Q3 2021 Dutch Bros Inc Earnings Call
But we will also continue developing the people pipeline that enables that unit growth and supports communities and investments.
A little background for those of you who aren't familiar with our company. That's frozen has been serving high quality handcrafted drinks across the Western U S for nearly 30 years and 1990 to Dane and Travis floors must started Dutch bros. With a double had espresso machine in a pushcart and downtown grants Paas, Oregon.
<unk> plays a daily visionary leadership role of Dutch Bros, and serves as our executive Chairman.
<unk> is already recognized as one of the fastest growing brands in the United States Foodservice and restaurant industry by location counts. We are still in the early stages of a long term growth story and believe Dutch Bros has enormous potential.
Since 2015 shop count has nearly doubled to more than 500 drive thru shops across 11 states. This.
This year, we entered two new states, Texas and Oklahoma.
Numbers have shown the brand translates well across regions and we look forward to our continued expansion in fact, our average unit volume in the most recent states. We entered are well above our system average and that is in spite of very little marketing in those markets.
While roughly half of our shops today are managed by a core group of trusted franchisees, who may continue to open stores in their existing markets. The vast majority of future growth for Dutch Bros will be through company owned shops. Several years ago. We made the decision to stop offering traditional franchise opportunities you've instead focused on working with our field leadership and existing.
Franchise partners to co develop a people pipeline of potential operators for company operated shops.
Great people are truly what drives the Dutch grows culture and experience and what fuels our shop growth.
Why we have an uncompromising and consistent focus on identifying individuals we believe will exemplify our culture never.
Our values and are eager to share the Dutch love.
These values are based on authentic authentically caring for each other our customers and our communities.
Unlike most drive through experience is to begin with them, maybe a muffled speaker at a faceless menu Board every Dutch Bros. Experience starts with an in person human connection.
This comes either through a personalized greeting by a runner who takes your order on a tablet or directly at the window you place a premium on quality speed and service without bypassing the personality of our brand.
<unk>.
Releases are genuinely excited to serve the excel at personalizing every experience and crafting a great drink and monitoring car throughput in the drive through lane to ensure operational consistency throughout the day.
I hope all of you will get to a Dutch bros. Soon to experience this energy from our people for yourself.
Our promote from within philosophy is made possible through the Dutch Bros. Leadership pathway program, which provides a clear path for them, but we stood to manager to regional operator.
First we focus in on hiring the right people provide them with leadership training and ongoing Mentorship and then offer them the opportunity for four.
Long longer term careers with real prospects of advancement.
There are currently more than 900 people in the Dutch Bros leadership pathway program and more than 200 people in our regional operator pipeline each with an average tenure of six five years.
That pipeline alone can support the Nyx 751000 company operated shops that we will open.
The strength of the relationship with our employees has resulted in our ability to attract great candidates.
Then outstanding retention, which we believe is a real differentiator for the Dutch bros. Compared to an industry that is contending with significant staffing headwinds.
All of our shop managers for the 200, plus shops opened systemwide since January 2018 were promoted from within turnover.
It's virtually nonexistent within the ranks of the regional operators that will lead our shop growth.
We believe our high retention rates are a product of the development opportunities culture and financial incentives, we provide to our employees in this industry, leading retention in turn produces high levels of customer service and a strong financial return.
As a result of our high rate of retention, we were able to keep our shops opened during the pandemic and have continued to meet consumer demand across all day parts, while others in the industry, maybe have struggled with some staffing.
We found one of the key factors in our success as a people first brand is our social impact platform.
We're dedicated to making a massive difference in the lives of our employees, our customers and communities by ensuring Dutch Bros. Is a powerful platform for positive action.
Our social impact platform is built on four pillars diversity equity and inclusion sustainability community relations and philanthropy, we look forward to sharing the progress were making across all of these aspects of our business in future calls.
Our growth is predicated on our people pipeline. We're confident we have a long runway for growth having reached less than 15% of our full brand penetration.
We're committed to steady disciplined growth that takes that gross coast to coast and serves both existing markets, where there is unfulfilled consumer demand and new markets, where customers are waiting to experience that grows.
Across our footprint, we take pride in being able to provide an incredible drive through experience by serving high quality and crafted hot and cold beverages with unparalleled speed and superior service.
And while the espresso based beverages, whether served hot <unk> blended are core to the brand they are less than 32% of total beverages sold demonstrating the breadth and the wide appeal of our menu offering.
Our ability to diversify and expand our menu and the innovative and customizable beverage categories has proven to be another key differentiator within the industry.
Cold brew and our proprietary blue rebel energy drink are prime examples multi customer favorites and are key areas of growth in terms of sales.
