Good afternoon, ladies and gentlemen. Welcome to the Sweetgreen Q3 2022 Earnings Conference Call. Please be advised that this call is being recorded. And now at this time, I'd like to turn the conference 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, which 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. As we near our first anniversary as a public company, I want to begin by offering my gratitude to our incredible team members who power our mission of building healthier communities by connecting people to real food, adding the Sweet touch with every customer interaction. For the quarter, we reported sales of $124 million, representing 29% year-over-year growth and same-store sales growth of 6%. We opened 10 restaurants in the quarter. Total digital sales represented 60% of our total Q3 revenue, with approximately 2/3 of those sales coming via our own digital channels. AUVs were $2.9 million, and restaurant-level margins were 16% for the quarter. Our adjusted EBITDA loss was $6.8 million in the third quarter, narrowing from a loss of $14.1 million this time last year. That figure has improved each quarter this year, and we continue to demonstrate improvement on our path to profitability. While this has been a challenging year for the industry, we are proud of how we have navigated the macro environment and believe that our high-quality product offers excellent price value. We are relentlessly focused on financial and operational discipline as we steer through uncertain times in the world ahead. Our strong value proposition starts with the help of our 200 sustainable farmers, producers, and distribution partners. We share a network of partners that supply some of the most highly regarded restaurants in the United States. The vast majority of what we source is local or organic, and our passionate team members make food from scratch every day in each restaurant. This creates the difference that our customers can taste. We have a bold price under $10 in all our markets, and we've held our core menu price flat since the beginning of the year, while the majority of our industry has raised prices more than once this year. During our two-plus years in the pandemic, we drove best-in-class digital acquisition and sales while simplifying our operating model. We continue to deliver value through technology by meeting customers wherever they are, believing technology should enhance the human experience, not replace it. Now that the world is opening up, we are going back to basics, relaunching the playbook that we call intimacy at scale that helps us build the best-in-class brand over the past 15 years. I'd like to highlight a few of the ways we built intimacy at scale. First, we take a local approach to building community connections with local chefs, farmers' markets, artists, community partners, and creators so that every opening becomes an authentic part of the community. Two, we create a great experience in our restaurants and have begun to retrain our team members with a focus on customer hospitality. We add the Sweet touch. It's one of our core values, and it's how we delight our customers with every interaction we have with them. Three, we offer fast service without compromising freshness. By focusing on improving throughput through refining our labor model and training, we believe we can drive incremental transactions and better customer satisfaction. In addition to driving operational excellence and reintroducing our intimacy at scale playbook, we are committed to driving long-term sustainable growth and becoming a profitable national brand even with the increasing uncertainty of the macro environment. As a reminder, our strategy has four pillars: 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 owned 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 through reimagining fast food; and four, create 5-star team member experiences and make Sweetgreen the employer of choice. Let me share a few highlights from the quarter on each of these pillars, starting with our footprint. In Q3, we opened 10 restaurants, ending the quarter with 176 restaurants. Late in the quarter and into Q4, we opened 5 restaurants in the Upper Midwest, Minneapolis, Detroit, and Indianapolis. To launch these new markets, we collaborated with local artists, small businesses, influencers, and chefs. Thanks to our intimacy at scale playbook, while early, these stores are exceeding expectations and tracking to an average AUV above $3 million. We have, however, a small cluster of Southeast restaurants that are underperforming to our standards. These restaurants opened during the pandemic, and as a result, we were not able to execute our playbook. We have begun the process of reenergizing these restaurants through community connection. We are starting to see positive responses and week-on-week revenue growth. We are confident in these markets as we have nearby restaurants that are already meeting or exceeding expectations. Last month, we opened our first digital-only pickup kitchen in the Mount Vernon area of Washington, D.C., which was a relocation of our City Vista restaurant nearby. Customers have been receptive, and the store was filled with new customers, downloading our app to experience the new model. Future pickup kitchens have the potential to unlock additional markets with smaller square footage needs, lower build-out costs, and improved return on invested capital. Our Mount Vernon restaurant will provide learnings for our future restaurants powered by the Infinite Kitchen. As you know, we acquired Spyce, the restaurant powered by automation technology, last year. We were in Boston a few weeks ago visiting the team. I cannot be more excited with the progress they've made. We can share that we will be opening 2 restaurants sometime next year that will feature our automated production line we call the Infinite Kitchen. These restaurants will serve our food with even better quality, perfect portioning, faster speed, and will create a more consistent customer experience, all while elevating