we can continue to grow the brand. And I think there's been a bit of a shift in how we've been received in new markets, not just from a customer perspective, bur from a landlord and community perspective. So we're starting to see better real estate, which creates a flywheel for us. And I'd say, despite the challenges around supply chain, on labor from a construction perspective, we feel really confident in the 30 -- at least 35 new stores for the year.

Your next question is from John Van Hout with JP Morgan. Your line is open.

Hi. Thank you. How are you guys? In the prepared remarks, I mean, I think I heard labor being flat '22 versus '21, and I wanted to kind dive into that a little bit. I think your guidance assume some pretty significant average unit volume increases '22 versus '21. So, labor leverage might be expected in such an average unit volume increase. So, are there any significant changes that are happening beneath the surface in terms of the employee that you're attracting, what you are doing on the retention side, please comment on your turnover numbers, if you can, both at the hourly and the manager level or if you're beginning to change your human resource practices in some way that might be leading the higher labor costs, at least as a percentage of sales than what the top-line would otherwise suggest?

So, as you see across the industry, labor has definitely been challenged on both lot to due to the pandemic and a lot of the impacts we saw there as well, a lot of the wage inflation that we've seen. So, we're not immune to that and I'll let Mitch talk a little bit about those inflationary pressures, the price offset that we've had. To your point, there's definitely a lot of sales leverage there. Having said that, the recovery that we are expecting basically is not significantly more than the recovery already seen, for looking just to return really to pre-Omicron recovery levels. But we'll be doing some, a little bit more recovery to hit our numbers. From a people perspective, we've done a lot. Last year, we've made a few really important moves to set us up. One was what we call it a simplification around how we are around our store structures. So, we went from about 25 different job codes inside of our restaurant in Q4. In doing so, we cross trained all of our team members. So it's created a much more resilient labor haul, where team members have been cross-trained and can work across different positions. What this does is helps us as we flex up and down. Beyond that we've made a number of investments in our team members, whether that'd be holiday pay, taking average wages up. We introduced a retention grant at the end of last year. And we also have been investing in equity in our team members. Last year right before the IPO, we did what we call a gratitude grant, every single team member working at Sweetgreen. We have this principle leadership principle at Sweetgreen acting like an owner. It was a really proud moment to actually make every team member an owner there. And our goal is not just on the compensation side, but on the environment side and making Sweetgreen a great place to work. So, one of the things that really sets us apart from the industry is the opportunity around growth and development. We're in the very early stages around 156 restaurants, and we've developed a clear path to the head coach, which is our GM from a team member. You can join Sweetgreen and within three years, go from a team member to a head coach making $100,000 plus package. So, a lot of things going on, how we develop our team members and we really support them.

Hi, John. Let me just add a little bit of the data to answer your question. When we took the 6% price increase in the beginning of the year and in terms of wages were envisioning approximately a 7% inflation factor in 2022. And as a result of that, we held our labor as a percent of revenue with 32% of sales for 2022 in line with 2021. In short, a slightly higher wage pressure will offset any gains from the leverage we received at the higher AUVs.

I don't know if you want to do it once a year or if you are prepared to do it once a quarter. Can you talk about the turnover numbers that you have at the staff and the head coach level just kind of where that's trending in? If you got caught up in any of the kind of great resignation, if you will, that is just the overall industry has seen over the past six months?

Hi, John. I can tell you few things. So, there is definitely a spike last year do a few things, one Omicron and a lot of all the great resignation pressures that that the whole industry saw. Adding to that a lot of the vaccine mandates that we had that were in place which forced us to make some changes to our team. Having said all that, we've seen our turnover stabilized and are seeing our average tenure increase. So, we're today, our average tenure for our head coach is at 2.5 years and our average team member tenure is at one year. So we're seeing definitely some pressure in the first 90 days, but as team members make it past 90 days, we're seeing a lot of stickiness. And I think that says a lot about the growth opportunities we offer for our team members, and the environment, culture, and lifelong skills that we're providing for them. So again, I'd like to hats off to our store leaders and our field leadership team, as well as our peoples team for some really amazing work in a really challenging environment.

John, one thing I'll build on that is, as we saw pressures building into the fourth quarter, we put in place a retention bonus program, which ran through December through January to really hold the labor in place, as we saw a lot of disruption in the labor market. That program is successful and what we've seen recently is really an improvement in the flow of applicants as a labor market.

Next question comes from a line of John Glass with Morgan Stanley. Your line is open.

First, as I commenting on the recovery guide sort of urban versus suburban markets, with the comp led by recovering urban, maybe you can comment on the Manhattan units, for example, other suburban markets recovered. Just getting a sense of what's driving the sales and how those different cohorts are performing?

Hi, John. Let me say, in terms of the suburban and urban splits of the business, we don't disclose specific numbers around them. But we found that the fourth quarter was the fastest growing piece of our business was the urban segment and it was specifically in the midtown Manhattan market, but we saw very rapid recovery. And we were very, very pleased with that. The urban stores, certainly, if you compared to 2019, we would say are fully recovered to those levels that we saw in 2019.

