Thank you for standing by. My name is Joe, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Rebecca Nounou, Head of Investor Relations. You may begin.

Thank you, and good afternoon, everyone. Speaking on today's call will be Jonathan Neman, Co-Founder and Chief Executive Officer; and Jamie McConnell, Chief Financial Officer. Both will be available for questions during the Q&A session following the prepared remarks. Today's call is being webcast live and recorded for replay. The earnings release and today's announcement regarding the sale of Spyce are available on the Investor Relations section of Sweetgreen's website at investor.sweetgreen.com. I'd like to remind everyone that the information under the heading Forward-Looking Statements included in our earnings release and Spyce announcement also applies to our comments made during the call. 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. We also direct you to our earnings release for additional information regarding our use of non-GAAP financial measures, including reconciliations of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Our earnings release can be found on our investor website. And now I'll turn the call over to Jonathan to kick things off.

Thank you, Rebecca, and thank you all for joining us this afternoon. We are addressing the headwinds from the current operating environment with agility and focus. We are tightening operations, accelerating menu innovation, and deepening guest engagement. The team is focused on delivering an exceptional guest experience, improving operational execution and serving delicious, high-quality food in every restaurant. The actions we're taking are designed to expand our value proposition, strengthen transactions, enhance restaurant performance and position Sweetgreen for a return to profitable growth. For the third quarter, we reported sales of $172.4 million and a same-store sales decline of 9.5%. Restaurant level margin was 13.1% and adjusted EBITDA was a loss of $4.4 million. Performance was impacted by softer sales trends in our Northeast and Los Angeles markets, which together represent about 60% of our comp base. This was coupled with lighter spending among younger guests, particularly the 25- to 35-year-old age group where we over-indexed. As we look to Q4 and beyond, our new leadership team has taken the learnings from the year and focused our actions around 5 key strategies to transform our business. We're calling it the Sweet Growth Transformation Plan. Our strategies are: one, operational excellence; two, brand relevance; three, food quality and menu innovation; four, personalized digital experience; and five, disciplined profitable investment. Now let me share some of the work being done under each of these strategic priorities, starting with operational excellence. Since joining earlier this year, our COO, Jason Cochran, has been instrumental in leading the work to strengthen operational execution. He has brought greater accountability and a new culture to how we run our restaurants. Building on the foundation we introduced last quarter, Jason and his team are continuing to deploy Project One Best Way, our system-wide effort to elevate operational excellence…

Thank you, Jonathan, and good afternoon, everyone. As a long-time Sweetgreen guest, I could not be more excited to join the team. This is an important time for the brand, and I'm grateful for the trust Jonathan, the Board and the company have placed in me to help shape the next chapter. Over the past few weeks, I've spent time in our restaurants listening and learning from our teams. What stood out immediately was the care our people bring to the food we serve and the ingredients we source. I met Yuri, who began as a dishwasher 6 years ago and now leads her own restaurant as a head coach. Seeing how she has grown within Sweetgreen and her pride in the restaurant showed me what makes this company so special. Since stepping into the CFO role a little over 6 weeks ago, I've been focused on gaining a clear understanding of our economic model and the levers that drive our results. It's clear there's meaningful work ahead. I've launched a full review of our restaurant level expenses and G&A structure to ensure we're operating as efficiently as possible, identifying savings, simplifying processes and investing only in what drives the business forward. Over time, this work will drive margin improvement, stronger cash flow and tighter financial discipline across the company to deliver steady, stable results. I will have more to share in future quarters. I'll now walk you through our third quarter results. Third quarter sales were $172.4 million compared to $173.4 million last year, with same-store sales decline of 9.5%. Restaurant-level margin was 13.1%, down from 20.1% a year ago. Adjusted EBITDA was negative $4.4 million compared to positive $6.8 million last year. The comp decline reflects an 11.7% decrease in traffic and mix, partially offset by a 2.2%…

[Operator Instructions] Your first question comes from the line of Brian Mullan of Piper Sandler.