the role of our team members. We are confident that automation will play a major role in elevating the experience for customers and team members but will also help us create a more profitable and scalable model. We look forward to sharing more about this transformative technology with you in future calls. Next week, we will be opening our first pull-through in Schaumburg, Illinois. With 60% of sales coming from digital channels, we are well-positioned to have another profitable and scalable format in our toolkit as we look to connect more people to real food. Enhancing our digital experience with a focus on owned relationships continues to be a priority for us. We believe the launch of a loyalty program in 2023 will lead to customer incrementality and engagement and is especially important to have in this recessionary environment. As a reminder, our Sweetpass subscription trial in Q1 saw Sweetpass users place an additional 5 orders on average during their 30-day trial, almost tripling their frequency and more than doubling their spend compared to the average monthly frequency in Q4 of 2021. In July, we launched our Rewards and Challenges feature with an aim to drive frequency and spend through a cohorted gamified experience. Looking back on a 90-day period, customers who opted into at least one of our digital challenges doubled their frequency and spend as compared to digital customers who did not opt into a challenge. We will continue to test and implement new challenges throughout Q4 as we iterate and learn towards a new loyalty program. Both Sweetpass and Rewards and Challenges were piloted as potential components of a future loyalty program. Given the level of customer engagement with both pilots, we believe our program will strongly resonate and be a powerful growth lever later next year. We continue to focus on the growth and profitability of our B2B channels as offices return. In addition to Outpost, we are in the early stages of rapidly growing the new catering channel. We've begun pilot and catering in 20 select stores with promising initial results. Average order values to date exceed $500, and weekly sales have tripled from start to end of Q3. Over the coming months, we will add additional markets to our pilot and begin marketing activity to drive awareness. We see real growth opportunities with Outpost and catering as return-to-office trends upward and group gatherings increase. Our brand's mission is to expand access to real food. We expand access by adding channels, expanding our footprint, and broadening our menu. Yesterday, we launched a Crispy Rice Treat dessert nationwide. It's our version of the beloved classic treat that honors our food ethos as it is free of highly processed preservatives and any refined or hidden sugars. We created this treat with our chef-in-residence Malcolm Livingston II, a renowned pastry chef who has worked at restaurants, such as Per Se and Noma, the 5-time winner of the title, World's Best restaurant. Across California, we're also testing new heartier offerings, grain bowls, and plates. The test features our delicious new protein currently in testing, organic turkey meatballs, which have 60% less carbon emissions than a traditional meatball. Finally, starting this Thursday, we will be testing our first-ever plant-based protein, Meati, at our Culver City food lab to address customer desire for a high-protein vegan option. For one month, customers can try this nutrient-rich mushroom root protein in their bowls or order the new Miso Meati bowl. We are proud to be working with a partner who shares the goal of creating a positive sustainable impact on the planet. Our team members power our mission and build the brand with each customer interaction. We continue to innovate to make their jobs easier as well as invest in training and development. This leads not only to increased employee satisfaction but also better-run restaurants. Given a number of factors, namely, a historically tight labor market, there are opportunities to improve stacking across many of our restaurants. While recruiting has become somewhat easier than earlier in the year, and we remain 95% staffed, call-outs have had an impact on throughput and operating hours in many locations. Our data shows that employees who are scheduled to work 30 hours or more call out less and have higher tenure than those who are scheduled to work fewer hours. In response, we are working to shift our staffing models. On the hiring front, we launched a new applicant tracking system this quarter. The rollout of our new ATS has reduced our time to hire by almost half. While we have seen the hiring environment get easier, industry demand for talent is still high. Training remains critical to our success in implementing our intimacy at scale playbook, especially as the majority of team members joined during the pandemic when we had to switch to digital-only operations. We've refocused our training on customer hospitality as the world opens back up. Finally, we continue to leverage automation and digital tools to free up time so our employees can do what they do best, connecting with our customers. This includes our newly rolled-out proprietary cold prep tool, which uses machine learning to generate a list of what to prepare and how much by incorporating multiple data points and a real-time algorithm to predict future consumption of ingredients. Early feedback from our teams is overwhelmingly positive. We are in the early innings of creating and defining a category of healthy, convenient, and delicious food. We have tremendous white space across the U.S., a national brand with a cult-like following and a proven playbook. We are well-capitalized and continue to have a relentless focus on financial discipline while enabling us to invest in growth to drive our business for the long term. I want to thank the whole Sweetgreen team for their work and commitment to our mission of connecting people to real food one customer at a time. Now I'll hand it over to Mitch to review our Q3 financial results.

