Sweetgreen (SG) Risk Analysis

Our intellectual property, particularly our trademark portfolio, is material to our business, as brand recognition is one of our key differentiating factors. Our ability to successfully implement our business plan depends in part on our ability to build and maintain brand recognition using our trademarks, service marks, trade dress, and other intellectual property, including our name and logos and the unique ambience of our restaurants. While we generally seek to register our material trademarks, our trademark applications may never be granted, and our trade dress may be difficult to register. In addition, third parties may oppose our trademark applications or seek to cancel our trademark registrations. Trademark rights generally exist on a country-by-country basis, and the unavailability or unenforceability of such rights in certain jurisdictions could interfere with our international expansion. Although we have filed trademark applications in certain foreign jurisdictions, our trademarks may be subject to cancellation if we do not operate our business in those jurisdictions within time periods specific to each jurisdiction. Due to the popularity of our brand, we have observed a number of companies, particularly internationally, that have designed their restaurants, logos, and names to be similar to ours, and we may lack the necessary trademark rights to prevent this behavior or may not be successful in enforcing such rights. Our success also depends in part on protecting our other intellectual property and proprietary information through a combination of copyright, trade secret, and other intellectual property laws, as well as confidentiality agreements with our employees and others. We require senior employees, and any employee or consultant who develops material intellectual property for us, to enter into agreements designed to protect our intellectual property rights and proprietary information. However, we cannot guarantee that these agreements will be effective, will not be breached, that we will have adequate remedies in the event of a breach, or that employees or consultants will not assert rights to our intellectual property or proprietary information. In addition, we may fail to enter into confidentiality agreements with all parties who have access to our trade secrets or other proprietary information. Although it is our policy to protect and vigorously defend our intellectual property rights, we cannot predict whether the measures we take will be sufficient to prevent infringement, dilution, misappropriation, or other violations of these rights, or the use by others of restaurant features based on, or otherwise similar to, our restaurant concept. Preventing others from copying elements of our concept may be difficult, and any litigation to enforce our rights will likely be costly and may not be successful. We also cannot guarantee that we will have sufficient resources to enforce our intellectual property rights. We have observed numerous international concepts that appear to have copied our trade dress or ambience, and foreign intellectual property laws may not provide the same protections as those available under U.S. law. Failure to protect or enforce our intellectual property rights could limit our ability to challenge third parties using similar trademarks or trade dress, which may cause consumer confusion or negatively affect public perception of our brand, and could have an adverse effect on our business, international expansion, financial condition, and results of operations.

Digital innovation and growth remain important to our business, and as the digital landscape continues to evolve, our technology must evolve concurrently to remain competitive. If we fail to maintain digital systems that are competitive within the industry, our digital business may be adversely affected, which could negatively impact our sales. Certain competitors, including those with greater resources than we have, such as Chipotle, have also prioritized digital strategies and may be more successful in executing them. We rely on third parties for certain aspects of our digital operations, including ordering and payment processing for our mobile application and website. Services provided by these third parties may be disrupted or interrupted by technological issues, which could result in lost sales for a period of time. In addition, under our contractual arrangements with such third parties, it is unlikely that we would be able to recover lost profits or other consequential damages. Information processed by these third parties may also be subject to cyber-attacks, which could not only negatively impact our sales but also harm our brand image. If DoorDash, or any future third-party delivery partner, fails to fulfill its obligations or provides unsatisfactory delivery service on our Native Delivery Channel-for example, by delivering orders late, lacking sufficient couriers, or experiencing system outages-we may be unable to provide reliable delivery services to our customers through our native application. Failures in delivery execution may result in customer dissatisfaction, loss of customers, reduced sales, increased refunds or credits, and damage to our brand image. In addition, as with any third party handling food, delivery services increase the risk of food tampering while orders are in transit. Changes to our agreement with DoorDash, or any future third-party delivery partner, including the loss or addition of a delivery partner, could also affect our ability to provide delivery services. We are also subject to risk from delivery driver shortages in any of our markets for any period of time, which could prevent us from meeting customer expectations and negatively impact our sales. We partner with national third-party delivery providers to offer our food on their marketplaces. If any of these partners experience reputational harm, we may also be adversely affected as a result of our association with them. In addition, we compete with these third-party delivery providers through our Native Delivery Channel, and some of these providers may have greater financial resources than us to invest in marketing and advertising for their digital and delivery offerings, which could adversely affect our business, financial performance, and results of operations. Further, our commission rates with third-party delivery partners may increase over time, whether for delivery services associated with orders placed through our website or native mobile application or through third-party delivery marketplaces, which could have an adverse effect on our business, financial condition, and results of operations.

