Sweetgreen, Inc.: Form 10-Q for the period ended Mar 26, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Special Note Regarding Forward-Looking Statements” and in other parts of this report. Unless the context otherwise requires, all references in this section to “we,” “us,” “our,” the “Company,” or “sweetgreen” refer to Sweetgreen, Inc. and its subsidiaries.

As a result of losing our emerging growth company status on December 25, 2022, we were required to adopt ASC 842, effective beginning on December 27, 2021. Additionally, we elected to reclassify prior period costs related to utilities and repairs and maintenance costs to conform with the current presentation of occupancy and other related cost within the condensed consolidated statement of operations. As a result, the amounts included in our condensed consolidated statement of operations represent the updated balances to the respective line items within previously filed quarterly statements’ condensed consolidated statement of operations. For the reasons described herein, the fiscal year 2022 quarterly information presented herein does not mirror the financial information included in our Quarterly Reports on Form 10-Q filed during fiscal year 2022.

Overview

We are a mission-driven, next generation restaurant and lifestyle brand that serves healthy food at scale. Our bold vision is to be as ubiquitous as traditional fast food, but with the transparency and quality that consumers increasingly expect. As of March 26, 2023, we owned and operated 195 restaurants in 16 states and Washington, D.C.

Factors Affecting Our Business

As we move into the second fiscal quarter, while it is still early, we have seen positive momentum in our revenues. We are encouraged by the the launch of our loyalty program in the second fiscal quarter and broadened menu offerings. However, these results are preliminary and we cannot currently predict whether such momentum will continue or that it will be indicative of our second fiscal quarter or future results.

Expanding Restaurant Footprint

Opening new restaurants is an important driver of our revenue growth. During the thirteen weeks ended March 26, 2023 and March 27, 2022, we had 9 and 8 Net New Restaurant Openings, respectively. Our total count as of March 26, 2023 was 195 restaurants in 16 states and Washington, D.C.

We are still in the very nascent stages of our journey, and one of our greatest immediate opportunities is to grow our footprint in both existing and new U.S. markets and, over time, internationally.

Real Estate Selection

We utilize a rigorous, data-driven real estate selection process to identify the location and timing of opening new restaurants, both in new and existing U.S. markets and in urban and suburban areas, with both high anticipated foot or vehicle traffic and proximity to workplaces, residences and other restaurant and retail businesses that support our multi-channel approach, including our Native Delivery, Marketplace Delivery and Outpost and Catering Channels.

Macroeconomic Conditions, Inflation, the Impact of the COVID-19 Pandemic and Supply Chain Constraints

Consumer spending on food outside the home fluctuates with macroeconomic conditions. Consumers tend to allocate higher spending to food outside the home when macroeconomic conditions are stronger, and rationalize spending on food outside the home during weaker economies. Throughout our history, our customers have demonstrated a willingness to pay a premium for a craveable, convenient, and healthier alternative to traditional fast-food and fast-casual offerings. However, as a premium offering in the fast-casual industry, we are exposed both to consumers trading the convenience of food away from home for the cost benefit of cooking, and to consumers selecting less expensive fast-casual alternatives during weaker economic periods.

While we have historically been able to partially offset inflation and other increases, such as wage increases and increases in cost of goods sold, in the costs of core operating resources by gradually increasing menu prices or other customer fees, such as service fees and delivery fees, coupled with more efficient purchasing practices, productivity improvements, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the current macroeconomic environment or in the future. In particular, current and future macroeconomic conditions could cause additional menu price increases to negatively impact our Same Store Sales Growth. There can be no assurance that future cost increases, including as a result of inflation, can be offset by increased menu prices or that our current or future menu prices will be fully absorbed by our customers without any resulting change to their demand for our products.

Our revenue growth has been negatively impacted in recent periods, in part by current macroeconomic conditions and softening consumer demand. We have seen increased variability in our customer traffic patterns, including as a result of employees returning to offices at a slower rate and at a lower frequency than anticipated as a result of many workplaces adopting remote or hybrid models. Additionally, since fiscal year 2022, as a result of inflation we have seen an increase in wage rates and costs of goods sold, which in recent periods has had a negative impact on our Restaurant Level Profit.

