Q1 2022 Dutch Bros Inc Earnings Call
Greetings and welcome to Dutch Bros, Inc. First quarter 2022 conference calls.
At this time all participants are in a 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.
It is now my pleasure to introduce your host Patti worn Dutch brothers director of Investor Relations and corporate development. Thank you you may begin.
Thank you good afternoon and welcome.
I'm joined today by Jos Ricky President and CEO and Charlie gently CFO .
We issued our earnings press release for the quarter ended March 31, 2022. After the market closed today and will file our 10-Q in the upcoming days.
The earnings press release, along with our supplemental information.
Information deck have now been posted to our Investor Relations website at investors that Dutch Bros. Dot Com and we will post our 10-Q, there as well when it is available.
Please be aware that all statements in our prepared remarks and responses to your question other than those of historical fact, including statements regarding our future results of operations or financial condition strategies plans and objectives of management 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.
The forward looking statements made are made.
They are.
<unk> 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 revised expectations or the occurrence of unanticipated events, except for as required by law.
We may not actually achieve these plans intentions or expectations disclosed in our forward looking statements and therefore, 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 annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 11th 2022.
And our upcoming quarterly report on Form 10-Q for the period ended March 31, 2022 to be filed with the SEC.
Finally, while we have prepared our consolidated financial statements in accordance with the generally accepted accounting principles of the United States.
We will also reference non-GAAP financial measures today, 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 for measures that are prepared under generally accounting generally accepted accounting principles.
Rather they are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for or superior to financial information prepared and presented in accordance with GAAP invest.
Investors should therefore, we view the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings press release and not rely on any single fans measure to evaluate our business with that I'd like to turn the call over to Josh.
Thank you Patty good afternoon and welcome everyone.
We certainly appreciate your continued interest in that for us.
Let me begin by with some opening remarks on our business in Q1 performance.
Charlie will then review our financial results in greater detail as well as update our full year outlook before I leave you with some concluding thoughts finally, we'll turn the call over for Q&A.
As we get started I want to remind you who we are as a people and accompany our north star is long term sustainable growth predicated on our people.
When we started this public company journey, we shared these focus points and promises.
One is that we would continue to find and develop our people who are our growth capital to.
Sue to open new shops wherever wherever people want great beverages with an eye on 4000 plus shops in the next 10 to 15 years.
<unk> three is to increase brand awareness and encourage a deeper customer engagement.
For to invest in and use digital technology to improve the customer experience.
And five expand margins through operating leverage.
We believe our investment thesis holds and we're living up to these promises that's in large part due to our team at.
<unk>, our leaders and our franchisees I want to thank everyone for their hard work in the last quarter and Dutch Bros. We view, our culture and our commitment to creating a better future for our employees customers and communities as the keys to our success and work our team did in the first quarter helped us live up to our mission and make a massive difference one cup at a time.
In the first quarter, we opened 34, new shops, 26% more total shops than a year ago, and we entered 11 new markets.
We grew total revenue, 54% year over year through new shop development and same shack sales of 6%.
We generated adjusted EBITDA of $9 7 million.
We celebrated our 30 <unk> anniversary in a very desperate way by getting over 400 of our people together in person for the first time in more than two years to enjoy each other and reinforced the strength of our culture.
And with our franchise partners, we raised a record amount to five food and security through our Dutch loved get back day, and which customers in local shops support food banks and agencies in their communities.
The first quarter represented another building block in our long term growth and value creation story, we remained focused on our disciplined growth strategy utilizing strategic sales transfer to create great customer and released the experiences a reception in new markets continues to be outstanding and the strength of the brand across geographies and doors.
While we are pleased with the strength of our revenue and shop development in the first quarter margin pressure in our company shops led to a lower adjusted EBITDA result than we expected that margin pressure was primarily a result of these factors our decision to be disciplined on the price, we took which we believe is less than half as much as many of our peers.
Faster inflation in cost of goods, especially in dairy.
Paul forward of deferred expenses related to the maintenance of shops.
And normal new store inefficiencies amplified by the volume of new and ramping units in quarter one.
It is important to always recognize the Dutch Bros. Stories, all about long term sustainable growth.
Everything we do inside the company is focused on making the business better and stronger at three five and 10 years from today.
Unfortunately in this past quarter, a confluence of cost pressures overwhelmed our decisions around price and resulted in near term margin compression, we anticipated higher expenditures. However, we did not foresee the speed and magnitude of cost escalation within the quarter dairy for example, which makes up 28% of our commodity.
Basket rose almost 25% in Q1.
While costs rose throughout the quarter, we experienced a change in sales trajectory from mid March onwards, as macroeconomic headwinds accelerated and comps turned negative.
We are monitoring these factors and have chosen to take a more conservative stance on our 2022 outlook given macroeconomic uncertainty, but importantly, as time passes we have a greater and greater confidence in the growth potential based on the performance of our new units in both established and new markets are.
Our labor margin remained elevated in Q1 relative to Q4, but down slightly from the first quarter of last year.
Importantly, as we mentioned in Q4, our operations are not being impacted by staffing shortages hiring has been brisk and turnover remained low. This is a key part of our story as we will always strive to provide great work quality compensation and advancement opportunities for our broad weakness. We believe this allows us to attract and retain.
The very best people that are committed to great customer experience.