They can both be served from the variety of flavor combinations homebrew can be enjoyed hot iced or straight from the can and standard or a nitro infused while rebel is typically ordered iced or blended with a wide selection of syrups and flavors.
Customization is core to both our menu and our people.
<unk> are able to create more than 9000 unique drink combinations exactly how the customer wants it using fewer than 12 primary ingredients, which drives broad demographic appeal, a balanced day part mix and traction across geographies.
We also utilized technology to enhance the customer experience. Most recently this included the launch of the Dutch Bros. App and our Dutch rewards program earlier this year.
Industrial is app has been among the most downloaded apps in the Apple App store within our category and offers customers the ability to earn points based on what they spend while removing friction from the sales experience.
While it's been less than nine months. That's rewards has already attracted $2 7 million members as of September 30th and is increasing throughput by improving speed and efficiency.
This increased speed for consumer.
Moving friction allows us to focus on our time and creating lasting connections and refining our innovation based on consumer insights.
Our growth strategy commitment to our people best in class customer service and highly efficient shop operations has resulted in a proven track record of strong unit growth and enabled us to create a highly compelling economic model, which Charlie will discuss here in a few minutes.
Our customer research points to significant demand for <unk> growth.
Many of the shops opened over the last few years have been infill shops to reach new customers and alleviate capacity constraints at nearby existing shops, where our sales are often just too high for a single store to handle.
Our new shop growth strategy balances infill and new trade zone market expansion.
Given how fast we're going we built our economic model to absorb sales transfer between an existing location in a new one.
Even as our number of shops have increased over 50% since the beginning of 2019, we have maintained positive same shack sales growth within our markets.
As we enter and scale new markets, we believe our white space expense nationwide.
Our company development and near term, we'll focus on Texas, Oklahoma, and California, Although we will continue to move east.
We're confident in our expansion as a recent new market shop openings in Texas, and Oklahoma have performed well above both our expectations and volumes in our legacy markets.
As we develop the first sites in new markets. We're also planning the next several shops and believe each opening and propels our brand awareness well beyond the existing shop footprint.
Word of mouth advocacy from our customers has been among the strongest drivers of brand awareness largely because our commitment to our people encourages them to become enthusiastic brand ambassadors.
77% of people surveyed in our existing markets, we're aware of Dutch Bros, and yet marketing spend represented only 2% of total system wide sales last year.
One of the ways, we're helping word of mouth spread is by enhancing our digital and social media footprint. So our customers and crews can engage with Dutch bros. Across multiple channels. This will deepen our connections within the communities, we serve and increase our social impact.
Finally, we plan to expand margins through operating leverage as we've already invested in corporate infrastructure ahead of our expected growth trajectory.
Therefore, we should be able to leverage our corporate costs over time to enhance our margins and project SG&A to grow at a slower rate than our shop based on revenue.
At the end of the day. This is a long term high growth story and one we're really excited to share.
We're already seeing our commitment to people development disciplined growth increasing brand awareness and expanding margin from operating leverage as resulting in gains beyond even what we had hoped for.
We have a strong new store model and we're managing external factors as well as as well or better than our peers.
Now briefly on our third quarter I'd like to highlight a few financial.
Comments and thank all of our Dutch team members for their work in achieving this before handing the call over to Charlie.
Of note.
System shop Count grew 21%.
Year over year to a total of 503 shops, and we are now open across 11 states.
A record 33 shops opened in this quarter of which 30 were company operated shops and <unk>.
We're opening record was 26 shops in the fourth quarter of 2020.
We achieved this record despite the well documented industry supply chain challenges these supply chain issues impacted everything from building materials to equipment to product.
Year to date, we've opened 63 shops of which 52 company operated we.
We anticipate opening a total of at least 92 shops this year.
Approximately 80 of those will be company operated.
Our third quarter financial results demonstrate the underlying strength of this business and reinforce why we have so much conviction.
<unk> long term growth prospects.
With that I'd like to turn the carload call over to Charlie.
To review a few more details of the results.
Okay. Thanks, Josh Good afternoon, as Josh mentioned, we achieved very strong third quarter results on top of what was a great start to the first half of 2021.
Fundamentally our performance is driven by our ability to continue to drive extraordinarily successful and predictable shop expansion, coupled with our ability to consistently grow sales at our existing stores, which provides us with a very high degree of confidence in our future in the third quarter.
Total revenue grew 50% to $130 million year to date as of September 30 revenue grew 51% on top of 33% growth we achieved back in 2020 over the same nine months.
Primary growth driver was company operated shop revenue, which grew 63% this quarter and 65% year to date in 2021.
The 65% growth represents an additional $114 million of revenue of which approximately 81% comes from the opening of new shops.