Yes, if I can just build on that, what gives us some confidence here is made a lot some moves during the pandemic, specifically around our digital channels and building our delivery channels. So when you take the growth of that channel and look at the actual recovery one metric closely is the castle office recovery data. Today, nationally that 36% in New York is about 30%. And so we're not expecting that from anywhere near 100%, but for us it does it need to. So, we feel really good about where we seat today, and with all of the removal of math mandates and returned to all states that are being said, it gives us a pretty good line of sight and confidence that the urban recover we need is there for us.

That's very helpful. Can you just talk about [indiscernible] in that you're most excited about '22? You mentioned subscription and you maybe want to talk about that later. But is that a key part of the '22 plan? Is many innovation in the media, what parts of many innovation is important to '22? Are you thinking about bringing beverages back online or more beverages, things that what are you doing in front of a gas to drive sales and kind of whatever rank order of things you think are most important in '22 aside from just recovery from COVID?

Yes, great question. So, there's a number of things that we're working on. You touched on loyalty suite past we ran highly in January, something we called Sweet path and it was a membership test for us. Essentially the way it works. If you spent $10 and exchange you got $3 off every day for 30 days. The results really exceeded our expectations across all cohorts, especially with new and last customers and low frequency customers. So, it gave us a lot of interesting data and things for us to consider as we look forward and test and iterate our way to what a future loyalty could be for us. Beyond that digital driving, our digital sales, there is a huge opportunity. So, in the prepared remarks, you heard us talk about delivery and move towards DoorDash. Through the optimizations around that channel, we are offering much better quality of service, faster delivery time, more on time range, cheaper -- better economic for us and our customers, and we're beginning to test into larger radius delivery radio. So, that's another channel that we are continuing to push on. Another place, where we are continuing to push is around personalized promotion. We've done some really interesting work around this idea of personalized promotion. So giving you the right at the right time, whether that be by channel, by gate part, or by menu. So we have some cool things coming out throughout the year, and it's a constant test and iterate approach. And the data that we have in the high digital penetration allows us to really flex that muscle. From a menu perspective, we're constantly optimize and innovating. So, I break that up into three categories, three buckets thing. The first being constant optimization of menu. We are constantly looking…

Your next question is from the line of Andrew Charles with Cowen. Your line is open.

Great. Thanks. John, that was a great segue in my question. You guys caught out the stickiness of digital sales, the frontline reopened. I know it kicked down a bit, but you know, really was sticky. Where do you envision the long-term digital mix settling out? You want to imagine that you'd love to get it as high as you possibly could. But I mean, what do you think is a realistic level? Just even proactive efforts do you have in place to build this via digital only innovation and initiatives like Sweetpass that someday we're going to see more to come on that?

Yes. So maybe what I would say, Andrew, and good to hear from you is, for us, the frontline coming back at our digital world, digital revenue going down is actually a very good thing for us. What I'd say is our restaurants are one of our best customer acquisition vehicles. And then we have very clear ways and strategies and tactics of moving frontline customers and moving them on for digital channels. And we really that we understand what happens when you do that, once we take frontline customer and move to digital, they're coming at least 1.5 times more frequently, and they're spending 20% more per transaction. Once we move them to a two channel customer, they're coming 2.5 times more. So for us, it's a healthy ecosystem of having of that customer kind of discover us on the front line and then being moved to a digital customer. Over time, we're going to continue to lean into a lot of strengths we have from a digital perspective. So today, we do things like digital exclusives, our menu and our deliveries cheaper on hour. It's more affordable for our customers, our native apps and in different marketplaces. And we're going to continue to invest in better experiences to make the Sweetgreen have the best place to order Sweetgreen. In many ways, we're going to have reasons for you to use our digital experience beyond that you can't get in the restaurant stuff and we already have some of those. So, we're pretty confident in continuing to hold that number, but we're not really stuck. We're not too worried and hung up on that number slightly going down, because a lot of you see that is a good thing for the business.

Mitch, I appreciate the detail on labor inflation that's expected to be 7% in 2022. You called out just one terms of COGS and you called out a recent bugs in COGS and got in 2020 COGS in line with 2021 levels. What's the underlying level of COGS inflation embedded in 2022 guidance? And your comments specifically on avocados and just recent events there have led to heightened relations versus your prior expectations?

So, switching back in 2021, we have approximately 3% inflation in food and beverage. And we often to get provide again some movements in many source. When look out to 2022, we see approximately a 6% inflation rates, which has been offset with the price increase. There were fortunate that we don't source and other items that have had a lot of rapid inflation. And most of our source is this local and organic, which is providing some degree of insulation for some of the recent cost pressures. You specifically mentioned avocados, we do see some pressure in avocados beginning of this year, but a great supply group we actually see reversing towards the back half of the year.

If I can just add one note on that, I think the fact that we do not serve this in our restaurant is a huge advantage for us. For us, we do it more from a food ethos perspective and a sustainability perspective, but there's been a lot of pressure on these prices and there is one thing that we're insulated from.

Your next question comes from the line of Brian Bittner with Oppenheimer.