Within our company shop, we choose to pull forward, we chose to pull forward certain deferred maintenance investments that we were unable to complete last year due to COVID-19, our full year expectations on these costs remain unchanged we.
We opened 54 companies shops in a condensed timeframe from December through March Therefore, we experienced margin pressure from an accelerating pace of new unit openings. Both in terms of elevated preopening spend and normal new shop inefficiency given the pace of openings.
And the speed by which the business is transforming a degree of variability within our results may often be the case over time.
Our focus is long term growth and these new market labor expenses support both our culture and investment thesis.
We need to make a significant investment in a market or in the development of our people prior to opening we'll do that without hesitation.
Short term cost, we're a long term growth and game.
Based upon our revised cost forecast, we are taking a more conservative stance in our 2022 annual outlook and for adjusted EBITDA bottom line is despite the macroeconomic uncertainty we remain highly confident in our ability to navigate through these short term challenges and in our overall value creation model.
During the first quarter, New shop development was the second highest on record for Dutch Bros. These 34 company operated shops openings compared favorably to our guidance of at least 30 total shop openings. We are encouraged by the performance of our real estate training and operations teams as we expand our shop footprint our pipeline remains.
Strong well into 2023, and we're highly confident in our new shop guidance for 2022, which we are in fact raising modestly today.
Our development strategy is centered on rapidly achieving density on our new markets. When we enter a new market. We start with one shot but quickly built several more to capture market share and satisfy consumer demand. If the strategy works as expected density and scale will thereby creating a positive flywheel effect increasing brand awareness and.
Providing more capacity.
Our class of 2020 in 2021 shops produced average unit volumes at $2 1 million, which is approximately 10% higher than our system average. Additionally, our new shops and demonstrated a predictable and consistent volume and margin progression typically reaching margin maturity within three to four quarters of opening.
Of the 34 shops opened in Q1 11 were in new markets and were turned it over to newly promoted regional operators on January 14, we opened our first shop east of the Mississippi River in Nashville, Tennessee, which we quickly followed with two additional shop openings in the surrounding area. Thus far the performance of these shops.
Seeded our expectations and serves to validate our optimism for further development as we move from west to East.
Beyond Tennessee, we look forward to increasing our shop density and other newly entered states 17 of our 34 Q1 openings were in Texas and Oklahoma. In Q1, we also begin to ramp up development in Southern California with five total openings initial results are positive with these new shops outperforming our system.
Average the entry into these markets as significant for us and we're excited about meaningful growth opportunities for this region in 2022 and beyond.
The remaining nine shops were infill locations in market in markets, such as Salt Lake City, Colorado Springs, Denver, Tucson, Sacramento and Las Vegas.
Okay.
Although like everyone. We've experienced a slight labor scheduling disruption during the first three weeks of January due to the omicron Berhad, we remain fully staffed and effectively experienced zero disruption to our shops in February and March where the quarter Covid related staffing constraints only affected point, 75% of company operated shop.
Yes.
Trailing 12 months shop level turnover for Q1 was 66%, which is up from the 12 months period, ending Q4, 2021 still our shop level turnover remains far below the industry average and new hiring has been brisk.
Shop level manager turnover was in the low double digits, while regional operator turnover was virtually nonexistent.
We attribute our comparatively low turnover metrics through our unique people first culture significant career development opportunities and the benefits and incentives we provide to our employees.
As we increase shop development, we opened up even more leadership and growth opportunities for our people in Q1. For example, 12 regional operator candidates were promoted as operators as of March 31, we have 109 regional operators running our 310 company operated shops currently two eight shops per operator.
As our system matures, we expect the spend to continue to grow to between four and seven.
One of our primary tools in growing market share understanding our customers and driving ticket increases as our Dutch rewards program.
As of March 31, we had $3 7 million registered users with nearly two thirds of those active over the last 90 days in the first quarter alone we added more than a quarter million New 90 day active members. This.
This is about 4000 active members per shop and is driving the 61% that's reward transaction penetration.
We are excited about the adoption of this program and the opportunity it provides us to recognize reward and engage many of our amazing customers.
In established markets, our digital penetration was about 15 points higher than in our expanding newer markets, providing potential upside for our program as our newer markets mature.
Consistent growth of our rewards program and our 90 day active members provides evidence of both customer acceptance and adoption.
Over the last quarter, the average ticket for Dutch rewards members was approximately six 5% higher than for non rewards members.
We are pleased with our customers' adoption and use of Dutch rewards, especially as users begin to utilize the platform stored value features as more customers load funds to their accounts. It should reduce transaction time speed up lines and free up time to create meaningful lasting connections. We also benefit from the additional average ticket increase of nearly <unk>.
10% when our members use the stored value or as we call it Dutch Paas feature.
While we are in the early innings, we begin to operationalize. This data at a small scale. We've had initial success with specifically targeting customer behavior Upselling and product trial, we look forward to expanding on these and other programs to generate consumer insights develop customized offers and personalize our members Dutch Bros experience.
<unk>.
Great customer experience helped drive our Q1 results.
With first first quarter revenue up 54% compared to the same period last year to $152 2 million systems same shop sales grew 6% in the first quarter and 11, 1% compared to 2019, while company operated same shop sales grew five 1% in the first quarter and $9 nine.
<unk> compared to 2019.
Same shack sales growth was a function of higher traffic and check that was partially offset by sales transfer.
