Earnings Call Transcript - SG Q2 2024

Operator, Operator

Thank you for joining us. My name is Jeannie, and I will be your conference operator today. I would like to welcome everyone to the Sweetgreen Inc Second Quarter 2024 Earnings Call. I will now hand the conference over to Rebecca Nounou, Vice President and Head of Investor Relations. You may begin.

Rebecca Nounou, Vice President, Head of Investor Relations

Thank you and good afternoon everyone. Speaking on today’s call will be Jonathan Neman, Co-Founder and Chief Executive Officer, and Mitch Reback, Chief Financial Officer. Both will be available for questions during the Q&A session following the prepared remarks. Today’s call is being webcast live and recorded for replay. I’d like to remind everyone that the information under the heading forward-looking statements included in our earnings release also applies to our comments made during the call. These forward-looking statements are based on information as of today, and we assume no obligation to publicly update or revise our forward-looking statement. I’d also direct you to our earnings release for additional information regarding our use of non-GAAP financial measures, including reconciliations of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Our earnings release can be found on our Investor website. With that, it’s my pleasure to turn the call over to Jonathan to kick things off.

Jonathan Neman, CEO

Thank you, Rebecca and good afternoon everyone. We had a strong second quarter, a testament to the groundwork we laid in 2023, the impact of our growth strategies, and the strength of our team. We reported sales of $184.6 million representing 21% year-over-year growth. Team sourced sales grew 9%. This consisted of a 5% benefit from menu prices and a 4% positive traffic and mix. Restaurant level margin for the second quarter was 22.5%, expanding over 200 basis points year-over-year, making this one of the highest restaurant level margin performances in the company’s history. Additionally, we generated an adjusted EBITDA of $12.4 million for the quarter. We delivered a strong second quarter due to several factors, including the launch of Caramelized Garlic Steak, disciplined operational execution, and strong restaurant openings, all part of our simple two-prong strategy. One, continue building our brand by creating great products and guest experiences. Two, expand our connection to guests by building and operating great restaurants. Let me share some of the highlights from this quarter. During the second quarter, we opened 4 new restaurants, one in Washington, DC, Chicago, Morristown, New Jersey, and Salem, New Hampshire. New Hampshire being a new market for us. Our 2024 cohort of new restaurant openings are ramping nicely and continue to have an average weekly revenue that already outpaces the existing fleet average. As we shared a few quarters ago, we relaunched our intimacy at scale playbook to execute new openings. This playbook prioritized choosing the best real estate, having the right leaders in place, and strategically investing in brand awareness, which is paying dividends. Additionally, we saw strong top-line performance in emerging markets such as the Midwest, Texas, and the Southeast. Our results continue to show that our brand’s relevancy extends far beyond our current footprint, with considerable white space in both new and existing markets. Sweetgreen’s high-quality offering and compelling value is clearly resonating with consumers in today’s industry backdrop. On July 15, we completed our first Infinite Kitchen retrofit at Penn Plaza, which is now the fastest way to get Sweetgreen in New York City. The retrofit began in June and took seven weeks to complete. We were able to keep the restaurant partially open during six of the seven weeks of renovation for online ordering and delivery; the restaurant was fully closed for one week. It is the first Infinite Kitchen made by our contract manufacturer, which was delivered on time and at target cost. Since reopening, we are seeing some of the highest throughput levels we have seen at the store. While less than a month in operation, we are pleased with the performance of the restaurant. We remain on track to open a total of 7 new restaurants featuring the Infinite Kitchen, as well as retrofitting two to three existing restaurants with the Infinite Kitchen in 2024. Looking ahead, we are resuming a new unique growth rate of 15% to 20% annually, with 2025 being at the lower end of this range, and 2026 and beyond targeting the upper end of the range. The majority of our 2025 pipeline is identified, and we are working on our 2026 pipeline. Our menu innovation has attracted new guests driving traffic and check sizes. Caramelized Garlic Steak, which launched in May, and protein plates have been particularly successful at driving same-store sales at dinner and on weekends in the second quarter. Dinner now represents 40% of sales, excluding the 2 p.m. to 4 p.m. midday day part. This was an expansion of 3 percentage points year-over-year. Additionally, in June, weekend same-store sales grew by double digits. We’ve also seen our share of new guests acquired steadily increase since the fourth quarter of last year. We believe our culinary innovation will allow us to further grow our dinner mix, as well as be a driver of long-term traffic. With respect to operations, our teams remain focused on prioritizing the guest experience and increasing throughput. We saw progress across the fleet, and it reflected in our results this quarter. This will continue to be an area of focus for us moving forward. Part of our culture is creating an ownership mindset, and our incentives are aligned to these values. These incentives include bonuses and equity grants for our head coaches. As we prepare for more restaurant openings in the coming years, we are building a solid pipeline of future head coaches, and are thrilled about the growth opportunities for all of our team members. This is why we’ve been focused on investing in the employee experience, including upgrading our learning path with an emphasis on leadership skills like performance management, culinary skills, and hospitality. We believe that Sweetgreen offers a career and not just a job. Many of our best head coaches are developed from within, and we are proud that over 50% are promoted from within. As we move forward, our goal is to increase this percentage. We’ve been focused on investing in head coaches to improve stability, because keeping leaders in place can reduce restaurant turnover, which has stabilized at a new post-pandemic low. Last week, Sweetgreen turned 17. Since day one, we’ve had a vision to redefine fast food by creating a concept that is committed to being fresh, craveable, convenient, and sustainable. Our unique sourcing model, partnering with farmers and suppliers we know and trust, combined with our commitment to delivering compelling value at scale, has made Sweetgreen a category leader. We plan to continue to lead and define this category by thoughtfully expanding our menu, building out our digital program, introducing new formats, and innovating how restaurants of the future will operate via the Infinite Kitchen. I want to thank all of our team members for their hard work. Over the past two years, we’ve been focused on strengthening our operations and financial model and positioning ourselves to accelerate profitable growth. Now I will turn over the call to Mitch to review our financial results in further detail.

