Sweetgreen, Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to the Sweetgreen Second Quarter 2022 Earnings Conference Call. And please be advised that this call is being recorded. And now at this time, I'll turn things 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. These non-GAAP financial measures 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. Last week, we celebrated Sweetgreen's 15-year anniversary. On August 1, 2007, just months after graduation, Nicolas, Nathaniel, and I opened our first Sweetgreen in a 500-square-foot old burger shack in Washington, D.C. While we have grown and evolved a lot, a few things have not changed: Our mission of building healthier communities by connecting people to real food and our long-term commitment to being a positive force on the food system while creating a sustainable and durable branded business. I want to take a moment and thank all of our team members, past and present, who have joined us along the journey and made Sweetgreen what it is today. In the second quarter, we reported sales of $124.9 million, representing a 45% year-over-year increase, fueled by same-store sales growth of 16%. Total digital sales represented 62% of our total Q2 revenue, with approximately two-thirds of those sales coming via our own digital channels. Average unit volumes grew to $2.9 million, up from $2.4 million at the end of the second quarter of 2021. Most importantly, profitability improved. Restaurant-level margins were 18.5% for the quarter, up from 14.9% this time last year and up from 13% from the first quarter of 2022. I want to give a shout-out to our restaurant and support center teams for their outstanding execution. Our adjusted EBITDA loss was $7.4 million in the second quarter, narrowing from the loss of $13.8 million this time last year and more than halving our first quarter 2022 loss of $16.5 million. This meaningful improvement demonstrates the leverage of our model and our team's operational discipline. While we had a strong second quarter, we saw sales growth begin to decelerate the week preceding Memorial Day. As of today, we have not seen our growth rates return to our pre-Memorial Day run rate. The external environment has become more challenging and uncertain since our last earnings call. We believe the slowdown in our sales growth is attributable to an unprecedented increase in summer travel, a recent wave of COVID cases, a slower-than-expected return to office, and an erratic urban recovery. We are also experiencing a slower ramp in our class of 2021 urban stores. Taking all these unanticipated factors into account, we've adjusted our 2022 top-line guidance down to $480 million to $500 million. Recognizing the shift in the external environment, we've taken steps to focus on our path to profitability, which includes reducing open and existing headcount as well as downsizing our L.A. headquarters. As a result, we expect our 2023 G&A spend, excluding stock-based compensation, to be similar to 2022 spend. We have proven we can leverage our G&A spend and are committed to continuing to do so as we scale our footprint. We continue to balance operational discipline while investing in our key strategic initiatives to drive long-term growth and become a profitable national brand. We remain on track to double our footprint in the next 3 to 5 years and achieve 1,000 restaurants by the end of the decade. I'm confident in our go-forward strategy, and I want to reaffirm our commitment to our four strategic initiatives that position us for profitable growth. 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 only-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; and four, create five-star team member experiences that make Sweetgreen the employer of choice. Let me provide a brief update on each of these initiatives, starting with our footprint. In Q2, we opened 8 restaurants. This morning, we opened our 20th new restaurant of the year in Birmingham, Michigan, a suburb of Detroit and a new market for us. We now have a total of 170 restaurants. We remain on track with our new restaurant pipeline of at least 35 new restaurants this year. In September, we are opening our first digital-only pickup kitchen in the Mount Vernon area of Washington, D.C., and later this year, our first pull-through in Cambria, Illinois. With nearly two-thirds of our sales already coming from digital channels, we have the unique opportunity to expand format to create hyper convenience for our digital pickup and delivery customers. Over the next several months, we are excited to bring Sweetgreen to three additional new markets: Minneapolis, Tampa, and Indianapolis, for a total of five new markets this year. As we continue to build our pipeline for 2023 and beyond, we remain disciplined with our site and market selection, continuing to target return metrics of a two-year cash-on-cash return of 42% to 50%. Enhancing our digital experience with a focus on only-digital relationships continues to be a priority for us. After our successful Sweetpass subscription trial in Q1, we launched another new engagement and promotional tool in July, Rewards and Challenges, as part of our path to a future loyalty program in 2023. Our launch campaign, the Summer of Rewards, featured four weeks of opt-in challenges with exciting offers to appeal to our broad base of customers, such as Buy One Get One and 50% off. Over 70,000 customers participated in the challenge, and during this period, we saw incrementality in both frequency and spend among participants. Our trials of Sweetpass and Rewards and Challenges were designed to enhance our digital experience and will also inform our revamped loyalty program we plan to launch in 2023. We believe that our planned loyalty program, combined with our healthy individual menu, will provide a unique opportunity for incrementality, increased profitability, and the chance for us to become a part of the daily ritual of an even larger number of customers. As noted in our last earnings call, we have continued to grow our native delivery channel by making it available to more