Because our customers access our website and mobile platform across a variety of mobile devices, including Android and iOS, we must continuously modify and enhance our platform to keep pace with changes in mobile devices and other internet-related hardware, software, communications, and browser technologies. We may not be successful in developing these modifications and enhancements or in bringing them to market in a timely manner. For example, our customers were unable to order delivery through our native Android smartphone application until March 2021, even though this functionality had been available on our iOS application for some time.In addition, uncertainty regarding the timing and nature of new mobile devices and other network platforms or technologies, or modifications to existing devices, platforms, or technologies, could increase our research and development expenses beyond what we anticipate. Any failure of our mobile platform to operate effectively with future technologies could result in customer dissatisfaction and harm our business. Our business might also be harmed in connection with the growing adoption of generative AI solutions within our industry. Our competitors may incorporate or deploy generative AI more quickly or more effectively than us, which may cause competitive harm to our business.

Our online and mobile ordering platforms incorporate highly technical and complex software. Our software has in the past contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities, some of which have been, and may in the future be, discovered only after the code has been released. Errors, bugs, or vulnerabilities identified after release could damage our reputation, reduce customer usage of our online and mobile platforms, result in lost revenue, or expose us to liability for damages, any of which could adversely affect our financial condition and results of operations. We also rely on multiple third-party vendors to operate components of our mobile ordering platforms, including delivery fulfillment services, and errors, bugs, vulnerabilities, or service outages affecting their software could adversely impact our platforms. For example, during fiscal years 2020 and 2021, our third-party delivery fulfillment partner for orders placed through our Native Delivery Channel experienced outages that required us to temporarily shut down that channel, either entirely or in certain geographic markets, which adversely impacted our revenue. In addition, our ability to control or remediate errors, bugs, or vulnerabilities in third-party software is limited, and we may be unable to address such issues in a timely manner, which could have an adverse effect on our business, financial condition, or results of operations.

Both our in-restaurant and online and mobile ordering businesses depend on the performance and reliability of internet infrastructure to process and fulfill orders, which is not under our control. Nearly all access to the internet is maintained by telecommunications network operators. Disruptions in internet infrastructure, or failures by telecommunications operators to provide sufficient bandwidth, could temporarily shut down our in-restaurant ordering business and interfere with the speed and availability of our online and mobile ordering platforms. If our online and mobile ordering platforms are unavailable when customers attempt to access them, or do not load as quickly as customers expect, customers may reduce their use of our platforms or may not return to them at all. Our online and mobile ordering business also depends on the efficient and uninterrupted operation of mobile communications systems. Despite precautions we may take, unanticipated events-such as power outages, telecommunications delays or failures, security breaches, or computer viruses-could result in service interruptions and business disruption for us and our customers. Any such events could damage our reputation, disrupt our operations, and subject us to liability, which could adversely affect our business, financial condition, and results of operations.

We have begun using various third party software solutions that rely upon artificial intelligence (AI), including but not limited to generative AI. Generative AI is a type of AI that uses generative models to create text and other content. Various generative AI tools are available to employees within parts of our company, and in the future we may more broadly use, develop, and incorporate generative AI within our systems, technology platforms, and services. While we have policies that govern the use of such technology, the use of such technology could result in unintended consequences, such as AI algorithms that produce inaccurate, biased, or incomplete output or that cause other issues with potentially negative consequences for our business. Further, use of this technology by our employees in violation of our policies could result in the loss or disclosure of our proprietary and confidential information. The use of generative AI may also result in a greater likelihood of cybersecurity incidents or other exposures of sensitive information that harm our business. The use of AI tools is subject to an increasing number of laws and regulations, including laws and regulations regarding data privacy and security and regarding the use of such tools in the context of hiring and other employment matters. Accordingly, our use of this technology could result in additional compliance costs, regulatory investigations, enforcement actions, and litigation. If we are unable to use AI, it could make our business less efficient and result in competitive disadvantages.