Notably trends were stronger in the first half of the quarter before temporary and in mid March which we believe were primarily driven by macroeconomic headwinds related to decrease in consumer discretionary income such as rapidly rising gas prices and the discontinuation of federal Covid stimulus checks and also greater sales trend.
For as more new shops in existing markets opened.
As I mentioned before our quarterly adjusted EBITDA was $9 7 million impacted largely by our decisions on pricing dairy costs labor costs, our decision to invest in preventative maintenance and the impact of accelerated new shop development.
To conclude we believe we have something here that is unique a growing profitable business, a strong balance sheet and a phenomenal culture and loyal customer base. These factors give us a strong foundation necessary to support enduring growth our culture remains as strong today as it did the last year.
Five years, and 25 years before that now.
Now I'd like to turn the call over to Charlie to review our financials.
Thanks, Josh.
Before I begin I want to highlight that with each earnings release, we post a presentation that contains supplemental information and details on our Investor Relations website.
I encourage you to reference it as I make my comments.
I will begin with the profitability of our overall company operated shop portfolio.
Our Q1 company operated shop contribution decreased from 26, 8% of company operated shop revenue to 18, 3%.
I'll walk you through the key drivers of that decline it starts with our decision to be conservative on price considers recent cost pressures and ends with the margin impact of executing our fast paced company shop led growth strategy.
As I discuss these drivers please see slide 11 of the investor deck.
Beginning in November of 2021 we took our first price increase since the beginning of Covid a modest two 9%.
This translated to approximately 220 basis points of margin relief.
At that time, we believe this was appropriate given the cost increases we were experiencing.
As a company we try to avoid taking large price increases and when we do take price we try to do it and frequently we think this is the right way to build lasting relationships with our customers and serves to encourage them to make Dutch bros. A key part of their daily beverage routine.
However, as Q1 unfolded, we experienced three significant rapid cost escalations that on an individual basis would not have caused distress, but when taken collectively did overwhelm our P&L.
Faster input cost employee inflation, especially in dairy and also labor cost increases the pull forward of expenses related to the ongoing Karen condition of shops, and new normal new store inefficiencies amplified by the sheer volume of new and ramping units in quarter one.
In the first quarter, we encountered 480 basis points of cost pressure from those higher ingredient costs relative to the prior year as Josh noted dairy increased by almost 25% towards the end of the first quarter to near historic highs in what is now 28% of our ingredients cost basket.
We did not anticipate the sharp rise while we do not believe dairy will stay this high indefinitely.
I have to assume that we'll remain high for most of 2022.
Additionally, we encountered 240 basis points of cost pressure on our labor line.
This includes higher training costs higher overtime to keep stores open and higher legislated minimum wage advances in California, Arizona, Washington State, we continue to see stability in our workforce. Despite a slight uptick in turnover in the first quarter. The good news is that our stores are staffed and opera.
Waiting at full hours.
The combination of margin pressure from ingredient costs and higher labor cost resulted in margin compression of 720 basis points.
<unk> two offsets we achieved through menu price increases are modest price increases that began in November and a positive discount rollover offset 370 basis points of this pressure netting to 350 basis points margin compression.
Please note that in April .
We placed a further 3% menu price increase in the motion that we expect to finish rolling out to the system by the end of May.
Should these elevated costs remain we will assess further pricing actions and productivity measures through the balance of this year to protect shop profitability long term.
Finally, we encountered 150 basis points of cost pressure from elevated shop operating expenses, primarily from pulled forward maintenance spending.
This maintenance spend was restricted during COVID-19 and much of this spend reflects clearing out of backlog our full year expectations remain unchanged. This expense category will come back to our original budgeted spend by year and therefore, there is a timing impact in our Q1 financials that we don't expect will impact.
The full year.
The second key driver of the year over year decline in company operated shop contribution is 340 basis points related to executing our fast paced company shop led growth strategy.
This effect is primarily timing.
And there is an inherent part of our long term growth strategy.
In the first quarter of 2022, we opened 34, new company shops compared to just nine new company shops in the first quarter of 2021.
Had the first month of operations for the 20 company operated shops, we opened in December of 2021.
Preopening costs were $6 million in the first quarter this year compared to just $1 7 million in the first quarter last year.
On a percentage basis pre opening costs were four 6% compared to two point to 2.2% last year, an increase of 240 basis points.
On a per shot basis. This is higher than our norm as we had 11 shops, where first shops in their respective markets and speed to market also had some cost first shops have higher preopening costs as we spend more time with our opening crew training, our staff and creating a solid competent base for expansion. Additionally.
We incurred approximately 100 basis points of impact from normal new shop inefficiencies that drop off is shops become more productive in ensuing quarters.
Our growth objectives will remain in place despite the challenges we face no P&L.
Regarding new shop profitability, new shops take a few quarters to reach the margin productivity levels of our mature shops. In this regard we remain on track you can reference this margin maturity curve and our actual results in the investor presentation on our website.
Another key objective of our growth strategy is that once shops mature we aim to have each new shop deliver a shop level contribution margin of approximately 30% in year. Two as a reminder, this margin excludes depreciation and would not include Preopening expenses, which are typically born in the first year.
Sure.
As an example, I direct you to slide 10, and a supplemental investor deck. Our class of 2020 achieved a gross margin of 26% and the trailing 12 months inclusive of depreciation expense.