Thank you, Jonathan, and good afternoon, everyone. Total revenue for the quarter was $124 million, up from $95.8 million in the third quarter of 2021, growing 29% year-over-year. This includes same-store sales growth of 6%, reflecting our price increase of 6% taken in January 2022. Since then, we have not taken a broad menu price increase. As stated previously, if our cost of goods and labor as a percent of revenue stayed in line with 2021, we do not anticipate any further price moves in 2022. Our average unit volume was $2.9 million, up from $2.5 million in Q3 2021. Digital revenue in Q3 was 60% of total revenue and our own digital revenue that is a transaction made on the Sweetgreen app or website was 40% of revenue. Q3 total digital dollars grew 22% year-over-year. We opened 10 new restaurants this quarter, ending the quarter with 176. The majority of these restaurants opened in the second half of Q3. We remain on track to achieve our guidance of at least 35 new restaurants this year. To date, we've opened 33 restaurants for a total of 182 restaurants. During the fourth quarter, we made the decision to close 1 restaurant in Texas. Restaurant-level margins in the third quarter were 16%, up from 14% in the third quarter of 2021. For a reconciliation of restaurant-level margin to comparable GAAP figures, please refer to the earnings release. Food, beverage, and packaging costs were 28% of revenue, which is consistent with the comparable period in 2021. As a percent of sales, we continue to expect that our food, beverage, and packaging costs for the full year 2022 will be in line with full year 2021, which was 28% of revenue. As we mentioned on earlier calls, we have seen inflationary pressures build in the second half of 2022 and expect further impacts due to recent weather disruptions impacting tomatoes and romaine in Q4. Labor and related costs were 31% of revenue, an improvement of over 100 basis points from this comparable period in 2021. This margin improvement year-over-year was the result of price increases and the simplification of our operating model. We continue to expect our labor and related costs as a percentage of revenue will be in line with or slightly better than full year 2021, which was 32% of revenue. Occupancy-related expenses were 14% of revenue, an improvement of 100 basis points from the third quarter of 2021. This improvement is primarily due to the impact of menu price increases. Our general and administrative expense for the quarter was $41.4 million compared to $28.9 million in Q3 2021. This $12.5 million increase in G&A is primarily attributable to a $14.6 million increase in stock-based compensation expense, an increase of $1.2 million in public company expenses and a $300,000 increase in our investment in Spyce. This was primarily offset by a decrease in salary and benefits. Due to the timing of the Spyce acquisition in Q3 2021, the change in Spyce cost was minimal for the quarter. Excluding these items, G&A for the quarter was $20.2 million compared to $23.7 million in the comparable period in 2021. This was a 15% improvement as revenues increased 29%. We expect that we will continue to gain meaningful leverage in our G&A, which is critical for our path to profitability. Our net loss for the quarter was $47.4 million compared to $30.1 million in the comparable period in 2021. The change is primarily attributable to a $14.6 million increase in stock-based compensation and $11.1 million of restructuring charges taken in the current quarter, partially offset by the increase in revenue and restaurant-level profit noted above. Adjusted EBITDA for the quarter was a loss of $6.8 million, narrowing the year-over-year quarterly loss from $14.1 million. This improvement is the result of higher sales, improved restaurant-level margins, and leverage in G&A, excluding stock-based compensation. As disclosed on our last call, we took steps to manage our corporate overhead costs in the third quarter. We incurred pretax restructuring charges of approximately $11 million related to moving to a smaller office and reducing our support center staff by approximately 5%. We ended the third quarter with a cash balance of $381 million. We have a strong capital position that allows us to continue to expand our mission and provide us with flexibility during these uncertain times. I would like to make a few comments now on our third quarter sales. First, the post-Memorial Day trends persisted throughout the quarter and into October. Second, we saw an unusually high volume of store closures due to call-outs and repair and maintenance issues affecting some high-volume stores. Third, we have a small cluster of restaurants in the Southeast, opened during the pandemic, ramping slower than expected. We are revisiting these stores with our intimacy at scale playbook. We have long-term confidence in these stores' end markets. In light of these trends, we expect to be at the lower end of our guidance we gave in August, with the possibility of our top line being a little short. The external operating environment continues to be challenging, and the world is hard to predict right now. While the macroeconomic environment grows increasingly uncertain, we are focused on doing what's best for the company over the long run. We believe we have the right long-term strategy to scale our mission of connecting people to real food and create an enduring brand. We are committed to driving sales, elevating our customer experience, and maintaining a disciplined approach to margins and G&A to drive the company's path to profitability. 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 Ivankoe of JPMorgan.