During the thirteen weeks ended March 26, 2023, we experienced an interruption by our supplier to the supply of packaging to our stores. This caused, and may in the future cause, a disruption in our stores, as well as higher costs of materials, which negatively impacted our restaurant operating costs during the period. While we have secured alternative suppliers, there can be no assurance we will be able to do so in the future on a timely basis, at commercially reasonable terms, or at all, and an interruption in supply of packaging could in the future adversely affect our business, financial condition and results of operations, including in particular our margins.

Seasonality

Our revenue fluctuates as a result of seasonal factors and weather conditions. Historically, our revenue has been lower in the first and fourth quarters of the year due, in part, to the holiday season and the fact that fewer people eat out during periods of inclement weather (generally the winter months, though inclement weather conditions may occur in certain markets at any time of the year) than during periods of mild to warm weather (the spring, summer, and fall months). In addition, a core part of our menu, salads, has proven to be more popular among consumers in the warmer months. Recently, as consumer behavior trends have changed, due in part to the COVID-19 pandemic and the emergence of hybrid or remote work environments, the seasonality in our business has been less predictable than in prior years and we have seen an increase and prolonged negative impact on our revenue around national holidays. As we move into the spring months, we have started to see improvement in our key metrics, specifically AUV.

Sales Channel Mix

Our revenue is derived from sales of food and beverage to customers through our five sales channels: In-Store Channel, Pick-Up Channel, Native Delivery Channel, Marketplace Channel and Outpost and Catering Channel. There have been historical fluctuations in the mix of sales between our various channels. For example, during the COVID-19 pandemic, we saw a significant increased percentage of sales through our Native Delivery and Marketplace Channels. Due to the fact that our Native Delivery, Outpost and Catering, and Marketplace Channels require the payment of third-party fees in order to fulfill deliveries, sales through these channels have historically negatively impacted our margins. Additionally, historically, orders on our Native Delivery, Outpost and Catering and Marketplace Channels have resulted in a higher rate of refunds and credits than our In-Store and Pick-Up Channels, which has a negative impact on revenue on these channels. We have also historically prioritized promotions and discounts on our Owned Digital Channels, which also reduces revenue on these channels. If we see a shift in sales through the Native Delivery, Outpost and Catering, and Marketplace channels, our margins may decrease.

Key Performance Metrics

We track the following key performance metrics and non-GAAP financial measures to evaluate our performance, identify trends, formulate financial projections, and make strategic decisions. We believe that these key performance metrics, which include certain non-GAAP financial measures, provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. These key performance metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled metrics or measures presented by other companies. See “Non-GAAP Financial Measures” below for a reconciliation of Restaurant-Level Profit, Restaurant-Level Profit Margin, Adjusted EBITDA, and Adjusted EBITDA Margin to the most directly comparable financial measures stated in accordance with GAAP.

(dollar amounts in thousands )

(1) Our results for the thirteen weeks ended March 26, 2023 have been adjusted to reflect the temporary closures of two restaurants which were excluded from the Comparable Restaurant Base. Such adjustments did not result in a material change to AUV. No restaurants were excluded from the Comparable Restaurant Base for the thirteen weeks ended March 27, 2022.

Net New Restaurant Openings

Net New Restaurant Openings reflect the number of new sweetgreen restaurant openings during a given reporting period, net of any permanent sweetgreen restaurant closures during the same given period. Before we open new restaurants, we incur pre-opening costs, as further described below.

Average Unit Volume

AUV is defined as the average trailing revenue for the prior four fiscal quarters for all restaurants in the Comparable Restaurant Base. The measure of AUV allows us to assess changes in guest traffic and per transaction patterns at our restaurants. Comparable Restaurant Base for any measurement period is defined as all restaurants that have operated for at least twelve full months as of the end of such measurement period, other than any restaurants that had a material, temporary closure during the relevant measurement period. For the thirteen weeks ended March 26, 2023, two restaurants were excluded from the Comparable Restaurant Base to reflect the temporary closure of such restaurants during the thirteen weeks ended March 26, 2023. Such exclusions did not result in a material change to AUV. For the thirteen weeks ended March 27, 2022, no restaurants were excluded from the Comparable Restaurant Base.