<unk> for all company shops was about 4% the same period.
We do not expect our long term objectives for new shop profitability will be at risk from the current economic climate.
Rather we will map menu prices and cost to protect the strong economic model. We have built further we will continue to focus on operational innovation to enhance productivity, while improving the employee and customer experience.
Shifting now to G&A.
We're beginning to realize G&A leverage in the first quarter. Our total G&A grew 26% relative to revenue growth of 54%.
A percentage of total revenue G&A was 29, 7% versus 36, 4% in the first quarter last year, we expect our G&A will continue to leverage as we gain scale.
Please note that our G&A was burdened by 120 basis points of public company costs.
160 basis points of one time special events, and 80 basis points of Covid related write offs.
Now a few comments on liquidity our balance sheet is strong and well capitalized as of March 31, we had $27 million in cash and equivalents and $372 million in committed undrawn debt capacity with an option to further increase our liquidity if needed.
As of March 31, we had $28 million drawn on our revolving credit facility and 100 million in term debt.
<unk> $101 million and net debt.
On February 28, 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.
Shifting now to guidance.
<unk> mentioned that late quarter sales trends were pressured.
Since mid March the normal seasonal traffic build that typically takes place as we move out of winter and into spring with a peak in may slowed measurably.
We expect the sales pressure to continue in the short to mid term with leading industry indicators, suggesting declining GSR traffic.
Creased incidence of trade down and outsized regional pressure in the Western United States, which we believe is due in part to higher relative energy costs. We are monitoring closely the potential impact of increases in energy prices on our customers' behaviors, which we believe maybe.
Negatively impacting consumer discretionary spending.
And affecting our traffic app.
Absent a change in the underlying macro environment, we are not projecting a meaningful tempering of these trends, hence our lowered full year adjusted EBITDA guidance.
Inflation in both ingredients and operating cost has risen rapidly catching us off guard from the speed and the sharpness of this rise in the short term it is unlikely that our new menu price actions will fully offset the extent of these input cost increases we believe outside.
Outsized menu price moves in the face of consumer discretionary spending headwinds would not be wise at this stage.
For our high growth brands, the lifetime value of each customer's heightened it is our desire to keep our menu prices approachable for customers across the income spectrum.
Given the unexpected speed and magnitude of these cost and consumer demand events. We are taking a more conservative view of 2022, adjusted EBITDA and same shop sales. However, given the strength of our openings and they're attractive returns we are modestly accelerating new shop <unk>.
<unk> for that and for full year 2022.
Total system shop openings are now expected to increase to at least 130 of which at least 110 shops will be company operated.
Revenues are projected to remain in the range of $700 million to $715 million, reflecting our continued expansion in shop openings.
Same shop sales growth is now estimated to be approximately flat.
Adjusted EBITDA is now estimated to be at least $90 million.
<unk> near term margin pressure in our company operated shops.
And our decision to take modest price increases during the year.
And capital expenditures are still 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 Q2 total shop openings are expected to be at least 30 of which nearly all shops will be company operated.
Same shop sales are estimated to be flat to slightly negative as we face macroeconomic headwinds impacting consumer discretionary income.
<unk> same shop sales were negative three 7% in 2022 compared to plus 22, 6% in 2021, our largest rollover of the year.
Before turning it back over to John I'd like to take a moment to reflect on how far this business has come from.
From the year before Covid 2019 to the end of 2021.
We finished 2021 operating 271 company shops, we had just 118 company shops at the end of 2019 at.
At the end of 2021 there were 538 total shops in the Dutch Bros system compared to just 370 at the end of 2019.
These were one 9 million for 2021 compared to just $1.6 million in 2019 and.
In 2021, we generated $498 million in revenue, we generated $238 million in 2019.
At this pace and with this level of transformation at times, there will be variability in our results and our growth will not always be linear.
And with that I'll turn it back over to John for closing remarks.
Thank you Charlie and I appreciate that perspective.
We all we have all the building blocks for Dutch Bros to remain a successful and enduring company.
Powerful authentic brand that shares from a store.
Strong people systems that drive company culture, and fuel our shop growth a highly engaged customer following.
Customizable and uniquely curated beverages highly.
Highly consistent and highly attractive unit the unit level economics.
Portable model that is successful across geographies, a strong and well capitalized balance sheet.
And in engage cofounder and experienced leadership team.
Nearly nine months after our initial public offering we are staying true to our core thesis.
We've hired more people and facilitated tremendous growth opportunities for our employees, we treated our customers well and we're doing our part to be good partners in our communities. We believe that we are on a 10 to 15 year path to 4000.
30 years that growth has been in the business the relationships.
We've been there for our people and our customers everyday the current environment is without precedent, but know that we will navigate this uncertain D. With the same long term outlook resourcefulness and collective wisdom of our <unk> leaders and.
And franchisees that has made this company what it is today.
We want to thank you again for your interest in desperate now we'd be happy to take your questions. Operator, Please open up the lines.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key if you could limit yourself to one question and one follow up so we may get to everyone's questions Bill.
Before time runs out.
Our first question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question.
Thank you good afternoon, and appreciate the update I thought I'd ask about the team first if I heard properly there was a comment in there about turnover being a little higher and I was curious what that rate of turnover is and just thinking about you know peak periods of stress and having more.
<unk> passed those why would you be experiencing higher turnover now.
Well I think that we.