We believe that our corporate culture and the internal advancement of our corporate values have been critical to our success, and we have invested significant time and resources in building our teams at both our Sweetgreen Support Center and our restaurants. As we continue to grow, we may find it more difficult to maintain the innovation, teamwork, passion, and focus on execution that we believe are important aspects of our culture. We have implemented workforce reductions in the past, which have negatively impacted, and may continue to negatively impact, employee morale and our corporate culture. We may implement additional workforce reductions in the future, which could further affect morale, culture, and our brand. As we have grown, we have experienced periods of management turnover. Such turnover may negatively impact our culture. Any failure to preserve our culture could impair our ability to retain and recruit employees, maintain engagement, and effectively pursue our corporate objectives. If we are unable to maintain our culture as we grow and evolve, it could have an adverse effect on our business, financial condition, and results of operations

We rely on our restaurant-level employees to consistently deliver high-quality food and positive guest experiences, which we refer to as the "sweet touch." Our success depends on our ability to hire, train, reward, and retain team members who can deliver the hospitality, food quality, and operational execution that define the Sweetgreen experience. Competition for qualified restaurant employees has intensified across the industry and may vary by market based on factors such as unemployment levels, immigration policies, cost of living, and competitive wage and benefit expectations. We have experienced staffing shortages in certain markets, particularly in major urban areas, which have resulted in reduced operating hours, temporary restaurant closures, delayed new restaurant openings, or higher labor costs. Many of our restaurants experience customer surges during lunch and dinner periods and our use of fresh ingredients requires significant preparation work. As a result of such difficult working conditions, employee turnover has, at times, been elevated. Sustained staffing challenges or increased turnover could adversely affect our ability to deliver the sweet touch, reduce operational efficiencies, reduce guest satisfaction, and negatively impact restaurant profitability. Workforce planning has become more complex due to scheduling and termination regulations, including predictive scheduling ("fair workweek") laws in certain markets and New York City's "just cause" termination law, as well as wage and hour laws. Staffing needs also vary by restaurant, market, and sales channel, and at times we may be unable to adequately staff certain restaurants or channels, which could result in reduced operating hours, temporary suspension of a sales channel or daypart, or diminished service levels. We have undertaken several workforce reductions and organizational restructurings at the Sweetgreen Support Center and may do so again. Such actions may result in unintended consequences, including loss of institutional knowledge, delays in technology or operational initiatives, reduced morale, or attrition beyond intended roles, which could impair our ability to support restaurant operations and growth.

Labor represents a significant component of our restaurant-level operating expenses. We may experience increased labor costs due to inflation, competition for employees, higher turnover, inefficiencies in scheduling, increases in federal, state, or local minimum wages, or higher benefit costs. Competition for qualified employees may require us to pay higher wages or offer additional incentives or benefits, which could increase labor costs and adversely affect margins. For example, effective April 1, 2024, California increased its minimum wage for certain restaurant chains, including Sweetgreen, to $20.00 per hour, and a state-appointed council may further increase this minimum wage in the future. Although we have sought and may continue to seek to offset labor cost increases through menu price increases, customers may be unwilling to accept higher prices, which could adversely affect demand and margins. If labor costs continue to increase or we are unable to sufficiently staff our restaurants, we may need to reduce operating hours, temporarily close certain restaurants or sales channels, delay restaurant openings, or incur higher costs, any of which could adversely affect our Restaurant-Level Profit Margin and overall profitability. In addition, failure to adequately monitor and respond to employee dissatisfaction or complaints could result in higher turnover, litigation, or unionization efforts. Although none of our employees are currently covered under collective bargaining agreements, employees may seek to unionize in the future. Unionization efforts, collective bargaining, strikes, or other labor disruptions involving our employees, suppliers, or delivery partners could increase labor costs, limit operational flexibility, divert management attention, disrupt operations, or harm our reputation.