Same-Store Sales Change

Same-Store Sales Change reflects the percentage change in year-over-year revenue for the relevant fiscal period for all restaurants that have operated for at least 13 full fiscal months as of the end of such fiscal period; provided, that for any restaurant that has had a temporary closure (which historically has been defined as a closure of at least five days during which the restaurant would have otherwise been open) during any prior or current fiscal month, such fiscal month, as well as the corresponding fiscal month for the prior or current fiscal year, as applicable, will be excluded when calculating Same-Store Sales Change for that restaurant. This financial measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and closures.

Restaurant-Level Profit and Restaurant-Level Profit Margin

We define Restaurant-Level Profit as loss from operations adjusted to exclude general and administrative expense, depreciation and amortization, pre-opening costs, loss on disposal of property and equipment, and, in certain periods, impairment and closure costs and restructuring charges. Restaurant-Level Profit Margin is Restaurant-Level Profit as a percentage of revenue.

As it excludes general and administrative expense, which is primarily attributable to our sweetgreen Support Center, we evaluate Restaurant-Level Profit and Restaurant-Level Profit Margin as a measure of profitability of our restaurants.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, loss on disposal of property and equipment, other (income) expense, Spyce acquisition costs and ERP implementation and, in certain periods, impairment and closure costs and restructuring charges. Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of revenue.

Total Digital Revenue Percentage and Owned Digital Revenue Percentage

Our Total Digital Revenue Percentage is the percentage of our revenue attributed to purchases made through our Total Digital Channels. Our Owned Digital Revenue Percentage is the percentage of our revenue attributed to purchases made through our Owned Digital Channels.

Components of Results of Operations

Revenue

We recognize food and beverage revenue, net of discounts and incentives, when payment is tendered at the point of sale as the performance obligation has been satisfied, through our three disaggregated revenue channels: Owned Digital Channels, In-Store-Channel (Non-Digital component), and Marketplace Channel. Provisions for discounts are provided for in the same period the related sales are recorded. Sales taxes and other taxes collected from customers and remitted to governmental authorities are presented on a net basis, and as such, are excluded from revenue. We expect revenue to increase as we focus on opening additional restaurants, diversify and expand our menu, make investments in our Owned Digital Channels to attract new customers and increase order frequency in our existing customers, as well as any increases in the price of our menu items.

Gift Cards

We also sell gift cards that do not have an expiration date. Upon sale, gift cards are recorded as unearned revenue and included within gift card liability in the accompanying consolidated balance sheets. The revenue from gift cards is recognized when redeemed by customers. Because we do not track addresses of gift card purchasers, the relevant jurisdiction related to the requirement for escheatment, the legal obligation to remit unclaimed assets to the state, is our state of incorporation, which is Delaware. The state of Delaware requires escheatment after five years from issuance. We do not recognize breakage income because of our requirements to escheat unredeemed gift card balances.

Delivery

All of our restaurant locations offer a delivery option. Delivery services are fulfilled by third-party service providers whether delivery is ordered through our Native Delivery Channel or Marketplace Channel. With respect to Native Delivery Channel sales, we control the delivery services and recognize revenue, including delivery revenue, when the delivery partner transfers food or beverage to the customer. For these sales, we receive payment directly from the customer at the time of sale. With respect to Marketplace Channel sales, we recognize revenue, excluding delivery fees collected by the delivery partner as we do not control the delivery service, when control of the food or beverage is delivered to the end customer. We receive payment from the delivery partner subsequent to the transfer of food and the payment terms are short-term in nature. For all delivery sales, we are considered the principal and recognize the revenue on a gross basis. For a more detailed discussion of our third-party delivery fees and our expectations regarding our margins, see the section titled “—Sales Channel Mix” above.

Restaurant Operating Costs, Exclusive of Depreciation and Amortization

Food, Beverage, and Packaging

Food, beverage, and packaging costs include the direct costs associated with food, beverage, and packaging of our menu items. We anticipate food, beverage and packaging costs on an absolute dollar basis will increase for the foreseeable future to the extent we experience additional in-store orders, as we open additional restaurants, and as a result our revenue grows. Additionally, we have recently experienced an increase in freight-related surcharges from our vendors as a result of increased inflation and higher gas prices. However, food, beverage, and packaging costs as a percentage of revenue may vary, as these costs are impacted by menu mix and fluctuations in commodity costs, inflation, and availability, as well as geographic scale and proximity.