Mitch Reback, CFO

Thank you, Jonathan and good afternoon everyone. As Jonathan just shared, our hard work over the past several quarters and commitment to disciplined, capital-efficient growth is demonstrated in our second quarter results. We achieved our 13th consecutive quarter of over 20% revenue growth, with same-store sales reaching its highest level in two years. This flowed through to restaurant level margin and adjusted EBITDA. For 2024, we remain on track to be adjusted EBITDA positive on an annual basis. Total revenue for the quarter was $184.6 million, up from $152.5 million in the second quarter of 2023, growing 21% year-over-year. For the second quarter, same-store sales grew 9% year-over-year. This consisted of a 5% benefit from increased menu prices and a 4% increase due to positive traffic and mix. All markets comped positively with very strong growth led by newer markets: Texas, Florida, Atlanta, and the upper Midwest. Year-to-date, same-store sales change is running at 7%. Our average unit volume in the second quarter was $2.9 million. Restaurant level profit margin in the second quarter was 22.5% compared to 20.4% a year ago. This is more than a 200 basis point improvement from the second quarter of 2023, and margins were strong across all regions and age cohorts. Year-to-date, restaurant level profit margin is 20.5%. Restaurant level profit for the second quarter was $41.5 million, a more than 30% increase year-over-year. For reconciliation of restaurant level margin to comparable GAAP figures, please refer to the earnings release. In the second quarter of 2024, we opened four restaurants, including locations in Washington, DC, Chicago, Morristown, New Jersey, and Salem, New Hampshire, a new market for us. We ended the quarter with a total of 231 restaurants. Our Infinite Kitchens continue to deliver on our financial, operational, and customer service metrics. Naperville just crossed its one-year anniversary in May, with $2.8 million in sales. For the second quarter, the restaurant level margin in Naperville was 31.3%. In its first year, team member turnover was around 45%, less than what we see in a classic restaurant at a similar stage. Our Huntington Beach Infinite Kitchen is six months old and following a similar trajectory. Our Penn Plaza retrofit, open for a few weeks, has shown strong performance. On its second day, the Infinite Kitchen produced nearly 200 bowls in 30 minutes with 100% on-time reliability and has the potential to reach 500 bowls per hour. As Jonathan mentioned, Penn Plaza offers the fastest way to get Sweetgreen, with an average order completion time of just under 3.5 minutes. For 2024, we are on track to open between 24 and 26 new restaurants, 7 of which will contain the Infinite Kitchen. These seven restaurants are scheduled to open in Q3 and Q4 of 2024, one of which opened this week in Fashion Island in Newport Beach, California. Food, beverage, and packaging costs were 27% of revenue for the quarter, flat year-over-year. Labor and related expenses were 27% of revenue for the second quarter, a 200 basis point improvement year-over-year. While we experienced wage rate increases, this was more than offset with improvements to labor optimization. Occupancy and related expenses were 8% of revenue, a 100 basis point improvement year-over-year. General and administrative expenses totaled $39.2 million, or 21% of revenue for the second quarter of 2024, compared to $40.4 million, or 26% of revenue in the prior year period. The decrease in general and administrative expenses was primarily due to a $3.6 million decrease in stock-based compensation expense, which was partially offset by an increase in our investment in advertising. Net loss for the second quarter of fiscal 2024 was $14.5 million compared to a loss of $27.3 million in the prior year period. The decrease in net loss is primarily due to a $10.4 million increase in our restaurant level profit and a $4.5 million decrease in restructuring, a $1.2 million decrease in pre-opening, and a $1.1 million decrease in general and administrative expenses described above. These decreases were partially offset by an increase in depreciation and amortization expense, primarily associated with an increase in restaurants as well as