Q2 2022 Dutch Bros Inc Earnings Call
Greetings and welcome to the Dutch Bros. Second quarter 2022 conference call. At this time all participants are in a listen only mode. A brief 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 Warren Director of Investor Relations and corporate development. Please go ahead.
Good afternoon and welcome.
Joined by Jos Ricky President and CEO and Charlie generally CFO .
We issued our earnings press release for the quarter ended June 32022, after the market closed today and will file our 10-Q in the upcoming days.
The earnings press release, along with the supplemental information deck have also 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 in response 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 our split Air Express expressly qualified in their entirety by cautionary statements.
These forward looking statements are made as of today's date.
Except as otherwise required by law, we are under no obligation to update these forward looking statements.
To reflect subsequent events circumstances, new information actual results revised expectations or the occurrence of unanticipated events.
We may not actually achieve any plans intentions or expectations disclosed in our forward looking statements and therefore, no one should place undue reliance upon them.
For more details please refer to our earnings press release and to the risk factors in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 11, 2022, and in our upcoming quarterly report on Form 10-Q for the period ending June 32022 to be filed with the SEC.
Finally, we will also reference non-GAAP financial measures on today's call to enhance investors' overall understanding of our financial performance. These non-GAAP financial measures may be different than similarly, titled measures used by are there companies.
As a reminder, non-GAAP financial measures are neither substitutes for or superior to measures that are prepared under GAAP when evaluating our business. Please do not rely on any single measure.
You can review the reconciliation of non-GAAP measures to comparable GAAP measures in our earnings press release.
With that I'd like to call turn the call over to Jeff.
Thank you Patty good afternoon, everyone and we appreciate your continued interest and support of Dutch Bros.
Our second quarter results reflect the continued strength of our brand across expanding geographic footprint.
As we announced earlier this afternoon, we delivered revenue of $186 $4 million, representing a 44, 2% increase from the second quarter of 2021, we.
We opened 31 shops during the quarter and increased our total shop count, 28% compared to Q2 last year, our real estate pipeline is strong as is our team's ability to open and staffed new shops ULIN our growth engine our.
Our new shops continued to outperform our expectations and we are confident in our ability to hit our 2022 development target of at least 130, new shops, collectively providing strength and momentum moving into 2023.
Same shop sales declined three 3% in Q2 included in this number is a positive benefit of pricing of approximately five 3% and headwinds from sales transfer of approximately 140 bps.
We began to see a traffic slowdown in March the trend stabilized in June and July with monthly same store sales of negative two 3% and negative <unk>, 9% and July respectively.
We are encouraged by the fact that although we took additional pricing action in the quarter, our traffic trends improved in July geographically the pressure in Q2 was driven by the headwinds in California, particularly in the afternoon with the rest of the system is slightly negative gas prices in California remained elevated relative to the rest of the country up.
Over 30%.
We continue executing our market entry strategy to build operational scale quickly, establishing and then fortifying our footprint and balancing market demand sales transfer helps ease demand driven challenges at any one shot these challenges may produce longer lines and potentially impact customer experience, we believe our market entry strategy.
<unk> enables us to more quickly gain position and brand awareness and we have successfully employed this strategy in Texas with our 61, new shops in the past 18 months.
In Q2 reported system comparable sales experienced a 140 bps of deliberate sales transfer.
That same impact was 260 bps and our company operated shops. These outcomes remain within our expectations.
In Q2, we took a second round of pricing of about 3% in Q2, we have about five 3% of pricing running through our total system typically we utilize pricing as one of the mechanisms to cover costs that we expect to remain elevated on a go forward basis, while we temporarily absorb more transitory input increases however.
Many input costs that have traditionally been more transitory have remained elevated therefore, we are considering additional menu pricing actions in Q3 separately, we have communicated the price increase for rebel and coffee being sold to our franchisees effective as of September one.
In Q2 company operated shop contribution grew 20% year over year to $39 $5 million importantly.
Importantly in Q2, we saw a sequential 630 bps of company operated shop margin improvement from Q1 2022, as we begin to see the impact of pricing and operational improvements flow through our P&L for the quarter, our adjusted EBITDA of $23 9 million better expectations and is in sync with our guide.
For the full year.
Recall that when we started this public company journey, we shared five key objectives number one continue to attract and develop our people who are gross capital number to open new shops wherever people want great beverages with an eye on 4000 shops in the next 10 to 15 years number three increase brand awareness and encourage.
Deeper customer engagement.
Four invest in and use technology to improve the customer experience and five expand margins through operating leverage.
And now nearly a year since our IPO our investment thesis is holding and we remain focused on these priorities. Despite the dynamic and the challenging macroeconomic backdrop, we are encouraged by our team's ability to react with agility.
During Q2 helped us to live up to our mission and make a massive difference one cup at a time.
Please let me provide a brief update on each of these priorities starting with people development.
In Q2 staffing and retention and applicant flow remains strong trailing 12 months shop level turnover stabilized holding at 66% in Q2 bar below the industry average shop level manager turnover remained in the low double digits, while operator turnover was once again virtually nonexistent.
We attribute our comparatively low turnover metrics to our unique people first culture significant career development opportunities and the benefits and incentives we provide to our employees.
Applications in new hiring and have also been brisk, we continue to be able to fully staff our shops, while remaining highly selective employer of choice. These factors have allowed us to continue to drive new shop growth.
Over the last 12 months, we've promoted 50, new operators underscoring the meaningful development opportunities for our people as of June 30, we have 115 operators running our 336 company operated shops. Currently 2.9 shops per operator is our system matures. We expect this spend to grow to between four and <unk>.
Seven.
In terms of our second objective, our new shop development remains brisk.