We've kind of looked at what was going on last year, what was going on this year on the market I think that there.
There was an accelerated return of I would say applicants.
We reviewed I think we reviewed 39000 applicants a year to date, if I'm not mistaken.
And.
It's probably just people getting back to work I mean, nichole I don't know exactly the answer to that question I can give you a lot of theory to that.
But.
But I think theres, probably just an element of.
Back to work like people coming back off of Covid.
More opportunities presenting themselves in the job market with such low inflation people might be.
Jumping for more money.
And so theres a lot of just job related and market related factors, that's going on out there.
But.
Yeah. It blips that our numbers are still really low so I'm so were okay.
Where we're at.
So it would be fair to conclude up but you're not talking about a material number at this point I mean yours has been Oh, Wow I didn't know how much to read into that comment frankly, and it and it kind of sounds like I mean, that's what I would've guessed and don't want to guess so how have you been able to.
No you don't present, the same sticker right wage, but when someone gets an assistant with the tips. They understand the process and the benefits are you still able to tell that story.
Absolutely Yeah, I don't think that story has changed at all.
And I think our trailing 12 month number.
End of March was like at 66%.
So it's still from a from a relative standpoint, I'd say, it's still relatively low it got as low as it was.
But I think it's still very manageable and I think our story and how we're treating our employees is as strong as ever.
And then just a numbers question.
And realizing we're all doing the same thing real time in terms of modeling, but with the $90 million adjusted EBITDA kind of bogey. It would imply I guess store level margin.
And I have to admit I'm, taking preopening out of mine. So if this number doesn't makes sense to go get it but just knowing this isn't without preopening.
So like store level margin in <unk> was around 23% you know it has to average for the rest of the year something around 30%. So you know it seems like the cadence can be lower in <unk>, but then store level margin has to pop back up in the back half and if that is the right assessment of these early read on numbers like how is that going to happen because march.
Jen you know was under pressure with a 6% comp isn't going to be even more under pressure with a flat comp how can we think about that.
Well I'd I'd refer you to the investor presentation, and I understand the seasonality right. So yeah quarter, one and quarter four are our lowest average daily unit volumes.
Two and quarter three are the higher ones. So part of what's taken place just from a sequence standpoint, as we move through the year, we get more leverage so margins start to rise.
And that that's that's very normal right. So margins have reset because of the higher cost pressure and gone lower but they still will rise in the summer as we get the higher volumes.
Okay. Thanks, a lot appreciate it.
Thank you.
Our next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.
Thanks.
Question on <unk>.
Demand side on the top line first and then a.
Follow up on the margins.
If I look at like kind of a three year trend and universities 2019. So I think you mentioned volumes were up about 10% versus 2019 in the first quarter.
I guess, turning slightly differently, but I know I know people calculate stacks differently, but if I assume kind of flattish comps in the second quarter it looks like a pretty similar.
Jack versus 2019, so I wanted to make sure I understand how much of that slowdown may just be that really.
Cold stack comparison versus you know the macro situation in particular also playing out given how hard the April lap right and then have.
Have you seen any variation you mentioned in the western in particular, but haven't seen any other variation in terms of demand.
Demand because it does feel like we're hearing.
A very wide disparity in terms of what different restaurant companies are seeing.
So let me let me take the lead.
Let me take the Sac question.
And at all again I think the our document on the web or help you see that the data on slide eight but.
The rollover we have in queue.
Q1 of 'twenty, one was was it.
You know.
Q1 of 2021 was a nine and a half com.
Q2 was a 9.9 comp so to your point, there's not a lot of difference in the roll over from a year over year basis, and then the lap gets a little bit easier back part of the year.
So what we're really saying is.
As I mentioned in my part of the script sales usually start to build in the spring and it hit a peak towards the end of May on an average daily volume basis, and we just are not seeing that growth. We're not declining we're not seeing that growth that expansion that happens seasonally.
And then I'll I'll start on your regional questions.
<unk>.
The biggest differential we've seen is is where the gas prices fuel prices energy prices are elevated we've seen more of.
More of this lack of sales growth coming in those areas.
Amongst many other factors points to the discretionary income piece at the low end of the consumer.
And then secondly, we are saying that afternoon more discretionary day part get restricted which is where you would expect when people are starting to choose.
Between what they've got leftover in their wallet at the end of the month and choices around spending.
Sorry, but just to clarify you said the one year compares and I understand there is the same but if I look at your two year stack. It gets about four to 500 basis points Kathryn I guess, that's what I'm I'm I'm asking about which is given that you know a lot of us are benchmarking versus two.
And in 19 to kind of control for the variability. It does look like that alone would explain a sequential deceleration and I guess, that's that's what I'm trying to understand.
Okay.
Yeah, Hi.
Mathematically, yes, but back to what I said earlier, which is I think the stacking thing can be difficult and challenging you are looking at multiple years, we know our business seasonality and the growth in our business seasonally really stopped in the <unk>.
Middle of March.
We we last February when we had the last earnings call with a really solid comp number through February and then it just decelerated very quickly from that point.
So I know you can look at the two year stack, but the way we analytically look at it as sequentially, whether we're getting seasonal sales growth or not.
I see okay, and then just on the margin yeah, the actual the restaurant level margins.
Actually it's pretty consistent I think with sort of where we thought they might be in and in particular, you know the cogs headwinds.