an increase in other expenses related to the change in fair value of our contingent consideration. Adjusted EBITDA, which excludes stock-based compensation and certain other adjustments, was $12.4 million for the second quarter, an improvement of $9.1 million from the second quarter of 2023. We ended the quarter with a cash balance of $245 million. During the first six months of 2024, we generated a positive operating cash flow of $22.5 million. Now turning to guidance. For the fiscal year 2024, the raising guidance reflects our strong performance in the first half of the year. We remain cautious for the second half of the year, given what we are reading about the uncertainty of the U.S. economic backdrop. Additionally, our guidance reflects the retrofitting of two high-volume restaurants with the Infinite Kitchen, including Willis Tower in Chicago. We expect to achieve 24 to 26 net new restaurant openings, revenue ranging from $670 million to $680 million, same-store sales growth between 5% and 7%, restaurant level margins between 19% and 20%, and adjusted EBITDA between $16 million and $19 million. As we shared before, we remain committed to disciplined capital-efficient growth and driving profitability so that we can accelerate the Sweetgreen flywheel. We remain focused on building our brand, culinary innovation, leveraging our unique supply chain, and delivering operational excellence. With this focus, we believe we are well positioned to deliver long-term growth for our stakeholders. With that, I’ll turn the call back to the operator to start Q&A.

Operator, Operator

Thank you. Your first question comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia, Analyst

Hi. Thanks for taking the question. The corner comp was really impressive, and obviously had this nice uptick sequentially in transaction and mix. Can you talk about what was the primary driver between those two components? Because I recognize steak was probably a mixed benefit. So, I’m not sure how much we should really attribute to traffic versus mix. And then secondarily, Mitch, when you’re talking about the uncertainty in the macro environment, it doesn’t seem like you’re seeing anything, but I just want to clarify if that is, in fact, the case.

Mitch Reback, CFO

Thank you very much, Sharon for the question. So, let me break the question apart into two buckets to take the first one, which was on the second quarter. We have any kind of comments about the traffic and mix and how it’s sequentially built. Let me just say that for the quarter, our traffic was positive and it built sequentially each month during the quarter. The mix benefit was largely attributable to the launch of steak. Your second question, I believe, was what are we seeing in terms of the cautious guide. And I guess I’ll translate that a little bit to what are we seeing early on in Q3. Like a lot of other people have reported, the first week of the quarter was soft around the 4th of July. As we moved away from the 4th of July, our business picked up, and for the last 3 weeks of July, our business comped at the top end of our guidance. I think what I would say, in a kind of making an overall comment, is we feel really happy and comfortable with the things that we control in our business. We’re very happy with the menu innovation and, most importantly, the customer acceptance of our new items. We’re very happy with our marketing that we’ve moved to more out of home, and it’s showing very strong results. We talked in the past about improving our labor scheduling and deployment in order to improve hospitality and lower labor costs as a percent of revenue. And we’re pleased with our results, and we alluded to in the script, very pleased with our new market response and the strong comp growth rates we’re seeing across all of our new markets. And the class of 2024 opened up very strong, with higher weekly revenue than we’re seeing in the fleet. However, we feel like we do not control the outside world, and we kind of read the same stuff in the same papers everybody reads and reports on, and I think we have a degree of cautiousness around the external environment. Having said that, we are pleased with the fact that the last three weeks of July came in at the top end of our guidance.

