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spk06: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Sweetgreen Inc. fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star 1. Thank you. It is now my pleasure to turn today's call over to Ms.
spk07: Rebecca Nunu. Please go ahead. Thank you, and good afternoon, everyone.
spk05: Here with me today are Jonathan Neiman, co-founder and CEO, and Mitch Reback, CFO. Before we begin, we have a couple of reminders. We issued our earnings press release for the fiscal quarter ended December 26, 2021, after the market closed today, and we will file our Form 10-K for the fiscal year ended December 26, 2021, in the upcoming days. These documents are available and will be made available on our Investor Relations website. During this call, we will be making comments of a forward-looking nature, including statements regarding our financial outlook for the first quarter and for the full fiscal year 2022, our expectations regarding financial and business trends, our growth strategy and business aspirations, and our expectations regarding the impacts of the COVID-19 pandemic on our business, each as more fully described in our earnings release. 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 the Perspectives, filed by the company in connection with its initial public offering and our upcoming Form 10-K. These forward-looking statements are based on management's current business and market expectations. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are an 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, which is available on our Investor Relations website. With that, it's my pleasure to turn the call over to Jonathan to kick things off.
spk12: Thank you, Rebecca, and good afternoon, everyone. We're excited to be with you here today as we begin our journey as a public company. We typically start meetings at Sweetgreen by sharing what we call a moment of gratitude. I'd like to do that here and offer my thanks to our team members as well as our network of more than 200 sustainable farmers and suppliers who partner with us every day to power our mission of building healthier communities by connecting people to real food. Their passion and purpose has been instrumental in helping us deliver a strong financial performance in our first quarter as a public company. 2021 was a record year for Sweetgreen, with revenue of $340 million, an increase of 54% from fiscal year 2020. Our performance demonstrates the strength of our business, and we believe we are well positioned to create long-term, sustainable shareholder value. Given this is our first earnings call, I'll begin with our long-term vision. When Nicholas, Nathaniel, and I opened the first Sweetgreen restaurant in 2007, we were three college students who were simply looking for a healthier way to eat. We saw an opportunity to create a business where quality was never sacrificed for convenience. Throughout our journey, we remain committed to this long-term vision to redefine fast food globally. Our goal is to be as ubiquitous as traditional fast food, but with the transparency and quality that consumers increasingly expect. We believe we are well positioned to be the category-defining food brand of our generation. We sit at the intersection of powerful consumer trends, a greater focus on health and wellness, a connection to purpose-driven brands, and a rapid adoption of digital connectivity. Studies show that nearly two-thirds of Americans want to eat healthier, and nearly half of all Americans are planning to incorporate more plant-based foods into their diet. Sweetgreen is poised to benefit from this shift. Our food ethos is rooted in food that is delicious, nutrient-dense, and sustainable. We serve a healthy, craveable, customizable menu that features fresh vegetables, whole grains, and lean proteins that can accommodate any flavor profile or dietary preference. Our food ethos gives us license to expand our offerings beyond salad and warm bowls, including warmer, heartier plates and sides to grow our gate parts and basket sides. Over the next few years, we will invest in executing our mission at scale through four strategic pillars. First is to expand and evolve our footprint in new and existing markets. The second is to enhance our digital experience with a focus on our own digital relationships. Third is to solidify our brand as the industry leader. And the fourth is to obsess over the team member experience. Here is how we believe each of these pillars will be critical to continuing our competitive advantage. Rapidly expanding and evolving our footprint will allow us to connect more communities to real food. We have a proven portable restaurant model and brand that resonates across geographies. In 2021, we successfully opened 31 new restaurants and entered two new markets, Atlanta and Dallas. We ended fiscal year 2021 with 150 sweet greens. While we are still in the early stages of our growth journey, we believe sweet green has tremendous white space. Since fiscal year 2014, we have more than 5x our footprint and are on track to double in the next three to five years. We see a clear runway to 1,000 restaurants by the end of the decade. In 2022, we anticipate opening at least 35 new sweet creams in two to three new markets, as well as in existing markets to densify our footprint. This year to date, we've opened six restaurants and one new market, San Diego. As part of expanding our footprint, we are exploring new restaurant formats to enhance convenience. We also enable convenience through our digital ecosystem. allowing us to add new customer channels, drive frequency, and additional restaurant volume. At the center of this ecosystem is our award-winning app. Early in our