While new shops will always be the core of our revenue growth. We also experienced strong growth in our existing stores.
In Q3 same shop sales grew seven 3% on a system wide basis or 8% year to date.
We achieved these quarterly comparisons despite rolling over headwinds caused by abnormally low discount promotion expenses in the same period of 2020.
This created a drag on comparable sales in the third quarter 2021 of approximately 470 basis points. As a reminder, unlike many in the restaurant industry that experienced declines from Covid. We actually grew same shop sales two 4% in the third quarter of 2020.
To the reliability of our drive through focused model.
Given the COVID-19 pandemic. We are also watching our performance relative to 2019 for the 2019 comparable store base.
297 of our 503 total shops 2021 same shop sales rose 10, 7% quarter three over 2019 levels for those same shops.
Same shop sales growth for company operated shops is also a strong four 7% in Q3. This was on top of two 5% growth for the same quarter in 2020, what is so impressive about that four 7% positive growth is that this comes despite two headwinds.
First was the negative rollover from abnormally low discount promotion costs in 2020, or 470 basis points and as a result of new company shops built near existing high volume shops, we experienced an additional 110 basis points of negative same shop sales drag from what some in the industry.
Cannibalization when we refer to as strategic sales transfer we call. It strategic sales transfer as in most cases, we have made the conscious decision to transfer some volume from existing high performance older shops to newer stores nearby that enhanced customer experience and creating more.
Balanced sales base across our stores that can then grow further in aggregate. These represent 580 basis points of headwinds in quarter, three making us even more proud of the same shop positive sales growth we achieved.
Isolating these factors gives a more accurate representation of the underlying strength and strong momentum of our business.
I want to take a moment to discuss discounts, which drives many of the margin comparisons and company operated shop profitability.
While this is a meaningful metric now as our discount rate stabilizes it will limit the impact of rollovers in the future. When the pandemic began we instituted a number of protocols to make employees and customers feel comfortable we stopped exchanging cash and we suspended the staffing of our paper based loyalty.
We then digitized our loyalty program through the Dutch rewards program launch in early 2021. These changes have significantly altered our discount and promotional expenses.
When expressed as a percent of gross sales discount and promotional expenses declined from the upper teens in 2019 following to as low as the mid single digits in 2020 and are now normalizing after absorbing the costs associated with signing up over 2 million members in the first half of 2021 discounted.
<unk> expenses are now settling in close to our targeted go forward rate.
We expect that rate to be in the low double digits, creating a permanent margin lift importantly, unlike a simple paper punch card, we're now able to create more value from this promotional expense by learning more about customer patterns and preferences. The Dutch rewards program is a powerful tool, giving us many op.
Opportunities to engage with customers and satisfy them in creative ways. We believe the yield will build over time and allow us to develop operational and speed of service efficiencies.
If the percentage of sales generated by our rewards customers continues to accelerate we may see our discounts and promotional expenses rise, but the payback on that is very clear by having customers joined the rewards program, where we can directly and efficiently engage with them.
As I mentioned earlier outstanding New shop performance as the primary driver of strong revenue and adjusted EBITDA growth, our new shops continued to exceed expectations and we've seen this consistently in recent quarters and uniformly across new and existing markets average weekly sales for new shops also continued to up.
Outperformed the overall system, increasing <unk> to an all time high of $1 $8 million on a trailing 12 month basis.
As we continue to infill existing markets or new shops provide balance to our existing high volume shops. This is accomplished by transferring customers in locations that are more convenient for them with both shops, maintaining very strong unit volumes and economics.
The result is a more even distribution of volume across locations, taking pressure off existing units as well as our <unk> by enabling them to deliver superior customer service. We will therefore continue to strategically infill markets as John explained earlier.
It is our culture that sets Dutch bros. Apart, we prefer not to under staff, our stores and our drive up productivity to a level that compromises the employee experience because that is what creates the customer experience. The <unk> brand is built around our ability to deliver on the promises of.
Speed quality and service without compromise.
Challenging times are often when a strong culture has the opportunity to demonstrate its greatest value.
Our approach to managing operations is even more critical today with the backdrop of an environment, where many business has struggled to source and retain employees or to even operate regular hours customers rely upon in Q3, we had less than 0.1% downtime on shops from staffing.
It's a metric that we believe positions us favorably in our industry.
Shifting now to company operated shop profitability as I mentioned in the third quarter company operated shop revenue grew 63% to $109 million.
Company operated shop profit grew 18% to $22 $8 million that delta between revenue growth and shop profit growth there.
Is the result of the abnormally low discount promotional costs in 2020 that I noted earlier.
We apply a consistent discounted promotional cost rate to quarter 321, and quarter 320 company operated shop growth.