Sharon Zackfia, Analyst

Thanks for that. And as my follow-up on the IK at Penn, are you seeing customers discover the improved throughput via walk-in, or does it happen more in the digital channel first? Thanks.

Jonathan Neman, CEO

Sure. Hi, Sharon, good to hear from you. And thank you for the question. So, just before I begin, I’d love to just thank the entire Sweetgreen team for a phenomenal quarter, a lot of hard work to get to this point. And I just want to take a moment to thank every single person especially our frontline team members, our head coaches that really bring the Sweetgreen mission to life every day. As it relates to Penn Plaza, I think if you go and experience it, it’s pretty amazing. I mean, we’re delivering food in under 3.5 minutes. If you had gone to that store before at peak, you would have waited in line, 10 to 15 minutes, and then once you started your order, it would be about another 3 minutes until you get your food. So, you can now pretty much walk in. There’s almost, the way we’ve designed it, with the kiosk ordering as well as the concierge ordering, practically zero wait to order, and your food is out in 3.5 minutes. So that is, aside from the digital orders, which, again, if you’re ordering on your phone, it’s also that fast. So, very encouraged. We’re seeing some really positive feedback from consumers, also seeing some great positive feedback from our team members, which is really important. This is the first restaurant where we had team members that worked in an old and existing Sweetgreen that are now working in the new model. So we get an interesting test on seeing how they view the experience, and they’re really thrilled. It’s just a lot more fun and an easier place to work for them. And so really excited about it. I think it’s early, but encouraging. And I think over time, as customers understand how fast they can get through and get their Sweetgreen, we will continue to see some traffic driving potential there.

Sharon Zackfia, Analyst

Thank you.

Katherine Griffin, Analyst

Hi, thanks for the question. First, I wanted to ask another question, I guess, on marketing. It’s been a different tack for Sweetgreen, the advertising around the Caramelized Garlic Steak launch. It’s clearly been successful. It seems like you’re seeing a return on it. So, I’m curious if this is something you’re thinking about incorporating in your go-forward strategy, or if it’s more something that’s reserved for a big culinary launch. Is there any thoughts on advertising for Sweetgreen and going forward?

Jonathan Neman, CEO

Sure, thank you for the question. So, I’d say it’s much more of how you can expect us to go forward. We’ve made some good investments in the talent around our marketing team. So shout out to our marketing team that has done a great job, really thinking about 360 campaigns, including how we leverage out of home digital community, and we’re seeing some really great results around it. So we will be incorporating this into our go-forward strategy. We’ve also, many people still think about Sweetgreen as a salad company. We’ve never viewed it that way. From the very beginning, the idea was to create a company that leveraged a really unique, fresh supply chain crafted around how we make our food, and then applied that to different types of food. Of course, we started with salads, and that’s what we’re very much known for. But as you’re seeing, we’re starting to branch out and leverage that license the brand has around the quality, craveable fresh food, and then apply it to plates. And over the next year or so, you’re going to see a lot more menu innovation. And one of the things that we’re really excited about that we’ve seen in this quarter, which is something we’ve been working on for a while, is that broadening of our consumer and broadening of our day part. So, we’ve seen a nice shift in dinner with huge growth in that dinner day part, we’ve brought in the consumer. And some of the results we’ve seen a lot, a lot of the success was actually from a lot of the emerging markets that, at one point, were a little bit questionable for us. We saw some massive comps in those markets, and I attribute that to a combination of the great culinary innovation we’ve had with this new approach to marketing.

Katherine Griffin, Analyst

That’s great. Thank you. And then on the menu innovation that Sweetgreen’s been executing. I’m curious how it’s resonating with your existing, more habitual customer base. And I guess what that means for how you’re thinking about balancing menu innovation going forward in order to appeal to your new cohorts versus existing.