Labor and Related Expenses

Labor and related expenses include salaries, bonuses, benefits, payroll taxes, workers compensation expenses, and other expenses related to our restaurant employees. As with other variable expense items, we expect labor costs to grow as our revenue grows. Other factors that influence labor costs include each jurisdiction’s minimum wage and payroll tax legislation, inflation, the strength of the labor market for hourly employees, benefit costs, health care costs, and the size and location of our restaurants.

Occupancy and Related Expenses

Occupancy and related expenses consist of restaurant-level occupancy expenses (including rent, common area maintenance (“CAM”) expenses and real estate taxes) and exclude occupancy expenses associated with unopened restaurants, which are recorded separately in pre-opening costs. We anticipate occupancy and related expenses on an absolute dollar basis will increase for the foreseeable future to the extent we continue to open new restaurants and revenue grows. Occupancy and related expenses as a percentage of revenue are impacted by geographic location, type of restaurant build, and amount of revenue.

Other Restaurant Operating Costs

Other restaurant operating costs include other operating expenses incidental to operating our restaurants, such as repairs and maintenance, utilities, certain local taxes, third-party delivery fees, non-perishable supplies, restaurant-level marketing, credit card fees and property insurance. We expect that other restaurant operating costs will increase on an absolute dollar basis for the foreseeable future to the extent we continue to open new restaurants and our revenue grows. Other restaurant operating costs as a percentage of revenue are expected to increase in line with growth in our Native Delivery, Outpost and Catering, and Marketplace Channels, as these channels require us to pay third-party delivery fees. However, as revenue increases, we expect that other restaurant operating costs, such as repairs and maintenance and property insurance, as a percentage of revenue will decline.

Operating Expenses

General and Administrative

General and administrative expenses consist primarily of operations, technology, finance, legal, human resources, administrative personnel, and other personnel costs that support restaurant development and operations, as well as stock-based compensation expense, brand-related marketing, and Spyce acquisition costs. We also incur expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general liability and director and officer insurance, investor relations, and professional services. As a percentage of revenue, we expect our general and administrative expenses to vary from period to period and to decrease over time.

Depreciation and Amortization

Depreciation and amortization include the depreciation of fixed assets, including leasehold improvements and equipment, and the amortization of external costs and certain internal costs directly associated with developing computer software applications for internal use. We expect that depreciation and amortization expenses will increase on an absolute dollar basis as we continue to build new restaurants and make investments in our digital platform.

Pre-Opening Costs

Pre-opening costs primarily consist of non-cash rent, wages, travel for training and restaurant opening teams, food, marketing, and other restaurant costs that we incur prior to the opening of a restaurant. These expenses will increase in proportion to the increase of our new restaurant openings. These costs are expensed as incurred. We expect that pre-opening costs will increase on an absolute dollar basis as we continue to build new restaurants and enter new markets.

Impairment and Closure Costs

Impairment includes impairment charges related to our long-lived assets, which include property and equipment, and operating lease assets.

Closure costs include lease and related costs associated with closed restaurants, including the amortization of the operating lease asset, and expenses associated with CAM and real estate taxes for previously closed stores.

Loss on Disposal of Property and Equipment

Loss on disposal of property and equipment includes the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business.

Restructuring Charges

Restructuring charges are expenses that are paid in connection with the reorganization of our operations. These costs primarily include the amortization of the operating lease asset related to our vacated sweetgreen Support Center, as well as related real estate and CAM charges.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash and cash equivalents. Interest expense includes mainly the interest incurred on our outstanding indebtedness, as well as amortization of deferred financing costs, mainly debt origination and commitment fees.

Other (Income) Expense

Other (income) expense consists of changes in the fair value of our contingent consideration liability and changes in fair value in our preferred warrant liability. We will continue to remeasure the liability associated with our contingent consideration liability until the underlying service conditions are met, or the performance period expires.