history, we realized that digital connection was essential to deepening our customer relationships. We were a pioneer with the introductions of digital pickup in 2013 and Outpost, our B2B delivery model in 2018. We were an early mover in developing our own native delivery experience in 2020 alongside marketplace deliveries. Whether our customers visit their local Sweetgreen, want a fresh meal delivered to their home, or grab lunch on an outpost shelf at work, they can get their personalized order in a convenient, frictionless way wherever they are. We consider ourselves an industry leader in the shift to digital. Digital sales represent 67% of our fiscal year 2021 total revenue. Two-thirds of those digital sales came through our own digital channels, our app and website. which provides the most seamless and personalized ordering experience for our customers. Our high percentage of own digital revenue contribution has several strategic advantages. These include greater order frequency, larger average order value, and access to data to better understand consumer preferences and behavior. We have a clearly defined strategy to drive own digital acquisition. Make our app the best way to order Sweetgreen, offer the best value in app, and enable exclusive experiences, including our seasonal menu, personalized promotions, curated collections, and chef and influencer collaborations. As an example, today you can only find esports gamer and Sweetgreen customer Valafrey's custom bowl on our own digital channels. Next season, you can only order our delicious chimichurri plate on the Sweetgreen app. Habituation is a key advantage as our healthy, customizable menu offering and digitally frictionless experience offers the potential for increased occasions versus traditional fast food. We are at the start of our journey to create tailored promotions and loyalty to drive incremental customer frequency and improve customer spend. In January, we piloted SweetPass, a limited-time offer subscription. We exceeded our pilot expectations across all customer cohorts, particularly with new and last customers, and look forward to sharing more takeaways on our Q1 earnings call. As a first mover in the industry, we're always looking for new and creative ways to engage with our guests and are excited to continue to test and learn how we can offer flexible options that fit their lifestyle, including digital challenges, personalized offers, and membership options. Our delivery business continues impressive growth as well. To enable a better delivery experience for our customers, we transitioned in November to DoorDash as our primary courier partner for delivery orders made via the Sweetgreen app. It was a smooth transition that resulted in improved per delivery rates for Sweetgreen and faster delivery times for our customers, leading to higher customer satisfaction within our own delivery channel. Additionally, we are testing the expanded delivery radii to reach more customers than our marketplace channel. Our brand is designed to inspire consumers to live healthier lives without compromising their values. This allows Sweetgreen to lead conversations on the importance of what we eat and the impact it has on the environment. From our music festival, Sweet Life, in 2011 to 2016, to our collaborations with like-minded partners such as David Chang, Malcolm Livingston, and Naomi Osaka over the past 15 years, We've maintained our relevance by incorporating lifestyle, music, and social impact into our mission urban brand. Our goal is to connect food and culture to help redefine what the fast food industry will look like in the years to come. Enabling all these strategies is our ability to operate great restaurants, and that starts with people. Our team members are our most important ingredient, and we will continue to be a leading brand because of them. Happy team members lead to happy customers. We nurture this in several ways, including investing in our talent, continuously simplifying our operations, and investing in tools to optimize execution. Our almost 5,000 team members joined Sweetgreen to be part of a fast-paced, mission-driven company with significant growth opportunities. We obsess over their experience, fostering development of lifelong skills and helping advance their careers. In as few as three years, team members can become a head coach, our version of a restaurant GM, and earn a six-figure package, including equity in Sweetgreen. In October 2021, Sweetgreen was named number 18 on Newsweek's Top 100 Most Loved Workplaces. The investments we make in our people return tangible benefits, including better customer experience and improved restaurant operations. Additionally, we have invested in technology to empower our people. Our team members bring our food ethos to life by freshly preparing our ingredients in each of our restaurants daily. To optimize for food safety, execution, and efficiency, we've simplified our menu and digitized processes to help manage daily inventory to ensure freshness, guide recipe preparation and cooking times, as well as increase accuracy and speed of service. We believe that these strategic pillars fuel our flywheel for growth and profitability. Our brand resonance combined with a massive TAM, menu designed for habituation, digital channels designed to increase customer frequency, and restaurant productivity with a highly passionate team makes for a very valuable and scalable model. I want to end by again thanking our team members for working tirelessly to help us deliver our mission of building healthier communities by connecting people to real food. They are our most important ingredient and are key to long-term success. Now I'll hand it over to Mitch to review our Q4 financial results.