Jonathan Neman, CEO

Yes, we’ve seen success across both. If you look at both the customer acquisition and the frequency trends, we’ve been pretty pleased about both how it’s brought in new customers and removed that veto vote in many ways, and created that occasion where I want that Sweetgreen experience. I may not want a bowl full of greens, but now I can get a steak bowl with wild rice and Caramelized Garlic Steak, and it’s a really hearty dinner option with a really great value, especially in this environment. And our existing guests are loving it too. So I’d say we’re seeing it in both existing and with new customers.

Brian Mullan, Analyst

Hi, thank you. Just a question on development, as you look to next year, do you have visibility yet in terms of how many of those locations might have Infinite Kitchens, or is that still yet to be determined? And really just wondering if that answer has more to do with the way you’re constructing your pipeline, or if there are any contract manufacturer constraints to think about as well?

Jonathan Neman, CEO

Sure. So the short answer is, expect a much higher percentage of Infinite Kitchens in the pipeline. We’re not yet disclosing exactly how many, as we’re finalizing design, but expect, I’d say a majority, more than 50% of new units will include an Infinite Kitchen next year.

Brian Mullan, Analyst

Okay, thank you. And then just a follow-up, Jon, more of a strategic question for you. But if the Infinite Kitchen continues to progress the way you hope, can you just talk about the strategic optionality that gives the company over the next 5, 10 years or even longer? What does that help you do with development, and does it also give you opportunities to do anything with the value perception with consumers and the value proposition?

Jonathan Neman, CEO

Yes, absolutely. I mean, one of the reasons – the reason we were so excited about this is we saw this as a huge tool for us, especially as labor becomes more challenging and more expensive, and today, we’re seeing a lot of success. But to your point, over time, there’s a lot of optionality, whether that be things we do from a price and value perspective. The unlocking of total addressable market that it allows us for with the margin increase and the fewer employees that we can run it with should unlock a lot of white space for us. The way it’s been designed and the innovation team we have around innovation and automation is, we believe that there are applications outside of this core bowl application as well. So, I’d say there’s a lot of option value around automation and what we’ve built with the Infinite Kitchen. And I just want to take a moment to thank the whole Spyce team, who’ve done just an incredible job leading this project.

Logan Reich, Analyst

Hey, thanks for taking the question. Congrats on the really solid results. My question was on restaurant margins, obviously, really impressive growth this quarter or margin expansion this quarter, year-over-year. Obviously steak is coming in the mix more so going forward. But I guess, just how do you sort of think about restaurant level margins trending, and what are the puts and takes beyond this year that you guys are most looking out for? And then I have a follow-up.

Mitch Reback, CFO

Thanks, Logan. I think, let me answer that question more in the broader term over the next few years. Since I think that’s the way the question was phrased. We continue to see our margins expanding near-term, and I think most of that is going to come from a few areas: continuing to see more improvements around labor and labor deployment. I think we’ve seen great success in the past few years, but we could see a lot of opportunity coming forward. There’s going to be some opportunity, of course, in our occupancy. As a small company, our occupancy was heavily influenced by deep urban areas. And as we grow in newer markets, our occupancy will steadily come down. And I think the other area, the P&L basically, in the area of other expenses, we continue to find leveraging opportunities throughout them, and you’ll see us continue to drive some of those. So, I believe over the next few years, you’ll see our margins increase. I want to caution it may not be exactly at a quarter-by-quarter basis, but on an annual basis, they should improve over the next few years, and this is absent the deployment of the Infinite Kitchen. The Infinite Kitchen, I believe, will supercharge the margin expansion, particularly if we can retrofit very high volume stores rapidly.

Logan Reich, Analyst

Great. Thanks. And then on the Penn Plaza retrofit, I guess, what are the sort of key learnings there that sort of instruct your views going forward on the retrofits, whether that be sales performance through that six or seven-week period? How does that sort of impact your views on the retrofits going forward?

Jonathan Neman, CEO

So is the question, what are – what did we learn? Or what are we trying to learn?

Logan Reich, Analyst

Yes, I guess, like, what were your learnings relative to expectations during that retrofit?

