Sweetgreen, Inc. (SG) Q3 2022 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Sweetgreen Q3 2022 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions] And now at this time, I'd like to turn the conference 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, 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 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. As we near our first anniversary as a public company, I want to begin by offering my gratitude to our incredible team members who power our mission of building healthier communities by connecting people to real food, adding the Sweet touch with every customer interaction. For the quarter, we reported sales of $124 million, representing 29% year-over-year growth and same-store sales growth of 6%. We opened 10 restaurants in the quarter. Total digital sales represented 60% of our total Q3 revenue, with approximately 2/3 of those sales coming via our own digital channels. AUVs were $2.9 million and restaurant-level margins were 16% for the quarter. Our adjusted EBITDA loss was $6.8 million in the third quarter, narrowing from a loss of $14.1 million this time last year. That figure has improved each quarter this year, and we continue to demonstrate improvement on our path to profitability. While this has been a challenging year for the entry, we are proud of how we have navigated the macro environment and believe that our high-quality product offers excellent price value. We are relentlessly focused on financial and operational discipline as we steer through uncertain times in the world ahead. Our strong value proposition starts with the help of our 200 sustainable farmers, producers and distribution partners. We share a network of partners that supply some of the most highly regarded restaurants in the United States. The vast majority of what we source is local or organic and our passionate team members make food from scratch every day in each restaurant. This creates the difference that our customers can taste. We have a bold price under $10 in all our markets, and we've held our core menu price flat since the beginning of the year, while the majority of our industry has raised prices more than once this year. During our 2-plus years in the pandemic, we drove best-in-class digital acquisition and sales while simplifying our operating model. We continue to deliver value through technology by meeting customers wherever they are, believing technology should enhance the human experience, not replace it. Now that the world is opening up, we are going back to basics, relaunching the playbook that we call intimacy at scale that helps us build the best-in-class brand over the past 15 years. I'd like to highlight a few of the ways we built intimacy at scale. First, we take a local approach to building community connections with local chefs, farmers' markets, artists, community partners and creators so that every opening become an authentic part of the community. Two, we create a great experience in our restaurants and have begun to retrain our team members with a focus on customer hospitality. We add the Sweet touch. It's one of our core values, and it's how we delight our customers with every interaction we have with them. Three, we offer fast service without compromising freshness. By focusing on improving throughput through refining our labor model and training, we believe we can drive incremental transactions and better customer satisfaction. In addition to driving operational excellence and reintroducing our intimacy at scale playbook, we are committed to driving long-term sustainable growth and becoming a profitable national brand even with the increasing uncertainty of the macro environment. As a reminder, our strategy has 4 pillars: one, expand and evolve our footprint in new and existing markets to connect more communities to real food; two, enhance our digital experience with a focus on own digital relationships, allowing us to add new customer channels, drive frequency and increase restaurant volume; three, solidify our brand as the industry leader and inspire consumers to live healthier lives through reimagining fast food; and four, create 5-star team member experiences and make Sweetgreen the employer of choice. Let me share a few highlights from the quarter on each of these pillars, starting with our footprint. In Q3, we opened 10 restaurants, ending the quarter with 176 restaurants. Late in the quarter and into Q4, we opened 5 restaurants in the Upper Midwest, Minneapolis, Detroit and Indianapolis. To launch these new markets, we collaborated with local artists, small businesses, influencers and chefs. Thanks to our intimacy at scale playbook, while early, these stores are exceeding expectations and tracking to an average AUV above $3 million. We have, however, a small cluster of Southeast restaurants that are underperforming to our standards. These restaurants opened during the pandemic and, as a result, we were not able to execute our playbook. We have begun the process of reenergizing these restaurants through community connection. We are starting to see positive responses and week-on-week revenue growth. We are confident in these markets as we have nearby restaurants that are already meeting or exceeding expectations. Last month, we opened our first digital-only pickup kitchen in the Mount Vernon area of Washington, D.C., which was a relocation of our City Vista restaurant nearby. Customers have been receptive, and the store was filled with new customers, downloading our app to experience the new model. Future pickup kitchens have the potential to unlock additional markets with smaller square footage needs, lower build-out cost and improved return on invested capital. Our Mount Vernon restaurant will provide learnings for our future restaurants powered by the Infinite Kitchen. As you know, we acquired Spyce, the restaurant powered by automation technology, last year. We were in Boston a few weeks ago visiting the team. I cannot be more excited with the progress they've made. We can share that we will be opening 2 restaurants sometime next year that will feature our automated production line we call the Infinite Kitchen. These restaurants