<unk> 31 shops across nine states in Q2, and this compares favorably to our guidance for the quarter of at least 30, new shop openings in the first half of the year. We have opened 65, new shops collectively these shops opened in Q2 ended the quarter with an annualized <unk> of $2 1 million exceeding our expectations and validated further.
<unk> as we move from West to East as.
As we have stated over the past few quarters, Southern California, and Texas are key to our near term development plans year to date, we have opened seven shops in southern California, and twenty-nine shops in Texas.
In southern California, there's a clear unmet demand as our new shops consistently open with annualized <unk> well in excess of our company operated <unk> and are among the best in the system. You are working quickly to infill and utilize strategic sales transfer to meet this demand and.
In Texas, we have opened 61 shops in less than 18 months across a number of key cities 34 of these shops represent the initial shop for an operator these investments in people and capacity position us to continue to scale quickly our market entry strategy enables us to spread out demand, while elevating the customer and Bro Easter experiences.
As well as making sure the Dutch Bros. Brand is growing awareness in the Lone Star State.
Mm wide, our 'twenty 2020 'twenty, one classes produce trailing 12 months average unit volumes of $2 1 million, which is approximately 10% higher than our system average demonstrating brand strength and health.
Our new shops have also exhibited a predictable volume and margin progression typically reaching margin maturity within the first three to four quarters of an opening.
Our Dutch rewards program has continued to grow along with our shop count ensuring we meet our third objective of increasing brand awareness and customer engagement.
<unk> App surpassed 4 million users in Q2 of $2 6 million 90 day active users as of June 30th in.
In Q2, we added almost 450000, new 90 day active members in total we now have approximately 4000 active members per shop.
In Q2, approximately 63% of our transactions came from Dutch rewards members. We believe there is a runway to expand this program as digital penetration is about 15 points higher than our legacy markets relative to our newer markets.
The benefits of Dutch rewards continue to evolve.
We have begun providing customized offers that personalize our members' experience and drive trial frequency and upsizing in Q2, we began to activate and target lapsed users seeing increases and visit frequency and targeted users and an uptick in 90 day active users.
Encouraged by the early results of specific campaigns, particularly those featuring a rebel category and look forward to expanding on these to unlock value.
Cold beverages make up 80% of our menu mix the driving traffic through cold beverage sales was a focus area in Q2 in that period. We saw same sales growth of both our freeze and rebel categories of approximately 10% for freeze and 1% for rebel respectively, demonstrating category strength in spite of the macro.
<unk> and regional headwinds I referenced earlier.
And the relationship between our <unk> and customers is Paramount we can.
Continuing to invest in systems to improve the customer experience, notably our Dutch paas future gives customers the ability to preload funds and the Dutch rewards at.
This facilitates faster transaction times speeds up lines and creates the space for more meaningful lasting connections. Additionally, Dutch paas users average ticket is about 10% higher than other Dutch rewards members.
Finally, our fifth commitment is to expand margins through operating leverage like so many of our peers. The macroeconomic environment has impacted various aspects of our business on our last quarterly update call. We noted that we have been impacted by higher input costs, particularly for dairy and freight.
In combination was observed weakening of consumer demand, we elected to moderate our full year profitability last quarter and are reiterating that outlook today.
We've remained agile in responding to these headwinds taking several steps to navigate the uncertainty on June one we completed our second round of pricing actions since 2019 through an increase of 3%.
In November of 2021, we also took a 3% price increase you will evaluate taking further menu price increases in the back half of the year balancing business needs with our customers' ability to absorb further increases on the cost side, we advanced and accelerated our efforts to achieve productivity gains in the middle of the P&L focusing.
Bolt on long term operating changes, including testing the beverage tap systems and near term outlier management.
At the start of the year, we implemented a repair and maintenance program to reduce shop administrative burden and quickly address necessary maintenance that was challenging to execute during COVID-19 towards the end of Q2, we begin to bring the spending run rate down to a more normalized pace, helping our margins through the balance of the year.
And we refined our labor mix and standards to better align staffing with day part demand. We also took steps to limit the use of overtime to the extent possible.
These efforts have led to immediate results as I mentioned earlier in Q2, our company operated shop margins improved considerably 630 basis points quarter over quarter. We are encouraged by our demonstrated ability in Q2 to navigate these challenges.
We had Dutch Bros are here to make a massive difference we are here for the long run and we're just getting started.
Contributing to our community that is integral part to our brand DNA in 2009 or co founder Dan Boersma passed away from AOS Dutch Bros, and the Boersma family started drink once again to bring awareness to and support for research to find treatments and cures for ALS on.
On May 20, we celebrated our annual drink one for Dan fundraiser by transaction Count. It was the second biggest day in our company's history, and we raised over $2 $3 million. Since 2018, we have raised more than $8 3 million for the costs.
Additionally, the desk Rose Foundation and affiliated charitable entity made donations to the Asian Pacific Fund and the Trevor project in honor of Asian Pacific American Heritage month end in May.
In May and pride month in June .
Back to our communities through both national and local give back days as one of our core tenants. These efforts energize, our crews and foster meaningful customer connections and brand affinity, enabling us to uphold our mission and make a massive difference one cup at a time.
Also in the quarter, we surpassed two major brand milestones, we opened our 600 shop and achieved $1 billion in trailing 12 months if that symptom was sales.
Put this into perspective, it took US 27 years to grow to 328 shops in three and a half years to grow from $3 28 to 603.
We saw that there was a massive unmet demand for Dutch Bros. And we went out and executed I couldn't be more proud of the team and what we've accomplished together and I couldn't be more excited for the next phase of our growth and on our path to 4000 shops in the next 10 to 15 years.