Can you hear me?

Yes.

The question really focuses on new unit volumes. We based our calculations on last year's average weekly sales and same-store sales, and it appears that this aspect, more than the comparison, explains most of the revenue shortfall relative to our expectations. I would like you to address whether you noticed this as well. Is there anything unusual? Have more than a few new stores opened that are performing poorly? What distinguishes the slower stores from the better-performing ones? Also, please discuss the initiatives you've mentioned, such as intimacy at scale, and any efforts you have to help the lower-performing stores improve and align more closely with the system average, or to resolve any emerging issues.

Sure, John, it's good to hear from you. Regarding your question, we have noticed a group of stores primarily in the Southeast that have had a slower start. In previous calls, we discussed some locations that we signed just before or at the beginning of the pandemic, without anticipating the demographic changes and traffic shifts. This, combined with our inability to implement our standard approach—which involves much of our business being digital but also heavily relies on in-person guest engagement—has contributed to the challenges. Our traditional method focuses on welcoming guests, educating them about Sweetgreen, and ensuring they have a great initial experience that encourages them to return. Additionally, engaging with our communities has always been a key part of our strategy. Unfortunately, several stores opened during the pandemic, and we couldn't execute our approach effectively. That is where we are seeing most of the difficulties. As the pandemic subsides, our recent openings, particularly in the Upper Midwest, have performed remarkably well. We firmly believe that the issues aren't predominantly related to real estate, as our successful stores exist in all of the markets where we have challenges. The crux of the issue lies in our market strategies and how we applied our methods. As we mentioned earlier, we've been re-engaging with our strategies and are beginning to see positive results, including with new stores. However, we still face challenges, especially relating to the labor market. While there has been improvement in labor conditions, during the height of the pandemic, it complicated the customer experience we aimed to deliver. We remain extremely focused on execution, one customer at a time. Our history shows that once people try Sweetgreen, they tend to return. Therefore, when stores initially perform slowly, we've consistently demonstrated our ability to turn things around with dedicated focus.

John, it's Mitch. It's interesting when we look at the modeling for both the class of 2021 and the class of 2022, we continue to see their year 2 volume averaging to $2.8 million target that we gave at the time of the IPO. So while there have been some stores that have all been softer than we would have liked, we have, on the offsetting, many stores that have opened stronger.

We go next now to Andrew Charles at Cowen.

Can you elaborate a bit more on the slowdown from May through October? The data on return-to-office seemed to show some improvement after Labor Day, but it may not have been as strong as you initially expected in your guidance. What do you think is driving this? How much of it is related to macroeconomic factors versus issues specific to the Southeast affecting performance and some challenges on the labor side?

Yes, Andrew, it's great to hear from you. I'll begin, and then Mitch can add more. I would say it's a mix of several macro factors. We previously discussed the slowdown in sales after Memorial Day, the impact of increased summer travel, the inconsistent return to the office, and various traffic trends. Even in the office, while we've noticed more traffic on certain days, Mondays and Fridays are definitely different. Overall, traffic patterns are unpredictable. Additionally, there are execution issues. During COVID, our operations were entirely digital, and the frontline became our fastest-growing channel this year, both year-over-year and quarter-over-quarter. Many of our team members are new to Sweetgreen and have not experienced the high customer volume we are accustomed to. We've been somewhat unprepared for this, leading to throughput and customer service not meeting our expectations. This has been a primary focus over the past couple of months, and I can confirm that we've already observed some positive developments as we concentrate on customer service and throughput. We are starting to see encouraging improvements. However, it's clear that the macro environment is challenging us, alongside some execution issues on our end.

Andrew, let me just build a little bit on Jon's comments. As we said on the call in August, what we saw happen post Memorial Day was very unusual in our business. As a general rule, Sweetgreen strengthens during the summer and slows down during the fall. Historically, Monday was our strongest day, followed by the end of the week. What we've seen coming out of the pandemic, or whatever we call the phase we're currently in, some of the consumer patterns have been very different than they were prior to the pandemic. So Jon talked about Monday and Friday essentially being almost an extension of weekends in the urban stores, but in addition to which what we saw was the summer slowdown. We felt part of that was travel, part of that may be due to COVID. It's possible it's due to the macroenvironment. It's very interesting as we approach fall and hit November, the business reignited and the same-store sales began to grow double digits again, counter to the historical pattern.

Okay. And then, Mitch, maybe just a follow-up question. How are you, just given the sales environment, you recognize that November has some improvement, but it's only been 7 or 8 days. So obviously, you don't want to get too far ahead of yourself. But can you talk about your feeling, your ambitions to turn profitable in the first half of 2024 now versus on the prior earnings call?

I think that it's a very, very important topic, and it's one that we spend a tremendous amount of time on at Sweetgreen. I would say in the current environment, our path to profitability is actually more important, not less important than it was. And it's one that we're more focused on than ever. The path to profitability for us is a relatively simple model. It's opening new stores that are successful, driving our restaurant-level margins through good control at the store level and leveraging our G&A expense. And we are completely focused on these, and we will continue to reassert that. In 2023, our losses will narrow significantly, and the company will be profitable on an adjusted EBITDA basis in the first half of 2024.

Okay. Got it. So still on track. Super. Maybe I can sneak one more in.