will serve our food with even better quality, perfect portioning, faster speed and will create a more consistent customer experience, all while elevating the role of our team members. We are confident that automation will play a major role in elevating the experience for customers and team members but will also help us create a more profitable and scalable model. We look forward to sharing more about this transformative technology with you in future calls. Next week, we will be opening our first pull-through in Schaumburg, Illinois. With 60% of sales coming from digital channels, we are well positioned to have another profitable and scalable format in our toolkit as we look to connect more people to real food. Enhancing our digital experience with a focus on owned relationships continues to be a priority for us. We believe the launch of a loyalty program in 2023 will lead to customer incrementality and engagement and is especially important to have in this recessionary environment. As a reminder, our Sweetpass subscription trial in Q1 saw Sweetpass users place an additional 5 orders on average during their 30-day trial, almost tripling their frequency and more than doubling their spend as compared to the average monthly frequency in Q4 of 2021. In July, we launched our Rewards and Challenges feature with an aim to drive frequency and spend through a cohorted gamified experience. Looking back on a 90-day period, customers who opted into at least one of our digital challenges doubled their frequency and spend as compared to digital customers who did not opt into a challenge. We will continue to test and implement new challenges throughout Q4 as we iterate and learn towards a new loyalty program. Both Sweetpass and Rewards and Challenges were piloted as potential components of a future loyalty program. Given the level of customer engagement with both pilots, we believe our program will strongly resonate and be a powerful growth lever later next year. We continue to focus on the growth and profitability of our B2B channels as offices return. In addition to Outpost, we are in the early stages of rapidly growing the new catering channel. We've begun pilot and catering in 20 select stores with promising initial results. Average order values to date exceed $500 and weekly sales have tripled from start to end of Q3. Over the coming months, we will add additional markets to our pilot and begin marketing activity to drive awareness. We see real growth opportunities with outpost and catering as return to office trends upward and group gatherings increase. Our brand's mission is to expand access to real food. We expand access by adding channels expanding our footprint and broadening our menu. Yesterday, we launched a Crispy Rice Treat dessert nationwide. It's our version of the beloved classic treat that honors our food ethos as it is free of highly processed preservative and any refined or hidden sugar. We created this treat with our chef-in-residence Malcolm Livingston II, renowned pastry chef who has worked at restaurants, such as Per Se and Noma, the 5-time winner of the title, World's Best restaurant. Across California, we're also testing new heartier offerings, grain bowls and plates. The test features our delicious new protein currently in testing, organic turkey meatballs, which have 60% less carbon emissions than a traditional meatball. Finally, starting this Thursday, we will be testing our first-ever, plant-based protein, Meati, at our Culver City food lab to address customer desire for a high-protein vegan option. For 1 month, customers can try this nutrient-rich mushroom root protein in their bowls or order the new Miso Meati bowl. We are proud to be working with a partner who shares the goal of creating a positive sustainable impact on the planet. Our team members power our mission and build the brand with each customer interaction. We continue to innovate to make their jobs easier as well as invest in training and development. This leads not only to increased employee satisfaction but also better-run restaurants. Given a number of factors, namely, a historically tight labor market, there are opportunities to improve stacking across many of our restaurants. While recruiting has become somewhat easier than earlier in the year, and we remain 95% staffed, call-outs have had an impact on throughput and operating hours in many locations. Our data shows that employees who are scheduled to work 30 hours or more call out less and have higher tenure than those who are scheduled to work fewer hours. In response, we are working to shift our staffing models. On the hiring front, we launched a new applicant tracking system this quarter. The rollout of our new ATS has reduced our time to hire by almost half. While we have seen the hiring environment get easier, industry demand for talent is still high. Training remains critical to our success in implementing our intimacy at scale playbook, especially as the majority of team members joined during the pandemic when we had to switch to digital-only operations. We've refocused our training on customer hospitality as the world opens back up. Finally, we continue to leverage automation and digital tools to free up time so our employees can do what they do best, connecting with our customers. This includes our newly rolled out proprietary cold prep tool, which uses machine learning to generate a list of what to prepare and how much by incorporating multiple data points and a real-time algorithm to predict future consumption of ingredients. Early feedback from our teams is overwhelmingly positive. We are in the early innings of creating and defining a category of healthy, convenient and delicious food. We have tremendous white space across the U.S., a national brand with a cult-like following and a proven playbook. We are well capitalized and continue to have a relentless focus on financial discipline while enabling us to invest in growth to drive our business for the long term. I want to thank the whole Sweetgreen team for their work and commitment to our mission of connecting people to real food one customer at a time. Now I'll hand it over to Mitch to review our Q3 financial results.