Now I would like to turn it over to Charlie to review our financials. Thanks John .
I began to reminders first as we've done in the past a presentation containing supplemental information is posted on our Investor Relations Web site that may prove helpful. As you Digest today's discussion or reflect upon it later second we are a fast growing brand, particularly our company operated shops.
We intend to continue executing a company operated shop growth algorithm guided by operational readiness and people and the people pipeline discipline.
Over the last few years, we have accelerated our unit growth and are very pleased with the continued outperformance of our new units relative to our system average.
Pace of new shop development has been increasing as you've seen our accelerated unit growth has driven some uneven flow of earnings and we are very willing to accept that and continue to work diligently to manage our margins. This has clearly been made even more difficult by dynamic exogenous factors, but fundamentally we are highly.
Confident in our ability to drive high growth with best in class margins over the medium to long term.
With that preamble for context, let's go over the results company operated shop revenue grew 56% Q2 to $161 million in overall consolidated revenue increased 44% to $186 million year to date consolidated revenue grew 48% in Q2.
We opened 31, new shops of which 26 were company operated that brings us to 65 for the first half of the year and 133 in the last 12 months as of the end of Q2 system shop Count grew 28% compared to one year ago. This is well ahead of our stated objective of mid teens system shock.
<unk> growth.
As of the end of Q2 336 company operated shops were open 62% more than one year ago growth has been unlocked by our capacity to open at least 30 company operated shops in a given quarter, which we have now demonstrated in three of the last four quarters. Looking ahead, we have a robust shop pipeline.
Despite facing many of the same obstacles the rest of the industry is experiencing.
Comparable shop sales decreased three 3% in Q2 throughout the quarter. We continued to experience the trend shift we flagged on our Q1 earnings call, which began in mid March a couple of additional points for context, we are lapping positive 9% same store sales.
Q2 of 2021 Q2 same store sales are 7% higher than 2019 pre pandemic levels.
<unk> stabilized in June and that stabilization held through July both in terms of total same store sales and traffic.
And as Josh mentioned, our same store sales headwinds were driven primarily by our shops in California.
The fast pace of new shop growth is driven by entry into new markets and meticulous infill around existing shops, even in relatively new markets aggressive infill results and perfect results in purposeful sales transfer from existing shops to new ones as we execute speed quality and service.
Objectives consistently at each shop reported comparable sales growth in Q2 was lower by 140 basis points for the system and 260 basis points for company operated shops as a result of that sales transfer. This remains very much in line with our expectations in Q2 company operated shop.
<unk> was $39 $5 million or 24, 6% of company operated shop revenue after removing the 240 basis points benefit from lower Preopening expenses in Q2 underlying margins advanced 390 basis points from Q1 to Q2. This improvement was a function of the following factor.
<unk> Ah stage menu price increase that we completed June 1st which helped margins in Q2, but importantly has not yet delivered its full impact improved labor deployment refined to more closely match current traffic trends better leverage of fixed costs as per shop volumes build in late spring and early summer.
It is notable that after seven straight quarters of escalation and company shopped beverage food and packaging percentage, we experienced the decline from Q1 to Q2, we saw modest tempering and input cost inflation in Q2 on a weighted basis, our beverage food and packaging basket increased 12% year over year in Q1.
Declining about 50 basis points to approximately 11, 5% in Q2.
Turning now to a year over year comparison company operated shop contribution decreased 740 basis points to 24, 6% last quarter, we noted sharp increases in beverage food and packaging costs.
I noted that slight moderation from quarter to quarter past due remain elevated compared to the prior year and have outright outpaced productivity gains and pricing actions slide 11 of the supplemental investor deck contains additional details of margin progression year over year.
<unk> are as follows beverage food and packaging costs increased 230 basis points to 27, 1% and then increase was measurably slower than Q1, which increased 400 basis points, we're starting to lap the inflation that began to show in Q2 of 2021.
Labor increased 120 basis points to 29, 4% year over year, but was below 30% in Q2 after rising above that in the three previous quarters occupancy and other costs increased 340 basis points to 16, 6% in part from the aforementioned R&M spending.
New shop, inefficiency and Preopening costs, the timing drag and margins of 160 basis points.
Our beverage food and packaging costs increased primarily from input cost inflation and the reformulation of our freeze product, which we first mentioned in Q3 2021's release.
<unk>, which now represents approximately 20% of our Cogs basket reached historic highs in the spring and while it has moderated somewhat our costs were about 30% higher than 12 months ago.
Our year over year labor cost increase was primarily driven by changes we implemented in 2021 to minimum staffing levels at opening close as well as legislated minimum wage increases as of Q2, we have not yet been material burdened by wage rate escalation outside of those state mandated minimum wage increase.
As a partial offset in Q2, we began to realize some of the gains that will come from improved labor execution moving forward.
The increase in occupancy and other costs was in part driven by Frontloaded maintenance spending beginning January one we executed with the emergency catch up spending around shop condition and preventative maintenance the pandemic limited our ability to fully execute that in 2021. This resulted in higher than anticipated R&M spend in Q1 and part of it.
Second quarter of this year.
We have two actions action items to address input cost inflation first menu pricing, Josh clearly outlined our view in his comments.
It is our responsibility use our many years of experience the deep supplier relationships and our emerging scale to reduce cost without harming the customer experience without having to rely too heavily on menu pricing in the short term, we sharpened our pencils and delivered margin improvement in Q2 relative to Q1, we expect to identify.
<unk> achieve productivity through a renewed focus on best in class operations, specifically understanding and targeting shops underperforming our sales and margin expectations.
A couple quick comments on our new shops in Q2, we experienced 120 basis points with new shop inefficiency in Cogs and labor and 40 bps of increased Preopening expenses and.
