Good afternoon, ladies and gentlemen. Welcome to the Sweetgreen Second Quarter 2022 Earnings Conference Call. [Operator Instructions] And please be advised that this call is being recorded. [Operator Instructions] And now at this time, I'll turn things over to Rebecca Nounou, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Here with me today are Jonathan Neman, Co-Founder and CEO; 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-K 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. 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, available on our IR 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. Last week, we celebrated Sweetgreen's 15-year anniversary. On August 1, 2007, just months after graduation, Nicolas, Nathaniel and I opened our first Sweetgreen in a 500-square-foot old burger shack in Washington, D.C. While we have grown and evolved a lot, a few things have not changed: Our mission of building healthier communities by connecting people to real food and our long-term commitment to being a positive force on the food system while creating a sustainable and durable branded business. I want to take a moment and thank all of our team members, past and present, who have joined us along the journey and made Sweetgreen what it is today. In the second quarter, we reported sales of $124.9 million, representing 45% year-over-year, fueled by same-store sales growth of 16%. Total digital sales represented 62% of our total Q2 revenue, with approximately 2/3 of those sales coming via our own digital channels. AUVs grew to $2.9 million, up from $2.4 million at the end of the second quarter of 2021. And most importantly, profitability improved. Restaurant-level margins were 18.5% for the quarter, up from 14.9% this time last year and up from 13% from the first quarter of 2022. I want to give a shout-out to our restaurant and support center teams for their outstanding execution. Our adjusted EBITDA loss was $7.4 million in the second quarter, narrowing from the loss of $13.8 million this time last year and more than having our first quarter 2022 loss of $16.5 million. This meaningful improvement demonstrates the leverage of our model and our team's operational discipline. While we had a strong second quarter, we saw sales growth begin to decelerate the week preceding Memorial Day. And as of today, we've not seen our growth rates return…

Thank you, Jonathan, and good afternoon, everyone. We had a strong second quarter despite the sales softness we began to see around Memorial Day. Total revenue for the quarter reached $124.9 million, up from $86.2 million in the second quarter of 2021, growing 45% year-over-year. This includes same-store sales growth of 16%, consisting of a 10% increase in transactions mix and the benefit from a price increase of 6% taken in January 2022. Our average unit volume grew to $2.9 million, up from $2.4 million in Q2 2021. Digital revenue in Q2 was 62% of total revenue and our owned digital revenue that is a transaction made on the Sweetgreen app or website, was 40% of revenue. Q2 total digital dollars grew 31% year-over-year. We opened 8 new restaurants in this quarter for a total of 16 new restaurants in the first half of 2022, ending the quarter with 166. As of today, we have opened 20 restaurants so far this year and now operate a total of 170 restaurants. We remain on track to achieve our guidance of at least 35 new restaurants this year. Restaurant-level margins in the second quarter were 18.5%, up from 14.9% in the second quarter of 2021. Our margin grew 5.5 points from Q1 2022. Over the past few years, the team has simplified our operations as well as made adjustments to our delivery agreements and pricing structure. These efforts are reflected in our improved margins, and margins are showing greater consistency across markets. For a reconciliation of restaurant-level margins to comparable GAAP figures, please refer to the earnings release. Food and beverage and packaging costs were 27% of revenue, which is consistent with the comparable period in 2021. We continue to see more inflationary pressure building in our cost of goods, particularly in…

[Operator Instructions] We'll take our first question this afternoon from John Glass of Morgan Stanley.

Mitch, can you first just talk about the comp slowdown you've experienced by suburban versus urban? Many of the things you talked about, maybe return to office and travel, had more to do with the urban markets. So can you just give us a sense of what the split is or the actual same-store sales by those cohorts? And can you also just clarify your comments or John's comments about G&A levels in '23 or even in '22 as a result of these reductions that you're currently undertaking?

John, thanks very much for the question. Let me start with the second half, the G&A levels for the company. The company is very committed to continuing to get leverage out of its G&A. And when we look at the G&A, let me for the moment exclude stock-based comp in that number. For 2022 for the full year, we now expect that G&A number to be approximately $107 million, and that would include around $2 million from an accounting change from the adoption of leasehold standards requiring us to not pass [this] as legal fees. For 2023, we would see the G&A, excluding stock-based comp, as no higher than the $107 million.

Okay. And then on the comp question?

On the comp question on the urban suburban split?

Correct.

Really, what we see in the urban-suburban split is the AUVs between the 2 stores really flipped. What we continue to see is that the urban stores are comping at a higher rate than the suburban stores. Right now, your urban stores are currently comping at around 26%, and the suburban stores are comping around 6%, and that's for the second quarter of the year. So the urban stores are showing faster recovery than the suburban stores, although they're coming in it from a much, much lower base.