customers and with improved delivery times. We also expanded our delivery availability up to 10 miles in January, and quarter-over-quarter saw 25% revenue growth among customers in these expanded delivery areas. Our outflows channel also continues to add accounts. Since our last earnings call, we added 123 outflows, ending the quarter with 702. Outflows continue to be seen as an important in-office perk for employees as companies return to work post Labor Day. Our brand is designed to inspire consumers to live healthier lives without compromising their values. Through our seasonal offerings, digital exclusive, and core menu, we continue to reinforce our commitment to our customer value proposition of making healthy food delicious and convenient. Starting this Thursday, we are launching our late summer seasonal menu, featuring one of our best sellers, the Elote Bowl, which has been on our seasonal menu for the last eight years. It's our take on classic Mexican street corn, highlighting seasonal corn and heirloom tomatoes. We're also bringing back another fan favorite, the Summer Barbecue Salad. As part of this launch, we are expanding our drink offerings, including adding bottles of cold brew coffee. We have an exciting and robust menu roadmap ahead of us, including launching a dessert later this year and testing heartier dinner options and kids meals in select markets this fall. This will help us broaden our customer base as well as expand dayparts and occasions. As much as we are a food company, we are a people company. Our success is the result of our team members, and they shine once again, showing their commitment to delivering on our customer promise of fast, fresh, and friendly service. We are always investing in creating five-star experiences for our team members. Today, we offer attractive benefits and wages. We've established a clear career pathway to General Manager that's supported by training and development of both technical and soft skills. Based on team member feedback, we're making the following additional investments to enhance our employee value proposition. We're offering more paid time off to our assistant coaches and head coaches, starting in Q4. We're introducing tipping by the end of 2023 across the fleet. We are building out the framework and technology solutions for our customers to tip our team members for exceptional service across our own digital and in-store channels. And recently, we relaunched Shades of Green, our rewards and recognition program that celebrates moments that matter, including recognizing exceptional leadership, welcoming new hires, and celebrating anniversaries and important milestones. We believe these investments will further improve attraction and retention of our team members. As part of creating a five-star team member experience, we are constantly simplifying our operations to make the work easier and improve our team members' speed to competency. We have been on a multi-year journey to simplify the execution of our menu, redefine our labor deployment model, and create proprietary tools to enhance our training effectiveness, speed of service, and labor productivity. I want to share two operational areas that the team has been focused on this quarter: streamlining the preparation of our cold ingredients and revamping our kitchen layouts. Currently, deciding what ingredients to prepare is done manually in each of our restaurants multiple times a day. Our new proprietary cold prep tool auto-generates a list of what to prepare and how much by incorporating multiple data points into a real-time algorithm to predict future consumption of ingredients. This tool eliminates the guesswork in what to prepare, reducing food waste and ensuring we always have fresh ingredients ready to serve our guests. We are currently testing the tool in six restaurants across the country, and it will be operational across all our restaurants by the end of the year. This tool complements our hot prep tool, which guides our team members on what, how much, and when to cook our hot items, optimizing for both taste and efficiency. In our business, every second and every step counts. So we're reimagining and optimizing our kitchen design to improve the team member experience and productivity. Our new optimized kitchen features a redesigned frontline, now operational in our Long Island City restaurant, and a revamped digital make line, now deployed in our Williamsburg restaurant. Both lines have been ergonomically designed, with our frontline featuring more space for mixing and POS systems, historically two of our biggest bottlenecks in our in-store experience. Both restaurants have experienced significant efficiency improvements. At Long Island City, we have been able to almost double frontline throughput. And in Williamsburg, the digital make line throughput increased by over 30%. The new frontline and digital make lines will be rolled out as part of our new market opening starting this month, and we will continue to optimize other areas of the kitchen. We believe consistent improvement in kitchen operations will be a force multiplier and should improve store efficiency, labor productivity, and the team member experience, which will subsequently enhance restaurant-level margins over time. I want to conclude by reaffirming my belief that our strategic pillars fuel our flywheel for growth and profitability. Despite some external challenges that are causing us to reduce our outlook in the near term, we've never been more excited about our long-term growth plans. We remain confident that our model will continue to elevate and expand our mission of building healthier communities by connecting people to real food. We believe that our value and brand proposition, omnichannel model, domestic sourcing strategy, and very strong balance sheet will allow us to not only weather the storm but take advantage of opportunities that may present themselves in the future. I'm really proud of the team and what we've accomplished this quarter together. Now I'll hand it over to Mitch to review our Q2 financial results.