Thank you, Jonathan, and good afternoon, everyone. Total revenue for the quarter was $124 million, up from $95.8 million in the third quarter of 2021, growing 29% year-over-year. This includes same-store sales growth of 6%, reflecting our price increase of 6% taken in January 2022. Since then, we have not taken a broad menu price increase. As stated previously, if our cost of goods and labor as a percent of revenue stayed in line with 2021, we do not anticipate any further price moves in 2022. Our average unit volume was $2.9 million, up from $2.5 million in Q3 2021. Digital revenue in Q3 was 60% of total revenue and our own digital revenue that is a transaction made on the Sweetgreen Apple website was 40% of revenue. Q3 total digital dollars grew 22% year-over-year. We opened 10 new restaurants this quarter, ending the quarter with 176. The majority of these restaurants opened in the second half of Q3. We remain on track to achieve our guidance of at least 35 new restaurants this year. To date, we've opened 33 restaurants for a total of 182 restaurants. During the fourth quarter, we made the decision to close 1 restaurant in Texas. Restaurant-level margins in the third quarter were 16%, up from 14% in the third quarter of 2021. For a reconciliation of restaurant-level margin to comparable GAAP figures, please refer to the earnings release. Food, beverage and packaging costs were 28% of revenue, which is consistent with the comparable period in 2021. As a percent of sales, we continue to expect that our food, beverage and packaging costs for 2020 will be in line with full year 2021, which was 28% of revenue. As we mentioned on earlier calls, we have seen inflationary pressures build in the second half of 2022 and expect further impacts due to recent weather disruptions impacting tomatoes and romaine in Q4. Labor and related costs were 31% of revenue, an improvement of over 100 basis points from this comparable period in 2021. This margin improvement year-over-year was the result of price increases and the simplification of our operating model. We continue to expect our labor and related costs as a percentage of revenue will be in line with or slightly better than full year 2021, which was 32% of revenue. Occupancy-related expenses were 14% of revenue, an improvement of 100 basis points from the third quarter 2021. This improvement is primarily due to the impact of menu price increases. Our G&A expense for the quarter was $41.4 million compared to $28.9 million in Q3 2021. This $12.5 million increase in G&A is primarily attributable to a $14.6 million increase in stock-based compensation expense, an increase of $1.2 million in public company expenses and a $300,000 increase in our investment in Spyce. This was primarily offset by a decrease in salary and benefits. Due to the timing of the Spyce acquisition in Q3 2021, the change in Spyce cost was minimal for the quarter. Excluding these items, G&A for the quarter was $20.2 million compared to $23.7 million in the comparable period in 2021. This was a 15% improvement as revenues increased 29%. We expect that we will continue to gain meaningful leverage in our G&A, which is critical for our path to profitability. Our net loss for the quarter was $47.4 million compared to $30.1 million in comparable period 2021. The change is primarily attributable to a $14.6 million increase in stock-based compensation and $11.1 million of restructuring charges taken in the current quarter partially offset by the increase in revenue and restaurant-level profit noted above. Adjusted EBITDA for the quarter was a loss of $6.8 million, narrowing the year-over-year quarterly loss from $14.1 million. This improvement is the result of higher sales, improved restaurant-level margins and leverage in G&A, excluding stock-based compensation. As disclosed on our last call, we took steps to manage our corporate overhead costs in the third quarter. We incurred pretax restructuring charges of approximately $11 million related to moving to a smaller office and reducing our support center staff by approximately 5%. We ended the third quarter with a cash balance of $381 million. We have a strong capital position that allows us to continue to expand our mission and provide us with flexibility during these uncertain times. I would like to make a few comments now on our third quarter sales. First, the post-Memorial Day trends persisted throughout the quarter and into October. Second, we saw an unusually high volume of store closures due to call-outs and repair and maintenance issues affecting some high-volume stores. Third, we have a small cluster of restaurants in the Southeast, opened during the pandemic, ramping slower than expected. We are revisiting these stores with our intimacy at scale playbook. We have long-term confidence in these stores' end markets. In light of these trends, we expect to be at the lower end of our guidance we gave in August, with the possibility of our top line being a little short. The external operating environment continues to be challenging, and the world is hard to predict right now. While the macroeconomic environment grows increasingly uncertain, we are focused on doing what's best for the company over the long run. We believe we have the right long-term strategy to scale our mission of connecting people to real food and create an enduring brand. We are committed to driving sales, elevating our customer experience and maintaining a disciplined approach to margins and G&A to drive the company's path to profitability. With that, I'll turn the call back to the operator to start Q&A.

