Q4 2021 Dutch Bros Inc Earnings Call
[music].
Greetings and welcome to the Dutch Brothers' fourth quarter, 2021 conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance.
During the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Patti one do that.
Actor of Investor Relations and corporate development, Sir you may begin.
Thanks.
Good afternoon, and welcome I'm joined today by John Ricky President and CEO and Charlie generally CFO .
We issued our earnings press release for the quarter and year ended December 31, 2021 after the market close today, and we will file our 10-K in the upcoming days.
We have also posted our earnings press release, and our supplemental information deck on our Investor Relations website at investors got Dutch Bros. Dot Com and we'll post our 10-K, there as well when it is released.
A recording of today's call will be available on our website immediately following this call.
Please be aware that all statements in our prepared remarks and in response to your questions other than other than those of historical fact, including statements regarding our future results of operations or financial condition.
Recent strategy and plans and objectives of management for future operations are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All such forward looking statements are inherently subject to risks uncertainties and assumptions.
They are not guarantees of performance and are expressly qualified in their entirety by cautionary statements.
Forward looking statements made are as of today's date, and we undertake no obligation to update them to reflect events or circumstances after today or to reflect new information actual results or revised expectations or the occurrence of unanticipated events, except for as required by law, we may not actually achieve these plans intentions or expectations.
<unk> disclosed in our forward looking statements and you should not place undue reliance upon them.
For more details please refer to our earnings press release and to the risk factors in our other SEC filings, particularly the risk factors described in our quarterly report on Form 10-Q for the quarter ended September 32021 filed with the SEC on November 12, 2021, and in our 10-K for the year ended 2021 that will be filed in the.
Coming days.
Finally, while we have prepared our consolidated financial statements in accordance with generally accepted accounting principles in the United States. We will also.
Our reference non-GAAP financial measures today, which will which can be useful in evaluating our core operating performance. However, these non-GAAP financial measures, which may be different than similarly, titled measures used by other companies and are not substitute.
From measures that are prepared under generally accepted accounting principles.
Rather they are presented to enhance investors' overall understanding of our financial performance, but should not be considered a substitute for or superior to the financial information prepared and presented in accordance with GAAP investors should therefore, we use a reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings press release and not rely on any single.
<unk> financial measure to evaluate our business with.
With that I would like to turn the call over to John .
Thank you Patty and good afternoon and welcome everyone. We appreciate your interest in Dutch Bros.
Let me begin by some opening remarks on our 2021 performance and then discuss how well positioned we are for the future.
Charlie will then review the important specifics of our financial results and provide guidance for 2022.
I'll conclude with some final thoughts before turning the call over to Q&A.
Our first section of shop development.
<unk> 2021 was a record year for Dutch Bros. On many levels of course, we completed a successful IPO, but.
But equally important we opened 98 shops systemwide of which 82 were company operated surpassing our previously provided guidance of 92 system wide shops in the process. We also entered three new States, Texas, Oklahoma and Kansas.
The magnitude of our new shop openings, along with our continued expansion into new markets. What has stood the test and the team delivered.
We also handled the faster pace of new openings very well and these units are performing at a very high level.
In the fourth quarter, New shop development was the highest on record for Dutch Rose, We opened 35, new shops, including 30 company operated shops in December we opened a record 23 shops.
On Wednesday December 3rd we opened six locations in six different states demonstrating our capacity to manage simultaneous development across multiple markets also of note. We opened eight more shops on the last weekend of the year.
Through our Preopening programs, we continue to invest in the success of each new shop, especially as we enter new markets.
We send a dedicated opening team to instill our distinctive culture of speed quality and service and in the long run this investment pays for itself in spades.
When shops opened late in the quarter. They incur all of this preopening and investment, but typically do not yet have a chance to contribute meaningfully to the revenue or profitability and to offset these preopening investments in the current quarter.
Harley will get into further detail on new unit performance and overall profitability.
When we enter a new market, we start with one shot but quickly build several more to capture market share and satisfy consumer demand.
Entity and scale create a positive flywheel effect for us increasing brand awareness and providing more capacity to serve customers. Since 2020 average unit volumes for new shops have exceeded the system average and these shops have demonstrated a predictable and consistent volume and margin progression typically reaching margin maturity within three to four.
Four quarters of opening.
The first quarter has also been off to a strong start with February we opened 25 shops, all of which are company operated.
We expect to end the quarter with at least 30, new shops opened.
We are excited about our near term development growth prospects, the new shop opportunity is even better than we originally anticipated during our IPO process last year as evidenced by our strong performance in new markets, like Texas, Oklahoma, Tennessee, and Kansas and early 'twenty 'twenty. Two we opened our first shop east of the Mississippi River in Nashville, Tennessee.
Throughout 2022, we will continue to expand in Texas, Oklahoma, Tennessee, and Kansas and also ramp up development in Southern California, where results are pointing to a significant opportunity.
In total we now expect to open at least 125 shops above our original guidance of at least 112, our ability to increase our development goal for 2022 is based upon our incredibly talented pool of operators as well as our confidence in our ability to identify and secure new sites at attractive returns.
Staffing and labor headwinds within the overall industry are well now we've read the headlines well.
While we are neither immune from market forces, nor the impact of the omicron berhad or overall labor cost and ability to maintain normal operating hours were stable in the fourth quarter and now into 2022 weird.
We had less than 1% downtime during the fourth quarter. This figure ticked up slightly in January 2022 is the variant peaked but quickly subsided in February .
We were able to utilize pooled staffing to help us. During these times are fully cross trained crews allow us to fill in where one shop as a shortage relative to another and draw from this tool as needed whether the headwinds.
We have not experienced the staffing challenges of the great resignation during the fourth quarter, our shop level turnover was 56% and down sequentially from the third quarter.
At the regional operator level, we have virtually nonexistent turnover, which we attribute to our unique people first culture, along with our significant career development opportunities and financial incentives that we provide to our employees.
<unk> has always been our people and culture first company focused on providing meaningful development opportunities to those who want them.