Profit grew 50%.
Any remaining delta in profitability is the result of the expected startup inefficiencies of our new shop newest shop openings. The shops, we opened in Q3 as their startup results impact. The overall portfolio that said, we are pleased with the ramp profile of our 2021 unit class.
For example, the shops opened in the first quarter of 'twenty, one are performing higher than the system average on both a sales and margin perspective.
Total selling general and administrative costs were $154 million in the third quarter compared to $26 million in the third quarter of 2020.
This increase is primarily from the recognition of 125 million in noncash stock based compensation and $3 3 million indirect IPO related transaction cost and a $1 $4 million onetime charitable donation in connection with our IPO.
Removing these expenses core G&A was 18, 7% of total revenue.
We will continue to invest in the people and systems necessary to enable and drive growth given the high returns. We are delivering in company operated shops. We believe these investments are necessary and position us well to support growth on a profitable and a sustainable level, we generated 20.
$6 million of adjusted EBITDA in the third quarter and $68 8 million year to date. This quarter reflects a two 6% decrease as compared to Q3 of 2020.
And reflects the lapping of dose abnormally low discount promotion costs in 2020.
On a year to date basis growth is 21%.
Note that our adjusted EBITDA adds back stock based equity compensation nonrecurring expenses related to our initial public offering on September 15, 2021 and costs related to the COVID-19, pandemic, which have not yet ended in.
In order to walk you from reported net income to adjusted EBITDA. We have included those details within a short presentation, we posted on our Investor website.
We reported a third quarter net loss of $117 million.
<unk> 15, EPS down from net income of $6 7 million in the prior year.
Adjusted for one time charges net income was $11 million or 23% EPS.
We used our primary proceeds from the IPO to pay down the entire balance of our $198 million term loan and to maintain a strong balance sheet geared for new shop growth as of September 30, we had $26 million in cash and equivalents.
And $35 million drawn on our revolving credit facility, reflecting just $9 million and net debt. We also had $115 million in committed undrawn capacity in our revolving credit facility, allowing us to be nimble and flexible as we grow.
Before turning it back over to Jos.
We wanted to share guidance for quarter, four and sold in a select metric for 2022.
Total shop openings are expected to be at least 30 in quarter. Four revenue is projected to be in the range of $125 million to $128 million same shop sales are estimated in the mid single digits adjusted EBIT.
It is projected to be in the range of 12, five to $13 5 million with.
With that I'll turn it back over to John for closing remarks.
Thanks, Charlie.
I hope what you take away from today's call as a better understanding not only the financials of the company, but what has and will continue to make such growth successful.
These results reinforce our disciplined plan to make that growth in national brands our.
Our success is driven by a phenomenal culture and the people who embody it.
As we move forward, we will continue to focus on people development and strengthening our systems to steadily move towards a 4000 shop goal you will introduce our brand in new markets increased brand awareness in existing markets and invest in digital technology to ensure we're reaching the right audience and living up to the extremely high.
Customer service standards, we set for ourselves.
Finally, we will expand margins through operating leverage.
Our strategy and business plan is about discipline, it's about executing and it's about having confidence in the fact that we can build on short term wins for long term success.
Thank you again for your interest in Dutch Bros, and now we'd be happy to take your questions operator.
Please open the line.
We will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing with Barclays.
One moment, please while we poll for question.
Thank you. Our first question is from Andrew Charles with Cowen. Please proceed with your question.
Great, Thanks, guys and great first quarter update.
Given the continued success for the shift to the digital loyalty program in 2021, what are your thoughts on digital ordering through the App I know you've been open minded about this in the past and was curious if it's something you're more focused on now than perhaps two months ago. When you were doing the roadshow.
Well I think hey, Andrew it's good to hear from you.
I think the.
That is certainly on our radar.
And something that we're actually working on and we'll hope to be looking towards a test of that here pretty soon.
And something I think we'll be able to talk about maybe in the next.
90 to 180 days with more specifics around it but I think our rewards platform is something that we're going to continue to build off of and really the basis of what we built was a foundation.
We can really grow from and I think our team is really looking at a variety of upgrade options that will fit the desk rose experience.
Very helpful and then I apologize I missed it but did you guys disclose what the mix of loyalty sales, where I think it was running around 50%. When you guys were pursuing the IPO and I am curious within that just what are the early learnings ban and the loyalty offers aimed to increase frequency and ticket that you working ultimately towards personalized marketing with.
Yes, Hey, Andrew it's Charlie.
So about 60% of tender.
Is or is it through the rewards program rewards members and then.
So that's your first question can you follow up with your second one yes, I am sorry, Charlie you said, 66%.