[Operator Instructions] We'll take our first question this afternoon from John Ivankoe of JPMorgan.

Can you hear me?

Yes.

So the question really is on new unit volumes. And listen, it's on a calculation that we can do perfectly from our seat but we contrived based on last year's average weekly sales and same-store sales, but that was a place in a model that did seem -- more so than even the comp, it did seem to explain most of the shortfall in the revenue relative to our expectations. So I guess I wanted for you to address, did you see that as well? I mean is there anything happening? Is there more than a handful of new stores that have opened, that have been weaker? And what would characterize, I guess, the stores that have been slower versus the stores that are better? And talk about initiatives, and I think you talked about intimacy at scale, but talk about the different initiatives that you may have to bring the lower-performing stores, at least up closer to the system average and correct what may or may not be a problem that's starting.

Sure. John, good to hear from you. So to your point, we do have a cluster of stores mostly isolated in the Southeast where we have seen a slower start. We've mentioned on prior calls about some stores, which we had signed right before the pandemic or at the onset of the pandemic, really not anticipating the changes to the demographics and the shifts in traffic. The combination of that as well as not being able to run our classic playbook, which really has to do -- while so much of our business is digital, a huge portion of it is that frontline business of really bringing guests in, educating them about Sweetgreen and giving them that first -- that incredible first trial and bringing them back. And then on top of that, part of our playbook has always been how we engage with our communities. There's a cluster of stores opened in the -- kind of right in the middle of pandemic where we weren't able to execute this playbook. And that's really where we're seeing most of the problem. As the pandemic starts to wane and if you look at the past openings, specifically the ones in the Upper Midwest, they've been incredibly successful. I don't think -- we're pretty confident that this has much less to do with the real estate of the market because in all of the markets where we have problem stores, we have very successful stores. It really has to do with our go-to-market and how we executed that playbook. So as we mentioned on the call, we've really begun to reengage on that playbook and are seeing some really nice results as well as using that playbook on new stores. I will also just talk a little bit about some of the challenges, being the labor environment, which we've now seen a lot of easing in the labor environment, but in the depths of the pandemic, that made a lot of the customer experience that we expect challenging. I'll have to say we're very, very focused on just execution one customer at a time. And we think in our history, we've proven that once people try Sweetgreen, they are very sticky. And so when stores start a little bit slow, we've always proven that we're able to ramp these stores when we focus on them.

John, it's Mitch. It's interesting when we look at the modeling for both the class of 2021 and the class of 2022, we continue to see their year 2 volume averaging to $2.8 million target that we gave at the time of the IPO. So while there have been some stores that have all been softer than we would have liked, we have, on the offsetting, many stores that have opened stronger.

We go next now to Andrew Charles at Cowen.

Looking for you guys to expand a little bit more about that slowdown in May sustained through October. Return-to-office data looked like it improved a bit post Labor Day but perhaps it wasn't as robust as you guys were thinking in your original guidance. So what else would you kind of attribute it to? I mean how much of this is more macro versus how much is this more the Southeast dragging down performance and just some challenges on the staffing side -- or labor side, excuse me?

Yes. Andrew, good to hear from you. I'll start and I'll let Mitch kind of fill in. I'd say it's a combination of a lot of macro effects. A lot of the stuff we talked about in the last call around the slowdown in sales post Memorial Day, things that we saw around heightened summer travel, erratic return to office and just general different traffic trends. Even on the office, while we've seen an increase on certain days, Mondays and Fridays are definitely not the same. So traffic patterns are erratic across the board. But beyond that, I think there's some on the execution side. We talked about the world -- our world was all digital during COVID and the front line was the fastest-growing channel for us this year, both year-over-year and quarter-over-quarter. And as most of our team members were really new to Sweetgreen, they've never experienced the Sweetgreen of lines out the door and the throughput that we're used to. So we're, in a lot of ways, maybe say, caught off guard by that and our throughput and customer service really not where we expected it to be. That's been the huge focus over the past couple of months and I can say that we've already seen some green shoots as we focused on that customer and on that throughput. We're starting to see some really nice gains there. But again, I'd say definitely the macro is not making things easier but some execution stuff on our side as well.

Andrew, let me just build a little bit on Jon's comments. As we said on the call in August, what we saw happen post Memorial Day was very unusual in our business. As a general rule, Sweetgreen strengthens during the summer and slows down during the fall. Historically, Monday was our strongest day followed by the end of the week. What we've seen coming out of the pandemic, or whatever we call the phase we're currently in, some of the consumer patterns have been very different than they were prior to the pandemic. So Jon talked about Monday and Friday essentially been almost an extension of weekends in the urban stores, but in addition to which what we saw was the summer slowdown. We felt part of that was travel, part of that may be due to COVID. It's possible it's due to the macro environment. It's very interesting as we approach fall and hit November, the business reignited and the same-store sales began to grow double digits again, again, counter to the historical pattern.

Okay. And then, Mitch, maybe just a follow-up question. How are you, just given the sales environment, you recognize that November has some improvement, but it's only been 7 or 8 days. So obviously, you don't want to get too far ahead of yourself. But can you talk about your feeling, your ambitions to turn profitable in first half 2024 now versus on the prior earnings call?

I think that it's a very, very important topic and it's one that we spend a tremendous amount of time on at Sweetgreen. I would say in the current environment, our path to profitability is actually more important, not less important than it was. And it's one that we're more focused on than ever. The path to profitability for us is a relatively simple model. It's opening new stores that are successful, driving our restaurant-level margins through good control at the store level and leveraging our G&A expense. And we are completely focused on these, and we will continue to reassert that. In 2023, our losses will narrow significantly and the company will be profitable on an adjusted EBITDA basis in the first half of 2024.

Okay. Got it. So still on track. Super. Maybe I can sneak one more in.

So one quick buildup. While the sales may have been a little lighter than we wanted in Q3, we were especially happy that the adjusted EBITDA came in significantly better than the modeling and at the restaurant-level margins were strong in Q3.

That's helpful. And Mitch, just one maybe follow-up question on that. Can you talk about your thinking around the sales and margin impact of the upcoming loyalty program, in particular, how this could to help enhance your path to profitability as, obviously, there's a portion of this where you're giving away more food for free?

Well, I think what I would say about that is you're correct, that the margin on that marginal sale through loyalty would be at a lower rate than historical. We're really driving the incrementality of the volume to kind of get the AUVs back up and gain more leverage around the box. So we believe that it will add both to the top line and the bottom line, although at a lower margin.