As we increased our shop development target, we open up even more leadership and growth opportunities for our people.
We are not a real estate company.
Our primary focus is not sai developed availability. It is people development when we commit to growth numbers. We do so because we are confident in the readiness of our operators. When we guide to at least 125, new shop openings. This year, we do so with the knowledge that we have a sufficient bench strength ready to achieve the goal.
Currently we have nearly 200 fully qualified regional operator candidates in the pipeline ready to run a market.
These candidates grew up in the Dutch Bros system, working their way up from breweries to both in our shops and our franchisees shops and have an average tenure of about six five years at scale. They can support the 750 to 1000, new shops across our system that we have planned.
Behind these fully qualified regional operator candidates are approximately 900, others in the Dutch gross leadership pathway program leadership pathway program provides a clear path from where we stood a manager to regional operator and is the core of our people development system.
I'd mentioned this program is our new Ed assist program that provides tuition assistance, where all employees across the company. We believe that our employees continuous improvement both personally and professionally improves retention and positions Dutch bros to win.
Now, let's turn to our performance.
Fourth quarter revenue increased 55, 8% to $140 1 million compared to last year.
System same shop sales grew 10, 1% in the fourth quarter and 15, 3% on a two year basis, while the company operated shame same shop sales grew 11, 5% in the fourth quarter and 17, 3% on a two year basis, our sales trends were steady throughout the quarter, we benefited from <unk>.
Good performance in our fall and holiday promotion window enticing more customers to chew or choose a premium add on our larger size and the execution of our system wide price increase in combination. These efforts resulted in a weighted average price increase that far exceeded our list price adjustments.
Quarterly adjusted EBITDA was $13 3 million at the upper end of our previously provided guidance range of 12 five to $13 5 million included in this figure is a $6 $2 million in preopening expenses of which approximately $1 million is related to openings that took place late in the third quarter.
<unk>.
The remaining investments supported a record setting 30 company operated shop openings in the fourth quarter, our confidence in our people pipeline and development team allowed us to accelerate openings ahead of plan, allowing these shops the sooner contribute to profitability in 2022.
While we are not immune to margin pressures, but are managing it appropriately we continue to look for operational improvements and further opportunities in our market based pricing model. In addition, we will use segmentation personalization and innovation to excite our customers about our unique premium and at times higher Maher.
Jen beverage offerings.
In November we successfully took a modest price increase of two 9%. It was our first since prior to the pandemic and was well received by our customers operators and franchisees.
Total revenue for the fiscal 2021 increased 52, 1% to 497 $9 million compared to last year.
System same shop sales grew eight 4% for fiscal 2021 and 10, 3% on two year basis, while the company operated same shop sales grew 9% for the full year 2021, and 11, 1% on a two year basis.
Annual adjusted EBITDA reached $82 1 million, an increase of 17, 7% compared to 2020.
Momentum has continued into the new year underlying consumer demand remains very positive as evidenced by our same shack sales and continued acceptance as we enter new markets and infill our current markets.
As we've discussed in the past or in one of our biggest priorities in 2021 and moving forward is the Dutch rewards app.
The Dutch rewards program launched last year had already grown to $3 2 million registered users by year end, which is approximately.
6000 customers per shop in the fourth quarter alone, we added a half a million new members over the last six months. The average ticket for Dutch rewards members was also 3% higher than for non rewards members.
At year end, our digital tender was over 60%.
We are pleased with our customers' adoption and use of the desk rewards, especially as users begin to utilize the platform stored value features as more customers load funds to their accounts. We believe it can reduce transaction times speed up our lines and free time to create meaningful lasting connections.
Through the App, we also have the ability to remember each interaction with all of our Dutch rewards members. We can leverage this knowledge to generate custom offers and thoughtful messaging to personalize our members Dutch Bros experience.
We're in the early innings of this work and we're excited to continue unlocking value for our customers and our brand.
Another area of things, we aimed for internally is to make a massive difference one cup at a time, giving back to our communities has always been part of our DNA.
Over the last several years, we've expanded and institutionalize, what we call our social impact platform.
This includes our ongoing philanthropy diversity equity and inclusion sustainability and community and government relations.
As a values driven company will hold ourselves accountable to our employees and our customers in this space and they have high expectations. We've made clear our unwavering commitment to inclusion launched important programs to support and train our people and initiated systems to foster a diverse and inclusive future for Dutch Bros.
Likewise, our sustainability program was focused on near term goals to reduce our waste and water usage and ensure our coffee is ethically sourced at the same time, we are developing a set of commitments towards an overall 2030 carbon reduction goal that will help ensure that we are a meaningful contributor to positive environmental change in the decade ahead.
We are excited to continue developing our capabilities along these pillars ensure our progress accomplishments and areas of improvement with you.
To conclude we believe that we have something here that is unique.
Growing profitable business with a phenomenal culture and loyal customer base with the foundation necessary to support growth for many many years to come.
After over two years of virtual events due to the pandemic, we held our first in person leadership summit in Nashville. This February .
The energy of our teams was unmatched. We also recently celebrated the Dutch Bros. 30th anniversary here in our home city of grants pass our employees were able to celebrate with their co founder trap and take a moment to reflect on the company's journey.
These two get Togethers will impact our G&A in the first quarter. It's been sometime since we had the ability to bring our people together on a larger scale and we believe this investment is critical to our future to our culture.
Both events were incredible for our operators franchisees and headquarters employees Testament to the culture. We have worked so hard to create carefully nurture and grow for over 30 years now.
It was humbling to look back at just how far we've come from the first double headed expresso machine on a pushcart and downtown grants Paas, Oregon to a system of over 538 shops across 12 states at the end of 2021, and while we are proud to be recognized as one of the fastest growing brands in the United States Foodservice and restaurant industry by location count.
We are still in the early early stages of a long term growth story with enormous potential.
Our goal is to serve high quality handcrafted drinks at 4000 locations across the U S. Within the next 10 to 15 years, while continuing to develop a people pipeline that enables our unit unit growth and supports communities.