I'm sorry, just one more clarifying question. Is the rate of decline though -- what I'm trying to understand is, going back to your logic about urban recoveries taking longer, has that been -- is the relative change in urban comps first to second quarter or second quarter into the third quarter greater than what you saw? Is the suburban store is more stable, let's say, sort of underscoring the fact that this is, in fact, more of an urban recovery issue?

Yes. Yes. Yes, looking forward, that is a correct statement. What we see is -- let me take a minute on that, John, to kind of elaborate. I think when we look back over the past 2 years, we constantly prognosticated a stronger urban recovery than materialized. So when we looked at our business now in terms of our guidance, we kind of reflected on where the business was trending in July. And we thought that you prognosticate that post Labor Day things accelerate or things remain flat. And what we did is we took the assumption, going forward, on the low end of our guidance as the urban recovery remains exactly where it is today. That is no improvement from where we're at. We hope this is a conservative estimate. But if you look back over the past 2 years, we think that we've just been wrong on so many of these calls.

We go next now to John Ivankoe at JPMorgan.

Looking at the 35 units that are expected to open this year, obviously, hearing what you've talked about in terms of the suburban-urban mix around 50-50, 85% of future stores being suburban, but it is, I think, a point worth mentioning. 50% of your stores really have not recovered to the extent where you've expected from an average unit volume perspective at least and perhaps a margin perspective as well. How does that influence your thinking on '23 and '24 development? Is there enough of, I guess, change relative to expectations that it might make sense to do fewer stores of higher quality, of a higher average volume, just to make sure that we have this model completely right, going forward? Or are you just kind of viewing this as a summer slowdown that's going to rectify itself and we should rely in the previous unit growth projections that I think most of us previously had?

John, thanks for the question. So I want to talk a little bit about the class of stores where we've seen some performance of expectations. There was really a number of stores that were approved either right before the onset of the pandemic or right at the beginning of the pandemic, where our models hadn't adjusted to what the new world would look like. So you kind of consider a little air pocket there, where we expected the world as it was pre-COVID. Those have all been adjusted for a while now. So the stores we're now seeing that we're opening in '22, '23 and beyond, we're not only seeing a lot more success because they're suburban but also because our models on what the world would look like are adjusted to the reality that we are in today. It gives us a lot more confidence and we're doing -- and we're seeing -- the class of 22 stores has been really fantastic. I mean just today, we opened a new market in Detroit, Birmingham, Michigan, sitting here right now just through lunch in the stores at over [$13,000] for lunch. So last week, we opened in Shrewsbury, New Jersey, yet again another suburban location, and did about $15,000 in day 1. So the model is working. We're very confident in the model, long term. And we're committed to our long-term pipeline of growth. Having said that, we're taking a more disciplined approach in improving sites and, I'd say, focused on more quality than quantity. But with that, we do believe we can still achieve our targets that we set out both in the next 3 to 5 years and definitely by the end of the decade to achieve 1,000.

John, let me kind of make a slight build on Jon's comments. We disclosed that our target ROIC for new stores year 2 is 42% to 50%. What we find in the urban stores is when we adjusted our models to kind of a pandemic-based model as opposed to pre-pandemic, that many of those urban stores' volumes declined, as you correctly point out. What we're finding in the marketplace is their rents have not declined proportionally. So those urban stores actually failed to meet the threshold, and the suburban stores are doing much better. So I don't think -- I think that we will achieve kind of the target units, but I think that what you'll see is the suburban stores get larger as the returns stay higher vis-a-vis the urban stores until the occupancy or the AUV adjust in the urban markets.

We go next now to Sharon Zackfia at William Blair.

I guess a question on the workplace reduction and the office move. Can you dimensionalize the annualized savings from those two moves? And I think it was mentioned in the release, obviously, to accelerate the path to EBITDA positivity. What is your timeline at this point where you would project positive EBITDA, based on the current sales run rate?

So Sharon, let me first say that we've not really given a timeline on the positive adjusted EBITDA. But if I was to flow it through right now, I would probably tell you that should happen early in 2024. 2023, we would anticipate to be very close to a breakeven year. In terms of the reduction in force in the company, we've been working on driving down our G&A and as we kind of discussed earlier, where we see the levels coming in 2023. And the actual force reduction, it was approximately 20 people in the support center. And as Jon mentioned, they moved to a smaller facility. That change would probably generate approximately $4 million a year annual savings in G&A.

We go next now to Jared Garber at Goldman Sachs.