It was a big one in the fourth quarter labor was up in the fourth quarter or so so a lot of that actually to me why isn't that surprising I guess I'm just trying to understand maybe where the the difference was and maybe this is easier said can you just tell me how to think about G&A for this year because you know I'm wondering if maybe that's where we went wrong or if it's.
Our expectations versus your own.
We think about guidance because like I said at the restaurant level margins all that the compression isn't all that different from what we saw last quarter.
Yeah, I mean I.
I don't know what you had down for G&A G&A for us is pretty uniform by quarter grey grows very steadily because its head count driven and its regional operator driven.
There's not a lot of there's not a lot of moving parts in that number.
The biggest change for US is is this.
Ingredient.
Logistics supply chain cost increase that we're feeling and that's why we're pulling our guidance down because relative to our models. We've got that 300 to 400 basis points margin contraction going forward.
And I think we.
We can do a click down with you to understand the G&A piece better that you're looking at.
Okay. Thank you mhm.
I'll pass it on.
Our next question comes from the line of John <unk> with Jpmorgan. Please proceed with your question.
Hi. Thank you you do have obviously interesting demographic, 55% I think under 25 years of age.
And also you said, 17% of customers visit before nine am which really does leave you quite different than some other.
Beverage focus our coffee focused peers I mean can you elaborate in terms of like I think you said that you were seeing weakness in the afternoon day part 31% of business.
Part of the IPO stuff you know after four o'clock, you would talk about I guess, the challenges and the opportunities.
That you may have of having a really young afternoon skewed customer I mean is there anything that you that you can or should or would do.
On the promotion side to kind of bring people you bring these folks back in or is there something that you can do.
In the morning to better utilize that day part.
Relative to the afternoon.
Yeah, Hey, John It's John .
We have seen morning day part growth.
Actually to your point, we've actually seen an uptick in that kind of pre 10, a M business.
And which I think is an indication of back to work and kind of some behavior based I think where we've seen our decline is that 10, a M to two really.
Probably six P M business.
Has been the largest decline in that we're really kind of chalking it up to a younger demographic.
With discretionary income challenges related to whats going on in the marketplace.
And and really how you attack that is I think a couple of things one is that I think energy drink and how we utilize the rewards program will be key I think we'll do more promotion with energy as we continue to kind of drive that and that day part I continue to think that's our biggest opportunity as a segment.
And I think in a in a in a market like this you work on market share and I think there's a way for us to make that happen in improving the business in that mid day to day part. So I think that's the key to that day part and in that will be different by region and the beauty of our App is we'll be able to do.
Execute at a market level program, if we need to depending on kind of what's happening with traffic patterns.
And you guys, presumably you have none of this is self inflicted at all like you haven't seen your throughput actually slow in terms of how many customers you can get through that line in any given hour was there any change in I know its probably tough to actually see in terms of what okay. So it was it really was demand driven if you weren't you were constrained.
Yeah, if anything with the sales transfer was actually helped improve flow and improve the things that we're doing and again, we believe the app is a has a significant improvement to how we.
Take people through so we're not we're not seeing anything related to consumer sentiment here, where our consumer sentiment remains very strong.
This is purely a I think this is a.
This is a consumer behavior issue that we're all dealing with.
Rapid.
It's a separate question then my second one that was just one of those wouldn't be if you will.
You know you've took up capex last quarter pulled down.
EBITDA this quarter.
You are in a slight net debt position, it's not classic that one would finance.
Our long term asset like store growth with a revolver for example, or I guess, maybe $100 million I know you have on the on the on the term loan a which has been drawn but could you just.
Philosophically you know kind of talk about your balance sheet your debt your capital needs.
The context of store growth in other words to what extent.
Does the balance sheet in and of itself you can maybe give us a reason for some moderation as we work on our 23% and 24 forecast.
Hey, John It's Charlie.
Yes, I agree if you were taking a long term asset you might want to match your financings for the long term value of that asset in our case as we model out the business and worked on our credit facility, we see our needs, peaking.
Modestly in 'twenty, four 'twenty, five and therefore and after that we start to generate free cash flow.
And so we felt like let's just shorten this instrument take a short instrument keep it flexible keep the cost of it low and then get to that 'twenty three 'twenty four 'twenty five timeframe and reassess where we're at in terms of whether we need to take on any kind of longer term structured debt all.
Call it.
Okay, Alright thats helpful. Thank you.
Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Hey, guys good afternoon.
Just a couple of things.
First Charlie on that.
<unk> I may have missed it but.
The sales transfer impact in the quarter and kind of what you're looking for going forward. It sounds like it's a little bit more elevated than it has been.
Little bit it was.
It was about 230 basis points of transfer.
Typically in prior quarters.
We've been seeing about 150, or so that that's mostly the timing of.
Of of accelerating the growth in and hitting some pretty high volume stores with sales transfer.
Think between 150, and 200 basis points of sales transfer as a good way to look at it going forward and the way we've modeled it out.
So slightly elevated but not out of the range of what we'd expect.
Okay understood and then just.
I guess philosophically and size wise, you know two things I mean.
As you get bigger is there an opportunity you know kind of closer at hand on.
On purchasing and supply chain to sort of.
You know eliminate I know the commodity markets are experiencing unprecedented volatility, but is there anything near term.
That could help on that front and then secondly.
Anything on sort of new unit glide path I mean they.