606, Europe got it and then just I'd love to know the early learnings just I know that you guys have a loyalty program you've been starting to do more not quick personalised, but certainly more offer is intended to increase frequency and ticket and was just curious what the early learnings there.
Yes, I think the early learnings on that have been.
Wildly receptive through September.
Our rewards members. Our average check is around is around gosh, 5% to 7% higher than a non rewards member.
And we've been after kind of very targeted promotional opportunities at local levels and then also thinking through category promotions.
Whether it's cold brew or or increasing even around some of our holiday drinks currently.
I think all of those have shown some some really some great early results.
With that we've enrolled now almost $2 8 million members in our rewards program with a launch of February one so.
Really getting some activity.
That's great. Thanks, so much.
Youre welcome. Thank you.
Thank you. Our next question is from David Tarantino with Baird. Please proceed with your question.
Hi, good afternoon.
I was hoping first ask about performance in your newest markets in Texas, and Oklahoma I think you've.
<unk> been adding more units in those markets.
The last time, we talked and was curious to know what youre seeing as you further penetrate those markets.
In terms of <unk>.
And I guess Directionally I think you mentioned that there is still above the <unk>.
The system average just wondering if you could maybe elaborate on what youre seeing as you penetrate those markets.
Yes so.
Hey, David It's Charlie.
So those markets are still holding in excess of 20% ahead of the system average so and we've been fast filling in our in those stores right quickly in filling.
<unk> been able to main very maintained very high volumes.
And when we look at our margins, we're very pleased with those outcomes as well so we're speeding through Texas as fast as we can get there.
Great. Thank you for that detail and then.
Charlie another one on margins. So I think in the presentation you show a bridge.
That gets you to 31%.
Shop margin after I guess.
Backing out the Preopening costs.
If I if I do the same bridge for the quarter you just reported it's lower than that so I wonder if you could talk about the factors on why the most recent quarter would be <unk>.
Lower than the last 12 months and whether you think that's a new run rate for the business.
A couple of things there number one the third quarter from a volume seasonality perspective is slightly below the average for the year. So you get a little bit of deleverage.
And then we're starting to feel a couple of things we changed operationally, we changed our freeze product to be a premix product rather than individually mixed in stores and that creates a little bit more cost of goods. But then eventually we haven't we have a far superior product itself and we'll eventually get that back and labor savings.
And you May have noted that we did pulse prices in early November we had not taken any prices in our system of any significance since pre COVID-19.
And so we've absorbed a little bit of general inflation normal inflation, whether its wage changes in markets that had legislated minimum wage and are getting to their last tiers or other general wage inflation.
And we've been very thoughtful and careful about price escalation.
And again, we instituted a price increase to defend our margins going forward. So you got both a seasonality aspect and then the lag of the current price increase versus whats happened inflationary over the last few quarters.
Got it and then I guess.
As you think about your fourth quarter <unk>.
EBITDA guidance or is that does that imply that you expect the margins to be.
Better in the fourth quarter than the third quarter given that price increase.
No not significantly no I mean.
The guidance is a little higher the absolute numbers lower than quarter, three that seasonality driven.
So no we're not expecting any real change in the shape of margin other than seasonality impacts.
Great. Thank you very much.
Thanks, David.
Thank you. Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much and welcome to the public markets.
Thank you for questions.
I'm not sure if you should be thanking us or not.
Yes.
Don't worry.
The first question just on the.
Well the pricing you just mentioned I'm just wondering maybe you can share your historical average in terms of pricing and how do you think about the right level in periods of outsized inflation.
It seemed like you have.
A couple of options you can either price to whatever level is necessary to hold the margins. If you think you have pricing power.
Well the alternative I guess your price more modestly maybe let the industry, leading margins take a little bit of a hit but you protect your traffic.
Just wondering how you think about pricing in this current environment and maybe what you just took in November as a proxy and then I had one follow up.
Okay. So historically over the years, 1% to 2% pricing and as I mentioned very low pricing since pre COVID-19.
The great thing and John mentioned it in his script that we have 12 ingredients we have.
I don't want to simplify the supply chain and dismissed the great effort, our teams make to get things to stores.
But we don't have a complexity that others do and therefore were not nearly as subject at least to date to the types of inflationary pressures that others are having we believe that that price increase we just took we will defend our margins again going into next year.
And we want to just stay really focused on genuinely giving value to our customers.
And we'll we'll just monitor it right, we don't have any hard and fast philosophy, it's an environment today, where you've got to be able to pivot quickly and.
And that's the approach we'd like to take.
I think we expect our margins to generally hold up they are industry leading.
We're very grateful to have that and we will watch this over time.
And the fact that we've gone through an entire set of prepared remarks, and there was no mention of your basket of commodities or labor inflation in the third quarter or your expectations going forward.