Income Tax Expense

Income tax expense consists of federal and state tax expense on our operating activity, and changes to our deferred tax asset and deferred tax liability. For additional information, see Note 11 to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

Results of Operations

Comparison of the thirteen weeks ended March 26, 2023 and March 27, 2022

The following table summarizes our results of operations for the thirteen weeks ended March 26, 2023 and March 27, 2022:

(dollar amounts in thousands)

29

Revenue

(dollar amounts in thousands)

The increase in revenue for the thirteen weeks ended March 26, 2023 was primarily due to an increase of $18.7 million incremental revenue associated with 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022. The remaining increase in revenue was due to an increase in Comparable Restaurant Base revenue of $5.6 million, resulting in a positive Same-Store Sales Change of 5%, consisting of a 3% benefit from menu price increases that were implemented subsequent to the thirteen weeks ended March 27, 2022 and a 2% increase from transactions. These increases were partially offset by a $1.8 million negative impact from restaurant closures and remodels that occurred subsequent to March 27, 2022.

Restaurant Operating Costs

Food, Beverage, and Packaging

(dollar amounts in thousands)

The increase in food, beverage, and packaging costs for the thirteen weeks ended March 26, 2023 was primarily due to a $6.9 million increase in food and beverage costs, a $1.5 million increase in packaging costs and a $0.1 million increase in freight and gas surcharges associated with deliveries from our distribution partners. This was primarily due to the 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022. In addition, during the thirteen weeks ended March 26, 2023, we experienced supply chain disruptions for our bowls and plates, which resulted in use of alternative packaging solutions as well as higher costs of materials.

As a percentage of revenue, food, beverage, and packaging costs for the thirteen weeks ended March 26, 2023 increased compared to the thirteen weeks ended March 27, 2022 mostly due to an increase in costs of materials as discussed above, partially offset by greater sales leverage.

Labor and Related Expenses

(dollar amounts in thousands)

The increase in labor and related expenses for the thirteen weeks ended March 26, 2023 was primarily due to the 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022. The increase was also due to an increase in staffing expenses across all restaurant locations, primarily related to an increase in prevailing wage rates in many of our markets as a result of continued wage rate inflation in the industry.

These increases were partially offset by a $1.8 million benefit related to refundable employee retention tax credits (“ERC”) issued as part of the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”) as well as an improvement in labor efficiencies. See Note 11 to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

As a percentage of revenue, the decrease in labor and related expenses for the thirteen weeks ended March 26, 2023 was primarily due to the $1.8 million retention credit in connection with the CARES Act as discussed above, as well as greater sales leverage.

Occupancy and Related Expenses

(dollar amounts in thousands)

The increase in occupancy and related expenses for the thirteen weeks ended March 26, 2023 was primarily due to the 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022.

As a percentage of revenue, occupancy and related expenses remained flat for the thirteen weeks ended March 26, 2023 compared to March 27, 2022, primarily due to the impact of menu price increases and greater sales leverage, described above, offset by the impact of the COVID-19-related rent abatement received for multiple restaurant locations during the thirteen weeks ended March 27, 2022.

Other Restaurant Operating Costs

(dollar amounts in thousands)

The increase in other restaurant operating costs for the thirteen weeks ended March 26, 2023 was primarily due to the 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022, including a $1.4 million increase in increase in real estate taxes, utilities and repair and maintenance expenses and a $0.7 million increase in kitchen, cleaning and related supplies to support the Net New Restaurant Openings described above. In addition, there was a $0.5 million increase in credit card and online related processing fees, related to the increases in revenue, and a $0.4 million increase in delivery fees from the growth in transaction volume from our Native Delivery, Outpost and Catering, and Marketplace Channels. The remaining $0.4 million increase is attributable to other store expenses, including personal property taxes, security and signage.

As a percentage of revenue, other restaurant operating costs for the thirteen weeks ended March 26, 2023 were flat compared to the thirteen weeks ended March 27, 2022 due to the impact of menu price increases and greater sales leverage, offset by inflationary pressures and the increases described above.

Operating Expenses

General and Administrative

(dollar amounts in thousands)

31

The decrease in general and administrative expenses for the thirteen weeks ended March 26, 2023 was primarily due to a $7.9 million decrease in stock-based compensation expense. Additionally, there was a benefit of $5.1 million of ERC’s. We also experienced a $2.2 million decrease in management salaries and benefits, including bonus, a $0.4 million decrease in COVID-19-related expenses and a $0.3 million decrease in other general and administrative costs. These decreases were partially offset by a $0.4 million increase in consulting fees and a $0.2 million increase in expense related to the amortization of costs associated with the implementation of our cloud computing arrangements in relation to our new ERP system.