They do ramp pretty quickly, but any anything that youre looking at there you talked about or mentioned some productivity initiatives once or twice without you know without specifics sorry, sorry, that's a lot there.
Okay, Andrew Youre testing my testing my my retention here.
So I think on the on the commodity costs you know in the.
And the place that we're at right now to see short term.
Effective improvement is is limited.
In how we buy and kind of where we're at we're out long on coffee.
Larry Obviously, you don't have a lot of control over.
And then really we're kind of beholden to some just some freight impact.
And some other <unk>.
Small basket of goods, because we just don't have that much in our basket of just so happens that dairy makes up such a large percentage of that basket. Previously we had been talking coffee a lot and had said it makes up just a small percentage.
Okay on coffee, which continues to be the case, but dairy.
Certainly caught us off guard I.
I do think we have some opportunity to improve internally on our purchasing and our purchasing capabilities and how we look at that long term and as we grow.
That is an area of emphasis for Charlie on myself as we kind of I'd say build that muscle here at Dutch Bros.
Two is is related to.
How we manage shops and I will tell you that our retail ops team.
Is is looking hard right now.
At Labor I think we all need to be looking at labor and we all need to be thinking about how we manage labor, especially related to overtime and things of that nature and maybe related to some day part flexibility.
Just because of the nature of the business is changing a little bit in the nature of the market is changing a little bit we need to be flexible on how we do that so.
And that would also include new shops, but I will tell you that the importance of the new shops, and why we mentioned it in the script the way we did is that.
You know it is so important for us to get a new shop off the ground out of the ground in a positive way and we will leave people in a marketplace until we feel like it can be transitioned over to the operating team that can be there on a day to day basis. So if we have the opportunity to take it.
<unk> out sooner we will.
But we won't skimp on that because the importance of that investment for the long term.
I think you got them all thank you very much.
Thanks, Andy.
Next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much couple of questions first one just on the broader restaurant margin, which seems to be a focus here.
How much do you believe are structural headwinds obviously you have a.
Slide that walks through kind of all the different factors there but.
Is there any concern that some of this might limit your long term restaurant margin recovery opportunity, maybe accelerating new unit growth pressuring restaurant margins long term or some of these incremental cost pressures that might not abate.
How do you think about what's kind of short term versus long term in terms of that restaurant margin based on the current headwinds.
It's Charlie Thank you for that.
No I don't think there's anything about the way we go about doing business structurally that would cause us to pause. These are just unprecedented.
Increases in our our most.
Our highest cost item dairy amongst other things.
At some point you have to feel like that can normalize and get to some reasonable place.
Typically very cyclical.
It does structurally stay elevated as we mentioned we will look at our pricing menu pricing structure to try to deal with that and then in terms of long term returns as we mentioned our year to cash margin, we'd look at achieving a 30%.
Yeah right now we're looking at 30 to 300 to 400 basis points of margin contraction from these cost pressures, let's say that that 30% as is.
Reduced by 10% and doesn't really change our 10%, meaning 30 goes to 27 that does not really change our investment thesis because we're doing higher volume in our new units and our original investment thesis.
If we did it a little less margin near term, that's not really going to change the answer so.
We're very comfortable.
Raising our guidance on new units, because we know it's a great investment and we have plenty of room between what we achieve in our cost of funds.
Understood and then.
You mentioned earlier that your pricing is clearly below some of your competitive set I think you said you took with the three plants in November and you've taken out of the three points lets look at last months how.
How do you test that I know you have a younger customer and its truly more discretionary in nature like how do you measure the elasticity.
Maybe it might.
Not that you shouldnt be taking it but the risk that it might accelerate the issue going into a macro slowdown what kind of testing to do for that.
We do test markets, but the good news about our business is we have such a fast purchase cycle that we get a quick read in any test market. When we do something yes. We are we are concerned that's why we're very prudent about not raising our prices fast.
We're going to make this next step and watch it and read it but again, we will get a pretty quick read because because we have a fast purchase cycle.
And then we will judge how that's landing and we'll assess what to do next.
Understood and then just lastly, because you commented on G&A I think you said your leverage it in the first quarter, which is impressive for high growth mode. Here I'm. Just wondering I think you said steady through the year, but is there any thoughts on 2022 range maybe growth relative to revenue on the G&A front, where you know anytime.
Color you can provide on that.
No not off the top of my head, but since our revenue growth rate is going to be pretty consistent quarter to quarter.
We're expecting to get very similar G&A leverage we are achieving as we achieved in the first quarter, we had over 50% revenue growth even at that temper slightly.
G&A is not going to accelerate from a growth perspective, it's pretty steady so.
Yeah, I think as we speak more we can kind of help with how to model that out.
Okay.
Our next question comes from the line of David Tarantino with Robert W. Baird. Please proceed with your question.
Sales trajectory here I guess the first question I have is related to that sort of lack of seasonal build you talked about Charlie.
And I was I was wondering if youre seeing that occur.
The.
Across most of the base, including some of the new location. So I guess is this a macro situation that's affecting all stores, maybe not to the same degree, but you are seeing it across the system.
Generally speaking yes. It is it is across the system.
Got it thank you for that and then on the on the clarification on the guidance.
I guess what is the assumption for the rest of the year I guess ignoring the.
During the comparisons.