Thank you, Jonathan, and good afternoon, everyone. We had a strong second quarter despite the sales softness we began to see around Memorial Day. Total revenue for the quarter reached $124.9 million, up from $86.2 million in the second quarter of 2021, growing 45% year-over-year. This includes same-store sales growth of 16%, consisting of a 10% increase in transaction mix and the benefit from a price increase of 6% taken in January 2022. Our average unit volume grew to $2.9 million, up from $2.4 million in Q2 2021. Digital revenue in Q2 was 62% of total revenue and our owned digital revenue, which is a transaction made on the Sweetgreen app or website, was 40% of revenue. Q2 total digital dollars grew 31% year-over-year. We opened 8 new restaurants in this quarter for a total of 16 new restaurants in the first half of 2022, ending the quarter with 166. As of today, we have opened 20 restaurants so far this year and now operate a total of 170 restaurants. We remain on track to achieve our guidance of at least 35 new restaurants this year. Restaurant-level margins in the second quarter were 18.5%, up from 14.9% in the second quarter of 2021. Our margin grew 5.5 points from Q1 2022. Over the past few years, the team has simplified our operations and made adjustments to our delivery agreements and pricing structure. These efforts are reflected in our improved margins, and margins are showing greater consistency across markets. For a reconciliation of restaurant-level margins to comparable GAAP figures, please refer to the earnings release. Food, beverage, and packaging costs were 27% of revenue, which is consistent with the comparable period in 2021. We continue to see more inflationary pressure building in our cost of goods, particularly in shipping and avocados. As a percent of sales, we expect that our food, beverage, and packaging costs for 2022 will be in line or slightly better than full year 2021, which was 28% of revenue. Labor and related costs were 30% of revenue, an improvement of over 100 basis points from the comparable period in 2021. This margin improvement resulted from greater sales leverage and simplification of our operating model. During the quarter, average wage rates were $17.10 an hour, up 0.4% since Q1. Recruiting has gotten somewhat easier. We are in the process of rolling out new applicant tracking systems to personalize, streamline, and automate the hiring process to ensure we can effectively hire at scale. Our restaurants remain 95% staffed, although in recent weeks, we have seen a rise in COVID callouts, which has put some pressure on our throughput. We expect labor and related costs as a percentage of revenue to be in line or slightly better than full year 2021, which was 32% of revenue. Occupancy and related expenses were 13% of revenue, an improvement of 100 basis points from the second quarter in 2021. This improvement results from sales leverage from higher volumes and the increase in our menu prices. Our G&A expense for the quarter was $51.3 million compared to $26.1 million in Q2 2021. This $25.2 million increase in G&A is primarily attributable to a $21.3 million increase in stock-based compensation expense, $3.5 million of costs related to our investment in spice, and an increase of $1.7 million in public company expenses. Excluding these items, G&A for the quarter was $22.7 million compared to $24 million in the comparable period in 2021. This was a 5% improvement as revenues increased 45%. We expect that we will continue to gain meaningful leverage in our G&A. Our net loss for the quarter was $40 million compared to $26.9 million in the comparable period in 2021. This change is primarily attributable to a $21.3 million increase in stock-based compensation, partially offset by the increases in revenue noted above. Adjusted EBITDA for the quarter was a loss of $7.4 