Does it really to the degree that it's fairly minimal or can you can you share maybe what your basket of inflation was for commodity and labor in the third quarter and what your outlook is.
Yes.
The basket is low single digits and inflation overall, it's very mild and tempered and we don't say that thinks.
<unk> thinking we're immune to the struggles that could happen going forward, but we've been very fortunate dairy is not really up but thats, a big component of our cost structure, where forward out on coffee very long.
And we have.
About three been blend that we can pivot around and manage our costs.
And so and so we feel we don't see the kind of pressure others are seeing.
And then.
On the labor side aside from wage changes related to minimum wage laws that are out here West for example.
We just we just have not felt the kind of wage inflation, we're already we're paying our people very well.
And we have not had to intervene at this stage.
Understood.
Really the question, Jeff I'm, just wondering as you think about the projected unit growth, which is obviously the fundamental driver of your topline and COO.
Clearly industry, leading I'm just wondering if you could talk about what you would perceive to maybe be the greatest challenge and the risk to that growth.
It doesn't sound like it's really staffing and it doesn't sound like it's necessarily real estate.
And it's not really new market pushback, which are usually the areas that high growth stories to talk about so I'm just wondering what leads to the guardrails of the mid teens annual unit growth that you've put out there relative to something higher or lower how do you. How do you arrive at that number when there doesn't seem to be much in the way of limitation. Thank you.
Thank you, Jeff I think the <unk>.
Answer to that is really our growth is predicated.
Based on our people readiness so.
What we're what we're trying not to do is we're not a real estate company.
That we're plugging people into where people company plugging real estate into it so what I am what I am Super careful of is is stretching.
Our culture to a degree where we wouldn't be able to handle that and we've gone from 42 locations.
71 locations through this year, we'll open 92.
We've been on a really good run here for the next three years.
Say building the muscle of growth, but also we will not compromise our culture or our people systems related to what really might be.
The less.
Sure.
The less challenging side of actually finding real estate our pipeline is full.
We're well out in on our leases and.
And we're very confident in our growth plan, but we also need to manage it with our people development.
We'll make sure that's our number one filter to open new shops.
Great. Thank you.
Thank you. Our next question is from John <unk> with Jpmorgan. Please proceed with your question Hi, Thank you I understand that there werent closed store days or maybe even close shifts or perhaps even closed hours at the store, but what about periodic staffing challenge.
That must have occurred and some stored somewhere.
In the quarter I mean, obviously you guys run a drive thru format.
And not having staffing and that drive thru format very logically would affect throughput. So can you I guess I'm really kind of premium pricing for an answer here.
Were there any operational challenges that did periodically occur.
In the quarter in terms of number of cars getting through and specific hours and I guess is that an opportunity going forward to get even better.
Well I think two answers to hey, John This is Jonathan I think theres two answers that one yes, there is an opportunity to get better too is that we have.
Absolutely Werent.
<unk> immune from a staffing problem here and there, but we certainly did not have anything that affected the overall performance of the business that even really hit to our radar.
It might've damaged our ability to perform so does that mean, we didn't have a challenge no does it mean that we had a challenge that was enough to create problems.
Im not aware of anything that did that so again I mean, we're kind of boring in that sense and also very fortunate.
That our leadership in the field and our people and the team have been people in the field have been amazing at the way they continue to onboard people recruit people and.
And make sure that we're fully staffed to serve the customer so.
Nothing really there for us to report.
No that's great.
<unk> in most cases is good so thank you for that.
I wrote down 60% of tender I think was through your reward program.
Converting that digital customer to mobile order and pay whether it's.
It's through curbside or perhaps it's just through the walk up window or maybe during different slower day parts, where youre not necessarily at your throughput peak I mean, I think it would be an interesting opportunity for you as you kind of further yourselves down the digital landscape and what's your current thinking on that and how would you kind of put that in your in the Dutch.
Those priorities I guess over the next couple of years.
Well I think I think the.
The expansion and development of our rewards program and the App itself.
As.
It's right there top 123 and priorities related to the development of this business and to think that we don't really have anything other than just a frictionless payment system right now I think for all of US said that theres opportunity operationally to improve order ahead walkup windows.
The order ahead and a Dutch Bros way, because we will we will always maintain the service aspect of what we do and we think Thats an important element to who we are we don't ever want to remove that but maybe there's a way to even improve the service aspect of what we do.
Through our last order system or.
The last drink you had in there are so many great enhancements in technology now.
Through kind of fencing your stores and when people go through that digital fence like what information. They can learn I think there is there are some incredible opportunities and I think our team is really just getting on the early stage of building that.
Thank you.