With that I'd like to turn the call over to Charlie to review a few more details of the results.
Thanks, Josh as John highlighted we're off to a very good start as a public company and we enter 2022 with good momentum across the business looking inside 2020 one's financial performance and looking forward into 2022, it's important to reflect on the overall investment thesis and map our outcomes against that.
Frame of reference in addition to our earnings release, there is a presentation that outlines our results posted on our Investor Relations website that contains supplemental information and details as a people first growth company one of our key objectives is to expand the brand and give our people across the system new opportunity.
This is going very well and even better than we anticipated entering 2021, let's get to the specifics of new shop growth our objectives in the near term were to grow shop, count by 20% annually and to add new shops that mature with average unit volumes at least as high as our system average.
At the end of the fourth quarter, we had 271 company operated shops, nearly 50% more than we had at the end of 2020, our overall system shop, count was 538 shops or 22% more than we had at the end of 2020 ahead of that objective and our guidance is 20 plus per se.
Growth again in 2022.
The second objective was to.
Was to add shops that meet or exceed our system <unk>, we continue to see new shops, performing higher than our system averages even as we work diligently to infill existing markets and quickly follow on and new markets shops opened in 2020 are averaging $2 1 million.
And average unit volumes and shops opened during 2021 are trending above this figure as well take for example, our college station Bryan market, where we made our Texas century, just over a year ago. After launching our first shop with volumes well ahead of our system average we quickly filled in the market to better distribute the demand.
Amongst four total shops that are all within four miles of each other the net effect was a better experience for our teams and our customers and this will be a recurring theme as we enter new markets. We do not celebrate after big opening and seek to harvest, we're very mindful of wait times and providing the best experience possible for our customers.
And for our teams are speed goal is not only to have good overall service times for each experience, but to also be consistent in delivering that service by being very reliable, we believe that protecting shops from being overburdened helps us achieve these goals our growth strategy is playing out in new markets like Texas and in the <unk>.
Legacy markets like California, where we're taking our expansion in southern California up a notch and southern California. We are seeing high opening week volumes, just like we have been seeing in Texas, Oklahoma, Kansas and Tennessee.
This speaks to how well the brand travels and to the underlying demand for the brand in existing and new markets. We entered 2022 with a strong pipeline of new shops that fit inside our selection criteria and meet our overall growth strategy objectives to expand in existing markets and to open a select set of new.
Achatz each year all of this is designed to give our operators growth opportunities and to do so in a financially successful way, we see that optimism in our new unit guidance for 2022.
Rounded by both volume and profitability results supporting our decision to quicken the pace in measured ways as it relates to new shop profitability. Our results in 2021 affirm that we are right on track. Our objective is to combine <unk> with outstanding contribution margins. Our goal is to have he.
Each new shop deliver a year or two shop level contribution of around 30% for the year 2021 company operated shop gross profit was 21.
One 1% of company shop revenue.
Depreciation was 4%, resulting in a company operated shop contribution of 25, 1% Importantly, Preopening expenses were three 2% of company operated shop revenue.
And considering our long term target of around 30 plus percent year two shop margins. We believe we're right on track.
As part of our company operated shop contribution of 25, 1%. Please note that this figure includes both the aforementioned preopening expenses and other new unit inefficiencies neither of which are included in a shop second year of operation.
Let me now walk you through the change in company operated shop margins for both the full year in the quarter as I know in todays environment. There is more focus on recent results versus long term trends.
As we've discussed last quarter, lower discount and promotional expenses positively impacted 2020 results based on social distancing distancing protocol, we suspended use of paper stamp card. Shortly after the COVID-19 pandemic began in March 2020.
This persisted until Dutch Bros. App launch in February 2021.
Discounted promotional expenses when expressed as a percentage of company shop revenue fell from the upper teens in 2019 to the mid single digits at the end of 2020, we're now trending in the low double digits, despite having such a large percent of our revenue driven by rewards customers.
<unk> spoke at length about all the positives from having a digitized rewards program. We track this investment very carefully and if membership prices further we would expect discount promotional expenses to rise accordingly.
However, having more rewards members is a big positive for engagement frequency and ultimately revenue expansion.
Secondly, as we move through the pandemic, we were very careful not to escalate our menu prices in November we took a modest price increase which was our first measurable price increase in over a year for our company shops that price advanced landed well for us.
Was appropriate relative to our desired positioning in the market.
With that grounding, let's now review company operated shop contribution margins given the importance of those trends to our investment thesis on a full year basis company operated shop contribution decreased from 28, 7% of company operated shop revenue to 25, 1% or a total reduction of 300.
60 basis points of that 340 basis points comes from the change in discount promotional expenses.
Let's quickly look at the movement in beverage food and packaging costs and labor costs. Given those are the two most significant cost and the industry in general has been challenged by these two areas over much of 2021.
Beverage food and packaging costs increased from 22, 4% to 25, 3% or 290 basis points.
120 basis points of that increase is related to the change in discounts that leaves 170 basis points of real changes mix and recipe changes drove 100 basis points of the increase we have previously mentioned our decision to shift to a pre made Max for the Dutch for each category of beverages driven.
By a number of operational considerations.
Further the costs and inefficiencies that are normal part of opening new shops makes up the remainder of this increase we opened many more shops in 2021 related to 2020. So this impact was outsized in our year over year comparison.
Labor costs increased modestly from 29, 3% to 36% or 130 basis points 140 basis points of that increase is related to the change in discounts that leaves just 10 basis points real reduction despite incurring cost increases and labor for example in our west.
Coast markets previously legislated minimum wage advances are in their final phases.
So beginning in 2021, we instituted minimum staffing levels in our stores, which slightly increased labor costs, but were necessary to set up shops at the beginning and close of each day, notably these added expenditures will persist as we opened many more shops in 2022 versus 2021.
However on the positive front, we incurred lower COVID-19 related costs in 2021, as compared to 2020, which helped to offset most of those increases on the whole our underlying labor costs have been stable with the impact of discounts driving change in the labor percentage.