As a percentage of revenue, the decrease in general and administrative expenses for the thirteen weeks ended March 26, 2023 was primarily due to the fluctuations noted above, as well as an increase in revenue.

Depreciation and Amortization

(dollar amounts in thousands)

The increase in depreciation and amortization for the thirteen weeks ended March 26, 2023 was primarily due to the 45 Net New Restaurant Openings during or subsequent to the thirteen weeks ended March 27, 2022.

As a percentage of revenue, depreciation and amortization remained flat for the thirteen weeks ended March 26, 2023, which was primarily due to comparatively higher revenue in the current period, offset by the increases noted above.

Pre-Opening Costs

(dollar amounts in thousands)

The increase in pre-opening costs for the thirteen weeks ended March 26, 2023 was due to the timing of openings in the period and an acceleration of restaurant openings anticipated in fiscal year 2023.

As a percentage of revenue, the increase in pre-opening costs in the thirteen weeks ended March 26, 2023 was due to the increases noted above, partially offset by comparatively higher revenue in the current period.

Impairment and Closure Costs

(dollar amounts in thousands)

During the thirteen weeks ended March 26, 2023, we recorded closure costs of $0.2 million related to lease and related costs associated with closed restaurants, including the amortization of operating lease asset, and expenses associated with CAM and real estate taxes for previously closed stores.

Restructuring

(dollar amounts in thousands)

During the thirteen weeks ended March 26, 2023, we recorded restructuring charges of $0.6 million related to lease and related costs associated with the former sweetgreen Support Center that was vacated in fiscal year 2022, including the amortization of the operating lease asset, and expenses associated with CAM and real estate taxes.

Loss on Disposal of Property and Equipment

(dollar amounts in thousands)

The increase in loss on disposal of property and equipment was due to an increase in furniture, equipment and fixture replacements at multiple restaurants for the thirteen weeks ended March 26, 2023 compared to the prior year period.

Interest Income and Interest Expense

(dollar amounts in thousands)

The increase in interest income, net, was primarily due to higher interest rates on our money market cash accounts during the thirteen weeks ended March 26, 2023 compared to the prior year period.

Other (Income) Expense

(dollar amounts in thousands)

The change in other (income) expense for the thirteen weeks ended March 26, 2023 was due to an increase in the fair value of our contingent consideration compared to the prior year, which was issued as part of the Spyce acquisition in the third quarter of fiscal year 2021.

Non-GAAP Financial Measures

In addition to our consolidated financial statements, which are presented in accordance with GAAP, we present certain non-GAAP financial measures, including Restaurant-Level Profit, Restaurant-Level Profit Margin,

Adjusted EBITDA, and Adjusted EBITDA Margin. We believe these measures are useful to investors and others in evaluating our performance because these measures:

• facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or NOL), and the age and book depreciation of facilities and equipment (affecting relative depreciation expense);
• are widely used by analysts, investors, and competitors to measure a company’s operating performance; are used by our management and board of directors for various purposes, including as measures of performance, as a basis for strategic planning and forecasting; and
• are used internally for a number of benchmarks including to compare our performance to that of our competitors.

We define Restaurant-Level Profit as loss from operations adjusted to exclude general and administrative expense, depreciation and amortization, pre-opening costs, loss on disposal of property and equipment, and, in certain periods, impairment and closure costs and restructuring charges. Restaurant-Level Profit Margin is Restaurant-Level Profit as a percentage of revenue. As it excludes general and administrative expense, which is primarily attributable to our sweetgreen Support Center, we evaluate Restaurant-Level Profit and Restaurant-Level Profit Margin as a measure of profitability of our restaurants.

We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, loss on disposal of property and equipment, other (income) expense, Spyce acquisition costs, ERP implementation and related costs and, in certain periods, impairment and closure costs and restructuring charges. Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of revenue.