We go next now to Jared Garber of Goldman Sachs.

Mitch, I wanted to come back to just maybe some comments that you had made last quarter around working with your sort of landlords in some of the urban markets that I think were open, the units that were open during the pandemic and maybe at the current moment are not necessarily best performers or performing to the same extent that you saw on the top line. So can you give us any update on what those conversations with some of those landlords have been like?

Thank you, Jared, for the question. Yes, let me first say that you're correct that the Deep Central Business District AUVs, particularly in Midtown Manhattan, have not returned anywhere close to their 2019 levels. While they are growing and it's continuing to grow, they are certainly off the mark they were at before. The profitability of these stores has been impacted by several margin points and the offset has been 100% in the occupancy line. We are in discussions with a number of landlords and modifying our leases in order to kind of accommodate that structure. The attempt is to move more of those leases from fixed rent to a percentage rent and with a breakpoint level in 2019, and we have had some success in that area.

Great. That's helpful. And then as it relates to unit growth, I mean, obviously, impressive to see you guys maintain that unit growth guide throughout the year despite all the macro pressures, and we've seen several companies kind of ratchet down their unit growth expectations for the year. But wanted to get a sense of how we should be thinking about unit growth into next year and how comfortable you feel with the original guidance that you've laid out during the IPO.

Jared, good to hear from you. So we’re on track for at least 35 this year. We might exceed that by a couple of stores, depending on how the year ends up. We have 43 leases signed for 2023 already. So we’re kind of still targeting – the way we think about it is cumulative between 22 and 23 stores. We have odelled 85. And we’re on track for 80 to 85, at least. So we feel pretty good about the development targets. On top of that – so first of all, kudos to our development team in this incredibly challenging environment. I’d like to say beyond the number of stores, we’ve been very focused on the quality of real estate and the sequencing. This year was a year of going wide, opening a lot of new markets. And anyone in our business knows opening a new market is a lot harder than more stores in existing markets as well as a lot more risk. Luckily, these new markets have done well for us. And what we’re doing next year is, on our path to profitability, we will be focusing on more stores in existing markets and just not going as wide, going deeper where we know it works and feel really good and confident about the pipeline that we have. We also mentioned some work on the new formats. We launched our pickup-only kitchen a couple of weeks ago in D.C., been doing exceptionally well, gives us a little bit of a taste of things to come as we get closer to our automated kitchen, what we’re calling the Infinite Kitchen. And next week, we’re super excited, finally opening our first drive-through or pull-through concept outside of Chicago. So some exciting stuff on the development front and we’re just getting better at how we build these restaurants and feel really good about the real estate and the pipeline.

We go next now to Matt Curtis of William Blair.

I want to get back to the revenue guidance. Have you seen any weakening in the suburban store base? And then on the other side of the coin, I guess, are the urban stores rebounding still more or less as you anticipated? Or is that still sluggish? Because you would expect that given the improvement in office occupancy.

Thank you, Matt. Yes, I would say that some of the trends that we've seen in Sweetgreen have been a lot on what others have seen. We've had faster same-store sales growth in the urban markets in the third quarter than suburban markets. Suburban market is basically flat and the markets have moved about 12%.

Okay. And then just looking at the comp guidance for the full year, I mean, it kind of implies a pretty wide range of comps for the fourth quarter. So could you be more specific in how October went, same-store sales-wise? And what exactly are the embedded expectations for the fourth quarter comp?

What I would say is to reiterate, I believe, what we said earlier, October pretty much was in line with trends happening post Memorial Day. Think of it as kind of the summer – maybe the summer gold drop. And then the business peaked around 1st of November.

We go next now to John Glass at Morgan Stanley.

I guess I'd like to again follow up on just sort of what you're seeing in terms of trends mentioned, Jon. What is -- is it possible to quantify what the impact of the store closures or reduced operating hours? Or how meaningful was that versus just sort of reduced overall demand? And I think last quarter, you have a lot of customer data, right, in terms of frequency bands, of high-frequency and low-frequency customers. Is there any new insights from that data on what's changed? Is it your high-frequency customers just dropped the visit or you're losing some new incremental newer customers? What does that tell you versus what you saw last quarter?

John, good to hear from you. So I'll answer the second part of the question, I'll let Mitch talk about the closures piece. So in terms of the customer trend, it's actually interesting, and it speaks to our intimacy at scale playbook. If you think about Sweetgreen traditionally, we would acquire the -- our biggest acquisition lever was in our frontline. So it's the virality of our front lines and people working together and kind of walking by, driving by, coming and trying Sweetgreen for the first time, a lot through community efforts and the mobility that we saw. Throughout COVID, obviously, that really went away. We got very good at digital acquisition. So digital became a primary acquisition driver for us. To answer your question directly, we actually have seen very steady frequency trends and, call it, like how we measure frequency or annual spend or quarterly spend has actually remained pretty sticky, actually has seen some increases as we rolled out rewards and challenges. Really, it's been more from an acquisition perspective. And that's why I speak to this playbook around community. A lot of the things that we used to do pre-COVID around acquiring new customers were kind of shut off, shut down during COVID. And so it took us a little -- to be honest, we probably reacted a little bit slow in bringing some of that back. But as we brought it back recently, we've seen acquisition tick up. So retention flat, slightly up with Rewards and Challenges. And we saw kind of a drop in new customer acquisition, and we've seen that energized recently.