In Q2, we opened 26, new company shops twice as many as the 13 New company shops opened in the second quarter of last year, resulting in pre opening expenses of two 2% of company operated shop revenue compared to one 8% last year or a 40 basis points increase we invested 138000 on a per shot.
Basis, and Preopening expenses slightly higher than our norm. This is a function of the nine shops that were first shops in their respected markets, which typically have a higher per unit investment preopening expense as both an investment and getting shop ready for customers, but also sets the tone for the rest of the market, we have a well orchestrated.
<unk> for entering new markets or.
Our new shops are ramping toward margin efficiency in line with our expectations. As a reminder, we are targeting a 30% plus contribution margin in year two for new shops. This margin excludes depreciation and would not include Preopening expenses, which are typically born in the first year.
As an example, I direct you to slide 10 in the supplemental investor deck. Our class of 2020 achieved a gross margin of 24% of trailing 12 months, which includes depreciation expense depreciation for all company shops is about 5%. During the same period. This gives us confidence as we effectively hit our second year Contra.
<unk> margin targets in this class in spite of the headwinds we've discussed refining our look at menu pricing driving operating efficiencies and the value creation from supply chain initiatives like the tap systems will drive our margins toward our objective and our franchising and other segment revenue decreased one 4% to 26.
Yeah.
Gross profit decreased 24, 6% to $13 8 million as a business we sell our franchisees certain products. In addition to collecting royalties typically we have held these costs more or less flat overtime, reducing variability and helping franchisees control their margins. However over the past 12 months underlying input cost.
Rose considerably impacting segment profitability.
As mentioned, we have communicated a price increased our franchisees for their purchases of rebel and coffee beans related to the products, we sell to them shift.
Shifting now to G&A, we are beginning to realize G&A leverage in the second quarter. Our total G&A grew 26% relative to total revenue growth of 44% as a percentage of total revenue G&A was 22, 7% versus 25, 9% in the second quarter last year, we expect that 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, and 110 basis points of stock based compensation.
Now for a few comments on liquidity, our balance sheet is strong and well capitalized as of June 30, we had $21 million in cash and equivalents and $148 million drawn on our revolving credit facility and in term debt.
Or a 126 million net debt position three.
<unk> $352 million in committed Undrawn debt capacity remains with an option to further increase our liquidity if needed.
Shifting now to guidance for the full year 2022, we are affirming our guidance from last quarter total system shop openings are expected to remain at least 130 of which at least 110 shops will be company operated total revenues are projected to now be at least $715 million same shop sales growth is.
Mated to remain flat.
Adjusted Ebitdas estimated remain at least $90 million capital expenditures are estimated to remain 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 late 2023 early 2024 with <unk>.
That I will now turn it back over to John for closing comments. Thanks, Charlie we're.
With 30 years Dutch Bros has been in the business of building and nurturing relationships and.
And we have all the building blocks to remain a successful and enduring company, including.
A powerful authentic brands strong people systems that drive company culture and fuel our shop growth.
A highly engaged customer following customizable and uniquely curated beverages highly consistent and highly attractive unit level economics.
Affordable model that is successful across geographies.
Our strong and well capitalized balance sheet that provides ample liquidity.
And in engage cofounder and in a very experienced leadership team.
We've been there and we will continue to be there for our people and our customers as we navigate through near term headwinds, while keeping our eyes keenly focus on our long term opportunity to expand our footprint and create real value for our shareholders.
Thank you again for your interest in Dutch Bros, and now we'd be happy to take your questions. Operator, Please open the lines.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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 queue.
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Your first question comes from Sharon Zackfia with William Blair.
Hi, good afternoon.
I guess, Jeff I recall, and you mentioned that you were going to do that promotion.
With rewards in June around Blue, Rob all it sounds like you had a good response to that and maybe even does something with with freezes as well can you talk about the learnings from that and how you might use that kind of more targeted offer dynamic in that third quarter and then Charlie I just wanted to quantify.
What you're expecting for commodity inflation in the back half of the year versus the 11 and a half you saw in the second quarter and are you, including an additional price increase in the guidance.
Okay.
Once you go first okay Hugo four cycles.
I'm not including an additional price increase in the guidance.
I would expect inflation as we start to lap prior year's inflation that 10% to 12% starts to slow down and becomes high single digit let's call. It.
And I did I catch it yes.
On the job and I think Sharon we did absolutely execute the rebel plan and really focused in on that in May and June in June we started to see.
A really nice uptick from that we also executed on freeze where we had.
Double digit growth on a freeze category as we came out at the end of the quarter.
A lot of the learnings that we're taking from that we are applying now.
As I talked about before to whether it's category specific or whether it's a customer specific promotion team is diving deeper into specific opportunities.
Really and have that planned for.
For Q3, and I think some of the results we saw in July .
Basically a result of the team getting even better at executing those types of promotions. So we.
We've got some fun things planned for our customers in the third and the fourth quarter and.
Look forward to more of that.
Okay. Thank you.
Next question Jeffrey Bernstein with Barclays.
Okay.
Great. Thank you very much two questions on the top line drivers.
The first one just specific to the comps you disclosed.
I know you said the system was down $3 three for the quarter June was only down to three so it seems better.
And only downpour nine in July I'm, just wondering if you were to prioritize the drivers you thought led to that improvement.
Whether it's the seething with easy compares or do you really believe it's improving underlying trends.
Maybe easing gas prices, which I know you talked about last quarter is potentially a major headwind for you. So I'm just trying to gauge whether you believe that what appears to be the improvement in July is improving.
Improving underlying fundamentals or something else any way you can prioritize that would be great and then I had one follow up.
Yeah.
Thanks, Jeff.