Think about modeling out the seasonally adjusted sales trends or the average daily sales trends as you called it are you assuming any improvement or any deceleration or I guess, how are you approaching that specifically.
We're not assuming any deceleration.
Pretty much the trend line that we're on today, we're extrapolating that forward.
So we guided to about flat realizing the first quarter, we had positive comps.
So that in itself and first slightly negative comps in the back three quarters of the year.
Got it okay.
That's helpful.
Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question Hi, Good afternoon, I know, it's always hard to figure out causality. When you have a big shift in your sales like you had but I guess I'm wondering are you seeing.
In signs of they consume or trying to manage their check which would kind of back out the idea that its maybe related to higher gas prices and I ask because obviously you have a suburban footprints and I'm wondering if you know the elevated returned to work might also be an impact on your business more broadly.
Yeah.
Yeah, Hey, Sharon without claiming to be a macro economist.
I will tell you that in mid March when gas prices jumped the way. They did we saw an immediate.
Flip on our daily sales it was almost almost to the day.
Of the way that that works. So I think you could infer.
As we.
We believe that we've done some some analysis on the gas prices and influence related to our daily sales and we believe it has influenced it and we believe that if gas prices stay inflated it will continue to influence it.
And I do believe there is some trends we're seeing we're seeing morning day part actually grow and I think that actually is going to two people going back to work and getting back into their daily routines of either taking kids back to school, especially on the West Coast, where we're really just came out of it.
Covid Lockdown, we'll call it in February .
We saw trending move in those markets.
That were previously affected by school closures and and things of that nature. So so there is something there to that end and.
And I think as long as gas prices stay high I think we could continue to see consumer trends our consumer spending.
We will suffer.
Can I ask a follow up have you I mean, Charlie you just said, you're you're kind of assuming similar comps for the rest of the year in the flat to slightly down or slightly down have you have you seen the trends stabilize.
Only mildly.
We don't have a falling knife we have.
A slightly negative sales trend that has just has continued since what John mentioned, which is mid March and it has just been treading.
<unk> low negatives.
Okay. Thank you.
Our next question comes from the line of Andrew Charles with Cowen <unk> Company. Please proceed with your question.
Great. Thank you Charlie can you talk more about the margin impact of new store inefficiencies. I mean this is something obviously is a fast growing system do you guys have seen before but curious if it's a more pronounced impact on margins versus what you've seen in prior quarters and as a follow up to that just how are you better managing that going forward as you guys will be accelerating unit growth as well.
Yeah. So a couple of things from a quarter to quarter sequence, it's not dramatically different or comments are related to prior year and of course, we had a lot more openings this year than last year. So I.
I I would separate it into two areas. One is just absolute preopening expenses and you can see that our P&L and you can add that back and then a little bit of a drag a little bit more drag than normal on the labor side and the cost side, because we compressed so many openings into three or four months cycle.
Normally might have got spread out over six months so.
We don't see a structural problem or challenge in our.
New store margins and you can see in the presentation, we put up there that were.
Those stores are still seasoning out very quickly.
But it's just a compression of all of those costs in a short timeframe.
That's helpful and I'm not trying to sell me along with my next question, but you know what I because I appreciate that the pressure on comps is very recent and you guys are still seeing strong productivity of new stores, prompting you to raise in 2022 development guidance, but.
I appreciate the guidance for same store sales embedded this level of performance the rest of the year, but I guess, if we just kind of think a little bit more sinister Lee what would you have to see that would lead you to take your foot off the gas in 2023 development to help improve trends that are in place.
I think we would have to see that new store volumes are really have gone backwards and they have it and we're just we're just not seeing that.
You know strong openings and as long as we see that.
It gives us confidence to keep going.
Very helpful. Thanks, Charlie.
Okay.
Our next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.
Thank you have a follow up on a quick question on the <unk>.
Follow up I'm, just looking for a little bit more.
Color on the magnitude of the gas price driven same store sales headwind for the west coast shops versus those in the rest of the country again, just trying to get an order of magnitude.
Given how much greater that gas price inflation has been on the west coast versus the rest of the country.
Well through the through the work.
Our analytics team has done we think it's about a 2%.
Hit on same store sales with gas pricing and theres variability to that depending on what region of the of our markets you're in but especially on the west coast.
And we believe that that number across the system is somewhere around 2%.
Okay. That's helpful and then.
Again switching gears here, a little bit to an entirely new topics.
As you report rewards customer sort of database for lack of a better word continues to grow.
I'm just curious if theres been any sort of what would you consider larger or bigger surprises in terms of how your customers are interacting with the concept anything that's caught you off guard.
Relative to a few years ago. When you didn't have all that data versus today. When you do have the data.
Yeah.
This is Charlie Hi.
Candidly not not a lot not a lot of surprises and their behaviors seem to be very.
And in ways, we would expect and predict.
So it's not surprising that's what we're seeing in frequency or stored value loads et cetera.
Very reliable.
Outcome.
Okay I appreciate that thank you.
<unk>.
There are no further questions in the queue I'd like to hand, the call back over to Joe Ritchie for closing remarks.
Again, we want to thank everyone for your continued interest in Dutch Bros.
We.
We are optimistic about our future we look forward to running this business for the long term.
And really can't wait to work with our people our teams our leaders are franchisees and creating the Dutch bros. For the future. So so thank you for the time, we're all in this together and.
And we look forward to the future of Dutch Bros. Operator, Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.