Jonathan Neman, CEO

Yes, I’d say, first of all, I think it was impressive that we were able to keep the store operating during that time. So we were able to turn that store in seven weeks and keep it running with digital ordering for delivery and pickup during that time for six of the seven weeks. We made the decision to close for one week really to focus on hospitality training for the team in that week. But I think it was an encouraging start for us, and I think over time, we should be able to bring that down. Other learnings, I think we’re learning continuously with each new Infinite Kitchen. We just opened one this week on Tuesday. Like I’ve said many times in the past, we feel very good about the technology, and that will continue to improve and we will continue to scale the cost down. We’re still working to perfect the overall experience. With each new one, we see you’ll notice a lot of things that we’re trying and testing as we start to perfect that feeling you get when you walk into the restaurant, as well as the team member experience and making sure we just nail down all the right adjacencies from a labor perspective, and the right flow from a customer perspective, all while trying to bring our build-out costs down pretty significantly as we look to accelerate openings. So, it’s a huge focus area for us. We are learning both about new builds and retros, but I would say, with four under our belt, we have learned a ton and I am very pleased with the results thus far, which is what has given us the confidence to continue to accelerate this year. Seven more will open, and we’re going to open a lot more this year and next year. We wouldn’t have that confidence if we didn’t see the results we are seeing today.

Unidentified Analyst, Analyst

Good evening, guys. Congrats on excellent results and execution. As Sweetgreen expands from being regional to truly national over time, can you share some of your early thoughts or your philosophy of reinvesting some of the margins you realize back into customer bowls or menu price? How are you as an organization thinking about this today as you build out your total addressable market? And I have a follow-up.

Jonathan Neman, CEO

Sure. So, thanks for the question. To your point, one of the – I think for me, one of the most encouraging things that we have seen over the past couple of quarters has been the momentum across the company, the breadth and depth of the sales growth, specifically a lot of the momentum we have seen in the emerging markets in the Upper Midwest, where we grew a lot. We planted a lot of restaurants last year in Texas, Florida, and Atlanta, all markets that we are seeing really robust growth. I think that once we get to a scale, I mean people have a different number, whether that’s 400 units or 500 units national, I think it does unlock a lot of marketing efficiencies as we are able to advertise more nationally. We are still a couple of years away from that, but we do think that over time we are seeing a lot of success with our marketing activities and brand awareness and as we continue to drive our margin to get scale, I think there is a lot of opportunity to get more people aware and trying Sweetgreen, because one thing that we know is once consumers try Sweetgreen, they are very sticky. There is a natural flywheel built in, given the habitual nature of the food. Something that we just got to do is just get more people to know who we are and give us a try.

Unidentified Analyst, Analyst

Perfect. And then considering the labor savings we discussed in the past on the infinite kitchen, longer term, would you expect to build any stores without infinite kitchens at all?

Jonathan Neman, CEO

So, I think I heard the question being whether you would build any stores without an infinite kitchen, the way to answer that question is that correct?

Unidentified Analyst, Analyst

Yes.

Jonathan Neman, CEO

Yes. So, I would say the vision would be to get to a place where all stores in the future do feature an infinite kitchen. At this moment, we are still learning a lot and we are trying to make sure we meet our capital return threshold. So, you are seeing it put into more stores that have higher volume or higher throughput needs or maybe have more challenges from a labor perspective, which is where you will see us prioritize. But over time, as we bring down the overall build-out costs around not just the infinite kitchen, but the cost of the automation, I think it will unlock the ability to be in most and eventually all restaurants.

Jon Tower, Analyst

Great. Thanks. Maybe just a little bit more on Infinite Kitchen and one other after, just on the retrofit itself. Can you maybe give us a range of the cost to retrofit the store? Obviously, you gave us the timing and specifically on the machine, I think you had mentioned that you have now moved on due to the contract manufacturer and originally you talked about a cost of roughly $400K to $550K for the machine itself. Are you seeing that begin to bend a little bit lower?

Jonathan Neman, CEO

Hi Jon. Let me say the costs are coming right in line with the guidance that we gave. These are early machines that are just kind of rolling off for them. In fact, I think Penn Plaza was the first unit made at the contract manufacturer. So, by no means have we obtained any type of scale in manufacturing. We would anticipate some of that to come down the road. In terms of the total cost of Penn, we really don’t want to give out the CapEx numbers on an individual store-by-store basis. But the number you have is what the IK gets cost. There were, of course, other modeling done at the same time when we had store available.