spk04: Thank you all for joining us today. I'm excited to be here with you for our first earnings call. The IPO in November marked a major milestone for Sweetgreen as we enter our next growth phase. I want to begin by thanking the financial community and our investors for their support. We are well capitalized to execute on our long-term strategic priorities. We are happy to report strong fourth quarter results, even with the continuing impact of COVID-19. Total revenue in the fourth quarter reached 96.4 million, up from 59.2 million in the fourth quarter of 2020, growing 63% year over year. This growth is primarily driven by same-store sales growth of 36%, of which our transactions and mix was 32%, and a price increase of just under 4%. For the fourth quarter, our digital mix was 65% of total revenue, and our owned digital revenue, that is transactions made on the Sweetgreen APRA website, was 43% of revenue. With every owned digital purchase, we understand who our customer is, when and where they visit us. We are able to leverage data for personalized marketing, resulting in higher customer frequency and higher average order value. Our digital revenue as a percent of total revenue fell slightly given the positive growth of our frontline channel, which we view as healthy for our overall business. As our in-store volume has continued to recover from COVID through 2021, we are very pleased with the stickiness of our delivery business. During the fourth quarter, we opened 10 new restaurants, up from four in the fourth quarter of 2020. Since this is our year end call, we wanted to reflect on how the class of 2021 performed. In total, we opened 31 restaurants in 2021. 13 of these stores are urban and 18 are suburban and residential. We opened up the following new markets, Atlanta with three restaurants and Dallas with one. We are currently projecting that as a group, the class of 2021 new restaurant openings will at least achieve our year two revenue targets for new stores. between $2.8 and $3 million. Our average unit volume grew to $2.6 million from $2.2 million in 2020. Restaurant-level margins for the fourth quarter were 13%, rebounding from a negative 4% in 2020. The margin improvement was largely the result of sales leverage, the impact of our price increase, and the elimination of our loyalty program. These factors led to an improvement across all major line items, food and beverage, labor, occupancy, and other costs. For reconciliation of restaurant-level margin to comparable gap figures, please refer to the earnings release. Food and beverage and packaging costs were 28% of revenue, an improvement of 170 basis points from 2020. We did experience some inflationary pressure on commodities, which were more than offset by improvements in packaging costs. We anticipate some inflationary pressures in 2022, particularly coming from freight expenses. At this time, we believe as a percent of sales, our food, beverage, and packaging costs for 2022 will be in line with 2021. Labor-related costs were 32% of revenue, an improvement of 560 basis points from 2020. This margin improvement resulted from reducing the complexity of our menu and simplifying our label scheduling, with some of these gains being invested into higher wages. At this point in time for 2022, we believe labor and related costs as a percentage of revenue will be in line with 2021. Occupancy and related expenses were 15% of revenue, an improvement of 460 basis points, This improvement is the result of sales leverage from higher volumes. Our G&A expense for the quarter was $47 million or 48% of sales compared to $27 million or 46% of sales in 2020. This $20 million increase in G&A is primarily attributable to a $21.5 million increase in stock-based compensation expense and $300,000 of non-reoccurring SPICE acquisition costs. Excluding the stock-based compensation and SPICE acquisition costs, G&A for the quarter was $24 million compared to $26 million in 2020. This decrease in G&A was largely the result of lower costs associated with one-time COVID expenses, offset by higher public company costs. Over the past several years, we have made significant investments in G&A, excluding stock-based compensation, primarily in technology and our people. We believe that we will continue to experience meaningful sales leverage in G&A, excluding stock-based compensation moving forward. For 2022, we anticipate stock compensation will be around $82 million. Our net loss for the quarter was $66 million up from $41 million in 2020. The increase is attributable to a $22 million increase in stock-based compensation. There was also a $17 million increase in other expense, of which $13 million is due to a one-time non-cash adjustment related to the change in fair value of our warrants issued prior to the IPO. As the warrants converted to common stock at the IPO, there will be no further adjustments related to the warrant valuation. Additionally, in the quarter, we incurred $4 million of non-cash expense related to the increase in fair value of our contingent consideration issued as part of the SPICE