Restaurant-Level Profit, Restaurant-Level Profit Margin, Adjusted EBITDA, and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. In particular, Restaurant-Level Profit and Adjusted EBITDA should not be viewed as substitutes for, or superior to, loss from operations or net loss prepared in accordance with GAAP as a measure of profitability. Some of these limitations are:

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Restaurant-Level Profit and Adjusted EBITDA do not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• Restaurant-Level Profit and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
• Restaurant-Level Profit and Adjusted EBITDA do not reflect the impact of the recording or release of valuation allowances or tax payments that may represent a reduction in cash available to us;
• Restaurant-Level Profit and Adjusted EBITDA do not consider the potentially dilutive impact of stock-based compensation;
• Restaurant-Level Profit is not indicative of overall results of the Company and does not accrue directly to the benefit of stockholders, as corporate-level expenses are excluded;
• Adjusted EBITDA does not take into account any income or costs that management determines are not indicative of ongoing operating performance, such as stock-based compensation; loss on disposal of property and equipment; certain other expenses; Spyce acquisition costs; ERP implementation and related costs; and, in certain periods, impairment and closure costs and restructuring costs; and
• other companies, including those in our industry, may calculate Restaurant-Level Profit and Adjusted EBITDA differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider Restaurant-Level Profit, Restaurant-Level Profit Margin, Adjusted EBITDA and Adjusted EBITDA Margin alongside other financial performance measures, loss from operations, net loss, and our other GAAP results.

The following table sets forth a reconciliation of our loss from operations to Restaurant-Level Profit, as well as the calculation of loss from operations margin and Restaurant-Level Profit Margin for each of the periods indicated:

(dollar amounts in thousands)

(1) Loss on disposal of property and equipment includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

(2) Restructuring charges are expenses that are paid in connection with reorganization of our operations. These costs primarily include lease and related costs associated with the vacated sweetgreen Support Center, including the amortization of the operating lease asset.

The following table sets forth a reconciliation of our net loss to Adjusted EBITDA, as well as the calculation of net loss margin and Adjusted EBITDA Margin for each of the periods indicated:

(dollar amounts in thousands)

(1) Includes non-cash, stock-based compensation.

(2) Loss on disposal of property and equipment includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

(3) Includes costs related to impairment of long-lived assets and store closures.

(4) Other expense/(income) includes the change in fair value of the contingent consideration and the change in fair value of the warrant liability. See Notes 1 and 3 to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

(5) Spyce acquisition costs includes one-time costs we incurred in order to acquire Spyce including, severance payments, retention bonuses, and valuation and legal expenses.

(6) Restructuring charges are expenses that are paid in connection with reorganization of our operations. These costs primarily include lease and related costs associated with the vacated sweetgreen Support Center, including the amortization of the operating lease asset.

(7) Represents the amortization costs associated to the implementation from our cloud computing arrangements in relation to our new ERP.

Liquidity and Capital Resources

Sources and Material Cash Requirements

To date, we have funded our operations through proceeds received from previous common stock and preferred stock issuances, our ability to obtain lending commitments and through cash flow from operations. Additionally, in November 2021, we completed our IPO, from which we received net proceeds of $384.7 million from sales of our shares of Class A common stock, after deducting underwriting discounts and commissions and offering expenses. As of March 26, 2023 and December 25, 2022, we had $296.8 million and $331.6 million in cash and cash equivalents, respectively. As of March 26, 2023, we had access to a $44.1 million revolver loan(s) under our 2020 Credit Agreement after giving effect to a $950,000 irrevocable standby Letter of Credit outstanding thereunder. As of March 26, 2023, there have been no draws on the revolving facility. Based on our current operating plan, we believe our existing cash and cash equivalents and access to available revolving loan(s), will be sufficient to fund our operating lease obligations, capital expenditures, and working capital needs for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and available revolving loan(s). If we are unable to generate positive operating cash flows, additional debt and equity financings may be necessary to sustain future operations, and there can be no assurance that such financing will be available to us on commercially reasonable terms, or at all.

Our primary liquidity and capital requirements are for new restaurant development, initiatives to improve the team member and customer experience in our restaurants, research and development costs, marketing-related costs, working capital and general corporate needs. We have not required significant working capital because customers generally pay using cash or credit and debit cards and, as a result, our operations do not require significant receivables. Additionally, our operations do not require significant inventories due, in part, to our use of numerous fresh ingredients. Additionally, we are able to sell most of our inventory items before payment is due to the supplier of such items. Refer to Note 8 to our condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information.