Further evidence comes and our lack of turnover the stability in our workforce and then we're not struggling to staff at the level other retailers seem to be is allowing us to keep our cost stable I want to reinforce it is a people first company. We are always assessing how we reward our teams and how we create engagement and <unk>.
Ways that go beyond compensation, we are fortunate to not be struggling at this point, but we are watching this very closely.
In the fourth quarter company operated shop contribution decreased from 24, 5% of company operated shop revenue to 18, 7% or a total reduction of 580 basis points. The change in discount and promotional expenses drove a 580 basis point reduction in margins identical to the entire <unk>.
In this measure of fourth quarter of 2020 represented our lowest discount and promotional cost expense of the year when expressed as a percent of revenue.
Similar to the full year 2021 view I. Just noted there are many moving parts in margins, but the major driver was this change in discount expenses.
Please note that our menu price increase began to take effect in early November of 2021, and therefore any supportive margins from pricing was for a partial quarter.
Beverage food and packaging costs increased from 22, 9% to 26, 8% or 390 basis points 190 basis points of this increase is related to the change in discounts that leaves 200 basis points of real change or 30 basis points more than the full year trends noted above.
Two things to point out first we incurred a bit more ingredient costs driven by inflation and second accelerating new shop development means we will have some cost efficiencies as we open up new shops, and established logistics in new markets labor costs increased from 29, 7% to 35% or 80 basis.
Since 220 basis points increases related to the change in discounts that leaves 140 basis points reduction to account for in the quarter. In Q4, 2021, we experienced lower lower Covid related costs. Then in Q4, 2020, driving 120 basis points improvement.
All of these metrics are spelled out in visual detail in the Investor presentation posted to support this earnings release on our Investor Relations website.
Some words about fourth quarter profit and its quality as we mentioned in the press release. This is being limited by a number of factors on a dollar basis, we had higher pre opening costs, which supported record new company shop openings after totaled $6 2 million of Preopening costs incurred $1 one.
Were attributable to openings late in the third quarter, leaving 5 million of Preopening costs for shops opened within the fourth quarter on a per shop basis. This is higher than our norm because we had a number of openings at represented first shops in their respective markets and speed to market also had some cost first shops have higher preopening cost.
As we spend more time with our opening crew training, our staff and creating a solid competent base for expansion.
For the year 2022, we expect the average preopening expense per shop will be consistent to what we saw in 2021 we.
We expect to incur approximately two thirds of our pre opening expenses in the first half of 2022 as a result of this type of opening and pace. This is an important factor as you look at our profitability in the first versus second half of 2022 adjusted.
Adjusted EBITDA was essentially flat in the fourth quarter compared to the same period in 2020, yet revenue growth in the quarter was over 50% I just noted the significance of preopening costs within our fourth quarter results.
Pre opening costs in the fourth quarter were $6 2 million or $2 5 million more than in the prior year. Additionally, the fourth quarter of 2020 was also positively impacted by lower by the lower rate of discount promotional expenses with that impact being approximately $2 $8 million finally.
Quarter of 2021 was burdened with $3 1 million in ongoing costs associated with being a public company, which did not exist in the comparable quarter of the prior year as a different set of cost versus the specific equity offering costs, we add back to arrive at adjusted EBITDA and total the impacts I've mentioned.
Were $8 $4 million.
As a reminder, adjusted EBITDA was $13 3 million in the fourth quarter. Once we consider the higher pre opening costs and public company costs in 2021, and the positive impact of lower discount promotional costs in our 2020 results revenue growth and adjusted EBITDA growth become more synchronized we made the <unk>.
Conscious decision to accelerate growth in the fourth quarter and into 2022, and while we always try to balance the profit growth equation in the near term. We're also keen to focus on long term high quality revenue that will yield lasting profit and growth.
Speaking of unit growth a few words about our liquidity as of December 31, we had $18 $5 million in cash and equivalents and $65 million drawn on our revolving credit facility, reflecting $46 5 million in net debt. We also had $85 million in committed undrawn capacity on our revolving credit.
<unk> yesterday, we refinanced our existing credit facility to provide greater liquidity and maintain a strong balance sheet geared for new shop growth, our new five year facility provides us with $500 million in committed capital split between a drawn term loan.
Undrawn delayed draw term loan and revolving credit facility. We believe this structure gives us ample capital to fund company operated unit growth, while always maintaining modest leverage levels and a conservative balance sheet.
We are opening more shops sooner and both our latest openings and future company shop pipeline pipeline is shifting more towards ground lease arrangements, where we spend more capital upfront in return for lower rent going forward as opposed to a build to suit arrangement.
It is evident they were able to go fast over 20 openings in December and a higher annual objective for 2022 versus 2021 total openings. We've also noticed that taking more control of the construction process.
Allowed us to move through the many challenges being faced today faster and more efficiently that requires more liquidity access going forward should we choose to need. It we are grateful to our banking partners for working with us to achieve solid affordable access to liquidity to fuel growth.
Before turning it back over to Josh we wanted to share guidance for 2022, and select metrics for Q1 or 2022, specifically total system shop openings are expected to be at least 125 of which at least 105 shops will be company operated total revenues are projected to be in the range of.
700 million to $715 million.
Same shack sales growth are estimated in the mid single digits. Adjusted EBITDA is estimated to be in the range of $115 million to $120 million.
Capital expenditures are estimated to be in the range of $175 million to $200 million.
Which includes approximately $15 million to $20 million for our new roasting facility that we project will open in 2023.
For Q1 total shop openings are expected to be at least 30 of which nearly all shops will be company operated we expect approximately half of these shops to be the first shops and their respective new markets, requiring our highest level of opening support same shop sales are estimated in the mid single digits.
G&A spending includes the two events Josh mentioned in the range of 2 million to $2 $5 million.
As a reminder, our business is seasonal with our best.
<unk> high daily volumes, taking place in quarter two.
Please see our supplemental slides in the investor deck for more details with that I'll turn it back over to John for closing remarks.
Thanks, Charlie.