Our profitability depends in part on our ability to anticipate and respond to changes in food and supply costs and to maintain consistent access to ingredients that meet our specifications. Shortages or interruptions caused by unanticipated demand, inaccurate forecasting, production or distribution issues, food contamination, inclement weather, climate-related events, or other conditions could increase costs, limit availability, or affect ingredient quality, including through the use of substitute products that may not meet our standards. For example, during the fourth fiscal quarter of 2024, extreme weather disrupted tomato and cucumber supplies, resulting in higher prices and temporary discontinuations in certain markets. Much of our supply chain is localized, and in some markets, we rely on a regional distributor for produce and another for grocery items, which may make our supply chain more difficult to manage than models that rely on national distributors. We also partner with farmers and suppliers of varying sophistication, some of whom may have limited inventory or ability to mitigate disruptions. In addition, certain suppliers may fail to maintain food safety certifications, which could increase our risk of a food safety incident. Although we monitor certifications and audit compliance, including suspending supply in cases of material noncompliance (such as with one leafy greens supplier in fiscal year 2024 and one pickle supplier in fiscal year 2023), these efforts may not be sufficient. Prices and availability of key ingredients may fluctuate due to weather, climate change, animal disease, labor costs at suppliers, inflation, other purchasers offering more competitive terms to our suppliers, government regulations, trade restrictions, or other reasons. For example, avian influenza outbreaks in fiscal year 2024 disrupted supplies of chicken and eggs in certain regions, resulting in shortages and higher prices. Ingredients such as avocados are particularly volatile due to limited supply sources, seasonal shifts, climate conditions, food safety concerns, and international trade dynamics. Changes in immigration or work authorization laws or enforcement, including recently intensified immigration enforcement efforts by U.S. Immigration and Customs Enforcement, could also increase suppliers' labor costs or limit availability. Tariffs or other trade barriers may further increase costs. Our ability to maintain consistent quality and pricing depends on our ability to source specified products in sufficient quantities at reasonable cost. Because of our supply chain structure and culinary standards, identifying acceptable substitutes, particularly for fresh or perishable products, may be difficult. We do not control our suppliers' or distributors' operations, and our efforts to monitor performance may not be successful. We have experienced supply chain disruptions and increased costs related to packaging, including bowls and plates produced outside the United States, which have been and may in the future be due to vendor nonperformance, transitions to new vendors, and tariffs, duties, or other import barriers. In the past, we have been forced to use substitute packaging for our products due to supply chain disruptions, and certain of that packaging caused customer dissatisfaction. Further disruptions or increased costs related to packaging may lead to additional customer dissatisfaction, store closures, or reduced margins. Our distributor and supplier contracts are generally short term, and in some cases include minimum purchase obligations. As a result, costs may increase with little notice, and we may be unable to offset such increases through pricing or purchasing adjustments. In the event of supplier disputes, we may not have adequate contractual recourse, and insurance maintained by us or our suppliers may be insufficient. Furthermore, certain food items are perishable, and we have limited control over whether such items are delivered to us in appropriate condition for use in our restaurants. In addition, accurately forecasting demand is inherently difficult, particularly during periods of disruption or when events occur outside of our control (such as during the COVID-19 pandemic). Inaccurate forecasts may result in shortages, higher costs, lower-quality substituted products, food waste, or donations of excess product. As we expand into new markets, our commitment to our food ethos may further limit the availability of suitable suppliers. In the event of such shortages, we may be unable to identify or negotiate alternative sources on commercially reasonable terms, or at all. If our suppliers or distributors are unable to fulfill their obligations or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could adversely affect our business, financial condition, and results of operations.