Great. On restaurant-level margins, Mitch, you talked about inflation still being a pressure point through the model, not surprising with what else we've heard through earnings season from some of your peers. Can you talk about your outlook on pricing and if there's any expectation to flow some incremental pricing through the model in the back half of the year?

Thanks, Jared. We are taking -- let me first say, our last earnings call, we stated that if our cost of goods and labor as a percent of revenue stayed in line with 2021, that we didn't anticipate any major price moves later in the year. As we've said, we expect these ratios to actually come in slightly favorable. So in a sense, we're not taking a major price move. We have seen our chicken go up recently, and we are adjusting our premium shipping add-on to $3.25 this Thursday. It used to be $3. And I should point out that the chicken add-on was $3.25 in 2020. And then in 2021, we lowered it to $3. And now we're bringing it back to $3.25 this week. That's the only price move we anticipate making for the rest of the year.

Yes. Just to build, we don't -- we're not taking any price on our core menu. And one of the things that we think gives us some advantages here is the more plant-based leaning menu. So we do have exposure to chicken and certain commodity -- inflation parts of the basket that are growing. But given that most of our spend is on produce, it insulates us from some of those inflationary pressures.

And if I can just follow up on one -- on the unit growth. I know you reaffirmed that, which was encouraging to see that 35 -- at least 35 units on the year. Can you just talk about what gives you confidence that you can achieve that number? Some of your peers have pushed out unit growth expectations into '23 regarding some supply chain issues. So just any color there would be great.

Yes. I just want to give shout-out to our team, who really worked tirelessly to make this happen. I think we foresaw some of the supply chain challenges around equipment, and we're able to do some mass buying last year to get ahead of a lot of this. And the confidence really comes from the fact that leases are signed and the deals are in construction. So we have very, very high confidence in the -- at least 35 this year, and we have a very healthy and robust pipeline next year, with just some great sites, great deals and many leases already signed. So the development is very much on track. And as I mentioned in the prepared remarks, the core model is being -- we're continuing to develop the core model while we optimize it with some of the improvements around the kitchen, which we think will help us from a productivity and store-level margin perspective. But we're also excited to learn from some of these new tests that -- these new formats that we're launching. So in the coming months, we're going to be launching our pickup kitchen in Washington, D.C., a digital-only store, and at the end of this year, our first drive-through or pull-through location outside of Chicago. So really positive developments on the new unit front and feel really confident about the pipeline, looking forward.

And next, we go to Katherine Griffin at Bank of America.

I wanted to ask another question just about the plan in terms of workforce reduction and like generally reducing G&A, just if the return to office is perhaps more delayed than even we're expecting now. What other levers do you have to pull, I'm assuming potentially like further headcount reduction or just like any other elements of G&A that we can just try to put a finer point on as we think about kind of places where you can lean out as you try to get to some EBITDA profitability?

Yes. Thanks for the question. So I want to start by saying Sweetgreen is a growth company, and we're really building this for the long term. At the same time, we want to take a really disciplined approach around our investments and our G&A. And so when you look at our G&A, we're going to be running '23 similar to '22 levels. And if you look back in our history and you take out the investment in spice and some of the public company costs, we're not very far off from 2019-level spend, with over 2x the number of stores. So a lot of confidence in our ability to leverage the investments we've made, and we're fiercely committed to continuing that operational discipline. We're very much focused on our growth right now. We have a number of growth levers both on the comp base as well as continuing to open new stores in new markets. So on the comp base, we have a number of exciting things, whether it be new menu rollouts, including dessert, wider drink selection and a push into hearty food, some really exciting stuff around kitchen optimization that I mentioned and a planned loyalty launch, which we think will be a huge sales driver at the beginning of '23. Having said all that, we are fiercely committed to our profitability. We do not foresee the need to take additional customer G&A perspective. But I'd say, we're being very cautious in additional headcount and any other investments, just to make sure that we do turn profitable, really, as soon as we can, and it's just all part of being a sustainable business. So I'll stop there.

We'll take our next question now from Chris Carril at RBC Capital Markets.

So just on the revenue guidance, can you expand a bit more on just kind of your expectations for how the remainder of the year plays out and what that implies for AUVs? You detailed the magnitude of the slowdown that you've seen, and I think the guide would suggest some improvement through the 4Q. So really just trying to understand the improvement implied by the updated revenue guidance versus the typical seasonality that you did note earlier.