In the prepared remarks, you mentioned starting to evaluate Sweetgreen's menu and pricing architecture. I think you said in Q4 and into Q1. So Jonathan, can you just give a sense of the scope of what you're looking at, what you're hoping to accomplish? Maybe you could characterize how difficult you think this will or won't be? And I ask because I know absolute price points, it's only one part of the value equation, but it's an important one. So I would just love to get your thoughts on what you think needs to be done.

Absolutely. Thank you, Brian. So yes, we're looking at menu and pricing architecture, as we mentioned. And I think there's a few ways that we're considering it. First is our pricing ladders and menu -- and new entry points. As you know, in the quarter, we tested a few things around $13 bull drops, we saw -- really to understand the price elasticity, we saw a lot of engagement around it. But given the fact that it was mostly marketed to existing customers, a relative high degree of cannibalization, but it did show us that there is a real opportunity around more entry price points around our menu. As we look at menu innovation, we also see opportunities to create different price points and again, entry ways into the brand. We've also looked at how we present menu price points on our menu boards, again, to really show the different pricing options we have. Lastly, I'll just follow up on the things that I talked about in the prepared remarks. We can do a much better job of talking about the value we provide, whether it be made from scratch or our proteins cooked without seed oils or all of our proteins being -- having no antibiotics ever, there's a much better job we can do around really delivering on the value message that we are offering. Lastly, we have increased our protein portions by about 25%. And we've been relatively quiet on that. But starting next week, we have a big campaign around the increased portioning around protein. And with all the craze around protein, we think that will also do well. So I'll close with on this is a lot of the pricing work is going into stage gate in the coming months, and we do think that there's going to be a lot of opportunity around these different pricing tiers.

Your next question comes from the line of Jon Tower of Citi.

I guess maybe I'm just looking at the guidance for the balance of the year or the implied guidance for the balance of the year, and it's effectively suggesting the fourth quarter is taking a step down. I don't think that's really too much of a surprise to people on the line. But I'm just curious if you could kind of walk through what you're seeing in the current environment? And specifically, I would think given where your stores are located in the Northeast and what's going on with the government shutdown, if you've seen anything worsen in the most recent months with respect to consumer demand? And frankly, how it's showing up in your business? Are you seeing it specifically during certain parts of the week? Are lunch or dinner getting hit more so than other dayparts and how people are spending at your stores relative to the past?

Jon, yes, you're right, we are seeing a step down. So in July, we saw a slight pickup from Q2, and that was due to the seasonal menu rolling out. However, in August, we saw a step down of about 200 basis points, and then we saw another step down in September of about 200 basis points. October is holding flat to September. So we're running at low negative double digits right now. I will tell you, you're absolutely right about the consumer. So the 25 to 35 consumer is the most under pressure, and they make up about 30% of our consumer base, and they're down about 15%. And then our Northeast and L.A. markets make up about 60% of our base and the comp -- and they're making up about 800 basis points of negative comp compared to the rest of the fleet. So we're definitely seeing that impact. And then we are seeing some declines in dinner.

Okay. And maybe just in terms of the Infinite Kitchen agreement that you guys made today, can you just walk us through how that's going to impact you going forward? Obviously, it sounds like in a license agreement, but will there be any incremental costs that you'll have to pay going forward like a royalty for the technology into the future?

Yes, Jon, I'll take that. So we think that this strategic agreement with Wonder is really a win-win-win for the business. Not only do we infuse the company with about $100 million in cash and another $86 million in Wonder stock, we also reduced our G&A by about $8 million and allow us to focus more of our time and resources on the customer and really on the food and the experience. Beyond that, around IK going forward, it will continue to be a huge part of our business. Like we said, it's continuing to scale in many of our new stores, and we're pleased with the results. And we've formed a really favorable agreement with Wonder, where we're able to have the units at about -- around cost plus 5% and then maintain the current cost around delivery, install and service. So it's just a huge win for us and able to still use that technology as we continue to scale, but at pretty much the same cost that we've had so far without the financial burden that it was causing.

Your next question comes from the line of Andrew Charles of TD Cowen.