We operate our restaurants in leased facilities, and payments under our restaurant leases account for a significant portion of our operating expenses. We expect that most of the new restaurants we open in the future will also be leased. It is becoming increasingly challenging to locate and secure favorable lease facilities for new restaurants, as competition for restaurant sites in our target markets is intense, and development and leasing costs, particularly in urban locations, are increasing. These factors could negatively impact our ability to manage occupancy costs and may adversely affect our profitability. In addition, these factors may be exacerbated by economic conditions, which could increase demand for developers and contractors and further drive up construction and leasing costs. As we open and operate more restaurants, our rate of expansion relative to the size of our existing restaurant base has declined and is likely to continue to decline, making it increasingly difficult to achieve the levels of sales and profitability growth we achieved in prior years. We are obligated under long-term, non-cancelable leases for all of our restaurants and the current and prior location of our Sweetgreen Support Center. Our restaurant leases generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges, and other operating costs, and certain leases also provide for contingent rental payments based on sales thresholds. Additional sites we lease are likely to be subject to similar long-term, non-cancelable lease terms. If an existing or future restaurant is not profitable and we decide to close it, we may nonetheless remain obligated to perform our lease obligations (or to negotiate a buyout with the landlord) including paying base rent for the remainder of the lease term. For example, in 2022, we vacated the premises for the former Sweetgreen Support Center and relocated to a smaller office space adjacent to its prior location. To date, we have been unsuccessful in subleasing our vacated former Sweetgreen Support Center, and it is uncertain whether we will be successful in doing so, or on what commercial terms. As our leases expire, we may be unable to negotiate renewals on commercially acceptable terms, or at all, which could result in increased occupancy costs or require us to close restaurants in desirable locations. Increased occupancy costs or restaurant closures could have an adverse effect on our business, financial condition, and results of operations. In addition, if we are unable to renew or extend leases in key metropolitan areas, or if such leases are terminated, any resulting inability to operate in those markets, as well as adverse publicity related to such non-renewals or terminations, could adversely affect our business, financial condition, and results of operations.