million, narrowing the year-over-year quarterly loss from $13.8 million. This improvement is the result of higher sales and improved restaurant-level margins. I am particularly pleased that our adjusted EBITDA quarterly loss of $7.4 million more than halved the Q1 loss of $16.5 million. We ended the second quarter with $407 million in cash. We have a strong capital position that allows us to continue to expand our mission and provides us with flexibility during these uncertain times. A number of people have asked that we provide an update on our expansion in the suburban markets. While I'm going to share some numbers, the business makes new store selection based on individual sites and their return on capital, and not on an urban and suburban dichotomy. At the end of 2019, our footprint was 65% urban and 35% suburban. Today, it's 50-50. At the end of 2019, our urban restaurants had an AUV of $3.1 million and our suburban restaurants had an AUV of $2.7 million. At the end of the second quarter of 2022, urban AUVs are now $2.7 million and suburban AUVs are $3.1 million. The restaurant-level margins for our suburban cohort now exceed our urban stores. Our success over the past 2.5 years in suburban trade areas gives us great confidence in our model and our pipeline, which is now over 85% suburban. As Jon spoke earlier in the call, we took steps to manage our corporate overhead costs. In the third quarter, we relocated our L.A. office to an adjacent smaller facility. And yesterday, we reduced our workforce at the support center by approximately 5%. The support center is now running with almost 20% fewer heads than planned for 2022. We made these changes to lower our operating expenses and protect our path to profitability in this uncertain environment. We are committed to continuing to deliver meaningful leverage in our G&A, excluding stock-based compensation and public company costs. Now turning to our outlook. During the second quarter, our revenue growth was strong in April and May. Sales growth decelerated the week preceding Memorial Day. These trends have continued into August. To dimensionalize this, in April and May, we had same-store sales growth of 21%. And in June and July, our same-store sales growth was 7%. In Sweetgreen's 15-year history of sales patterns, we've never seen this before. Our historical seasonality always showed growth during this period. We believe that looking at internal and external data, the slowdown in our growth is the result of an unprecedented increase in summer travel, a recent wave of COVID cases, slower-than-expected return to office, and an erratic urban recovery. Additionally, our class of 2021 restaurants, which were underwritten pre-pandemic, recently are taking longer to ramp than expected. The sales growth lag is site-specific, largely in the urban stores, making up 45% of the class. These restaurants are impacted by the erratic urban recovery. We feel confident in these stores over the long term. However, we are making short-term adjustments to our projections. For the full year 2022, we now anticipate at least 35 new restaurants, revenue in the range of $480 million to $500 million, same-store sales growth of 13% to 19%, restaurant-level margins of 15% to 17%, and adjusted EBITDA of a loss of $45 million to a loss of $35 million. The strength of our brand, product, digital platform, and team gives us confidence in reaching our goal of 1,000 restaurants across the United States by the end of the decade. We will continue to make investments to improve our customer and team member experiences while maintaining a disciplined approach to margins and G&A to drive the company's path to profitability. We continue to believe our long-term investments will enable us to drive industry-leading performance. With that, I'll turn the call back to the operator to start Q&A.