I wanted to also stay on margins. The margin outlook for 2022 is very impressive, particularly given these inflationary pressures, but as you think about catalysts to improve margins and longer term past 2022, what are the top drivers there? I know sales leverage is a big driver but outside of that, what are the top drivers? And how impactful could automation be to your margin path as you eventually integrate the Spice acquisition?

So let me start off at that, Brain. Thank you for your comments. We see the business continuing to have margin expansion over the next few years. We have carried approximately 16% margin at the restaurant level this year. Part of the improvements in margins, you mentioned, are largely coming on sales leverage. So you know we operate in five channels in our stores, in-store kick off, native delivery, marketplace delivery and outpost. And we really have never operated in all five channels in a non-pandemic environment. So we're starting to see some sales from that we think that will propel us forward for several more years to come. And we think that, that's just going to be to accelerate on our margins. In addition to which John talked about revamping our loyalty program and move into personalization, so we see a major lift in volume coming from the train promotional programs. In addition to that, at the restaurant level, we've got a lot of work about what we call our operation simplification initiative to really streamline the way we operate our actual restaurants but that comes from a simplification and labor classifications that's given us more flexibility and labor scheduling and in addition to which some sourcing changes that we think can be margin accretive over time. We're very confident on the long run margin. As you know, we did make the Spice acquisition, Spice acquisition is a major acquisition in terms of changing the labor model. And at this point, we really don't have a lot to add to that, except to say we're very pleased with the progress we've seen with our Spice acquisition. And at this point in time, it is certainly on time.

Your next question is from Chris Carroll with RBC Capital Markets. Your line is open.

Mitch, I think you mentioned additional pricing actions at the beginning of the year. I was hoping if you could provide an update just kind of philosophically how you're thinking about pricing today, perhaps how customers have responded to pricing actions? And to what extent do you think you have further pricing power should cost headwinds last longer or greater than anticipated?

Thanks, Chris, for the question with the air for you. Let me kind of first answer that a little bit of a historical perspective. We believe as a company that we have a lot of pricing power with our customer. We think that comes from the fact that we have a very cold like following with a lot of customer love that we built to marketing over many, many years. Our customers can taste the difference in our product and the freshness of product. And they also highly value the convenience we offer them to our technology, with our ordering and really seamless pickup. So we do believe we have a lot of pricing power. We also are recognizant that our mission is to connect more people to real food and how subs would like our price points to be accessible. So when we look at our pricing architecture, what we've done in the past few years is spread out our price points to be sure we always maintain high-value entry price points to bring new customers in. So we think that we are kind of having the correct pricing architecture in place, we do have a lot of price power. We will, in our view, use that judiciously because we certainly want to continue to connect with our customers. But if need be, we are certainly prepared to use some nominal price increase towards the middle, back half of the year to protect margins in the event we see inflation run away.

And your final question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi. Good afternoon. I appreciate the commentary on the class of '21. I was also curious on how the digital spend is ramping in that class maybe relative to prior classes? And then on the outpost, I think you ended the third quarter with around $350 million reopened. Where are you at now for ourpost? And how do you expect that to ramp in '22?

Sharon, thanks for the question. So I'll start with the output part and then I get to the digital and the new stores. So we've actually been pleasantly pleased with output for us. What's interesting about Outpost is it's a bit of a leading indicator on return to office. And so it's been ahead of our expectations. We're today at over 500 households and are seeing some really nice kind of like record revenue and outflow above and beyond where we expected to be at this point in the recovery. So for us, it's still very early in the world in office coming back, which is the primary use case for output. But overall, it's been a nice leading indicator for us and pleasantly surprised with over 500 outflows today and more and more launches kind of the sign-ups are accelerating. We have, I think, 17 launching next week alone. Go ahead.

So, let me take the second part of your question, which is how do we see the digital ramp in our new stores. It's very interesting. We see our new stores adopting our digital ordering and app at a much faster rate than the historical stores have gone. As a result, when you look at it as a percent of revenue new stores are roughly in line with the fleet average, and that happens really within approximately a 60- to 90-day period of our opening. So we're very pleased with the progress we see.

There are further questions at this time. And it is my pleasure to turn the call back over to Mr. Jonathan Neman, CEO and Co-Founder.

Thank you. I just want to take a moment to thank you all for joining us on our inaugural earnings call. We really believe we have the winning recipe for long-term growth and shareholder value creation. I can leave you with one major takeaway about Sweet Green is that 2021 and in particular Q4, which, to be honest, is typically our most challenging quarter because of the seasonality in our business, shows the strength of our product, our brand and our mission. As the country started to emerge from the pandemic in the second half of '21, we saw significant improvement in our revenue, same-store sales and restaurant level profit and we firmly believe that this is just the beginning of the recovery. As we look out in 2022, we are optimistic. While we experienced some choppiness with Omicron in the first four weeks of the quarter and their larger global macroeconomic courses of play, we are confident that the remainder of 2022, combined with our focus on execution as we scale provides a strong indication of what we can expect in '22 and beyond. So thank you all for joining us on today's call and on this journey. It's only the beginning as we redefine fast food.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.