In the course of operating our business, we collect, use, receive, store, process, generate, transfer, make accessible, protect, secure, dispose of, transmit, share, and disclose personal information and other sensitive information about customers, personnel, business contacts, and others; proprietary and confidential business data; trade secrets; intellectual property; and sensitive third-party data and financial information. These activities are or may become regulated by a variety of domestic and foreign laws, regulations, guidance, industry standards, external and internal data privacy and security policies, contractual requirements, and other obligations relating to data privacy and security, which are complex, rapidly evolving, and increasingly stringent. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal information privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and other similar laws (e.g., wiretapping laws). Additionally, numerous U.S. states have enacted comprehensive data privacy and security laws that impose certain obligations on covered businesses, including providing specific disclosures in privacy notices and affording residents with certain rights concerning their personal information. As applicable, such rights may include the right to access, correct, or delete certain personal information, and to opt-out of certain data processing activities, such as targeted advertising, profiling, and automated decision-making. The exercise of these rights may impact our business and ability to provide our products and services. Certain states also impose stricter requirements for processing certain personal information, including sensitive information, such as conducting data privacy impact assessments. These state laws allow for statutory fines for noncompliance. For example, the CCPA applies to personal information of consumers, business representatives, and employees who are California residents, and requires covered businesses to provide specific disclosures in privacy notices and honor requests of California residents to exercise certain privacy rights related to their personal information. The CCPA also imposes restrictions on "sales" of personal information that allow California residents to opt-out of certain sharing of their personal information and may restrict the use of cookies and similar technologies for advertising purposes. Our platform relies on such technologies for advertising purposes and could be adversely affected by the CCPA's restrictions if a significant number of users opt-out of certain information sharing on which our advertising relies, which would impair our ability to advertise. This could decrease the effectiveness of our marketing and advertising strategies and decrease our level of customer acquisition and/or retention, may cause us to seek new avenues to market and advertise, and may cause us to increase our marketing and advertising expenditures. The CCPA provides for civil penalties for violations and allows private litigants affected by certain data breaches to recover significant statutory damages. Similar laws have been proposed in several other states, as well as at the federal and local levels, and we expect more states to pass similar laws in the future, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws complicates compliance efforts, and increases legal risk and compliance costs for us and the third parties with whom we work. We are also subject to laws governing the privacy of consumer health data. For example, Washington's My Health My Data Act broadly defines consumer health data, places restrictions on processing consumer health data (including imposing stringent requirements for consents), provides consumers certain rights with respect to their health data, and creates a private right of action to allow individuals to sue for violations of the law. Other states have passed, are considering, and may adopt similar laws. In addition to the risks we face under privacy laws, the restrictions on text message communications imposed by the Telephone Consumer Protection Act ("TCPA") have long been a source of potential liability for our business. The TCPA imposes various consumer consent requirements and other restrictions on certain telemarketing activity and other communications with consumers by phone, fax, or text message. TCPA violations can result in significant financial penalties, including penalties or criminal fines imposed by the Federal Communications Commission or fines of up to $1,500 per violation imposed through private litigation or by state authorities. Claims that we have violated the TCPA could be costly to litigate and could expose us to substantial statutory damages or settlement costs. We are also subject to the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM"), which imposes specific requirements on our email communications with current or potential customers. Separately, certain of our data practices have been, and may in the future be, challenged under wiretapping, eavesdropping, or similar laws. Plaintiffs in these actions have alleged, and may in the future allege, that our use of third-party technologies on websites and mobile applications, including chatbots, session replay tools, or marketing pixels, constitute unlawful "interceptions" of visitors' communications. Such allegations may result in class action litigation, mass arbitration demands, and significant defense costs or settlements, regardless of the ultimate merit of the claims. Privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards by which we are, or may become, legally or contractually bound. Moreover, certain privacy laws, such as the CCPA, require us to impose specific contractual restrictions on our service providers. If we fail to comply with these contractual obligations or standards, we may face public or regulatory scrutiny, substantial liability, fines, or other adverse consequences. In addition, under various data privacy and security laws and other obligations, we may be required to obtain certain consents to process personal information. Our inability or failure to obtain required consents could result in adverse consequences. We also publish privacy policies, statements and other documentation regarding data privacy, security, and our processing, of sensitive information. If these policies, statements, and other materials are found, or alleged, to be deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to investigations, regulatory enforcement actions, litigation, or other adverse consequences. Additionally, our business relies in part on revenue from customers acquired through behavioral, interest-based, or tailored advertising. Consumer resistance to the collection or sharing of data used to deliver such advertising, the use of consent or "do not track" mechanisms as a result of legal, regulatory, or industry developments, the adoption by consumers of ad-blocking software or browser settings, and the development or deployment of new technologies could limit our ability to collect data or engage in marketing and advertising, which could have an adverse effect on our business, financial condition, or results of operations. We are subject to the Payment Card Industry Data Security Standard ("PCI DSS"), which applies to companies that collect, store, or transmit certain payment card and related transaction data. We rely on third-party vendors to handle PCI DSS matters and to address PCI DSS compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI DSS based on past, present, or future business practices. Our actual or perceived failure to comply with the PCI DSS could subject us to fines, increased transaction fees, termination of banking relationships, or other penalties. In addition, compliance with the PCI DSS does not guarantee that illegal or improper use of our payment systems, or theft, loss, or misuse of payment card data or transaction information, will not occur. Obligations and consumer expectations related to data privacy and security continue to evolve rapidly, and create uncertainty. These obligations may also be subject to differing applications and interpretations that may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources and may necessitate changes to our services, information technologies, systems, and business practices, as well as those of third parties that process personal information on our behalf. Despite our efforts, we may not be successful in complying with the rapidly evolving data privacy and security requirements discussed above, and our personnel or third parties with whom we work may be unable or fail to comply with such obligations. If we or the third parties with whom we work fail, or are perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant adverse consequences, including, but not limited to, government enforcement actions (such as investigations, fines, penalties, audits, or inspections), litigation (including class claims), additional reporting requirements or oversight obligations, restrictions or bans on data processing, orders to destroy or cease using personal information, indemnification obligations, negative publicity, reputational harm, diversion of management attention, operational disruptions (including reduced data availability), or financial losses. Any of these consequences could have a material adverse effect on our reputation, business, financial condition, or results of operations.

The restaurant industry is subject to various federal, state, and local regulations, including those relating to the design and construction of restaurants and the sale of food and beverages, which are subject to change from time to time. For example, during the COVID-19 pandemic, the time required to obtain licenses and permits increased significantly. Failure to timely obtain, maintain, or comply with required licenses, permits, or approvals could have an adverse effect on our business, financial condition, and results of operations. Licenses typically must be renewed annually and may be revoked, suspended, or denied renewal for cause, and we may be subject to fines or temporary restaurant closures if governmental authorities determine that we are not in compliance with applicable regulations. Difficulties or failures in obtaining or maintaining required licenses and approvals could adversely affect the operation of our existing restaurants and delay, or result in our decision to cancel, the opening of new restaurants, which could harm our business, brand and reputation, financial condition, and results of operations.