We have all the building blocks in place to ensure that <unk> remains a successful and enduring company.
A powerful authentic brand that shares the love <unk>.
Strong people systems that drive company culture, and fuel our shop growth.
A highly engaged customer following.
Customizable and uniquely curated beverages.
Kylie consistent and highly attractive unit level economics.
Portable model that is successful across geographies.
And in engage cofounder with an experienced leadership team.
Six months after our initial public offering we are staying true to our core thesis in many respects. We were ahead of the game with more revenue and more profit and more stores than what we expected.
And this time, we've hired more people and facilitated tremendous growth opportunities for our employees as well, we've treated our customers well and we're doing our part to be good partners in our communities.
Thank you again for your interest in Dutch grows and now we'd be happy to take questions. Operator, Please open the lines.
Thank you very much.
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My first question is from the lineup John I haven't Covid.
J P. Morgan. Please go ahead.
Two questions if I may 1st I'd like to actually start on the Capex number I mean that is a pretty substantial change at least relative to what we had in the model going to $175 million to $200 million. So I guess two things first could you repeat how much is going to that roasting facility, which I guess would be isolated to two.
Two in 'twenty, three but secondly.
As the business shifts from build to suit to ground lease how much are you expecting to spend per ground lease unit.
And how much lower occupancy costs or.
Or lack of landlord financing do you think actually could benefit the P&L as you bear more of that upfront cost.
So and that was one of the one yeah.
So in 2022, we expect about $20 million of capital related to the roasting facility that will open in 2023 in terms of the ground lease if you recall from our IPO work, we said that a ground lease was our capital our cash of about one three to one.
$4 million.
A build to suit is about $500000 cash contribution if you take that differential essentially times, 7%. That's the different rent that's the lower rent youll pay.
Yes.
If you select a ground lease.
And <unk>.
Yes, it and doing it still isn't even if I were to back out that $20 million for the roasting facility on 105 company units I mean, it still does feel a little bit high in Capex. I mean is there anything else going on on the corporate basis, perhaps and in Remodels.
Our system made benefit from as part of that Capex or.
Is it your once again frontloading fiscal 'twenty three openings, perhaps in some of that fiscal 'twenty two capital budget.
Yeah, you're on it John that we do have some frontload spend as we move in and keep ramping up into 'twenty three some pre spend.
If you look at your pipeline, 65% to 70% ground lease and you start to do that shift versus where we were we work for the full year 'twenty. One you use up more more cash will get a little more active on upgrading units some things that we had just delayed.
With all the Covid disruption, we just put things on the back burner.
So we will go ahead and take care of that now and throughout 2022.
Yes go ahead please.
Well I think also coming out of IPO, we had some more cash expenses related to taxes.
The equity piece of employee compensation that we had we had the front as well. So we left 21 with a little bit more out on our line.
We would have expected.
Okay, and you know as we think about the 'twenty two and 'twenty three development I mean is there any.
Rethinking of the you know the Dutch Bros box of the future may be including a little bit more automation, including fountains for example.
Figuring out how to be you know more.
More efficient you, perhaps with some of your best beverage preparation waste consistency what have you is that something that's now contemplated in your capital budget for 'twenty two.
While I know that.
John we are in the middle of.
Testing.
Several operational improvements inside of our stance.
That if go well in testing phase that we could see start to rollout things like fountain systems or things like.
Tap systems for Cold Brew.
Which we have in place in several locations already.
So to put a specific number on that I couldnt I couldnt give it to you right now but.
There are several operational improvements underway inside the stand.
Thank you.
Thank you we have next question from the line of Sara Senatore with Bank of America. Please go ahead.
Okay. Thank you very much and I'll just add.
I guess, a clarification and then a.
Question on on loyalty.
So first on the on the comp for the quarter.
Initially you had expected that to be up mid single digits, as well and end up being quite a bit better than that was that just you know kind of.
Upside from the success of the seasonal and beverages and the mix shift or I guess I'm just trying to understand you know to what extent for example.
Guidance for once you might prove conservative.
So far as you know it's sort of similar.
You gave us.
The quarter that just passed so that's that's the first question and then the second question is on the loyalty members and you mentioned that they're spending about 3% more.
But you're also seeing higher frequency.
Yeah.
Just trying to get a sense of whether overall spend might be even bigger than that when we've seen other loyalty programs I think the initial lift has been pretty meaningful so.
China gauge kind of what is still the opportunity or maybe how your loyalty program might differ from some of the other that we've seen.
Thanks Sarah.
A couple of things on the promotional side of fourth quarter comps as we did.
As I mentioned, we executed.
A holiday program.
Was.
As strong and really surpassed all of our expectations related to what we did in kind of the December period, and then kind of what we executed in the fall and how our team did that I think it surprised.
All of us and how well that was received by the customer.
And the response that we had.
We've also been been working on premium amortization of some of our products and utilizing.
The.
The increased popularity of our soft top business.
And other ways to premium is our business. So we just I think our team did a good job of.
Pulling together just incremental business during that time.
We also I believe that we received a nice halo effect from the IPO and the news in the fourth quarter. We had more mentioned a Dutch bros are crossed.
All regions of the country than we'd ever seen in the past and I believe that there was impact on that in a very positive way to our business.
As it relates to to reward you want handle that I think.
So you couple of things around loyalty spend when you look at how much more a loyalty member spends and our program versus a non oil number it looks a little light. We have we have very loyal group of consumers across the business, whether theyre part of the rewards program.
Not.
We think that the.
The biggest thing that can happen is if you look at our top tier frequent customers and you drop down to the next here.
A pretty significant difference in frequency and so we feel like as we we can do some effective things to get that frequency up in that that next quintile or core Tyler customers on down that's that's perhaps the biggest thing we can do we also believe that stored value.
It is a big idea not only operationally, but just to create attachment and engagement and loyalty and we're really.
At the infancy stages of getting customers to load money on their on their program.
Understood. Thank you very much.
Hugh.
Yes.
Thank you we have next question from the line up Andy Barish with Jefferies. Please go ahead.