We'll take our first question this afternoon from John Glass of Morgan Stanley.

Mitch, can you first just talk about the comp slowdown you've experienced by suburban versus urban? Many of the things you talked about, maybe return to office and travel, had more to do with the urban markets. So can you just give us a sense of what the split is or the actual same-store sales by those cohorts? And can you also just clarify your comments or John's comments about G&A levels in '23 or even in '22 as a result of these reductions that you're currently undertaking?

John, thanks very much for the question. Let me start with the second half, the G&A levels for the company. The company is very committed to continuing to get leverage out of its G&A. And when we look at the G&A, let me for the moment exclude stock-based compensation from that number. For 2022, for the full year, we now expect that G&A number to be approximately $107 million, and that would include around $2 million from an accounting change from the adoption of leasehold standards requiring us to not pass certain costs as legal fees. For 2023, we would see the G&A, excluding stock-based compensation, as no higher than $107 million.

Okay. And then on the comp question?

On the comp question on the urban suburban split? Really, what we see in the urban-suburban split is the AUVs between the two stores really flipped. What we continue to see is that the urban stores are comping at a higher rate than the suburban stores. Right now, your urban stores are currently comping at around 26%, and the suburban stores are comping around 6%, and that's for the second quarter of the year. So the urban stores are showing a faster recovery than the suburban stores, although they're coming in from a much lower base.

I'm sorry, I have one more clarifying question. Is the rate of decline what I'm trying to understand? Has the relative change in urban comparisons from the first to the second quarter, or from the second quarter to the third quarter, been greater than what you observed? Are the suburban stores more stable, which would suggest that this is primarily an urban recovery issue?

Yes, that's correct. Looking ahead, I would like to expand on that. Over the past two years, we consistently expected a stronger recovery in urban areas than what has actually occurred. In our current guidance, we based our expectations on the business trends we observed in July. We anticipated that post Labor Day, growth would either accelerate or remain stable. Therefore, we adopted a conservative approach by setting our guidance at the low end, assuming the urban recovery stays at its current level without any improvement. We hope this is a cautious assessment. However, reflecting on the past two years, we realize we have misjudged many of these situations.

We go next now to John Ivankoe at JPMorgan.

Looking at the 35 units that are expected to open this year, obviously, hearing what you've talked about in terms of the suburban-urban mix around 50-50, 85% of future stores being suburban, but it is a point worth mentioning. 50% of your stores really have not recovered to the extent where you've expected from an average unit volume perspective at least and perhaps a margin perspective as well. How does that influence your thinking on '23 and '24 development? Is there enough of, I guess, change relative to expectations that it might make sense to do fewer stores of higher quality, of a higher average volume, just to ensure that our model is completely right going forward? Or are you just viewing this as a summer slowdown that's going to rectify itself and we should rely on the previous unit growth projections that I think most of us previously had?

Thank you for the question, John. I want to discuss the stores that have underperformed. We have several locations that were approved just before or at the start of the pandemic, and our projections at that time did not account for the changes that would occur. We found ourselves in a temporary situation where we expected conditions to remain as they were before COVID. Our assumptions have since been updated. The stores we are opening in 2022, 2023, and beyond are performing much better, not just because they are in suburban areas, but also because our expectations have aligned with the current reality. This gives us greater confidence, and the stores from 2022 have been very successful. For instance, we recently launched a new market in Detroit, specifically in Birmingham, Michigan, and during lunch alone, the stores generated over $13,000. Last week, we opened in Shrewsbury, New Jersey, another suburban area, and achieved around $15,000 on the first day. Clearly, our model is effective, and we have strong long-term confidence in it. We remain dedicated to our growth pipeline but are adopting a more disciplined strategy, prioritizing quality over quantity in our site improvements. However, we still believe we can meet the targets we've set for the next three to five years, ultimately reaching 1,000 locations by the end of the decade.

John, let me kind of expand on Jon's comments. We disclosed that our target return on invested capital for new stores in year 2 is 42% to 50%. What we find in the urban stores is when we adjusted our models to kind of a pandemic-based model as opposed to pre-pandemic, many of those urban stores' volumes declined, as you correctly point out. What we're finding in the marketplace is their rents have not declined proportionally. So those urban stores actually failed to meet the threshold, and the suburban stores are doing much better. I think that we will achieve our target units, but I think that what you'll see is the suburban stores will get larger as the returns stay higher than the urban stores until the occupancy or the AUV adjusts in the urban markets.

We go next now to Sharon Zackfia at William Blair.

I guess a question on the workforce reduction and the office move. Can you dimensionalize the annualized savings from those two moves? And I think it was mentioned in the release, obviously, to accelerate the path to EBITDA positivity. What is your timeline at this point where you would project positive EBITDA, based on the current sales run rate?

So Sharon, let me first say that we've not really given a timeline on the positive adjusted EBITDA. But if I was to estimate it right now, I would probably tell you that should happen early in 2024. 2023, we would anticipate to be very close to a breakeven year. In terms of the reduction in force in the company, we've been working on driving down our G&A and as we discussed earlier, we see the levels coming in 2023. The actual force reduction was approximately 20 people in the support center. As Jon mentioned, they moved to a smaller facility. That change will probably generate approximately $4 million in annual savings in G&A.