In 2010, the Patient Protection and Affordable Care Act ("PPACA") was signed into law in the United States, which requires health care coverage for many previously uninsured individuals and expanded coverage for those already insured. PPACA requires us to offer healthcare benefits to all full-time employees, including full-time hourly employees, that meet certain minimum coverage and affordability requirements, or we may be subject to penalties for noncompliance. We have incurred and will continue to incur expenses to maintain a healthcare plan that covers employees who have elected to obtain coverage through a plan that we subsidize in part. If we fail to continue to offer such benefits, or if the benefits we offer do not meet applicable requirements, we may be subject to penalties. In addition, changes to, or a failure to make changes to, our healthcare plans could make us less competitive in the labor market. The future costs and effects of healthcare requirements are uncertain and may significantly increase our healthcare coverage costs and adversely affect our business, financial condition, and results of operations. In addition, future federal or state healthcare reform could adversely affect our business, financial condition, and results of operations, and we cannot predict the impact of any future legislative, judicial, or administrative developments relating to healthcare laws.

We are subject to various federal, state, and local regulations, including those relating to building and zoning requirements and the preparation and sale of food. The development and operation of restaurants depends, to a significant extent, on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic, and other regulations and requirements. Our restaurants are also subject to state and local licensing and regulation by health, sanitation, food, occupational safety, and other agencies. We may experience difficulties or failures in obtaining required licenses, approvals, or permits, which could delay planned restaurant openings or adversely affect the operations of our existing restaurants. In addition, stringent or varying requirements of local regulators with respect to zoning, land use, and environmental factors could delay or prevent the development of new restaurants in particular locations. Our operations are subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs matters such as minimum wages and overtime, as well as a variety of similar federal, state, and local labor and employment laws, including predictive scheduling laws, wage and hour laws, laws governing the employment of minors, leave laws, termination laws, and state occupational safety regulations. We may be subject to lawsuits or investigations by current or former employees, the U.S. Equal Employment Opportunity Commission, or other agencies alleging violations of workplace or employment laws, discrimination, or similar matters. We are currently, and have in the past been, a party to such matters. These lawsuits and investigations require significant management time and resources and may result in fines, penalties, settlement payments, and/or remediation efforts, some or all of which may not be covered by insurance. Such remediation efforts may be costly, time consuming, and not implemented effectively. We have been negatively impacted by these types of matters in the past, and current or additional lawsuits or investigations could adversely affect our business, brand and reputation, financial condition, and results of operations. Additional federal, state, and local proposals related to leave or similar matters could, if implemented, also adversely affect our business, financial condition, and results of operations. We are also subject to the ADA and similar state laws that provide civil rights protections to individuals with disabilities in the context of employment, public accommodations, and other areas, including our restaurants, websites, and smartphone applications. In the past, we have settled lawsuits related to alleged ADA non-compliance, which resulted in accommodations to our websites, smartphone applications, and physical restaurants. We are currently engaged in ADA-related litigation and may face additional litigation in the future. We may be required to further modify our restaurants, websites, or other digital platforms, including any digital kiosks we may implement, to provide reasonable accommodations to individuals with disabilities. The expenses associated with these modifications could be material, and there can be no assurance that we will be able to limit additional claims in the future. We operate in a highly regulated industry and strive to implement industry best practices relating to food and customer safety, whether or not required by regulation, including with respect to sanitation and the handling of perishable food items. Failure to maintain such practices or comply with applicable regulations could result in foodborne illness incidents, which could adversely affect our brand and operations. Local, state, and federal regulatory requirements continue to evolve, and compliance with these requirements may increase our costs and present additional challenges and risks to our business. Current laws and regulations, future changes in laws or regulations that impose additional requirements, including requirements relating to reasonable accommodations for individuals with disabilities, litigation relating to current or future laws and regulations, and our inability to respond effectively to regulatory or public policy developments could increase our compliance and other operating costs and adversely affect our business, financial condition, and results of operations. Failure to comply with applicable laws and regulations could result in revocation of required licenses, administrative enforcement actions, fines, or civil or criminal liability. Compliance with these laws and regulations can be costly and may adversely affect our financial condition.