Hey, guys.
Let me do the follow up first just on that last comment Charlie.
What what percentage of rewards members roughly.
<unk> pre loaded funds at this point and are there any specific programs to to drive that higher.
So about 20% to 25% of our tickets.
From rewards members include stored value stored value activity.
And I can't tell you about a specific promo that's coming but we are working on ways to either incent them with with additional points if they were load.
Or some some additional reason to try to get that attachment up.
Got it and then.
Can you just give us I guess, a little bit more color on.
Just sort of.
The EBIT.
I guess, the absolute dollars building up I mean, it sounds like.
The first half.
Especially in the first quarter will be a little bit lower than if you just straight line.
You're 100 tens of $115 million or $115 million to $120 million guidance, sorry about that so just just.
Trying to kind of get a sense of that.
The cadence and how we should think of the discounting impact as we move into.
2022, again understanding that it is kind of a moving target.
While discounting.
Once we got past this fourth quarter and the first quarter, we will rollover the launch from from 'twenty. One. So we'll have have had a high level of promotional and discount expenses in quarter. One in 'twenty. One we will lap that in quarter. Two of 22, So we'll get a little bit of favorability from that lap.
The biggest thing going on is we're.
We're going to have a fair degree of Preopening expenses in the first half of this year.
More than 50% of those expenses will come in the first half because of this dynamic of these first in shops.
So we average about 125000 per store in Preopening first shops can can spend over 200, and then it falls off after that so the way our pipeline shaping up is we're going to have a lot more.
A fair degree more preopening costs in the first two quarters of 'twenty, two and that that's going to create a timing drag on earnings until we reach the second half and we kind of get that back also note. We're opening more stores than probably you originally would've modeled and so we're going to have.
More preopening expenses in aggregate related to that as well.
Okay very helpful color. Thank you.
Thank you we have next question from the line David Tarantino with Baird. Please go ahead.
Hi, Good afternoon, my question's on the the shop level EBITDA margins and Charlie I just wanted to go.
Your thoughts on.
What do you think the right long term margin of the business.
And whether that.
Changed in your mind or not and then if you think about you know all the details.
Gave us.
For the fourth quarter and some of the nonrecurring impact.
You know what.
What's the bridge to get to whatever your long term assumption of about the shop level.
EBITDA.
That's a great question, David I would.
Gets you to reference and it's hard because we just released the stuff is page 12 on the deck that we put together up on the website and it does a bit of a bridge and if you go over to the right hand side and you look on a trailing 12 month basis at our margins and you see from us.
His contribution perspective, we reported 25, 1% for the full year, that's got some preopening in it we put that off to the right.
We're not going to have I expect to not have COVID-19 costs, if we do identify that.
If you look at that sort of cash margin I'll call. It in the upper Twenty's.
Including new stores and if you were to take out the drag you get from new stores, because again were going faster and faster.
And you were to sort of put that back in as well as the fact that we didn't have much of a price increase in 'twenty. One you get to that I'll call. It 30% cash margin in the second year of stores open and that ties right to our thesis.
So as long as we we feel like we can hold the line on investment costs and we're doing just fine there.
Can do these unit average unit volumes, 10% plus versus the system average.
And we get a 30% second year cash margin, we have a really compelling investment thesis that's very much in sync with what we articulated back in the fall.
Yeah.
Got it and then.
Yes.
Always going to have new stores and the mix dragging that number down so what do you think are good.
At the expected growth rate.
What do you think a good steady state on a reported basis look like.
And I apologize I don't have a good internet connection, but that download the slides right now so it maybe you have it in there but.
Of course, yeah.
So.
If you just if you hit the brakes, right, which is kind of the way. The slide is set up if you hit the brakes and you had no preopening costs and then you had the stores mature and season out to their margins Youre, probably looking at 50 to 100 basis points of drag from just the margin of new stores.
That come in right.
Either late in the quarter or partly through the year. So that's the way I would think about it is as we're since we're going this fast.
If you just remove preopening the immaturity drag is 50 to 100 basis points and the overall reported margin.
Got it.
Very helpful. And then the last question I'm, sorry for the Covid any follow ups here, but.
You mentioned the fairly modest price increase out of the really modest relative to what we're seeing.
Elsewhere are you contemplating adding more pricing to address some of the cost pressures on the business.
This year.
So we look typically in a normal time frame, we're going to look at our pricing Windows every six months right in the fall before holiday in the spring for summer and so we're very mindful of that I think we've been fortunate to not have a lot of inflation drag both in 'twenty one.
Frankly, moving into early 'twenty, two and so we haven't felt compelled we don't price to a margin first of all we want price to what consumers are willing to pay and.
So we're just honestly, we're flexible and we're watching that closely.
But we do it with the mindset of the our relative position in the market and the customer not to seek to a margin level.
We are feeling good as we enter 'twenty two with the trajectory of our margins given everything going on.
Great. Thank you very much.
Thank you we have next question from the line of Jeffrey Bernstein with Barclays. Please go ahead.
Great. Thank you very much.
The next question was just on the restaurant margin you were discussing earlier.
As you mentioned, obviously, the big focus for investors because a lot of peers are facing more pressure is perhaps than you are I was hoping you could maybe just share what you think well cogs and labor inflation might be in 'twenty two.
For if you can give any kind of directional color just because you gave so much granularity on the fourth quarter, what guidance might be for the first quarter of the full year 'twenty two on that restaurant restaurant operating margin line.
Yes, so we're fortunate.
The two big cost cost of goods and labor, we don't have.
Any real significant upward momentum in the labor line. So we're starting halfway better than everybody else to begin with.
And then secondly.
We have a pretty simple pantry of goods, what we're really.
Dealing with right now is freight and logistics costs going up.
But we're able to do as we've shown in Q4 and the walk I gave you in Cogs were really able to handle that pretty effectively and and we'll get a full quarter of the price impact from November in our Q1.
In terms of guiding a specific margin for Q1, I'd prefer not to do that.