Just first, one quick bookkeeping. On the 15 to 20 net openings for 2026, what's contemplated the number of closures for next year? And then my real question is it's good to hear the handheld is making a reappearance after you first talked about around a year ago. What were the key unlocks in the operational side to get it to the market test where I know you're going to figure out more on the operations side, but what were the key unlocks you did in this planning phase to get it to the market test?

I'll start with the net 15 store openings. So we've identified 2 that are going to close, and then we're also looking at lease expirations and being really diligent on if we should renew those leases. So we still expect about net 15. We've identified 2, but net 15 is our number.

And on the unlocks, I think we're -- we've tested this with consumers. We know we have a really, really killer product. The point of the market test is to make sure that we can operationalize it and really understand any impacts to throughput. So it's a bit early to talk about it, but we've run some internal testing and are very confident that we can come up with something that is accretive and incremental to the business, unlock new dayparts and really be a big acquisition driver for us. So it's something that we've known for a while. Jason, our COO and team are very confident that this is something that we can operationalize. But as I mentioned in the prepared remarks, the stage-gate process is really critical to getting this right, and that's why we are not rushing this out. We want to make sure both the product, offering and the menu assortment is right, the pricing is right, and most importantly, that we can operationalize this.

Your next question comes from the line of Rahul Kro of JPMorgan.

Firstly, kudos on making the changes to the protein portion increases, Jonathan, they're quite visible and consistently hitting the 100-gram scope. Happy to see that being executed well. The question is on the net cash proceeds after any tax components associated with the Spyce sale. Given the cost basis and factoring in stock in the initial purchase price of Spyce, can you give us a detail on the actual cash that would be realized on the balance sheet? And also, like does it impact the future IK mix given the hurdle rate, given the cost plus 5% comment you made, Jonathan? Any color on that would be great.

I'll take the second part of the question, and I'll let Jamie take the first. So in terms of the actual cost, I think it's actually a huge benefit to us because today, at our scale, there's only so many -- so much economies of scale we can achieve with the machine at a cost-plus model at just a very small 5%, which would be about $25,000 on the cost of the machine, we benefit from the economies of scale as they begin to scale production and also have access to future technologies. So we actually think this will help us bring the unit cost down, have them invest more in the R&D and innovation of potentially cheaper and more effective automation units. And so overall, a win-win in that scenario.

And then following up on the cash, we're still going through the tax analysis and the valuation. So I don't expect it to be a material amount of tax that we are going to pay. And then we're still going through the tax and legal fees, et cetera, but I don't expect any of them to be material.

Your next question comes from the line of Sara Senatore of Bank of America.

Jamie, I just -- I guess, one confirmation or clarification and then a question. I think you said that dinner is where you're seeing some softness. So I guess, does that mean sort of disproportionate? Some of what I've seen is that your lunch has actually been more vulnerable just because it's something where people can kind of pack and bring from home. So I wanted to understand the daypart impact, if you kind of control for sort of suburban or urban mix.

Yes. Sara, we actually are not seeing a slowdown in our lunch quarter-over-quarter. We're actually seeing a slight decrease. So really, it's the dinner time that we're seeing that decrease.

Okay. And then the question was on just -- again, on the sort of sale. What, I guess, is the impetus to doing that now? I mean, other than perhaps your cash position? I guess I asked because, Jon, to your point about being kind of subscale. My sense is that a lot of restaurants generally will outsource technology unless they're really big. And so I just wanted to understand kind of the thought process of developing tech in-house versus maybe just going forward, just deciding to just to the outsourcing approach.

Yes, absolutely. So when we bought Spyce originally, there was no automation platform that we could have bought from there. And so we took what was a nascent idea, really a prototype in a couple of stores. We perfected it for Sweetgreen. We've commercialized it. We've gotten the manufacturing set up, and we've now scaled it. And it's now in this year, over half of the new NROs, again next year. And we're really at that point where us fully owning it is not needed as long as we have a level of control and license around the technology, and now we can benefit from the economies of scale and future innovation under Wonder. So it not only provides cash and lowers our G&A in this critical moment, it allows us to focus on our business. And we believe over time, it will actually bring the unit cost of the technology down so we can put it in more and more restaurants.