Credit Facility

On December 14, 2020, we entered into a First Amended and Restated Revolving Credit, Delayed Draw Term Loan and Security Agreement (as subsequently amended, as discussed below, the “2020 Credit Facility”) with EagleBank. The 2020 Credit Facility superseded our 2017 revolving credit facility with EagleBank and allows us to borrow (i) up to $35.0 million (subsequently increased to $45.0 million) in the aggregate principal amount under the refinanced revolving facility and (ii) up to $10.0 million in the aggregate principal amount under a delayed draw term loan facility, which expired on December 14, 2021, and which was never drawn on. The refinanced revolving facility originally matured on December 14, 2022 (and has since been extended to December 13, 2024). However, if we issue certain convertible debt or unsecured indebtedness under the 2020 Credit Facility, then the refinanced revolving facility will mature on the earlier to occur of (i) the maturity date indicated in the previous sentence and (ii) 90 days prior to the scheduled maturity date for any portion of such permitted convertible debt or unsecured indebtedness.

On May 9, 2022, we and Eagle Bank amended the 2020 Credit Facility to allow for the issuance of Letters of Credit of up to $1.5 million. In connection therewith, we entered into a $950,000 irrevocable standby Letter of Credit with Eagle Bank with The Travelers Indemnity Company as the beneficiary in connection with our workers compensation insurance policy.

On December 13, 2022, we and Eagle Bank amended the 2020 Credit Facility to extend the maturity date from December 14, 2022 to December 13, 2024. The amendment also increased the revolving facility cap by $10.0 million, to allow for us to borrow up to $45.0 million in the aggregate principal amount under the refinanced revolving facility.

Under the 2020 Credit Facility, interest accrues on the outstanding loan balance and is payable monthly at a rate of the adjusted one-month term Secured Overnight Financing Rate, plus 2.90%, with a floor on the interest rate at 3.75%. As of March 26, 2023 and December 25, 2022, we had no outstanding balance under the 2020 Credit Facility.

The obligations under the 2020 Credit Facility are guaranteed by our existing and future material subsidiaries and secured by substantially all of our and our subsidiary guarantor’s assets. The 2020 Credit Facility also restricts our ability, and the ability of our subsidiary guarantors, to, among other things, incur liens; incur additional indebtedness; transfer or dispose of assets; make acquisitions, change the nature of the business; guarantee obligations; pay dividends to shareholders or repurchase stock; and make advances, loans, or other investments. The 2020 Credit Facility contains customary events of default, including, without limitation, failure to pay the outstanding loans or accrued interest on the due date.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

(amounts in thousands)

Operating Activities

For the thirteen weeks ended March 26, 2023, cash used in operating activities decreased $14.2 million compared to the thirteen weeks ended March 27, 2022. The decrease was primarily due to a $12.9 million reduction in loss after excluding non-cash items, partially offset by the impact of unfavorable working capital fluctuations of $2.7 million.

The unfavorable working capital fluctuations were primarily due to an increase in other current assets related to the expected receipt of $6.9 million in ERC’s, and timing of payments in the ordinary course of business.

Investing Activities

For the thirteen weeks ended March 26, 2023, cash used in investing activities increased $13.3 million compared to the thirteen weeks ended March 27, 2022, primarily due to a $12.8 million increase in the purchases of property and equipment, due to an increase in new restaurants.

Financing Activities

For the thirteen weeks ended March 26, 2023, cash provided by financing activities decreased $0.1 million compared to the thirteen weeks ended March 27, 2022. This was primarily due to a decrease in proceeds received from stock option exercises of $0.1 million.

Off-Balance Sheet Arrangements

Our material off-balance sheet arrangements are operating lease obligations and purchase obligations. We excluded these items from the balance sheet in accordance with GAAP. For additional information, see Note 1 and Note 8 to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve difficult, subjective, or complex judgements made by management. Actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We had no significant changes to our critical accounting estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.

Recent Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report.

We are exposed to market risks in the ordinary course of business. The primary risks we face are commodity price risks, interest rate risk, and the effects of inflation. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the fiscal quarter ended March 26, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.