It is a Q4 is the lowest seasonality Q1 is the next lowest seasonality than we kind of get into Q2.
But I just think from a other than the discount rollover from a year over year perspective, we're just not feeling compression in margins.
And the biggest thing for US is our labor costs are stable.
Understood and then.
The unit growth projection, obviously, the bump up impressive considering the environment, we're looking into 'twenty two.
But I think you mentioned, obviously, you're not a real estate company, but do you have any concerns over or any pressures you are seeing related to supply chain or equipment or permitting delays I would think that the.
It has to have some impact unless you have a pipeline much greater than the $1 25 in your therefore factoring in some.
Challenges from that perspective, just trying to get a sense for your level of confidence with that increase despite the headwinds your peers are referring too. Thank you.
Hey, Jeff This is Jonathan.
We absolutely have considered all those factors in guiding to the new number so your hunch is right.
And.
And we certainly.
We're working on pipeline well into 'twenty three so so all of those factors have been included in the way that we've looked at that.
The potential for our openings for this year, which is why we took the number up to $1 25.
Great. Thank you.
Yeah.
Thank you we have next question from the lineup Andrew Charles with Cowen. Please go ahead.
Great. Thank you you guys mentioned the App remembers orders for the 60% of tenure utilized by the Dutch rewards program I know, it's early days, but can you talk to your philosophy on how to create offers at this stage and then as you.
Look a couple of years out as you collect more data data mining gets more sophisticated what's the vision for how you plan to create offers longer term I know I know for instance on the mobile order side potentially.
Firing and those orders are prepping those orders if you will.
Before customers can really get to the stores and start to try to get them in advance or at least scanned at the point that have the braces scan them at the point of order children can help accelerate but just wanted to be a little bit more imaginative around where this could go longer term.
Yes.
Andrew its Josh.
As we've discussed for 2021, our goal was to test as much as we could on variable offers so for example.
One of the programs we ran in December was about.
Having a new offer everyday of the week for seven straight days and testing how customers responded to different point levels. So we could start to zero in on what's our most effective <unk>.
Promotional program that we can run so we did everything from double points on a specific item to bonus points on a total order too.
Get an extra sticker like how did that and then what we've done is we've tracked lift we track traffic lift we track.
Sales for that day, and we really start to identify like what the impact was.
Another key that will do is we'll do regional activations as well so.
So we have tested things like encouraging people to load.
Stored value and and what that type of promotion offers.
And then going back to that same customer group and encouraging them to spend.
How do those Activations work when we've also tested those down to market levels and in some cases down to micro market level. So.
I think it's safe to say that we have run hundreds of tests over the course of 2022 and really.
Really starting to kind of compartmentalize and build a strategy for how we build the app, how we use it to grow sales, how we use it to effectively manage a dynamic pricing model.
And encourage more.
More develop amongst publicly our mid and second tier users.
So we can get more traffic out of out of that customer tier but.
All in teams doing a great job of learning and I think as we move forward.
I think.
My goal would be is that we could activate a promotion at the at the single customer level.
That could be a few years away, but I think that you are effective in building a customer relationship with one to one relationship.
Okay. Thanks, John that's really helpful. And then Charlie a quick quick follow up.
Guidance for mid single digit comps in 2022, very encouraging I know you guided that level as well for the first quarter. Just you are lacking the easiest comparison of the year and <unk>. So just curious does guidance embed some level of conservatism for the quarter or perhaps if you can help us out just two thirds of the way through the first quarter that January maybe it was a little bit more.
Softwood omicron before rebounding in February just looking to better contextualize the guidance for <unk>.
Yes. It was softer in January it was better than February and less outages.
We're sitting ahead of the mid singles right now, we're like everybody don't know where the world is going to go over the next 30 days with all that's going on and so we're just being a little tepid about how we look at things.
It doesn't really move the needle much the biggest revenue driver is and utilization in new stores and new stores getting added.
So it gets a lot of talk track and it is important to the underlying health of the business, but it's really not that financially meaningful right now as fast as we're growing the top line.
It's why we don't we try not to over think it.
It makes perfect sense, thanks, guys.
Thank you we have next question from the line up Chris <unk> with Stifel. Please go ahead.
Thanks.
Jonathan I was hoping you could unpack the opportunity you're seeing in southern California, a bit more and why you think youre seeing such a strong consumer response relative to what you might have previously expected.
Yes.
Over the last years.
We made that move into southern California.
Yes. Some of it is just the people equation and.
And the fact is is that the density of people and the opportunities in that market as we looked at it.
We just.
As we've launched in Texas and got into some bigger markets and have seen success in places like Phoenix and.
Sacramento and Denver with our larger cities, we just felt like the opportunity in southern California. It was tremendous are our plan is to stay in the suburbs of the major markets. Our plan is to not to go into.
Los Angeles, or San Diego proper, but to stay in the outer skirts of those counties.
We opened and really in Riverside County, and in Palm Springs to begin with and have now started to kind of trickle in more including some development that we have in San Diego County.
In the second quarter so.
I believe in our modeling when.
When we launched the IPO, we said that California was about 30% developed.
Considering what we felt like the total opportunity was in that state. So while we have a very well developed market in Sacramento and continuing to grow new stores as our franchisees.
In that market, we think that the southern California opportunity really will make up the bulk of that of that 70% that was untapped in the state of California.
Okay, and then I was hoping you could also provide any talk about any initiatives you might you guys might be working on this year to improve drive thru speed of service just to help reduce the number of looking leaves.
Yeah, well now that we have a shop in Tennessee.
It hits home, but.
Yes.
The.
The number one thing we can do is improve drive thru speed and service and but we want to be careful about putting our people on a clock because we think that.
We want people to serve speed with quality.
Two quick and make mistakes and so.
What we're doing we believe the App and the continued growth of the App and the encouragement of the App I think part of why our <unk> are the number one.
Salespeople for the App and having customers convert as it doesn't improve speed. It's the number one way for people to improve speed in our in our lines is to continue to use of that app because it removes the friction in the line to do that and the second thing is we just continue to focus on our on our managers with our teams.