transaction. Adjusted EBITDA for the quarter was a loss of $14 million for an improvement from the 2020 loss of $29 million. This improvement is the result of higher sales, improved restaurant-level margins, and lower adjusted G&A. For reconciliation of adjusted EBITDA to the comparable gap figures, please refer to our earnings release. Now looking forward to 2022. Given Sweetgreen is a long-term focus company, we plan only on giving annual guidance. However, given the timing of this earnings report in relationship to the quarter end, we are issuing a one-time quarterly guidance for the first quarter of fiscal year 2022. Like most businesses during the beginning of the quarter, we saw significant impact from Omicron. The impact is broadly felt across many areas, including lower demand, reduced staffing, and in some cases leading to a limited operating hours and reduced line capacity. Additionally, adverse weather on the East Coast impacted sales. By mid-February, these impacts dissipated, and we returned to our pre-Omicron growth trajectory. Taking all of this into account, we believe in the first quarter we will deliver seven new restaurant openings in the first quarter of 2022, revenue ranging from $100 million to $102 million, same-store sales growth between 30% and 33%, Restaurant-level margins between 10% and 11%. An adjusted EBITDA loss of between $20 million and a loss of $18 million. For fiscal year 2022, we anticipate the following, assuming no additional COVID-19 headwinds. At least 35 new restaurant openings. Revenue ranging from $515 million to $535 million. Same-store sales growth between $20 and $26. restaurant level margins between 16 and 17%, and adjusted EBITDA between a loss of 40 million and a loss of 33 million. In closing, we are very pleased with our 2021 results. We are confident about how Sweet Queen is positioned and our ability to scale our mission of connecting people to real food. We have built a great brand, a solid infrastructure across our people, supply chain, and technology that we believe positions us profitably grow our business, and create shareholder value. I want to end by extending my gratitude to our team members in the Restaurant Center Support Center who have worked tirelessly during these challenging times to make 2021 a successful year. With that, I'll turn the call back to the operator to start Q&A.
spk06: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Jared Garber with Goldman Sachs. Your line is open.
spk02: Hi, thanks for taking the question and congrats on a strong quarter, specifically related to some of the Omicron headwinds. I wanted to get a sense, Mitch, you guided to basically in-line unit growth next year in 2022. And I think the fourth quarter came in just slightly ahead of where you were expecting a couple months ago. Can you talk about some of the headwinds that you're seeing or lack thereof in terms of the supply chain and opening those new restaurants? We've obviously heard a lot about equipment delays and labor and staffing challenges as it relates to opening. So I wanted to just get a sense of your comfort and your confidence in hitting that number for 22. Thanks. Hey, Jared. How are you?
spk12: It's Jonathan. So as you noted, we've definitely seen some challenges as related to new openings from a construction and labor perspective. But having said that, we feel very confident in the guidance of at least 35 new stores. So I want to give a huge hats off to our real estate and development teams, really building a healthy pipeline of just iconic locations. And for us, it's about optionality. As we've opened in more and more markets, we have more places where we can continue to grow the brand. And I think there's been a bit of a shift in how we've been received in new markets, not just from a customer perspective, from a landlord and community perspective. So we're starting to see, you know, better real estate, which creates a flywheel for us. And I'll say, despite the challenges around supply chain and labor from a construction perspective, we feel really confident in the 30, at least 35 new stores for the year.
spk07: Great. Thanks so much.
spk06: Your next question is from Ivan Cole with JP Morgan. Your line is open.
spk11: um hi thank you uh how are you guys um in the prepared remarks i mean i think i heard you know labor being flat 22 versus 21 and i wanted you know to kind of dive into that a little bit i think your your guidance assumes some pretty significant average unit volume increases 22 versus 21 so you know labor leverage might be expected um you know in such an average unit volume increase so Are there any significant changes that are happening beneath the surface in terms of the employee that you're attracting, what you're doing on the retention side? Please comment on your turnover numbers, if you can, both at the hourly and the manager level. Or if you're beginning to change your human resource practices in some way, that might be leading to higher labor costs, at least as a percentage of sales, than what this hotline would otherwise suggest. Thanks.
spk12: Yeah, absolutely.