John, let me break the question about store closures in 2 general groups. We had a number of store outages caused by labor call-outs, impacting things like line time, store operating hours, our back lines operating and general R&M issues. Frankly, it probably was the highest the company has ever experienced. In addition to that, we had 3 significant store closures, highlighted, of course, by our Grand Central New York store that was closed for about half the quarter due to a landlord problem. So collectively, they all made up kind of a pretty significant number in the quarter. We have seen them begin to dissipate as we move into the fourth quarter.

Can I just follow up, one, can you quantify what that impact was? That's what I was trying to get at, how big is that from a comp drag? And as a follow-up, Mitch, unrelated follow-up. Last quarter, you talked about some of the class of '21, like in New York stores, maybe if you did it again, you wouldn't have done it again just because those are coming down. Now we're talking about the Southeast. How is the class of '21 in those New York stores? Does that continue to be a drag? Is it worse? Is it better? And now we're introducing a new element to some of the Southeast stores. I just want to understand what we talked about last quarter in terms of the New York stores being sort of softer to open.

Okay, John. So let tell you, probably the closure number, to get specific, was probably in the neighborhood of $1.5 million in the quarter. In terms of the class of '21, as I said, as an average class that's on track to our aggregate metrics. Some of those New York stores that I called out have begun to grow and grow pretty significantly. For example, Spring and Hudson in the World Trade Center, really confining most of the kind of challenged market stores in that Southeast corridor.

Yes, John, we've been with how that class of '21 has begun to ramp and it kind of speaks to -- the model that we have is once customers try us, they end up being really sticky. And so some stores hit right away and some stores take a little bit longer, but we know once we get people to try the food and give them a great experience, the store is built. And so we've seen some nice improvement on that class of '21.

We go next now to Brian Bittner at Oppenheimer.

Just first question is on pricing. Jonathan, you said in your prepared remarks that you've held your core menu price flat since the beginning of the year. I think your last price increase was in January. That's obviously very unique in this time we're in. So can you just elaborate on how you are strategically thinking about pricing moving into 2023, especially since you kind of said some costs have stiffened lately? And Mitch, can you just help us understand how we should expect the price factor in the model to play out in fourth quarter and throughout 2023? And then I have a follow-up.

Yes. As I mentioned in my remarks, we did hold price since January. And I just want to take a moment on the price value Sweetgreen offers because I think sometimes -- I think we all know this, but I just want to reiterate. Sweetgreen sources most of our vast majority of our food locally and from organic partners, really from some of the -- same sources that many of the best restaurants in the world, in the country use. On top of that, we make the food from scratch every single day. So you're getting a very, very high-quality product for the price that you're paying. And as our competitors have continued to take price, the relative value we offer, we believe, is improving. The reason we haven't taken price is partially our menu are more plant-based, has had less commodity pressure, although we've seen some definitely commodity pressure. And we do expect to see some more, much less than our competitors. And we saw this as an opportunity to take some share. As more and more people take price, we do expect the environment for consumers to get more challenging, and we, in a lot of ways, just saw an opportunity. I talked about customer acquisition being an opportunity for us to hold our price and continue to take share. We do expect to have to take some price next year, but we're really judicious in how we use that. And in this environment, we want to make sure that we offer the right value. One of the things that we've begun to see and we think there is an opportunity in this environment is the trade down. Given the consumers that we have and what they value from the places that they go, we see an opportunity for many people actually in this recessionary environment to be trading down for something like Sweetgreen.

Brian, just following up on your question. There's no change in our pricing in the fourth quarter. So it will look exactly like it did in the third. You are correct, our last price move was the beginning of 2022, and that's the only price change for the year.

Okay. And I think I heard you correctly in your prepared remarks, so I'm sorry if this is off base, but I think you said a couple of stores next year will have the Spyce technology. And if that's the case, I'm just curious how much of these stores' product-making capabilities will actually be automated, the stores that are going to have the Spyce technology. And how important is the success of these stores in your overall thinking regarding the ability to scale this automation across your asset base moving forward?