Thanks, John.
Thank you. Our next question comes from Chris <unk> with Stifel. Please proceed with your question.
Okay. Great. Thanks, guys. This is Patrick on for Chris.
You're obviously building a lot of sites at a really rapid pace and I'm just curious if youre seeing any upward pressure in terms of site prep or construction costs.
Due to labor shortages of raw material inflation on that side on the construction side of things or if youre seeing any need to.
Order equipment out farther ahead or any issues just procuring equipment as you develop and then I had one follow up.
Yeah, Hey, how are you it's Charlie.
We are seeing a little bit of upward pressure in build out costs.
We've had some disruption, but we've been able to pivot pretty quickly to be able to get equipment onsite materials on site. We're fortunate that we're not doing elaborate build outs in terms of lobbies and things like that again not dismissive of what it takes to get all these sites built.
But we're not seeing great upward pressure and we're not experiencing great difficulty.
In terms of getting things logistically on the sites.
Great. That's helpful. And then just one question I mean I. Appreciate everything you guys had said on staffing already and certainly Thats. Your operator turnover is really low, but I'm curious just underneath the hood of not having as many issues as maybe some of your peers is there is there less turnover in the hourly ranks because you're you have that upward mobility and youre seeing that.
Really pay off for you from a retention standpoint or is it that you've seen hourly turnover increase but maybe youre just more effective as an employer of choice in your markets to be able to bring people in to replace as as that churn, maybe it's gotten a little bit higher just any additional color you have there would be helpful. Thanks.
We actually.
We actually have seen our hourly turnover go down here over the over the last.
A few pay periods and have not.
Had that issue and market so.
Again, I got to give credit to two or to our hiring teams in markets.
We have a lot of our employees attracting.
Other people and communities to come forward, there actually our best.
Recruiters as our current employees to say come work a Dutch its a great place to work in and so I think that the system that we have and the people that are out there.
Just talking about how great. It is to be a Dutch bros has really been a difference maker for us.
And market so.
Again.
The staffing issue.
Isn't there for us.
And what if anything is the labor market continues to improve we think is only going to get better.
Thank you. Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.
Yes.
One question and a couple of thoughts.
The first one you mentioned.
Is that the right number to think of that going forward.
Hey, Sara we actually can't hear you we could barely hear you.
Alright, how about this.
Are there any back okay, yes.
Yes, okay.
Okay.
Yes.
Yes.
Good morning.
Okay.
Is that correct.
Sure.
Alright.
Okay.
Okay.
Okay.
Right.
Okay.
Okay.
Yes.
Sarah It's Charlie.
Hi on the sales transfer.
That's the right way to think about it the <unk> forward about that level, it may ebb and flow a little bit.
Four quarter, just depending on how much backfill or until we do versus new trade zones, but that's the way we're thinking about it given what's happened over the last few months.
And are you do you have.
Now as you open more about sort of how long it takes for a store.
Store that may be.
Okay.
Same store that did.
Some of that sales transfer working against that to get back to previous levels.
And as we think about just the kind of volume cadence over time.
Not not enough data that we could really anchor ourselves on given how fast we've gone recently.
But we see that store that are receiving impact are receiving impact of less than 10% right now.
So we definitely think theres, some build back opportunity, but we couldn't quantify that just yet it's still we're still new in the new into all of that.
Sort of strategy. So I think in the coming quarters, I think we'll have much better information to share on that.
Okay and then just.
You may get the same answer to this next question My last one Richard.
You mentioned the payback.
Consumers and offering some of this discount.
Clear do you have any information on frequency or spend.
How it changes when people join.
And the rewards program.
So.
So we have data on frequency, but I think the.
Thing that we want to do.
Let this.
<unk> over time, so in other words now we can follow a customer and we have identified them through the rewards program and just in February of this began so when you really need to follow them through a number of cycles. Our frequency is good but it's not such a high frequency business that we could point to.
Our people's behaviors, changing as part of becoming a reward member and how are those rewards members behaviors changing over time as we engage with them so you're exactly right.
Going to give you the same answer it's a bit too early to tell.
But everything we see gives us a ton of optimism around where this is going.
Okay. Thank you very much.
Thank you. Thank you.
Thank you. Our next question comes from Nicole Miller with Piper Sandler. Please proceed with your question.
Good afternoon, and thank you just two questions the first.
Clearly seeing same store sales momentum.
Year over year compares become more challenging can you just rank the impact of price and I'm thinking it might be.
The 5% to 7% higher check on 60% of the tender of loyalty more than anything but I also don't want to overlook any menu our marketing influences on comp as well.
Yes, well over.
Over time prices, just such a small piece of what our comp momentum is I mean, it's almost not measurable.