So one quick buildup. While the sales may have been a little lighter than we wanted in Q3, we were especially happy that the adjusted EBITDA came in significantly better than the modeling and at the restaurant-level margins were strong in Q3.

That's helpful. And Mitch, just one maybe follow-up question on that. Can you talk about your thinking around the sales and margin impact of the upcoming loyalty program, in particular, how this could help enhance your path to profitability as, obviously, there's a portion of this where you're giving away more food for free?

Well, I think what I would say about that is you're correct that the margin on that marginal sale through loyalty would be at a lower rate than historical. We're really driving the incrementality of the volume to kind of get the AUVs back up and gain more leverage around the box. So we believe that it will add both to the top line and the bottom line, although at a lower margin.

We go next now to Jared Garber of Goldman Sachs.

Mitch, I wanted to come back to just maybe some comments that you had made last quarter around working with your sort of landlords in some of the urban markets that I think were open, the units that were open during the pandemic and maybe at the current moment are not necessarily best performers or performing to the same extent that you saw on the top line. So can you give us any update on what those conversations with some of those landlords have been like?

Thank you, Jared, for the question. Yes, let me first say that you're correct that the Deep Central Business District AUVs, particularly in Midtown Manhattan, have not returned anywhere close to their 2019 levels. While they are growing and it's continuing to grow, they are certainly off the mark they were at before. The profitability of these stores has been impacted by several margin points, and the offset has been 100% in the occupancy line. We are in discussions with a number of landlords and modifying our leases in order to kind of accommodate that structure. The attempt is to move more of those leases from fixed rent to a percentage rent and with a breakpoint level in 2019, and we have had some success in that area.

Great. That's helpful. And then as it relates to unit growth, I mean, obviously, impressive to see you guys maintain that unit growth guide throughout the year despite all the macro pressures, and we've seen several companies kind of ratchet down their unit growth expectations for the year. But wanted to get a sense of how we should be thinking about unit growth into next year and how comfortable you feel with the original guidance that you've laid out during the IPO.

Jared, good to hear from you. So we’re on track for at least 35 this year. We might exceed that by a couple of stores, depending on how the year ends up. We have 43 leases signed for 2023 already. So we’re kind of still targeting – the way we think about it is cumulative between 22 and 23 stores. We have modeled 85. And we’re on track for 80 to 85, at least. So we feel pretty good about the development targets. On top of that – so first of all, kudos to our development team in this incredibly challenging environment. I’d like to say beyond the number of stores, we’ve been very focused on the quality of real estate and the sequencing. This year was a year of going wide, opening a lot of new markets. And anyone in our business knows opening a new market is a lot harder than more stores in existing markets as well as a lot more risk. Luckily, these new markets have done well for us. And what we’re doing next year is, on our path to profitability, we will be focusing on more stores in existing markets and just not going as wide, going deeper where we know it works and feel really good and confident about the pipeline that we have. We also mentioned some work on the new formats. We launched our pickup-only kitchen a couple of weeks ago in D.C., been doing exceptionally well, gives us a little bit of a taste of things to come as we get closer to our automated kitchen, what we’re calling the Infinite Kitchen. And next week, we’re super excited, finally opening our first drive-through or pull-through concept outside of Chicago. So some exciting stuff on the development front, and we’re just getting better at how we build these restaurants and feel really good about the real estate and the pipeline.

We go next now to Matt Curtis of William Blair.

I want to get back to the revenue guidance. Have you seen any weakening in the suburban store base? And then on the other side of the coin, I guess, are the urban stores rebounding still more or less as you anticipated? Or is that still sluggish? Because you would expect that given the improvement in office occupancy.

Thank you, Matt. Yes, I would say that some of the trends that we've seen in Sweetgreen have been a lot on what others have seen. We've had faster same-store sales growth in the urban markets in the third quarter than suburban markets. The suburban market is basically flat, and the markets have moved about 12%.

Okay. And then just looking at the comp guidance for the full year, I mean, it kind of implies a pretty wide range of comps for the fourth quarter. So could you be more specific in how October went, same-store sales-wise? And what exactly are the embedded expectations for the fourth quarter comp?

What I would say is to reiterate, I believe, what we said earlier, October pretty much was in line with trends happening post-Memorial Day. Think of it as kind of the summer maybe the summer gold drop. And then the business peaked around the 1st of November.

We go next now to John Glass at Morgan Stanley.

I'd like to follow up on the trends you've mentioned, Jon. Can you quantify the impact of store closures or reduced operating hours? How significant was that compared to overall reduced demand? Last quarter, you had a lot of customer data regarding frequency bands of high-frequency and low-frequency customers. Are there any new insights from that data about changes? Have your high-frequency customers decreased their visits, or are you losing some newer customers? What does that indicate compared to what you observed last quarter?

