For Sweetgreen, margins remain a big hurdle

The fast-casual, in its first earnings report as a public company, said it expects its first-quarter restaurant-level margins to be between 10% and 11% despite growing sales.
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Margins remain a major issue for Sweetgreen.

The fast-casual salad chain on Thursday released its first earnings as a public company, reporting restaurant-level margins of 13% for the quarter ended Dec. 26.

But Sweetgreen, which went public in November, said it is forecasting margins between 10% and 11% for the first quarter, given the pressures of omicron and inflation on its business. For 2022, the chain said it hopes to see margins between 16% and 17%, “assuming no additional COVID-19 headwinds.”

That would return Sweetgreen to pre-pandemic levels, in which margins were 16%.

The 156-unit chain raised prices 6% at the beginning of the year.

“We do believe we have a lot of pricing power,” Sweetgreen CFO Mitch Reback told analysts. “We would like our price points to be accessible.”

For the quarter, Sweetgreen saw average unit volumes of $2.6 million, up about $400,000 from the year before. Pre-pandemic, though, the chain said it had $3 million AUVs.

Sweetgreen, which has yet to turn a profit, reported a loss of $47.8 million in the fourth quarter. Total revenue was $96.4 million, up 63% from the year before. Same-store sales rose 36% over the prior year.

The strong sales apparently impressed investors. The company stock closed down more than 11% on Wednesday. But it soared more than 17% in after-hours trading. 

The chain set some ambitious growth goals, saying it has the whitespace to grow to 1,000 restaurants by the end of the decade and that it intends to double its units in the next three to five years.

“We’ve definitely seen some challenges as it relates to new openings, with construction and labor,” CEO Jonathan Neman said.

Neman said labor has also been a challenge, largely because of pandemic surges and wage inflation.

Last year, Sweetgreen simplified operations from 25 job codes down to four, and cross-trained all employees on all tasks.

“It created a much more resilient labor model,” he said.

Sweetgreen ditched its loyalty program in 2021 but tested a new subscription program called Sweetpass.

Customers paid $10 for a monthly pass that gave them a $3 credit off each purchase.

“The results really exceeded our expectations,” Neman said, adding that new, lapsed and low-frequency customers were especially drawn to the subscription.

Executives said they are hopeful Sweetgreen’s margins will improve, especially as COVID becomes less of an issue.

Reback noted that the company operates five sales channels—in-store, pickup, third-party delivery, native delivery and Outpost office building drop-offs.

“We have never operated all five channels in a non-pandemic environment,” he said. “We see the business continuing to have margin expansion over the next few years.”

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