spk11: Hi, John.
spk12: How are you? So as you've seen across the industry, labor has definitely been a challenge, both largely due to the pandemic and a lot of the impacts we saw there, as well as a lot of the wage inflation that we've seen. So we're not immune to that. And I'll have Mitch talk a little bit about those inflationary pressures and price offsets that we've had. To your point, there's definitely a lot of sales leverage there. Having said that, the recovery that we are expecting base is not significantly more than the recovery we've already seen. We're looking just to return really to pre-Omnicom recovery levels. But we do need a little bit more recovery to hit our numbers. From a people perspective, we've done a lot. Last year we made a few really important moves to set us up. One was what we call a simplification around our store structure. went from about 25 different job codes inside of our restaurant into four. In doing so, we cross-trained all of our team members, so it created a much more resilient labor model, where team members have been cross-trained and can work across different positions. What this does is it helps us as we flex up and down. Beyond that, we made a number of investments in our team members, whether that be holiday pay, taking average wages up. We introduced a retention grant at the end of last year, And we also have been investing in equity in our team members. Last year, right before the IPO, we did what we call a gratitude grant to every single team member working at Sweetgreen. You know, we have this principle, leadership principle at Sweetgreen of acting like an owner. And for us, it was a really proud moment to actually make every team member an owner there. And our goal is not just on the compensation side, but on the environment side and making Sweetgreen a great place to work. So one of the things that really sets us part in the industry is the opportunity around growth and development. We're in the very early stages of our growth, 156 restaurants, and we've developed a clear path to the head coach, which is our GM from a team member. You can join Sweetgreen and within three years go from a team member to a head coach making $100,000 plus package. So a lot of things going on in how we develop our team members and really support them.
spk03: Hi, John.
spk04: Let me just fill in with a little bit of the data to answer your question. We took a 6% price increase at the beginning of the year, and in terms of wages, we're envisioning approximately a 7% inflation factor in 2022. As a result of that, we held our labor as a percent of revenue at 32%. 2022 in line with 2021.
spk03: In short, a slightly higher wage pressure will offset any gains from the leverage we've received from the higher AUPs.
spk11: Okay. All right. And if I can, can you, you know, I don't know if you want to do it once a year or if you are prepared to do it once a quarter. Can you talk about the turnover numbers, you know, that you have at the staff and the head coach, you know, level, just, you know, kind of where that's trending. And, you know, if you got caught up in any of the, you know, kind of great resignation, if you will, that, you know, this, the overall industry has seen over the past six months.
spk12: Yeah, John, what I can say is a few things. So there was definitely a spike last year due to a few things. One, Omicron and a lot of them, you know, called the great resignation pressures that the whole industry saw. Adding to that a lot of the vaccine mandates, that were in place, which forced us to make some changes to our team. Having said all that, we've seen our turnover stabilize and are seeing our average tenure increase. So today, our average tenure for our head coach is at two and a half years, and our average team member tenure is at one year. So we're seeing definitely some pressure in the first 90 days, but as team members make it past 90 days, we're seeing a lot of stickiness. And I think that says a lot about the growth opportunities we offer for our team members and the environment, culture, and lifelong skills that we're providing for them. So again, I'd like to, you know, hats off to our store leaders and our field leadership team, as well as our people team for some really amazing work in a really challenging environment.
spk04: John, one thing I'd build on that is, as we saw pressures building into the fourth quarter, we put in place a retention bonus program which ran through December through January to really hold the labor in place as we saw a lot of disruption in the labor market.
spk03: That program was successful, and what we've seen recently is really an improvement in the flow of applicants and the labor market.
spk11: Thank you very much.
spk06: Your next question comes from a line of John Glass with Morgan Stanley. Your line is open.
spk09: Thanks. Good afternoon, everyone. First, would you mind commenting on the recovery by sort of urban versus suburban markets? You know, was the comp led by recovery in urban? Maybe you can comment on the Manhattan units, for example, how the suburban markets recover. Just getting a sense of what's driving the sales and how those different cohorts are performing. Thanks.