Your next question comes from the line of Logan Reich of RBC Capital Markets.

I just had one on the unit growth guidance for next year and the pipeline. Obviously, pulling back a little bit on unit development here. But I guess like the question is, is there any potential for that number to creep a little bit higher in a scenario where same-store sales gets back to growth and you guys feel comfortable about the operations. Curious if there's any flexibility in the pipeline to maybe scale that number up a little bit higher for next year.

Yes, absolutely, there is. The decision was made, one, from a financial discipline perspective, but also a focus perspective as we really focus on menu innovation and store experience in order to inflect our transaction comp. We do have a very robust pipeline over the next couple of years, and we made the strategic decision to kind of cherry pick the best approximately 20 restaurants, but do have some flexibility depending on how things go to accelerate, and we are planning a reacceleration into 2027, not all the way to the 15% unit growth, but do expect some reasonable step-up from the 20-ish stores in '26 into '27. So if we are able to inflect comp and feel really good about our overall operations and how we're delivering on the experience, we do have the potential to slightly increase next year's unit count.

Your next question comes from the line of Brian Harbour of Morgan Stanley.

This is Kelly Merrill on for Brian. I'm just curious, can we get an update on loyalty and where that stands today? I think on the last call, you noted it as an uplift to the beginning of Q3. So just wondering if that's sustained throughout the quarter or if you're seeing anything different now?

Yes. We've been generally pleased with loyalty. Now we just hit our 6-month mark. We are seeing continued activations at almost 20,000 per week in terms of new customers, and we have seen some frequency increases of those loyalty members. We are right now in the process of really perfecting the different customer journeys and how we can get them to be more personalized and really understanding the different promo levers. One of the things you will see us do, especially in this -- in this kind of cost-conscious environment for consumers is lean a bit more on certain kind of breakthrough promos to drive acquisitions. So you'll see us trying and testing a bunch more things with a lot of discipline, making sure that it can be accretive. But still, I'd say, very early stages of the loyalty program. And over the next 6 months, we expect that to be more of a comp driver for us, especially as some of the overhang from the Sweetpass+ starts to fall off. And then again, it's really about how we leverage that data. Very excited about Zipporah, we call Zip being here, and her expertise in loyalty and CRM. And again, we see a lot of opportunity to kind of leverage that digital flywheel.

Your next question comes from the line of Jeff Bernstein of Barclays.

This is Anisha on for Jeff. With only 1 quarter remaining in the year, restaurant level margins were cut significantly. Can you break down what's driving that, if it's labor deleverage, commodity inflation or other factors?

Yes. So you're right. It's about half of sales deleverage. And then the next biggest piece is the protein increase. So we have about 140 bps in protein related to the increased portions of chicken and tofu. Those we plan to offset with supply chain initiatives and restaurant initiatives. And then we have tariffs, which we expect to hold at about 50 bps.

Your next question comes from Teddy Farley of Goldman Sachs.

One more on the loyalty program for me. Is the pricing and menu architecture review inclusive of a review of the rewards redemption stack for SG Rewards, just kind of making sure that you're competitive versus peers with value, not only on the core menu, but also with regards to the point redemption opportunities?

Yes, absolutely. It's a really good point. We've gone in with relatively modest programmatic benefits. So it gives us a lot of opportunity to move up and also leverage more on the personalized offers in CRM. So we are evaluating all of it, including the potential for tiers and other benefits for members. So the loyalty program will be a huge lever for us. The one thing I will add on loyalty, which it was in the prepared remarks, but we recently rolled out the ability to Scan to Pay. And the good thing about that is we're now able -- you're now able to very seamlessly use loyalty in-store. So we're capturing more -- since we've done that, we are seeing a step-up of customers using loyalty in restaurants. It also helps us from a throughput perspective. So a lot more improvements coming on that side. And generally, in our digital experience, we have a lot of exciting things planned over the next 6 to 12 months to continue to drive that digital flywheel.

With no further questions, that concludes our Q&A session and today's conference call. We thank you for your participation. You may now disconnect.