Question and <unk>.
Puzzle that we're actually kind of unpacking, a little bit because.
The three three across the system.
The numbers are actually, California, actually drove quite a bit of that decline in Q2, and you've got we talked a lot about gas prices in the last earnings call and some of the meetings in the quarter were California still running 30 plus percent over the national gas.
Average and we think that definitely has an impact.
When you take a look at like California, specifically from Bakersfield to Chico our business was down about 97% same store sales, but it also was impacted by a pretty high degree of sales transfer. So there's this down three three remember is impacted by.
You know that three threes and impacted by one 4% of sales transfer.
You have some discounting there you've got.
A very specific market.
It's down almost 97, if you remove that market the system actually the rest of the company is down one.
So we're really trying to isolate down get smarter about how we promote and attack those comps.
Understood.
And then the follow up.
You know you mentioned, the California weakness fully appreciate that I'm just wondering in your research otherwise is there any learnings in terms of.
Maybe varying by age brackets or lower versus higher household income.
It seems like.
Talk more and more about a slow on consumer more broadly I'm just wondering what your research showing in terms of where you are most and least vulnerable in terms of your core customer. Thank you.
Yeah. Thank you are are definitely are lower income.
Younger customer base, where we're seeing the impact we've seen.
If you have a customer base of 40000 household income of 40000 or lower we've seen up to 45% declines in California in the in the visiting right of those people and actually really in Oregon and California.
And customers that are between the 40 and $60000, earning or about 27% less in those markets as well so it's definitely indexing higher in lower income consumers.
Just to clarify you said, a 40% decline in the traffic if the household income with sub.
40000.
And visits correct.
Just where is it on the other end of the spectrum are you seeing greater.
I mean that seems like a severe decline I'm wondering at what level youre not seeing any decline.
And of the household income.
It's minor two two so I'd say little if any on the mid to high end income, it's really all been affected on the lower income and we're not weighted that heavy to the low end consumer right. So so even that big a drop is not creating that much drag weighted right.
Hum.
I understood you share what percentage of your customer mix is in each of those buckets.
We don't know.
Okay. Thank you.
Okay.
Your next question comes from David Tarantino with Baird.
Hi, Good afternoon, my question's on the the margins then.
I'm, specifically interested in some of the productivity gains that you achieved in the second quarter.
And Charlie if you could maybe kind of unpack those for us a bit.
Give us a sense of how much that might have helped the margin in the quarter and if I heard you correctly I think.
You referenced that there was only a partial quarter benefit in the second quarter. So if you could talk about kind of what you think the run rate savings or improvement might be as we think about the second half of the year and into next year.
So the pricing that we mentioned was not fully rolled out until June one that that's not a productivity, but it does help margins. So we expect.
Naturally expect that to fully take place in Q3, as we get a full quarter of pricing.
In terms of productivity as I mentioned in my comments, we removed the benefit of Preopening expenses.
Quarter over quarter, when we laid that out so you had about.
400 basis points of real margin improvement a little less than half of that is just comes from seasonality and leverage and the remaining piece of that is some moderation in our cost of goods.
And in our labor deployment again matching traffic levels closely that was late in the quarter right. Because we haven't had enough time to course correct. Our schedule. So we expect.
That to fully be in the third quarter.
And late in the quarter moderating some of our R&M spending so those are the two two big drivers.
And I guess because some of those.
It came in late in the quarter or how would you how would you encourage us to think about the margins for the second half of the year.
Given given those savings in and maybe.
No you haven't put a price increase into your <unk>.
Your model, so ex that potential price increase how should we think about the margins developing in the second half of the year.
They will float upward in the second half of the year relative to say the second quarter.
Because of the full brunt of pricing because of the moderation of our labor scheduling to match the traffic levels were at and we are going to bring the R&M spending closer to a normal run rate. So you should expect us to report to you company shop margins that are starting to elevate again.
Great and then I guess longer term you mentioned a goal on the shop level EBITDA margins getting to 30% I guess, what is what is the reasonable timeframe.
Or how are you thinking about that internally.
The timeframe to deliver that.
That type of performance.
Yes.
I think we talked about the 24 six in the quarter and if you put.
Preopening and.
And new store drag back into that were in the upper Twenty's already.
If you really if you were to break our store group down into the last three years of age classes those margins are actually above 30%.
Year to margin right. So they those mature more mature new stores are already delivering that number. So our total portfolio is actually weighted down by our lower volume legacy stores.
That's why we're very confident that we will deliver 30% because we're actually delivering yet and our newest age classes already.
Great very helpful. Thank you.
Mhm.
Next question, Nicole Miller with Piper Sandler.
Thank you good afternoon, I just wanted to make sure I got the monthly comps right I know April was down three seven I. Miss May can you just cover May June and July again, because I have a question that relates to that.
Yeah.
So April was down three seven may was down three eight system.
June was down $2 three for the system and we mentioned July for the system was down negative <unk>, 9%.
Okay, noting that the system right okay.
And the reason I think you and I was curious about the June to July so down two 3% down <unk> nine is a pretty big move.
And if it's if it's really gas prices right that is causing the comp fluctuation usually you give somebody something in this case low gas prices or stimulus and they were happy to spend right away you take it away and even though it's reversing course it can take there can be a lag I mean, usually gas starts to go down and at the COO.
Comp improvement for the industry does not happen in 30 days and so do you think is this gas prices or do you think there is anything else happening.
Well recognize as Charlie recognized in July we had the pricing action rolling and fully alright, so it got it.
Fully taking place. Good news is we've not seen traffic fall off as a result of that.
And so I would say stability is the key point here on the fuel gas prices I think it's always made that is representative of the rest of the consumer is under.