spk03: Hi, John. Let me say, you know,
spk04: In terms of the suburban and urban splits of the business, we don't disclose specific numbers around them. What we found in the fourth quarter was the fastest growing piece of our business was the urban segment. And it was specifically in the midtown Manhattan market. But we saw very rapid recovery. And we were very, very pleased with that. The urban stores, certainly if you compared them to 2019, we would say are
spk12: fully recovered to those levels that we saw in 2019 yeah if i could just build on that you know what gives us some confidence here is made a lot you know some moves during the pandemic specifically around our digital channels and building out our delivery channel um and and so when you take the growth of that channel and then look at the actual recovery one metric we get back closely is the castle office recovery data today nationally that's at 36 in new york it's about 30 percent And so we're not expecting that to come anywhere near 100%, but for us it doesn't need to. So we feel really good about where we sit today. And with all of the removal of mask mandates and return to all of the states that are being said, it gives us a pretty good line of sight and confidence that the urban recovery we need is there for us.
spk09: That's very helpful. Can you just talk about what you're most excited about for 22? You mentioned subscription, and I know you maybe want to talk about that later, but is that a key part of the 22 plan? Is menu innovation and maybe what parts of menu innovation is important to 22? Are you thinking about bringing beverages back online or more beverages? What are you doing internally, I guess, to drive sales and kind of what are the rank order of things you think are most important in 22 aside from just recovery from COVID?
spk12: Yeah, great question. So there's a number of things that we're working on. You touched on loyalty and SweetPath. We ran a pilot in January, something we called SweetPath, and it was a membership test for us. Essentially the way it worked, if you spent $10 and in exchange you got $3 off every day for 30 days, The results really exceeded our expectations across all cohorts, especially with new and lapsed customers and low-frequency customers. So it gave us a lot of interesting data and things for us to consider as we look forward and test and iterate our way to what a future loyalty could be for us. Beyond that, driving our digital sales is a huge opportunity. So in the prepared remarks, you heard us talk about delivery and the move towards DoorDash. You know, through the optimizations around that channel, we're offering much better quality of service, faster delivery times, more on-time rates, better economics for us and our customers, and we're beginning to test into larger radius, delivery radii. So that's another channel that we're continuing to push on. Another place where we're continuing to push is around personalized promotions. We've done some really interesting work around around this idea of personalized promotion. So giving you the right promotion at the right time, whether that be by channel, by day part, or by menu. So we have some cool things coming out throughout the year, and it's a constant test and iterate approach. And the data that we have and the high digital penetration allows us to really flex that muscle. From a menu perspective, we're constantly optimizing and innovating. So I break that up into three categories. Three buckets. The first being constant optimization of our menu. We're constantly looking at both our bowls and our SKUs and figuring out ways to make them better. So you'll see constant improvements there throughout the year. The second is, you mentioned, is around attachment. We've actually had a lot of success around some of our new beverage programs and some of the sides that we've been testing. So expect some more news there in the coming quarters around attachment. And then the third is around new menu innovation. Within new menu innovation, we think about it really in two ways. One, how can we push our core menu to acquire new customers? For us, that's a pretty big push towards heartier food. We've had a lot of success with our plate. Really, the hot honey chicken plate has been a huge success for us. And so we're going to continue to push on heartier food specifically within plate and think that'll do well for us in broadening our consumer base. getting us a little bit, being more relevant at dinner, as well as creating more frequency. We also have what we call digital exclusives. So within our menu, we have a number of menu items that you can only have, that are only offered on our own digital channels. And again, that's where we can test a number of new things kind of mid-season using a lot of data that we're able to collect. And what's amazing about the digital exclusives is we're able to do them without any complexity added to the restaurant. So it's a very disciplined approach to creating newness for our guests without any additional complexity for our team members. The last thing I'll say, and definitely not least, probably most importantly, is running great restaurants. Our people, great leadership, and running a great restaurant drives loyalty and drives AUVs. And so we're really focused on developing great leaders Retaining great talent and creating great customer experiences. And we believe some of the just execution and executing brilliantly within our restaurant is also going to be a sales driver for us.
spk09: Thank you so much. Thank you.
spk06: Your next question is from the line of Andrew Charles with Cowan. Your line is open.