To have very efficient service and <unk>.
And some of that is art not science right. So we have to be careful that we don't upset a customer who does want to talk to one of our employees who has built a great relationship with them, we don't want to rush them through because we're trying to quicken the line both define dynamic between.
Between taking care of people and improving our speed, but I think with the constant attention of our leadership in the field in field operations that will help the last thing is as we build our infill model.
We'll continue to relieve pressure off of some of our larger locations and make sure that we're balancing volume as Charlie mentioned, we've got four locations now in the college station Bryan market.
And the pressure relieved from number one is really helping out balance the volume across the market, which also helps improve speed and improves our customer service.
That's helpful and Charlie can you remind me what are your kind of cannibalization measure you're looking for this year.
As you backfill some of these markets.
So about 100 basis points of sales transfer as what the drag is on total comp.
You look at what happened to us in the fourth quarter, we had about 140 basis points, we went very fast.
And filled very quickly.
And we're kind of siphoning off 10% to 15% when we hit a store just to give you a relative.
Evel of understanding on that and that's back to John's comments is the most important thing is we can infill relieve pressure.
And create opportunities for the source to grow more effectively.
That's helpful. I'm looking forward to you guys in filling Nashville.
We're going as fast as best as we can.
Take care.
Thank you.
Thank you we have next question from the line of Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
I guess a question about new markets excuse me.
You are building out these new markets I'm getting all choked up here high deepwater or coffee or.
Are you what are you learning about how loyalty the digital loyalty program ramps and new markets and how to best build awareness and then Charlie on the discount side of the equation I know youll have summaries.
Some residual of course in the first quarter, given the timing of the lapping last year.
Are there any initiation last year can you kind of quantify how much discount.
Discount impact do you expect in the first quarter.
The positive lap is about 100 150 basis points, if I recollect that on the discount rate.
So from a little higher elevated rate in quarter, one of 2021 to where our run rate is right now.
Roughly I think I think that's the number.
So that was the second part of your question. The first part Sharon is is really it's.
The benefit of our new markets.
Is it we're opening our stands now with the App.
<unk> been not.
Two are new customers. That's just part of the program and so QR code on the QR codes on the cup of releases encourage and use of at.
Downloads of the App before you even make your first visit.
So on and so forth how that compares to comp stores I don't know the answer to that is something we can certainly find out and I think thats a good question.
But intuitively.
Intuitively I will tell you that the App has been very positive for us as we've executed our new plan and I do think I do think it's a it's a result of wide the shops that we opened in the last year with the App in place.
Have done so well.
Okay.
Oh sure.
Any further questions.
Alright, I would probably choke if I ask any more silo ended there. Thanks. Thanks.
Darren.
Yeah.
Thank you we have next question from the lineup Joshua long with Piper Sandler. Please go ahead.
Great. Thanks for taking the question, perhaps following up on that last point, when we think about the opportunity around.
Throughput or just the overall operational efficiency by driving that digital tender mix higher curious if you might be able to share any of the experiences or learnings you have for those stores were.
Perhaps their index thing are over indexing, our head of the system. I think you mentioned in <unk> that was about 60% of them.
Tinder was through that.
Okay.
Some stores that you've seen that mix skew higher and just what you've seen worked through or how you might think about that.
Translate into the rest of the system is that piece of the business scales.
So if a higher percent of sales is coming from rewards members and one shop relative to another I mean, you have CFC when I look at some of the data upwards of 70% or so of tender coming in some shops are higher.
Higher uptake shops rewards, sometimes as low as 50, not enough really not enough data to figure out whether that's affecting comp or not at this stage.
Certainly something.
As we click down on this a little further is back to micro targeting where do we have the best uptake on rewards as a percent of tender and where do we have to lease good uptake and how do we target that.
Try to get that higher and in the lower ones, because we know that creates a lot more attachment.
So.
We're in the early innings as we said we've done a lot of testing we can do click downs could look at this a lot closer in.
There's a lot of opportunities.
Thank you for that and then just as a follow up thinking about the commentary around moving into some new markets or at least in the first half of the year, having some of the stores being more focused on going into new markets. Just curious how do you think about scaling and I'm sure the answer varies across markets, but any sort of high level commentary.
You can vote.
Really start to see that hitting that threshold in terms of either awareness or the initial stages of gaining scale in the market in terms of the number of units.
Well I think it's a great question I think.
As we've talked.
And we've kind of got this.
Kind of got this three pronged approach right. So we need to.
We're going into new markets I think that our entry into newer markets. This year will be less than last year.
Because because we had so many new entries last year that we're now going to be doing things like we did in college station, where we're opening shop number two three and four and now filling end markets places like Lubbock, Texas, and Nashville, and Kansas City, and Houston, and Dallas like a lot of work will be done.
On in filling those areas, we have a lot of legacy markets like a like like opportunities, where we can relieve pressure from existing businesses that had been around for a long time in places like Sacramento and Phoenix, specifically, where we can really offload, maybe some higher volume stores and start to balance volume.
And then we still have plenty of new opportunities as we as we look east where we'll be opening a brand new market. So.
It's kind of a.
It's hard to answer that one way because we are really kind of running three different business models.
Very effectively in a lot of it will be determined by like what opens when.
And how that affects that plus people.
That are really.
Moving into those new opportunities or taking on more of an existing opportunity so unless a wordy answer but.
There's a lot of factors that go into that.
Okay.
Understood I appreciate the color. Thanks, so much.
Thank you well with that everyone. We want to thank you for your questions. Thank you for your time. Thank you for your continued interest in Dutch growth.
We we are very excited about where we're headed in 2022 and beyond and we want to thank everybody for their support.
Not just of our calls and the things that we do but also of our people.
Every day understand so thank you very much. We appreciate you and have a have an amazing day.
Okay.
Thank you very much gentlemen, ladies and gentlemen this.
Concludes today's conference.
You may disconnect your lines at this time, thank you for your participation.
Okay.
Yes.
Okay.
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Okay.
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