Yes. Let me tell you a little bit about this technology and we're calling this new format as the Infinite Kitchen. So we're super excited about it. We've had a belief that automation would be -- can be transformative for the restaurant business and specifically our model. We see a lot of advantages. Talking about the customer, what the customer gets is the throughput gains are significant. We're talking about many times the throughput of our current line. On top of that, some of the biggest attractors we have today are around accuracy portioning. As you'd expect, the machine makes these things perfectly. We also are really excited about what this does for the team member experience. We spent a lot of time thinking about how we designed this technology in the store really to be designed around elevating the human experience and that team member experience. And our team members are super excited about bringing this technology into their restaurants and working side by side. On top of that, it's definitely transformational from a model perspective, a financial perspective. If you look at our restaurants, about half of our labor, our variable labor in the restaurant, is production or assembly. And this Infinite Kitchen takes the majority of that. We -- to be clear, I mentioned our Mount Vernon pickup kitchen and why we're excited around that being kind of a test towards Infinite Kitchen. Because for us, the Infinite Kitchen, the automated assembly will prepare all orders. It's not -- in those stores, we don't envision a frontline and a secondary make line. So it would be 100% of our orders. We're excited for these pilots. It's early. We've got to test these. We've got to not only test the technology but also the customer and team member experience and perfect it. But we're feeling pretty confident about it and think it will be transformational for the brand and really for the industry. And in '24, we should see in -- see us beginning to roll these out given that they're successful next year. And to be clear, these will be 2 new builds. They won't be retrofits. We'll be opening 2 new stores with this technology.

And those 2 stores are in '23, right?

Correct.

And we'll go next now to Jon Tower at Citi.

Just a few, if I may. Curious, not a significant shift, but sequentially, digital revenue -- digital mix as a percentage of revenue did slip quarter-over-quarter and year-over-year. And I know during the period you ran the summer of rewards program, at least for part of the quarter. So I'm curious if you could delve into what's happening here, maybe why it slipped modestly in the period.

Yes. It's really the frontline coming back. We see that as a good thing. I actually hope, in future quarters, we see more frontline traffic because that's a great customer acquisition driver for us. So we actually expect and hope to see more customers coming, experiencing us through our frontline and then converting them over to digital. So it's really just -- it's a shift, and it's really that the denominator got bigger, but you have that frontline that's grown. So I'll say we encourage that to happen.

Okay. And then going over back to the -- I hate to beat a dead horse, but going back to the unit growth discussion, I'm just curious, it does seem like, obviously, the business is under quite a bit of pressure right now. And there's a number of different reasons for it. So why not consider concentrating some of the growth next year on those markets that are going to be the most profitable, which might come at the expense of total new store growth rate but knowing that those stores that you're opening are going to be more profitable and/or higher volumes and more profitable than historically? Just curious to your take on the rate of growth and how important it is to you.

In an earlier question, when I talked about the pipeline and our focus on fewer markets, it's exactly that. So this year, we went to a lot of new markets and tested out some demographics and areas that were, in a lot of ways, new to us in building the brand. In '23, you'll see us focus much more on markets where we know it works. It's a proven model, really reducing the risk from our pipeline. So what you said is exactly what is happening.

Right. But does that translate into potentially smaller number of stores relative to the 20%-plus growth rate?

No. I'll tell you the honest truth is the pipeline was a bit bigger than that, and we're now kind of like focused it to be on -- we're still hitting the numbers with that focus on those markets and areas where we have the high confidence. So you can kind of get to the point that it would have maybe been bigger if we're willing to take more risk, but really focused on driving profitable growth right now.

Got it. And then on the Infinite Kitchen stores that you're contemplating are going to open next year, are those going to be digital only? Or are they also counter service, frontline?

So we haven't really shared much on the experience, but we want to make sure customers -- what I can say is we want to make sure customers can order in multiple different ways. And we know everybody doesn't want to order digitally, so there will be some way for people to order in store. We think, as I've mentioned today, a number of times, that human experience and adding that Sweet touch is super important. So even today, if you go into our new digital-only store, it's maybe deceiving to say digital only because there's a very high-touch concierge experience when you go in and ability to order from a human as well. So imagine some sort of concierge ordering plus digital and kiosks being part of that experience.

Got it. And last one for me, commodity inflation in the quarter. I don't know if you guys had mentioned it on the call yet, but if you haven't, you might give me an update.

Now what we really have seen is no significant change from the run rate throughout the whole year, but we expect it to average for the year approximately 6%, in line with our price increase taken in January.

And we'll go next now to Katherine Griffin of Bank of America.

So first, I just wanted to drill into this, the call-out issue a little bit further. So number one, can you just remind us again sort of why the call-outs were higher in third quarter than you were expecting? And then as a follow-up to that, I believe Sweetgreen ran for a 1-week long promotion for a $10 harvest bowl. So I'm just curious, given some of the staffing challenges you're facing, why choose to do a promotion at that time?

Yes, I can take that. So in terms of the staffing, what I'll say is we -- during the quarter, Q3, we had a lot of new team members and our shift during the pandemic, our staffing mix, moved to be more part time than we were used to. What we saw is in this challenging labor environment and with more of a part-time mix, we saw more call-outs with that. In markets where we have a higher full-time -- markets in stores with a higher full-time mix, we've seen that minimize significantly. So there's a huge focus for us on how we shift the mix to be more full time. You want people who are Sweetgreen as your primary place of work. And when that happens, and there's a career, you're more committed to the job. And so our staffing levels are actually quite good. It's really just getting the mix right and getting some more tenure under our belt with these team members as the world opens up and they get used to our omnichannel model and the high volumes we do. So really, the call-out issue, we believe will be really addressed by shifting the mix to be more full time. In terms of the $10 promo, we've actually -- like I said, we're staffed and we are ready. So a lot of the challenges we were referring to were -- persisted throughout Q3 and a little bit in October, but we feel like our operations have gotten to a much better place getting into November. And we saw an opportunity to really just reengage some lapsed users and give people a little pulse of value in this environment. And it's very early. We're still understanding the results, but it seems the results are very promising in terms of what it did for reengaging users and customer acquisition. So pretty excited about the promo and huge thanks to the whole team for making that happen. The one reason we chose the harvest bowl, it's not only our best seller. We find that when people try the harvest bowl, they're most likely to come back. We call it our stickiest, it's the stickiest bowl we have. So not only did it have nice results last week, but we expect there to be some nice residual results coming from that promotion.