spk10: Great, thanks. John, that's a great segue to my question. You know, you guys caught up the stickiness of digital sales as the frontline reopened. I know it ticked down a bit, but, you know, it really was sticky. Where do you envision the long-term digital mix settling out? You know, I'd imagine that you'd love to get it as high as you possibly could, but, I mean, what do you think is a realistic level, just given proactive efforts that you have in place to build this via digital-only innovation and initiatives like SweetPass that, you know, it sounds like we're going to see more to come on that.
spk12: Yeah, so maybe what I would say, Andrew, and good to hear from you, is for us, the frontline coming back and our overall digital revenue going down is actually a very good thing for us. What I'd say is our restaurants are one of our best customer acquisition vehicles, and we have very clear ways and strategies and tactics of moving frontline customers and moving them on to our digital channels. And we understand what happens when we do that. Once we take a frontline customer and move them to digital, They're coming at least 1.5 times more frequently, and they're spending 20% more per transaction. Once we move them to a two-channel customer, they're coming two and a half times more. So for us, there's a healthy ecosystem of having that customer kind of discover us on the front line and then being moved to a digital customer. Over time, we're going to continue to lean into a lot of the strengths we have from a digital perspective. Today, we do things like digital exclusives. Our menu and our delivery is cheaper on our. It's more affordable for our customers on our native app than it is on marketplaces. And we're going to continue to invest in better experiences to make the Sweetgreen app the best place to order Sweetgreen. In many ways, we're going to have reasons for you to use our digital experience beyond that you can't get in the restaurant itself. And we already have some of those. So we're pretty confident in continuing to hold that number, but we're not really stuck. We're not too worried and hung up on that number slightly going down because a lot of we see that as a good thing for the business.
spk10: That makes total sense. Mitch, I appreciate the detail on labor inflation that's expected to be 7% in 2022. You called out, I just want to turn to COGS. I mean, you called out a recent spike in COGS and got a 2022 COGS in line with 2021 levels. What's the underlying level of COGS inflation embedded in 2022 guidance? And do you comment specifically on avocados and just if recent events there have led to heightened inflations versus your prior expectations?
spk03: So let me say that looking back, in 2021, we had approximately 3% inflation in food and beverage.
spk04: And we offset that with price and some improvements we made in sourcing. When we look out to 2022, we see Approximately a six percent inflation rate which has been offset with the price increase we talk You know We're fortunate that we don't source beef and other items that have had a lot of rapid inflation And most of our sourcing is local and organic providing some degree of insulation from some of the recent cost pressures. You specifically mentioned avocados. We do see some pressure in avocados beginning of this year.
spk03: But according to our supply group, we actually see that completely reversing towards the back half of the year.
spk12: Yeah, if I could just add one note on that. I think the fact that we do not serve beef in our restaurant is a huge advantage for us. For us, we do it more from a food ethos perspective and a sustainability perspective, but there's been a lot of pressure on beef prices, and it's one thing that we're isolated from.
spk10: Very good. Thanks, guys. Thank you.
spk06: Your next question comes from the line of Brian Bittner with Oppenheimer. Your line is open.
spk01: Thanks for the question, and congratulations, guys, on your first earnings call here. I wanted to also stay on margins. The margin outlook for 2022 is very impressive, particularly given these inflationary pressures. But as you think about catalysts to improve margins in longer term past 2022, where are the top drivers there? I know sales leverage is a big driver, but outside of that, what are the top drivers? And how impactful could automation be to your margin path as you eventually integrate the SPICE acquisition?
spk03: So let me start off with that one. Thank you for your comments. You know, we see the business continuing to have margin expansion over the next few years.
spk04: We have targeted approximately a 16% margin at the restaurant level this year. Part of the improvements in margins you mentioned are largely coming out of sales leverage. So you know we operate in five channels in our stores. In-store, pickup, native delivery, marketplace delivery, and outpost. And we really have never operated all five channels in a non-pandemic environment. So we're starting to see some sales lift from that.
spk03: And we think that will propel us forward for several more years to come.
spk04: And we think that that's just going to be an accelerant on our margins. In addition to which, John talked about revamping our loyalty program and moving into personalization. So we see a major lift in volume coming from the change in our promotional program. You know, in addition to that, at the restaurant level, we've got a lot of work around what we call our operations simplification initiative to really streamline the way we operate our actual restaurants. Both of that comes from a simplification of labor classifications that's given us more flexibility in labor scheduling, and in addition to which, some sourcing changes that and be margin accretive over time. We're very confident on the long run margin. As you know, we did make the SPICE acquisition. SPICE acquisition is a major acquisition in terms of changing the labor model.