In terms of what loyalty is doing just yet again.
Yes, we get a higher average check from loyal customers, but you would expect that because they're loyal customers.
So a lot of what we're seeing is just plain good solid traffic growth.
Alright, so execution excellence.
And then it was very helpful to understand the concept and the employee for sure because they touch the customer, but I wanted to ask you a little bit more on the customer.
Is that customer going to are coming from.
That's the first cup of tea.
And coffee.
Essentially what is the behavior of the customer and has anything changed.
Well that's it.
Wish I knew the answer to that.
I think that we're learning about that every day I mean, I think some of our our data points too obviously.
Our West Coast brand for 30 years, and we're very close to <unk>.
Starbucks and probably every market that we're in and so I am sure we trade back and forth.
With customers there I do think.
Some other people in the industry have thanked us for introducing customers to two a copy type concept, because we tend to be younger audience, where people are coming into the industry and so I think we get a you get some degree of credit for introducing that to people, but as our menu is shifting.
With energy and and Cold brew and things of that nature, I think thats also changing a bit too so.
For us it's convenience stores.
It's probably the local large chain.
Coffee location.
And really anybody else, who serves beverages I think thats, what we what we love about the business that we're in is that.
The beverage business, whether it's the lunch counter pickup business or whether it's convenience store or whether it's the Starbucks that's been there I think everybody who is in the beverage business I think we're all competing for that for that occasion. So.
So we'll learn more as especially over the next couple of years as we dig more into that type of information and research.
I appreciate that I asked that question just terribly so I'm going to try again, although that was very helpful.
Theyre coming in the middle of the day, our late morning, and no one's getting up at five am in well I shouldn't say no one a nice chunk or getting up super early hustling over to the drive thru, but my goodness, they're coming all day long. So I think you have the customer themselves like why were they drank driving to where are they driving from it.
Is it is it work is it.
Something else besides that I was asking and then frame.
Framework, sorry, yes, okay that well.
Thanks, Nicole I think that you have the short answer is yes. So we do have that early morning, I'm going to work or we do have the I've dropped off kids at school now getting started with my day, we do have the I'm going to school crowd I think we have.
27, 5% of our business is done in the afternoon.
In the afternoon day part so that tells me its an after school crowd. It's a it's a second drink of the day pick me up crowd.
30, 37% of our business is done mid day sort of like 11% to one which is definitely a lunch crowd. So we're very spread across day parts. I mean 2025, 7% in the morning, 36, 6% mid day and 27, 5% in the afternoon. So.
The answer is yes, I mean, they are coming from whatever they are kind of doing in their lives and making Dutch part of their day and I think that's what's what's pretty important about our concept and the menu that we offer.
Thanks for that thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.
Hi, good afternoon.
I was hoping you could talk about turnover at the hourly and managerial levels and if you have any metrics you could compare relative to 2019.
For those those metrics and then sorry, if I missed this but it looks like the franchise comps, although it's a smaller part of the business, where we're stronger than company owned is there something going on where the franchisees are taking more price or can you talk about what what might be going on there.
So I'll take the franchise piece.
Slight difference in pricing that they'll take their little more aggressive, but its really geography, it's just where they are placed.
Some of the markets, there and just to add a bit more growth in some of the markets. The company is anchored in.
They're great operators, but theyre not better operators than our company folks, it's really just the dispersion by geography.
And then I think in terms of turnover and staffing and joppa weigh in here.
We almost we almost have no turnover at the manager store manager level and as we talked about that core position in the regional operator.
Our.
On shift employees I'll call it it's.
It's way below a 100% turnover and it's just and I know from other experiences in other businesses, it's simply lower than its one of the lowest around we're just not feeling much churn.
Yes.
It really I think it's to Charlie's point, it's kind of.
Call it mid 50% range for staffing and really.
We're 100% staffed and no turnover at the management level. So we've been fortunate and we have people who love to come to work at Dutch Bros. Everyday.
We'd love to be a part of the chemistry that we havent stands and like I said are if anything that people who are working at our standards are our best recruiters.
For new employees, so they love being there in.
And I think our team on the ground creates a great environment for people to work.
Great. Thank you.
Okay.
Thank you there are no further questions at this time I would like to turn the floor back over to Jos <unk> for any closing comments.
Thank you and.
Thank you to everyone who joined the call today.
Thank you for being part of this journey with us as we.
As we have now become a public company we have been just.
Very thankful for the response that we've gotten.
For the excitement that people have and for the many people who are just learning about Dutch grows for the first time.
We welcome you to the family and in.
And look forward to having you along this journey with us so thank.
Thank you again.
Look forward to future calls and sharing results and.
Most importantly have a great rest of your day. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.