And.
Similar result, we would say we are seeing in trend that elevated fuel prices are are a challenge for some consumers and we think thats why California's lagging as well because it has the highest gas prices in the country.
And then just thinking about where those sales went did any insights at all I'd be curious to understand.
No.
Afternoon treat no treats in California, no coffee in general or did somebody substitute something from home or from another channel convenience store ready to drink just curious where you think you will be getting those sales back from them eventually.
Thank you.
Yeah, Great Great question, and when you when you kind of breakdown, where you see the loss it's definitely.
Afternoon and evening.
And.
And really it's about kind of it's again.
When we kind of boil down to where is it it seems to be afternoon and evening.
California makes up a heavily weighted amount.
Of that loss.
And it is really in like ice classic smoothies cold Brew Frost ice tea.
Which would lead me to believe that ties back to that.
That lower income customer.
So where do we think it's going.
Hypothesis would tell me that it's headed to convenience stores and I have talked about the interaction between convenience and Dutch bros, and how that can interchange.
Do we know exactly where it's going now.
But where are we after now is to start to isolate Dutch rewards and our programming our promotion program and our customer interface back into that afternoon evening customer and bring that back because we still saw morning day parts improving.
And actually saw growth in morning day parts. So.
We've really got it isolated down to category time of day, and who we think that customer is.
And last one do you know how far.
That's all gas or those guests that are having trouble getting to do you know how far they usually traveled a CEO and distance or time and are they just driving last I mean, we hear that is the thing is that possibly happening happening as well.
I only have anecdotal evidence Nicole I don't have.
Don't know exactly how far they drive.
We try to map our stores in a.
Call. It a three to five mile radius. If we can if we have the right volume in those stores. So we could say that.
Think of it as a five mile radius, but in some cases people are stopping by on their way to work or if it's within our.
Back to school market and that's a shorter trip, but we don't know directly.
Thank you.
Next question, Andrew Charles with Cowen.
Great. Thank you Charlie.
Charlie I wanted to dig into the impact of sales transfer if I recall correctly. It was running around 230 basis points at <unk> 240 basis points into Q Quito can you talk through what drove the easing of that impact.
Within guidance for flat comps, what we should how we should think about sales trends for the back half of the year.
Yeah. So the $2 30 was for company shops as a reference point in the in the 140 was for the system.
We are seeing sales transfer rise slightly and the company network.
And.
So it's up a little bit from last quarter.
And in terms of.
Just get comfortable that when we open a shop what percentage of that sales is incremental.
And we.
We are seeing that incremental <unk> across the new shop network to be.
Well within our expectations.
And Thats the way we measure it so we report the drag on comp, but we're really looking at when we when we infill of network how much of the sales are incremental every time, we add a shop.
Okay.
It's fair to assume kind of this flight.
Slight growth and sales transfer continues in the back half of the year.
Embedded in expectations.
I think similar levels or what we're expecting for the balance of the year because our our shop development program is not dramatically different we're going to open about 30 a quarter.
The ratio of company shops will be very similar so we would expect this to persist.
Okay.
Question for you you know notwithstanding the improved sales trajectory in the quarter and July if your guidance for flat same store sales in 2022 proves true are you opening slowing development in 2023 to eliminate the distraction and help intensify the focus on growing same store sales and rebounding goes back to that targeted low single digit range.
No.
In fact R R.
Our plan for 2023 growth will stay within.
That that mid teens plan that we've laid out as far as the year over year, new shopped expectations I think that the.
And we've talked about the kind of the growth story of Dutch and that is.
One of it is new unit growth, which obviously impacts and the sales transfer that we see in those markets. The other one too is that and as I've talked about I think you know <unk>.
Topline sales are really important measure of this because we are also working on growing market share.
So for example in Q2 26 of the 31 markets that we are tracking all grew.
Topline sales and we're growing total market share.
Have sales transfer with us within the guidance and the expectations of what we had and we're seeing total market share grow.
In almost all of our markets.
That's kind of a combination of things that we're looking at to make sure that we're delivering on the long term expectation.
That's very helpful and just one last clarification on that when you say mid teens, you're referring to the number of actual store openings. So if you're saying basically 130 for this year mid teens being 15% that was just a 150 plus for next year just to make sure we're talking apples to apples.
Would be $1 30.
With 15% on top of it so whatever whatever number that gets you to that would be the number yes.
Excellent. Thank you so much.
Yeah.
Next question, Sara Senatore with Bank of America.
Great. Thank you so much I have I have a couple of questions about your unit growth accident related.
First of all you made the point that you're well ahead of that mid teens guidance can you just talk about whether we should think about as a sort of a gating factor or a limiting factor is the growth rate or is it the absolute number of new units you can open because obviously the rate is twice as high as what the long term guide imply.
And so as we think through that took a converging on that long term rate. How do we think about that and then I'll have a follow up please.
I think Sara I think.
It's a great question and I think we've obviously.
<unk> pretty fast to get to this spot rate. So we we've gone from the high Ninety's last year or two that $1 30 number this year, we raised our guidance to the $1 30 number.
In the first quarter, and but we really want to settle in to that mid teens growth rate in.
And we will look at opportunities we will look at it.
Where we can be opportunistic on new markets.
Where that might vary that number and like this year, it's going to be.
Somewhere in the in the high Twenty's low 30% range.
But I'd like to see us settle in I think we have to manage the pressure that it puts on the system you have to manage.
And as I've said before we will manage the.
How it does for culture and for growth opportunities and how we're developing our people because as we develop people that has to fit into how we develop our pipeline and how we build that so.
The recipe for that success is the people side of it is as important as the construction side of it and we'll make sure we manage those to hit that long term expectation.