We go next now to Jared Garber at Goldman Sachs.

Great. On restaurant-level margins, Mitch, you talked about inflation still being a pressure point through the model, not surprising with what else we've heard through earnings season from some of your peers. Can you talk about your outlook on pricing and if there's any expectation to flow some incremental pricing through the model in the back half of the year?

Thanks, Jared. In our last earnings call, we mentioned that if our costs for goods and labor as a percentage of revenue remained consistent with 2021, we did not expect any significant price changes later in the year. We believe these ratios will be slightly more favorable. Therefore, we are not planning a major price change. We have recently seen an increase in chicken prices, and we are adjusting our premium shipping add-on to $3.25 starting this Thursday, up from $3. The chicken add-on was previously $3.25 in 2020, then we reduced it to $3 in 2021, and now we are reverting it to $3.25 this week. That is the only price adjustment we expect to make for the remainder of the year.

Yes. Just to elaborate, we're not taking any price increases on our core menu. One of the things that we think gives us some advantages is our more plant-based leaning menu. We do have exposure to chicken and certain high commodity inflation parts of the basket that are growing. But given that most of our spend is on produce, it insulates us from some of those inflationary pressures.

If I could follow up on the unit growth, I appreciate that you have reaffirmed the expectation of at least 35 units this year. Can you explain what gives you the confidence to achieve that number? Some of your competitors have extended their unit growth timelines into 2023 due to supply chain challenges. Any insights on this would be helpful.

Yes. I just want to give a shout-out to our team, who really worked tirelessly to make this happen. I think we foresaw some of the supply chain challenges around equipment, and we were able to do some mass buying last year to get ahead of a lot of this. The confidence really comes from the fact that leases are signed and the deals are in construction. So we have very, very high confidence in at least 35 this year, and we have a very healthy and robust pipeline next year, with just some great sites, great deals, and many leases already signed. So the development is very much on track. As I mentioned in the prepared remarks, the core model is continuing to be optimized with some of the improvements around the kitchen, which we believe will help us from a productivity and store-level margin perspective. We're also excited to learn from some of these new tests that we're launching. In the coming months, we're going to be launching our pickup kitchen in Washington, D.C., a digital-only store, and at the end of this year, our first drive-through or pull-through location outside of Chicago. So really positive developments on the new unit front and feel really confident about the pipeline looking forward.

And next, we go to Katherine Griffin at Bank of America.

I wanted to ask another question just about the plan in terms of workforce reduction and generally reducing G&A. If the return to office is perhaps more delayed than even we're expecting now, what other levers do you have to pull, I'm assuming potentially further headcount reduction or just any other elements of G&A that we can just try to pinpoint as we think about places where you can lean out as you try to get to some EBITDA profitability?

Yes. Thanks for the question. I want to start by saying that Sweetgreen is a growth company, and we're really building this for the long term. At the same time, we want to take a really disciplined approach around our investments and our G&A. When you look at our G&A, we're going to be running '23 similar to '22 levels. If you look back in our history and take out the investment in spice and some of the public company costs, we're not very far off from 2019-level spend, with over two times the number of stores. So there is a lot of confidence in our ability to leverage the investments we've made, and we're fiercely committed to continuing that operational discipline. We're very much focused on our growth right now. We have a number of growth levers, both on the comp base as well as continuing to open new stores in new markets. On the comp base, we have a number of exciting initiatives, including new menu rollouts, a planned loyalty launch, which we think will be a huge sales driver at the beginning of '23. Having said that, we're fiercely committed to our profitability. We do not foresee the need to take additional customer G&A perspective. However, we're being very cautious about additional headcount and any other investments to ensure that we do turn profitable as soon as we can. This is all part of being a sustainable business, so I’ll stop there.

We'll take our next question now from Chris Carril at RBC Capital Markets.

So just on the revenue guidance, can you expand a bit more on just kind of your expectations for how the remainder of the year plays out and what that implies for AUVs? You detailed the magnitude of the slowdown that you've seen, and I think the guide would suggest some improvement through the fourth quarter. So really just trying to understand the improvement implied by the updated revenue guidance versus the typical seasonality that you noted earlier.