One of the key means of achieving our growth strategy is opening new restaurants and operating them profitably. We opened 35 Net New Restaurants in fiscal year 2025 and 25 in fiscal year 2024. We expect approximately 15 Net New Restaurant openings in fiscal year 2026. In the past, we have experienced delays in opening restaurants due to, amongst other things, supply chain challenges, inflation-driven increases in wage and commodity costs, construction delays, and permitting issues, and such delays may continue to occur. Delays or failures in opening new restaurants, or in launching new restaurant formats (including drive-up or formats incorporating automation technology such as the Infinite Kitchen) could result in lost sales and additional labor and marketing costs and could adversely affect our growth strategy and our business, financial condition, and results of operations. As we operate more restaurants, our rate of expansion relative to the size of our restaurant base may decline.

Locating and securing a sufficient number of suitable restaurant sites in desirable locations is increasingly competitive, and other restaurant and retail concepts may have economic models that allow them to bid more aggressively than we can. There is no guarantee that an adequate number of suitable sites will be available to us on acceptable terms in existing, adjacent, or new markets. Our ability to identify, secure and open new restaurant sites also depends on other factors, including, amongst other things: - identifying and securing sites with appropriate attributes such as site size, traffic patterns, nearby retail and business attractions and infrastructure, proximity to existing restaurants, and anticipated commercial, residential, and infrastructure development-factors made more challenging by uncertainty regarding other companies' return-to-office plans;- negotiating leases with acceptable terms (including but not limited to sufficient tenant improvement allowances);- identifying and securing sites that can be expected to allow for the timely delivery of the leased premises;- properly analyzing financial conditions that may adversely affect developers or landlords (including availability of development financing, macroeconomic conditions, and credit markets) and which might lead to project delays or cancellations;- identifying and securing sites that will have acceptable construction and development resources and costs and that will have access to a sufficient pool of qualified store operations personnel (particularly in competitive markets); and - securing required governmental approvals, permits, and licenses (including construction permits and certificates of occupancy) on a timely basis and responding to changes in applicable zoning, land use, environmental, health and safety, and other rules and regulations (including interpretations thereof). If we do not open new restaurants in the future according to our current plans, the delay could have an adverse effect on our business, financial condition, and results of operations.

New restaurants may not perform as planned or achieve our expected Average Unit Volumes, Same-Store Sales Change, or Restaurant-Level Profit Margin, which could adversely affect our business, financial condition, and results of operations. Our restaurant concept may have limited appeal in new markets, and the popularity of our restaurant concept may decline in existing markets. Newly opened restaurants, whether in existing or new markets, may take longer to reach expected sales and profit levels and may not be successful. Any such underperformance could slow our overall growth and have an adverse effect on our business, financial condition, and results of operations. The customer target area for each restaurant varies by location, depending on factors such as population density, nearby retail and business activity, demographics, and geography. Opening new restaurants in or near markets where we already operate could reduce sales at existing restaurants, particularly in highly concentrated markets, such as New York City, Los Angeles, Boston, Chicago, and the Washington D.C./Maryland/Virginia metropolitan area. We periodically open locations near existing restaurants that are operating at or near capacity to more effectively serve our customers. We believe these openings cause some sales cannibalization. Such sales cannibalization may increase as we expand our restaurant footprint, especially where food delivery radii overlap. Additionally, our restaurants must be able to support growth across our In-Store and Pick-Up Channels and, depending on location, through our Native Delivery, Outpost and Catering, and Marketplace Channels. Although we seek to select sites that align with our geographic sales channel strategy, we may not be successful with identifying and securing such sites. Moreover, our geographic sales channel strategy might be incorrect. Historically, shifts in customer behavior (for example, the slower than expected pace of employees' return to offices following the COVID-19 pandemic) have resulted in some restaurants operating under capacity and others operating over capacity. We are developing and implementing new restaurant formats, including drive-up and Infinite Kitchen-enabled formats. We have limited experience operating these new formats and we may not be able to operate them as efficiently as we operate our traditional restaurant formats. Accordingly, such formats may not achieve expected efficiencies or returns. We have closed restaurants for performance reasons in the past and may do so again, which could adversely affect our business, financial condition, and results of operations.