Okay. Thank you and then just a related question I know you mentioned, California.
Poker market for you I understand the impact of the high gas prices are transitory, but the sales transfer is also relatively high them and is there I guess, some kind of argument to be made that perhaps the volumes that.
That you can support their different or the density is somehow different I. You know I know you always talk about not wanting sex long lines at the service degrades, but just as I think about that is both.
A long growth runway, but also one where youre seeing probably some of the greatest sales transfer how do I reconcile that sort of thing.
Yes, so so when I talk California, I think of California in two ways I think about it in our developed part of California, which is basically Chico to Fresno, because our our long term history in those markets is very different from when you look at the Southern California Basin.
In the Central Coast, where it was opened up a lot of new business in the last few years. So <unk>.
Sacramento in the Sacramento area as one of our largest.
The markets that we have in the system. So when we start to do infill in that market, we're going to naturally see some impact that will improve overall customer experience, but it will knock down volumes and and we're okay with that as we've said that's an important piece of the business.
We've got we average about $2 $7 million and units that have been opened in the last two years in California, and so we're seeing great response to new outlets to come into those markets.
But I think one of the long term objective here will start to kind of stabilize and actually balance out volume.
In markets that were highly developed so you see that.
In California, we see it in Vegas, we see it in markets like Tucson.
There were we are purposefully doing a knockdown of volume and spreading out and growing market share and we will continue to do that and probably need to even get better at how we analyze and provide that information to you guys.
Thank you very much very helpful.
Next.
Western Johnnie Walker with J P. Morgan.
Hi, Thank you so just getting back to.
Point, you just made to Sarah's question is settling in on mid teens growth and again just to make sure that that would be I think there might be some apples and oranges in fact, I've made that mistake myself.
Settling into mid teens growth at some point on the <unk>.
Unit count.
Any given year.
Do you think in perpetuity opened 15% more units a year until we get and I guess.
Theoretically high number.
Hey, John in the in the offering we talked about getting 15%.
Sharp growth right the system growing year over year, 15%.
We mentioned in our comments, we actually over the last 12 months have grown 28% that's very high growth.
Ultimately, we're going to slow down from 28 towards 15, I can a slam the brakes on.
Look down now if we were at 15 now and we were going to <unk> to remain at 15, we would as Jon mentioned at 15% more openings every year. So right now we're going to target, 15% more openings year over year, which will allow us to slope down from the 28 growth rate down towards the <unk>.
15 over time.
As long as I got you.
I gotcha.
Yes.
And maybe it's just it's just coincidental that those numbers are just that.
You need to get out my pencil just did those numbers have happened to be the same but for foot, but reflective of just different thanks.
Okay, I got you and that's that's loud and clear and thank you for that.
And thank you for making the comment that your wages are up because of mandated minimum wage increases and achieving minimum staffing levels at the store level.
As opposed to just market pressure, which is very interesting because thats like literally you are unique in terms of not talking about market pressure in wages. So I just wanted to see are there any signs or pockets anywhere.
<unk>, New pro East does mature Boece does general managers and assistant managers, what have you are there any pockets of.
Wage pressure that you know that youre seeing or do you want to be proactive in terms of keeping some of your some of your good people kind of in the store.
If you can comment.
Then just looking across the system and different.
Types of cohorts of employees, if youre seeing any change at all.
In terms of in terms of the turnover of tenure at the at the store level as it currently stands.
Yeah. So a couple of things on that John I think that.
I would say that we are watching and learning.
Federal minimum wage states because the the wage.
The wage market in those states is very different from <unk>.
The West Coast States that we've had where you have high minimum wage and so.
We've responded in a couple of micro situations on a very minor wage increase.
In a couple of places where we were having.
Kind of working on some staffing things.
But.
It's really interesting I mean, we've had 64000 applicants in the second quarter, we hired 3500 of them and so we're not having any problem getting applicants were not having any problem hiring good people.
And that goes across the system turnover moderated and so we haven't had the we haven't really needed to play.
The market challenge game or the.
Or like we need to I think a year ago, we were talking about.
Hiring bonuses and things like that but we never did any of that because we really wanted to focus on on working to Dutch grows in the value of working at Dutch froze and and why that was important in how we have that combination of good wages and tips, but will remain.
Chile will remain responsive to what the market.
Needs and will continue to evaluate it but so far.
The strategy, we put in place about 18 months ago has held.
And a number of others that you.
See you're you're great retention, and who you have been able to attract in terms of.
The tipping from customers to employees and making it easy for the customers to recognize good service do you have you seen any changes in terms of increased tipping for hourly employees in your marketplaces that something.
That that you should be sensitive to whereas kind of the.
The boroughs.
Culture of recognition I'll call. It between customers and employees is something that is just hustle that will be very difficult for others to replicate.
I think the culture of recognition as a great way to put it.
I think the changes that we've seen in tipping.
Have really kind of flowed through what was the COVID-19 couple of years.
And not taking any cash it was a really high appreciation for being open and being there for the customer we've seen chipping kind of stabilize here I would say over the last.
Six to nine months is kind of markets have opened back up and we've kind of let's call. It normalized for whatever that is so.
But I think back to the culture and kind of what we do and again I think I think great service and taking care of the customer is what we're about and we believe that the customer appreciates that versus feeling like they have to do something.
And finally, if I may I'll give comments on the general manager side. I mean, just you you were at record low turnover before I mean, what is the overall commentary of that employee base.
At that stage now on our operator on our operator side, we've had basically.
Zero turnover on that end.
On the manager side its still in the low double digits on the system. So.
I'm really happy with the way that we've stabilized across the entire system on how we've.
<unk>.
Taking it I think that theres been a lot of pressure.