Thanks, Chris, for the question. Let me spend a minute on it because I think it's a very important topic. The guidance that we gave really took us a lot of thought. We had a very good five months this year, and then the business, as I said, slowed down around Memorial Day. We believe that these factors, as we went through them, were urban COVID, uneven office recovery, and a high degree of travel. When we thought about that, the logical conclusion was that many of these things would reverse themselves as we get past the summer months. So the question we faced was whether the company anticipates these things reversing and whether sales trends improve and go back to pre-Memorial Day levels or whether we lock the guidance in around what we see in July. Quite frankly, that was a very difficult conversation. One of the characteristics we believe in is radical transparency in our relationships. We've maintained that with our customers, with sourcing boards in our restaurants, with our farmers, and with our team members. Jon and I have always tried to maintain that with the investment community. The low end of the guidance reflects exactly where the business is today in July. We found that the low end of 480 reflects the same-store sales growth in the back half of the year, running 5%. The new stores in the class of 2021 remain exactly flat in their revenue as they were in July. I understand that being viewed as very conservatively because certainly, some college stores, for example, UCLA, should pick up when school comes back. The other viewpoint would be three stores in New York all in that class of 2021 should improve post Labor Day. However, I think we would tell you that we thought that way a year ago. The world felt that way two years ago. The low end of the guidance of 480 is the world in July, showing 5% same-store sales and no change in the class of 2021's average weekly revenue. The high end of $500 million reflects a second half same-store sales growth rate of 15%. We just held the new stores flat. Our hope, in all candor, is that the low end is certainly a conservative projection. Many people have been a little bit scarred by chasing a view of an ever-improving external environment, only to find that new things keep coming our way.

We'll go next now to Andrew Charles of Cowen.

Great. Mitch, my question is a follow-up to the previous inquiry. Obviously, you mentioned that the rate of deterioration in the business during June and July is the most significant you've observed in Sweetgreen's history. I appreciate your careful approach to guidance. But why are you targeting the low end? Is this trend expected to continue rather than considering the possibility that it could worsen, or would the midpoint of the range suggest that this underlying trend will persist?

Thanks, Andrew. I'm smiling, as you asked a great question. We've asked ourselves that question for about a month. So let me provide you with some detail. While the low end of the guidance is a 5% same-store sales growth, during a brief period through August, the same-store sales growth was actually 7%, so beginning to show some upward trajectory. In a normal period, we probably would have done exactly what you said and gone for some middle range. The reason we didn't, as I said, is that we felt a little scarred, thinking that after a holiday or Memorial Day things would always improve, but we found that the nature of that recovery has been quite erratic, making it difficult to know where and how large it would be.

Andrew, let me give a little bit more insight on this. As we shared in our remarks, we believe the slowdown in sales is largely due to our footprint and our customer being absent for much of the summer. Think of it as a summer lull, with people traveling, a rise in COVID, and delays in the return to the office; that's what we all see in the data. We do believe that September, after Labor Day, will be much better. Some of our internal data around outpost launches and planned launches have already shown that more people are returning to their normal routines and that companies are establishing back-to-office routines. Generally, we're optimistic about what September and beyond look like. However, as you all know, we're in a choppy macroeconomic environment, so we're just trying to be conservative in our guidance. That being said, we have high confidence in our long-term model and our goal of achieving 1,000 by the end of the decade, as well as creating a brand that impacts our consumers. We see much of this as a small bump in the macro environment, but we believe we are well situated to grow through it.

That's helpful. I appreciate that transparency. My other question was just going to be, if I look at the AUV growth, it was about 18% in Q2 that exceeded 16% same-store sales growth. Can you flush out a bit more on what's driving that? My guess would be a function of robust new store openings that are predominantly skewed in the stronger suburban markets, but any clarification there would be helpful.

No, that's exactly it. The difference in AUV is simply based on the stores we opened, as we do every quarter.

And ladies and gentlemen, it appears we have no further questions this afternoon. Mr. Neman, I'd like to turn things back to you for any closing comments.

I just want to thank everyone, and we'll see you next quarter.

Thank you very much. Ladies and gentlemen, that will conclude today's Sweetgreen Second Quarter Earnings Conference Call. I would like to thank you all so much for joining us. I wish you all a great evening. Goodbye.