Got it. And then, Jon, I just wanted to follow up on something. I want to make sure I heard you right. I believe you said you expect there could be some trade down into Sweetgreen. So can you just talk about, number one, sort of where those customers would be coming from? And then alternatively, what is the risk of customers that you know today trading out from Sweetgreen?

Yes. We’ve seen it across the industry in these environments where casual dining, fine dining, people deciding they still want a high-quality, healthy meal, but they maybe don’t want to spend $100 for dinner and they want to spend $25 or $30 general for a couple. And so we’ve seen some opportunities in engaging customers there. Listen, in terms of the consumers tightening their belts in this environment, we’re not – we’re expecting some of that. I mean I think it’s pretty clear we’re entering some sort – we’re in or we’re entering some sort of recession. But what’s important for us is to really focus on our price value and what we offer. We have a bowl under $10 in every market. We all – our food is local and organic, made from scratch, really delicious, changes seasonally. And I think customers really value that. On top of that, we have a loyalty program being launched next year, which we think will be a huge driver for us. It’s something that we’ve historically had for the history of Sweetgreen and over – during the pandemic, we’ve been piloting new ways to improve it. So we’ve essentially been running without a loyalty program. I’ll also say in this recessionary environment, we think that will be very important for us and a huge growth driver.

We go next now to Chris Carril of RBC Capital.

Just following up on the $10 harvest bowl promotion. I know you mentioned you're still evaluating the promotion. But do you anticipate leveraging price point promotions going forward, more just given the positive results you just mentioned? Or was this just very targeted and tactical for this point in time?

I'd say in this environment, we're always testing things. We're always testing ways to drive traffic, just making sure that it's margin positive at the end of the day. So we're evaluating the results. It seems like it worked out really well. And if it does, we'll play with different ways to acquire customers and just create some buzz in our markets. So I would expect us -- if it proves out that it worked and the numbers come in, we expect to do some more things like this.

Got it. Okay. And then, Mitch, on just margins for the 4Q, it seems like just based on quickly plugging in the full year guidance commentary into our model, that would suggest a meaningful step down sequentially in margins from the 3Q to the 4Q, if I have that correct. I presume this is largely -- or due in part to seasonality, which we haven't really seen as much of over the past couple of years. But is there anything else we should think about with respect to 4Q margins specifically?

No, the fourth quarter margin traditionally has been a low margin for Sweetgreen, largely built around the holiday schedule and winter time. So there's really nothing else going through it.

Okay. Got it. And then just last one, on the automated kitchen technology, Jonathan, you mentioned that the stores featuring the technology will be new builds for next year. But how are you thinking about opportunities to retrofit existing stores with the technology?

Yes. We haven't gotten there yet. The beauty, I think, for us, at our scale and our size is, I call it, we're in this like Goldilocks size where we're big enough where we can invest in technology and transformative technology like this, but small enough where most of our growth is in front of us. And so while I do think the technology could work in a retrofit, we're very well positioned in terms of doing -- focusing on new builds. And we believe that really is -- integrating this technology into the experience and thinking about it in a holistic way is the way we believe this will be deployed best. And so we're really well positioned for that.

And ladies and gentlemen, that is all the questions we have this afternoon. Mr. Neman, I'd like to turn things back to you for any closing comments.

Thank you so much. Yes, I just wanted to close up. I’ve been spending a lot of time in the field with our restaurants, with our restaurant leaders, meeting customers, talking to team members. And I’ve got to say I come back very energized about our intimacy at scale playbook. We learned a lot throughout the pandemic, and we’ve tightened up our model in terms of how we operate. But now we’re getting back to basics on how we connect the communities and how we add the suite touch one customer at a time. So we’re really excited about the year ahead. We have a robust pipeline of MROs. We have 2 Infinite Kitchens plan, which I think are going to be really interesting to learn from. We’re going to be introducing our loyalty program, and we have a lot of exciting stuff on the menu side, including some cool tests going on from a hearty perspective. So all to say, challenging environment, but excited about the progress we’ve made and really excited about the prospects looking out into ‘23 and beyond. Lastly, I just want to thank everyone for your time on today’s call and for joining us on this journey. See you all soon.

Thank you, Mr. Neman. Ladies and gentlemen, that will conclude Sweetgreen's Q3 2022 earnings conference call. We'd like to thank you all so much for joining us, and wish you all a great remainder of your day. Goodbye.