John, it's great to connect with you. I'll address the second part of your question, and then Mitch can discuss the closures. Regarding customer trends, it's interesting and aligns with our intimacy at scale strategy. Traditionally, Sweetgreen's primary method for gaining customers was through our frontline staff, where the energy and interaction of our employees encouraged new visitors to try Sweetgreen for the first time, largely driven by community initiatives and our mobility. However, during COVID, this approach diminished significantly, and we became quite adept at digital acquisition, making it our main driver for obtaining new customers. To answer your question directly, we've observed consistent frequency trends, and measures of frequency such as annual and quarterly spending have remained stable, with some increases attributed to the introduction of rewards and challenges. Most of the changes we've seen have come from an acquisition standpoint, which is why I emphasize our community approach. Many pre-COVID customer acquisition methods were halted during the pandemic, and it took us some time to reinstate them. However, since we've reintroduced these strategies, we've noticed an uptick in customer acquisition. Retention has remained steady or slightly improved with the implementation of rewards and challenges, though we did experience a dip in new customer acquisition, which we are now seeing come back to life.

John, let me break the question about store closures into 2 general groups. We had a number of store outages caused by labor call-outs, impacting things like line time, store operating hours, our back lines operating, and general R&M issues. Frankly, it probably was the highest the company has ever experienced. In addition to that, we had 3 significant store closures, highlighted, of course, by our Grand Central New York store that was closed for about half the quarter due to a landlord problem. So collectively, they all made up kind of a pretty significant number in the quarter. We have seen them begin to dissipate as we move into the fourth quarter.

Can I just follow up, one, can you quantify what that impact was? That's what I was trying to get at, how big is that from a comp drag? And as a follow-up, Mitch, unrelated follow-up. Last quarter, you talked about some of the class of '21, like in New York stores, maybe if you did it again, you wouldn't have done it again just because those are coming down. Now we're talking about the Southeast. How is the class of '21 in those New York stores? Does that continue to be a drag? Is it worse? Is it better? And now we're introducing a new element to some of the Southeast stores. I just want to understand what we talked about last quarter in terms of the New York stores being sort of softer to open.

Okay, John. So let tell you, probably the closure number to get specific was probably in the neighborhood of $1.5 million in the quarter. In terms of the class of '21, as I said, as an average class that's on track to our aggregate metrics. Some of those New York stores that I called out have begun to grow and grow pretty significantly. For example, Spring and Hudson in the World Trade Center, really confining most of the kind of challenged market stores in that Southeast corridor.

Yes, John, we've been observing how the class of '21 has started to gain traction, and it illustrates that our model results in customers becoming very loyal after they try us. Some stores perform well immediately while others may take some time to reach their potential, but we understand that once we get customers to experience our food and provide them with a positive experience, the store becomes successful. We've noted a nice improvement from that class of '21.

We go next now to Brian Bittner at Oppenheimer.

Just first question is on pricing. Jonathan, you said in your prepared remarks that you've held your core menu price flat since the beginning of the year. I think your last price increase was in January. That's obviously very unique in this time we're in. So can you just elaborate on how you are strategically thinking about pricing moving into 2023, especially since you kind of said some costs have stiffened lately? And Mitch, can you just help us understand how we should expect the price factor in the model to play out in the fourth quarter and throughout 2023?

Yes, as I mentioned earlier, we have kept our prices steady since January. I want to emphasize the value that Sweetgreen provides. We source most of our food locally and from organic suppliers, often from the same sources used by top restaurants. Additionally, we prepare our food from scratch daily, ensuring a high-quality product for the price. While our competitors have raised prices, we believe that our relative value is improving. We haven’t increased prices partly because our plant-based menu has been less affected by commodity pressures, though we have experienced some. We see this as an opportunity to capture market share as others increase their prices. With the consumer environment becoming more challenging, we view this as a chance to attract more customers. We do anticipate needing to raise prices next year, but we will be cautious about how we approach that. In the current market, we want to ensure we offer the right value. We’ve also started to notice that some consumers may be trading down during this recession, which presents an opportunity for Sweetgreen.

Brian, just following up on your question. There's no change in our pricing in the fourth quarter. So it will look exactly like it did in the third. You are correct, our last price move was the beginning of 2022, and that's the only price change for the year.

Okay. And I think I heard you correctly in your prepared remarks, so I'm sorry if this is off base, but I think you said a couple of stores next year will have the Spyce technology. And if that's the case, I'm just curious how much of these stores' product-making capabilities will actually be automated, the stores that are going to have the Spyce technology. And how important is the success of these stores in your overall thinking regarding the ability to scale this automation across your asset base moving forward?