Jon Tower, Analyst

Okay. And then just maybe pivoting to pricing, I know this year you are running about 5% price, given some of the inflation that you are seeing across the model. But I am just curious, as you alluded to earlier, Mitch, there is some softness seemingly forming with the consumer. How do you guys think about pricing in 2025 if we are kind of in a backdrop where consumers are a little bit more pinched on their spend?

Mitch Reback, CFO

Jon, yes. First, let me just make a comment that in the month of July, we did have one point to price roll off. So, we are currently running at about four points in price. We really haven’t begun to finalize our view of 2025 or certainly at the pricing level, but I can certainly say that we take a slightly more cautious view from this vantage point today than maybe we have in the past couple of years. Like a lot of people, as reflected in our guidance, we are kind of watching the outside world pretty closely.

Brian Bittner, Analyst

Thanks. On the restaurant margins, the upside that you are demonstrating in restaurant margins relative to expectations, it’s continuing to be driven by significant leverage on labor. As it relates to this quarter and moving forward, is that just a result of the strengthening same-store sales, or are there maybe some other strategic factors that keep you optimistic about this line item? As you execute moving forward?

Mitch Reback, CFO

Yes. So, I will – let me talk about labor for a minute and some of the things that we are seeing. So yes, obviously we are seeing some leverage with sales. We have also seen the addition of steak and a lot of positive developments there. But beyond that, we have been very, very focused on finding and developing the best head coaches and improving the retention of our teams. We really believe by having the best head coaches that stay with us and are promoted from within, they create a stable, great working environment for their teams, and that reflects in the results. We had a lot of improvements over the past year there. So, our turnover has continued. It has stabilized at lows. We continue to see our head coach stability grow and our head coach tenure grow. We are working on some very exciting things that we think can continue to drive that. Beyond that, we are working on some things around labor deployment that we think can help us, not just on hospitality and throughput, making sure we are staffing the peaks properly but also in terms of continuing to leverage that labor line. So, I would also say that we have some really exciting things in the works to continue to drive leverage on labor and drive our restaurant level margins.

Jonathan Neman, CEO

And Brian, I will take the second part of your question, which I think was on the other expenses. The other expenses were largely the result of channel mix shifts in the business and really a higher level of our repair and maintenance, particularly around HVAC, not unlike what other people have reported as things have heated up across the country.

Dennis Geiger, Analyst

Hi guys. Can you hear me?

Mitch Reback, CFO

We can hear you.

Dennis Geiger, Analyst

Great. Terrific. Congrats to the team. Two quick questions, the first one as it relates to the IK margin versus the non-IK, it would be helpful to get the Naperville solid number there. It sounds like Huntington Beach is seeing something, I assume probably somewhat similar. Just wanted to get a sense on sort of that margin spread if it’s sort of in the ballpark of what we saw in the last quarter, how you would kind of frame that up if there is anything more to add there.

Jonathan Neman, CEO

Thanks Dennis. I would say it is certainly in the ballpark or slightly better than we thought in all of our modeling. What we have seen in the past, largely coming out of the labor line, obviously, which you can see when you visit an IK store with some additional benefits in cost of goods. So, very pleased with the early results. I’d say on the suburban stores, we will continue and on the two original pilots, we continue to see similar trends with the higher ticket. We do believe with the better experience that customers are having, it’s more accurate, it’s on time. We have Naperville, the first store to now hit a year to start to see common numbers. But we do expect based on a better experience to see some comp opportunity in those restaurants that will drive AUV. The real test of this is when we go into urban environments where we do have long lines and we can capture more customers. This is the first time we are seeing this with the Penn Plaza. Fashion Island should be a pretty heavily trafficked store as well. But I think that’s when we are really going to start to understand in these high-traffic locations, can we get an AUV lift just by serving more customers in those peak periods. So, in some ways, I would say we are very encouraged and think better experiences will help us continue to drive comps. In more high-traffic locations, there is definitely an opportunity, but pretty early to say for now.

Operator, Operator

This concludes today’s Q&A session and today’s conference call. Thank you for attending. You may now disconnect.