On on kind of mid management as it manage as managing.
Covid managing some of the challenges are coming back to work.
I think theres a lot of challenges for for a mid level manager right now.
And.
Think that our teams have done a good job of kind of keeping those people around making sure. We take care of those people and we will continue to do that so again our numbers stay low.
And really have proven that even in many of the new markets that we've opened up.
Thank you.
Next question, Andy Barish with Jefferies.
Hey, guys.
Nice progress here in the quarter.
As we.
As we think about the back half and that the.
Same store sales progression.
Okay.
Can you help kind of how you're thinking about it is the negative one that you.
So on July kind of.
What you expect for the rest of the year I mean, <unk> compares get a little bit easier, but then you had some.
Halo from the IPO and a good holiday season, and the <unk> last year.
Any help on that I guess would be.
<unk>.
I mean, I would say that.
Doug.
Is pricing that we took extends through traffic a little bit to slightly negative is what we're feeling and were really we just don't have enough evidence to look and view it view it any differently candidly.
So right now we're kind of remaining with.
Guidance was and watching it really closely.
As the next coming weeks shape up we'll get a stronger view, we were encouraged with the flooring or call it or the stability we saw in July .
We hope to see that in August through September and that will that would give us a better outlook for things I wish I could give you more but we're just all sitting in uncharted territory.
Yes.
That's totally understandable and win.
Do you have a mindset of when you would.
Look at pricing again or are you fairly flexible that it can be implemented fairly quickly. If you do decide to go in that direction.
Well I think as we mentioned we did the we announced the price increase for our franchisee side of the business and then.
Right now were evaluating.
Another increase in Q3.
So.
It's literally on our docket to make a decision on here pretty quickly.
Because we need to get to.
Three four weeks to get a pricing implemented.
And we have not implemented that yet.
Okay. Thanks, and then just finally on the new shop inefficiencies that at about 120 20 bps.
Is that a land in this.
30, a quarter now and you start to kind of lap that here in the three Q is that.
On the company owned side openings.
Is that a number that should be started.
Topping out at this kind of level, just just purely looking at that margin headwind.
Yes, Andy I think I think you should expect that to continue you remember its an absolute number. So if we had a margin of X, we're saying it's dragged down by the 120 Bips.
That's not a year over year number right. It's just an absolutely where it's important as we take our absolute margins, we add back that inefficiency, we look at pre opening and we say hey, that's kind of the trajectory of the year to margin for our shops, but I would just consider that to continue kind of with what we've articulated.
In the quarter.
And it's very manageable and interestingly if you look at our deck Youll see those stores. We just opened this year that.
That are already six months old have already popped up in margin.
We made that distinction this quarter, we broke it out into two six month window. So you could see the strong margin compression in our niche.
Margin expansion not compression in our new stores.
Yeah, really really helpful actually I noticed noticed that dramatic difference there okay understood. Thank you thanks for the color.
Yes. Thank you.
Next question, Chris <unk> with Stifel.
Hey, good afternoon guys.
The company expects to be at the high end of its total revenue target now, but kept the number of shop openings in comp outlook unchanged. So I may have missed this but are you expecting more operating weeks this year or just the new the <unk> being higher at new shops.
I think there is just more evidence that the <unk> upheld and therefore, we will go to the top end of that guidance now and now we're six months in so it becomes a math it becomes algebra.
Going forward.
Fair enough and Charlie are you assuming that they average what they've averaged the first half like the new stores that type of higher <unk> or are you still seeing a little conservative with that outlook.
I think we should be conservative because of we're aggressively in filling I mean, you look at Texas, We've already got 60 stores open there and just shy of 18 months and we aggressively unfilled. There. So we're meticulously knocking those volumes down that's why we're being reticent.
Over declare on new shop Au vs right now.
Okay. That's helpful. And then just could you provide an update on your entry into Tennessee, given it's the furthest east are the farthest east you've come in terms of meaningful market presence I'm just wondering.
If youre seeing what kind of sales transfer youre seeing in this market and if youre still seeing a strong uptick in terms of customer adoption and loyalty.
Yes, so the Tennessee shops are spaced out enough right now where we wouldn't experience any any real sales transfer I've. We've approved a lot a number of stores. There recently, so we're going in and we will start to knock volumes down, but so far so good like we have not.
We're really pleased with how Tennessee is going.
And and.
And that's why we hustled out to get even more locations in place.
The lines have been long so it looks like it's going well.
And then just lastly, I know, it's a follow up to that related to traffic I know you mentioned that transactions. It stabilized in June and July but can you help us understand what level of traffic performance Youre seeing in July .
If I just look at the absolute traffic per store in our comp group group.
It's very similar to June right, there's there's just and I'm talking the customer counts right the actual transactions itself.
You would normally expect from June to July to go down seasonally right its summer time and we.
You've seen us it's been very flattish I'll call. It so again the year over year number right. As you report it is negative but but in this environment you really look in the near term and you really look week to week and month to month.
And I also encourage us when we compare over prior year Theres, a lot of disruption habits, and COVID-19 and openings and closing and so right now we're just in a world of looking sequentially at how many people are coming through the shop everyday.
Okay. Okay. Thanks, guys.
Thank you.
Thank you I would like to turn the floor over to Josh Ricky for closing remarks.
Thank you operator and again, thank you to everyone for your for your support your interest and your commitment to Dutch Bros.
We and our team our R. R.
We committed to what our what we set out in our plan a year ago as I said earlier, we are excited about the progress that we've made we're excited about the amount of things that we're learning every day and I'm really excited to take Dutch bros. To many many more markets in.
In the years ahead. So thank you again for the time have a great afternoon, and thank you for the interest.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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Okay.
Yeah.
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