Let me explain a bit about this technology, which we're calling the Infinite Kitchen. We're very excited about it. We believe that automation can be transformative for the restaurant industry, especially for our model. There are numerous advantages. From the customer’s perspective, the throughput gains will be substantial, significantly exceeding our current line's capacity. Additionally, a key benefit we offer today is improved accuracy in portioning; the machine achieves this perfectly. We're also thrilled about its impact on the team member experience. We have focused on designing this technology to enhance the human experience within the store, which our team members are eager to embrace as they work alongside this technology. Furthermore, it represents a significant transformation from both a model and financial standpoint. In our restaurants, about half of our variable labor costs are related to production or assembly, and the Infinite Kitchen will handle the majority of that. To clarify, our Mount Vernon pickup kitchen serves as a test for the Infinite Kitchen concept. In our vision, this automated assembly will fulfill all orders without distinguishing between frontline and secondary make lines. We are enthusiastic about these pilot programs. Although it’s early, we need to evaluate both the technology and the experiences of our customers and team members and refine them. We feel confident that this will be groundbreaking for our brand and the industry. If everything goes well, we plan to start rolling these out in 2024. It’s important to note that these will involve two new builds rather than retrofits, and we will be opening two new stores featuring this technology.

And those 2 stores are in '23, right?

Correct.

And we'll go next now to Jon Tower at Citi.

I have a few questions. I'm curious about the digital revenue; the digital mix as a percentage of revenue showed a slight decline both quarter-over-quarter and year-over-year. I understand that during this period you implemented the summer of rewards program for part of the quarter. Could you provide some insight into what might have caused this modest decline?

Yes, we are seeing the frontline return, which is positive for us. I hope to see even more frontline traffic in future quarters as it serves as an effective customer acquisition strategy. We expect more customers to engage with us through our frontline and then transition to digital. This is simply a shift in dynamics where the overall number has increased, but the frontline has also grown. We truly encourage this trend to continue.

Okay. Regarding the unit growth discussion, I remain concerned because the business is currently under significant pressure for various reasons. Why not focus the growth next year on more profitable markets? This might reduce the overall new store growth rate, but it ensures that the stores you open will be more profitable or have higher volumes than in the past. I'm interested in your thoughts on the importance of growth rate.

In an earlier question, when I talked about the pipeline and our focus on fewer markets, it's exactly that. So this year, we went to a lot of new markets and tested out some demographics and areas that were, in a lot of ways, new to us in building the brand. In '23, you'll see us focus much more on markets where we know it works. It's a proven model, really reducing the risk from our pipeline. So what you said is exactly what is happening.

Right. But does that translate into potentially smaller number of stores relative to the 20%-plus growth rate?

No, the truth is the pipeline was actually larger, but we are now concentrating on specific markets and areas where we have strong confidence. It could have been even bigger if we were willing to take on more risk, but right now, our priority is on driving profitable growth.

Got it. And then on the Infinite Kitchen stores that you're contemplating are going to open next year, are those going to be digital only? Or are they also counter service, frontline?

We haven't shared much about the experience yet, but we want to ensure customers can order in various ways. We understand that not everyone prefers to order digitally, so there will be options for in-store ordering. As I mentioned earlier, the human experience and adding that personal touch are very important. Even in our new digital-only store, it might be misleading to call it digital only because there is a high-touch concierge experience, allowing customers to order from a person as well. Picture a blend of concierge ordering, digital options, and kiosks as part of that experience.

Got it. And last one for me, commodity inflation in the quarter. I don't know if you guys had mentioned it on the call yet, but if you haven't, you might give me an update.

Now what we really have seen is no significant change from the run rate throughout the whole year, but we expect it to average for the year approximately 6%, in line with our price increase taken in January.

And we'll go next now to Katherine Griffin of Bank of America.

So first, I just wanted to drill into this, the call-out issue a little bit further. So number one, can you just remind us again sort of why the call-outs were higher in the third quarter than you were expecting? And then as a follow-up to that, I believe Sweetgreen ran for a one-week long promotion for a $10 harvest bowl. So I'm just curious, given some of the staffing challenges you're facing, why choose to do a promotion at that time?

Yes, I can address that. During the third quarter, we brought on many new team members, and our staffing mix shifted to more part-time employees than we had previously experienced. In the current challenging labor environment, this part-time mix led to an increase in call-outs. However, in locations where we have a higher proportion of full-time staff, the call-out rate has decreased considerably. Therefore, we are focused on adjusting our staffing mix to include more full-time employees. We want Sweetgreen to be their primary workplace, as that commitment leads to better job performance. Our staffing levels are actually quite adequate; we just need to optimize the mix and allow our team members to acclimate to our omnichannel model and the high volumes we handle. We believe addressing the call-out issue will be significantly aided by increasing the number of full-time employees. Regarding the $10 promotion, we are prepared and ready for it. Many of the challenges we mentioned lingered through Q3 and into early October, but we believe our operations have improved entering November. We identified an opportunity to reengage some lapsed users and offer them value in this market. It's still early, and we are analyzing the results, but initial findings indicate promising outcomes for user reengagement and customer acquisition. We're excited about the promotion, and I want to thank the entire team for their efforts. The reason we chose the harvest bowl for the promotion is that it is our best-selling item. We’ve found that when customers try the harvest bowl, they are more likely to return. It’s our most popular bowl, and we anticipate some lasting positive effects from this promotion.