spk03: And at this point, we really don't have a lot to add to that except to say we're very pleased with the progress we've seen with our SPICE acquisition. And at this point, time is certainly on time. Great. Thank you.
spk06: Your next question is from Chris Carroll with RBC Capital Markets. Your line is open.
spk13: Thanks for the question, and good afternoon, and great to hear from you all. Mitch, I think you mentioned additional pricing actions at the beginning of the year. So I was hoping if you could provide an update just kind of philosophically how you're thinking about pricing today, perhaps how customers have responded to pricing actions, and to what extent you think you have further pricing power should cost headwinds last longer or greater than anticipated?
spk03: Thanks, Chris, for the question. Good to hear from you. Let me kind of first answer that with a little bit of a historical perspective. We believe as a company that we have a lot of pricing power with
spk04: very cult-like following with a lot of customer love that we built through marketing over many, many years. Our customers can taste the difference in our product and the freshness in our product, and they also highly value the convenience we offer them through our technology with our ordering and really seamless pickup. So we do believe we have a lot of pricing power. We also are very cognizant that our mission is to connect more people to real food, and as such, we would like our price points to be accessible. So when we look at our pricing architecture, what we've done in the past few years is spread out our price points to be sure we always maintain high-value entry price points to bring new customers in. So we think that we kind of have the correct pricing architecture in place. We do have a lot of price power. We will, in our view, use that judiciously because we certainly want to continue to connect with our customers.
spk03: But if need be, we are certainly prepared to use some nominal price increase towards the middle back half of the year to protect margins in the event we see inflation run away.
spk07: Great, thank you.
spk06: And your final question comes from the line of Sharon Zakfia with William Blair. Your line is open.
spk00: Hi, good afternoon. I appreciate the commentary on the class of 21. I was also curious on how the digital spend is ramping in that class, maybe relative to prior classes. And then on the outpost, I think you ended the third quarter with around 350 reopened. Where are you at now for outposts, and how do you expect that to ramp in 22?
spk12: Hi, Sharon. Thanks for the question. So I'll start with the outpost part, and then I'll get to the digital and the news stories. So we've actually been pleasantly pleased with outposts. For us, what's interesting about outposts is it's a bit of a leading indicator on return to office. And so it's been ahead of our expectations. We're today at over 500 outposts and are seeing some really nice, you know, kind of like record revenue on outposts that, you know, above and beyond where we expect it to be at this point in the recovery. So for us, it's still very early in the world, you know, in office coming back, which is the primary use case for outposts. But overall, overall, Today and more and more launches have the signups are accelerating.
spk04: We have that in 17 launching next week alone That So sure, let me take the second part of your question, which is how do we see the digital ramp in our new stores? It's very interesting. We see our new stores adopting our digital ordering an app at a much faster rate than the historical stores have done and
spk03: As a result, when you look at it as a percent of revenue, the new stores are roughly in line with the average, and that happens really within approximately a 60- to 90-day period of our opening. So we're very pleased with the progress we see.
spk00: Okay, great. Thank you.
spk06: There are no further questions at this time. It is now my pleasure to turn the call back over to Mr. Jonathan Neiman, CEO and co-founder.
spk12: Thank you. I just want to take a moment to thank you all for joining us on our inaugural earnings call. We really believe we have the winning recipe for long-term growth and shareholder value creation. If I can leave you with one major takeaway about Sweetgreen is that 2021, and in particular Q4, which to be honest is typically our most challenging quarter because of the seasonality in our business, shows the strength of our product, our brand, and our mission. As the country has started to emerge from the pandemic in the second half of 21, we saw significant improvement in our revenue, chain-source sales, and restaurant-level profits, and we firmly believe that this is just the beginning of the recovery. As we look out in 2022, we are optimistic. While we experienced some choppiness with Omicron in the first four weeks of the quarter and there are larger global macroeconomic forces at play, we are confident that the remainder of 2022, combined with our focus on execution as we scale, provides a strong indication of what we can expect in 22 and beyond. So thank you all for joining us on today's call and on this journey. It's only the beginning as we redefine fast food.
spk06: Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.
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