Operations

Sweetgreen makes progress toward profitability

Innovations like the fully automated restaurant and Sweetpass loyalty program are showing early signs of bottom-line boosting results.
Sweetgreen is planning more hearty options, like the Chicken + Chipotle Pepper Bowl. | Photo courtesy of Sweetgreen.

Sweetgreen reported its first profitable quarter as a public company on Thursday—at least based on adjusted earnings—saying innovations like automated restaurants and the subscription loyalty program are showing potential needle-moving results.

The Los Angeles-based chain said revenues increased 22% to $152.5 million for the June 25-ended second quarter, and the net loss narrowed to $27.3 million, compared with a loss of $40.5 million a year ago. But the chain’s adjusted earnings before interest, taxes, depreciation and amortization was $3.3 million, compared with an adjusted EBITDA loss of $7.8 million the prior year.

Same-store sales were up 3%, which was the result of a 4% menu price increase and a 2% increase in traffic, offset by 3% negative impact in mix that was attributed to early investments in the Sweetpass program, as well as a shift to in-restaurant ordering and pickup from native delivery.

Still, the largely positive results didn't match Wall Street expectations and Sweetgreen's stock price tumbled after market.

Sweetgreen CEO Jonathan Neman, however, was optimistic that 2023 could be the break-even year for the fast-casual chain. The company upgraded guidance, saying it expects restaurant-level margins of between 16% to 18% (up from earlier projections of 15% to 17%) for the year and adjusted EBITDA between a loss of $10 million and zero (versus earlier estimates of a loss between $13 million and $3 million).

Neman credited the company’s commitment to “disciplined capital-efficient growth,” saying second-quarter restaurant-level margins had improved by 185 basis points to 20.4%.

During the quarter, Sweetgreen opened 10 new restaurants, for a total of 205. The most notable among them is the new Infinite Kitchen location in the Chicago suburb of Naperville, Ill., which features the first fully automated makeline.

Neman said the company is pleased with how the robotic location is going so far, though it has only been open since May, and a second one is on the horizon.

The Infinite Kitchen has proven to be faster than other units, producing 400 to 500 items an hour, which is 50% more than a traditional restaurant’s front and digital makelines combined.

It also offers a better in-store experience, he added.

“Customers know when they order their meal, they will get it in under five minutes with consistent portioning and accuracy,” said Neman. “We believe that this speed of service and consistency is contributing to the Infinite Kitchen’s overperformance on both the top and bottom line.”

 The Infinite Kitchen restaurant is also less congested, he said, allowing team members to spend more time with customers. It requires about one-third fewer team members, and it has been easier to hire and retain people to work with the automated system.

In June, the first full month the Infinite Kitchen was open, the restaurant-level margin was 26%, which was significantly higher than any of the brand’s other new restaurant’s first month. And Neman said that will only improve as the restaurant continues to ramp.

Without revealing the initial capital investment for the automated units, Neman expressed confidence that they would “deliver an accretive return on capital anywhere we put them.”

A second Infinite Kitchen location—one that will be converted from an existing restaurant—is scheduled to open in Huntington Beach, Calif., at the end of the year. And Neman said more stores could see the technology as soon as next year.

Another innovation that Neman said is paying off is the Sweetpass loyalty program that launched in April, which he said is steadily growing in membership and driving incrementality. Sales from catering and the chain’s Outpost program, in which meals are delivered to office drop-off sites, also doubled year-over-year in the second quarter.

Neman also credited margin improvements to a new regional general manager model that was put in place at the beginning of the year to “create more empowerment at the restaurant level, get our teams closer to our customers and reduce support center expenses related to field oversight.”

Another 285-basis-point improvement in labor costs during the quarter was a result of an initiative in the spring to empower head coaches to spend more time on the floor, which helped boost throughput, lower turnover and improve retention.

Neman also said labor costs were shaved a bit as the company “upstreamed” some ingredients, like bringing in pre-made salad dressings, for example, to ease the burden on team members. Though Sweetgreen takes pride in scratch cooking in restaurants, upstreaming can improve quality and consistency if they are careful about what they change, he said.

And, in an effort to boost wages and benefits, Sweetgreen is launching tipping, both digital and in-store. The move will come first to restaurants in Northern California. By the end of the year, tipping will be systemwide, he said.

Following the success of the Chipotle Pepper Chicken Bowl—which prompted threats of a legal battle with rival Chipotle—Sweetgreen is bringing more hearty options to the menu, though Neman did not say what will be next. Feedback has been positive on new drinks and desserts, like the Crispy Rice Treat made with organic brown rice, quinoa and puffed millet, and more are coming, including warm dishes for the winter months.

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