Got it. And then, Jon, I just wanted to follow up on something. I want to make sure I heard you right. I believe you said you expect there could be some trade down into Sweetgreen. So can you just talk about, number one, sort of where those customers would be coming from? And then alternatively, what is the risk of customers that you know today trading out from Sweetgreen?

Yes. We’ve seen it across the industry in these environments where casual dining, fine dining, people deciding they still want a high-quality, healthy meal, but they maybe don’t want to spend $100 for dinner and they want to spend $25 or $30 general for a couple. And so we’ve seen some opportunities in engaging customers there. Listen, in terms of the consumers tightening their belts in this environment, we’re not – we’re expecting some of that. I mean I think it’s pretty clear we’re entering some sort – we’re in or we’re entering some sort of recession. But what’s important for us is to really focus on our price value and what we offer. We have a bowl under $10 in every market. We all – our food is local and organic, made from scratch, really delicious, changes seasonally. And I think customers really value that. On top of that, we have a loyalty program being launched next year, which we think will be a huge driver for us. It’s something that we’ve historically had for the history of Sweetgreen and over – during the pandemic, we’ve been piloting new ways to improve it. So we’ve essentially been running without a loyalty program. I’ll also say in this recessionary environment, we think that will be very important for us and a huge growth driver.

We go next now to Chris Carril of RBC Capital.

Just following up on the $10 harvest bowl promotion. I know you mentioned you're still evaluating the promotion. But do you anticipate leveraging price point promotions going forward, more just given the positive results you just mentioned? Or was this just very targeted and tactical for this point in time?

In this environment, we are constantly experimenting with different strategies to increase traffic while ensuring that they remain profitable. We are currently assessing the outcomes, and it seems to be successful. If it continues to yield positive results, we will explore various methods to attract customers and generate excitement in our markets. Therefore, if the results confirm its effectiveness, we plan to implement more initiatives like this.

Got it. Okay. And then, Mitch, regarding the margins for the fourth quarter, it looks like, based on our model and the full year guidance commentary, there will be a significant decrease in margins from the third quarter to the fourth quarter, if I'm correct. I assume this is primarily due to seasonality, which we haven't experienced as much in recent years. However, is there anything else we should consider regarding the fourth quarter margins specifically?

No, the fourth quarter margin traditionally has been a low margin for Sweetgreen, largely built around the holiday schedule and winter time. So there's really nothing else going through it.

Okay. Got it. And then just last one, on the automated kitchen technology, Jonathan, you mentioned that the stores featuring the technology will be new builds for next year. But how are you thinking about opportunities to retrofit existing stores with the technology?

Yes, we haven't reached that point yet. The advantage for us, given our scale and size, is that we are in an ideal position where we are large enough to invest in transformative technology, yet small enough that the majority of our growth is still ahead of us. While I believe the technology could be adapted for existing stores, we are really focused on implementing it in new builds. We think that integrating this technology into the overall experience and considering it in a comprehensive manner is the best way to deploy it. Therefore, we are well-positioned for that.

And ladies and gentlemen, that is all the questions we have this afternoon. Mr. Neman, I'd like to turn things back to you for any closing comments.

Thank you so much. Yes, I just wanted to close up. I’ve been spending a lot of time in the field with our restaurants, with our restaurant leaders, meeting customers, talking to team members. And I’ve got to say I come back very energized about our intimacy at scale playbook. We learned a lot throughout the pandemic, and we’ve tightened up our model in terms of how we operate. But now we’re getting back to basics on how we connect the communities and how we add the suite touch one customer at a time. So we’re really excited about the year ahead. We have a robust pipeline of MROs. We have 2 Infinite Kitchens planned, which I think are going to be really interesting to learn from. We’re going to be introducing our loyalty program, and we have a lot of exciting stuff on the menu side, including some cool tests going on from a hearty perspective. So all to say, challenging environment, but excited about the progress we’ve made and really excited about the prospects looking out into ‘23 and beyond. Lastly, I just want to thank everyone for your time on today’s call and for joining us on this journey. See you all soon.

Thank you, Mr. Neman. Ladies and gentlemen, that will conclude Sweetgreen's Q3 2022 earnings conference call. We'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.