Thanks, Chris, for the question. Let me spend a minute on it because I think it's a very important topic. The guidance that we gave really took us a lot of thought. And part of the reason for that was we've had a very good 5 months this year. And then the business, as I said, slowed down around Memorial Day. We believe that these factors as we went through were urban [COVID], uneven office recovery and a high degree of travel. When we thought about that, the logical conclusion was many of these things reversed themselves as we get past the summer months. So the question that we faced was, does the company anticipate these things reversing and the sales trends improving and going back to the pre-Memorial Day levels? Or do you lock the guidance in around what you see in July? And quite frankly, that was a very difficult conversation. I want to say that one of the characteristics [this week] is we believe in radical transparency in our relationships. We've maintained that with our customers, with sourcing boards in our restaurants, with our farmers, with our team members. And frankly, Jon and I have always tried to do that with the investment community. So when we looked at it, we decided that the low end of the guidance should reflect exactly where the business is today in July. So what we found is that the low end of 480 reflects the same-store sales growth in the back half of the year, running 5%. And the new stores in the class of 2021 remaining exactly flat to their revenue with where they are in July. I understand that, that'd be viewed as very conservatively because certainly, we have some college stores and one viewpoint is the college stores. For example, UCLA should pick up when school comes back. The other view would be the 3 stores in New York, World Trade Center, [Spring] in Hudson and 52nd Lex, all in that class of 2021 should improve post Labor Day. However, I think we would tell you in, we felt that way a year ago. And the world felt that way 2 years ago. So the low end of the guidance of 480 is the world in July, 5% same-store sales and no change in the class of 2021's average weekly revenue. The high end of $500 million reflects a second half same-store sales growth rate of 15%. And again, we just held the new stores flat. Our hope in all candor is that the low end is certainly a conservative projection. But I think like many people were a little bit scarred by chasing a view of an ever-improving external environment, only to find new things coming our way.

[Operator Instructions] We'll go next now to Andrew Charles of Cowen.

Great. Mitch, my question is a follow-up of the previous question. Just obviously, you called out that the rate of deterioration you saw in the business in June, July is the most pronounced you've seen in Sweetgreen's history. And so appreciate how thoughtful you guys are around guidance. But why [target] the low end? Is just this trend continuing rather than thinking that heaven forbid it gets worse or just perhaps at the middle point of the range being that this trend -- this underlying trend will continue?

Thanks, Andrew. I'm smiling, thinking great question because we've asked ourselves that question for about a month. So let me just give you a little bit of the detail and say, while the low end of the guidance is a 5% same-store sales growth, while it's a brief period through August, the same-store sales growth was actually 7%. So beginning to show some upward trajectory. I think, in a normal period, we probably would have done exactly what you said and gone to some middle type of range. I think the reason we didn't, as I said, is that we felt that we were always scarred, thinking that in -- after a holiday or Memorial Day or Labor Day, things would always improve. And what we have found is, the nature of that recovery has just been so erratic that it was very difficult to kind of call it in terms of when it would happen, where it would happen and, quite frankly, how large it would be.

Andrew, let me just give a little bit more color on this. So as we shared in our remarks, we do believe the slowdown in sales is largely attributable to our footprint and our customer being missing for a lot of the summer. So call it a summer lull in a lot of ways, with people traveling, a rise in COVID and the delay in return to office, which we all look at the data. So we do believe September post Labor Day is going to be much better. And some of our internal data around outpost launch, planned launches already proved that, that everything we see, and I'm sure you all see is that more people are expecting both companies that are already back in the office and going back to their normal routines, but also new companies establishing back-to-office routine. So generally optimistic about what September beyond looks like. But as you all know, we're in kind of choppy waters from a macroeconomic perspective. I'm just trying to be conservative in terms of -- definitely see some tailwinds, but don't know what the headwinds have to offer. And so we're just trying to be conservative in the guide. Having said all that, just extreme confidence in the model, long term, and our goal of 1,000 by the end of the decade and really just creating a brand that makes an impact on our consumers. So we see a lot of this as a little bump in the macro environment, but I believe we're really well situated to grow through this.

That's helpful. I appreciate that transparency. My other question was just going to be, if I look at the AUV growth, it was about 18% in 2Q that exceeded 16% same-store sales growth. Can you flush out a bit more what's driving that? My guess would be a function of robust new store openings that are predominantly skewed in the stronger suburban markets, but any help kind of flushing that out would be helpful.

No, that's exactly it. It's just a difference in the AUV base of stores that go into it. So we picked up some stores, as we do every quarter.

And ladies and gentlemen, it appears we have no further questions this afternoon. Mr. Neman, I'd like to turn things back to you for any closing comments.

I just want to thank everyone, and we'll see you next quarter.

Thank you very much. Ladies and gentlemen, that will conclude today's Sweetgreen Second Quarter Earnings Conference Call. I would like to thank you all so much for joining us. I wish you all a great evening. Goodbye.