Q3 2022 Dutch Bros Inc Earnings Call
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It is now my pleasure to introduce your host Pettie Lauren. Thank you and you may begin.
Good afternoon, and welcome I am joined today by John Ricky President and CEO and Charlie Jim <unk> CFO , We issued our earnings press release for the quarter ended September 32022. After the market closed today and will file our 10-Q in the upcoming days.
The earnings press release, along with a supplemental investor deck have also been now posted to our Investor Relations website at investors <unk> Dot Com and we'll 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 questions. Other those other than those of historical fact, including statements regarding our future results or financial condition strategies plans and objectives 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.
Presley 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.
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 ending December 31 2021.
Filled with the SEC on March 11, 2022, and our upcoming quarterly report on Form 10-Q for the period ending September 32022, which will be similarly filed with the SEC.
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 those.
non-GAAP financial measures used by other companies.
As a reminder, non-GAAP financial measures are neither substitutes for more superior to the measures that are prepared under GAAP.
When evaluating our business. Please do not rely on any single measure.
We also review the reconciliation of non-GAAP financial measures to comparable GAAP results in our earnings press release, and with that I'd like to turn the call over to John .
Thank you Patty and also thank you for starting this on time.
Good afternoon, everyone. We appreciate your continued interest in Dutch Bros.
We continue to execute our growth strategy, leveraging our strong team to open new shops, and our proven operational playbook and loyalty program to engage and connect with new and existing customers in the third quarter. We opened a record number of shops 38 grew our revenue by more than 50% and expanded our shop level.
Contribution margins, both year over year and quarter over quarter.
Our real estate pipeline and our team's ability to execute new shop openings remains strong.
Our perspective, we opened almost as many shops in Q3 2022 than we did in the entire year of 2019, we have now opened at least 30 shops in five consecutive quarters and we fully expect to cap off our first full year as a public company by reaching our 2022 development target of at least 130 new shops.
While I am proud of these headline numbers and equally proud of our new shops quality brand continues to demonstrate strength as we travel eastern in new geographies and as we further penetrate our existing markets.
Revenue in Q3 grew 53% to $198 6 million compared to Q3 last year and has actually doubled in just 18 months.
Same shop sales grew one 7% in Q3 sequentially improving each month of the quarter as we mentioned in last quarter's remarks traffic trends begin to stabilize in July and which continued into August .
Our same store sales performance was driven by our cold beverage business, which drove over 90% of sales in the last 90 days and were headlined by the strength in our rebel and Dutch freeze categories. Additionally.
Additionally, we saw greater consistency across day parts with positive sales from the morning through the afternoon and into the evening.
Same store sales in Q3 benefited modestly from four 4% additional menu pricing taking at the beginning of September bringing our year over year pricing to 10, 3%.
Effective pricing during the quarter itself was closer to nine 1% based on the timing of our Q3 pricing action.
Separately, we increased prices for rebel and coffee being sold of our franchisees effective September one.
We tried to keep a long term perspective, when we choose to take price our pricing philosophy centers on one and maintained a consistently strong value proposition to keep the opportunity to customize top of mind for customers and three present, a clear path towards upsizing.
In Q3 company operated shop contribution grew 62% year over year to $44 3 million outpacing our top line growth and generating margin expansion.
Importantly in Q3, we saw a sequential 100 bps of company operated shop margin improvement from Q2, 2022, and 730 bps of improvement from Q1 2022, as the impact of pricing and operational improvements such as better labor scheduling flowed through our P&L in Q3, we encourage four.
$5 million in Preopening expenses, which were elevated due to a record 34 company operated shop openings in the quarter.
Third quarter, adjusted EBITDA reached $27 8 million meeting our expectations and remain in sync with our full year guidance of at least $90 million.
Recall that at the beginning of our public company journey, we shared five key objectives.
Turning to attract and develop people our growth capital.
Opened new shops wherever people want great beverages with an eye on 4000 plus shops in the next 10 to 15 years.
Increased brand awareness and encourage deeper customer engagement.
Invest in and use technology to improve the customer experience.
And expand consolidated margins through operating leverage.
It's now been just over a year since our IPO. We remained focused on these priorities.
In Q3, our shop level and management turnover remained below industry averages and our shops remain fully staffed trailing 12 months shop turnover.
Remained below industry average of 78%, but was up from just 66% in Q2.
This was not entirely unexpected as turnovers, often higher when we enter new markets and have to staff from scratch and start building our internal employee brand importantly shop manager turnover remains in the low double digits far below the industry average and for operators, who we view as the linchpin of our field organization turnover was once again.
Again virtually nonexistent the.
The combination of fully staffed shops, a deep bench of qualified operator candidates and a 20 to one ratio of frontline applications to new hires which we believe positions us as an employer of choice gives us confidence that we have the right pieces in place to fuel our growth.
We are committed to growing our field organization organically.
Working in partnership with our franchisees to identify and promote outstanding crew members and providing realistic growth ladder when being released to an operator with multi unit responsibilities.
In Q3, we promoted nine new operators and over the last past 12 months, we have promoted 45, new operators and.
In combination with our people first culture, we believe our outstanding career opportunities derive drive our comparatively low turnover.
People capability and availability are fundamental to realizing our growth potential. We've recently made several key hires in appointments in September we welcomed Victoria Tal. It is our first ever Chief legal officer Vittorio joins us from Papa Murphy's, where she served for more than 20 years and.
In August we welcomed and Miller, who joined the Dutch Bros. Board is our third independent director and brings deep governance experience and currently serves as executive Vice President and Chief legal officer of Nike.
Across geographies, our new shops continued to perform for example, our Oceanside, California shop, our first in San Diego County generated 123000 sales over four days, even more encouraging the shop demonstrated sustained power and the strength of operations by generating $629000 in its first.
Month.
We're obviously thrilled by such a warm reception in San Diego County, but we must also quickly open additional shops to satisfy consumer demand and maintain this goodwill since.
Since 2017, we have developed this strategy successfully in several markets, including Tucson, Las Vegas, resulting in significant brand awareness and market share gains improved customer experiences and increased operational efficiencies are.
Our new shop pipeline is fully populated for 2023, new additions to the pipeline are slated for opening in 'twenty four and in 2025.
Through proactive bulk purchasing of key materials with enable to sidestep, many supply chain disruptions and keep our construction timeline stable.
While we have seen cost escalation of several inputs, including site work and skilled labor. We remain focused on the long game and are encouraged by the resilience of our strong cash on cash returns, which remain in the range of 30% to 40% for ground leases.
In 2018, we publicly announced our five year goal of operating 800 total shops by the end of 2023, and we expect to meet this goal right on schedule given the strength of our people development and new unit pipelines. We can now commit to 150, new shop openings next year.
Since 2020, we've entered seven new states, reaching Tennessee earlier this year.
As we have moved across the country, we've seen strong reception, including $1 8 million annualized.
In the greater Nashville market 2 million and the greater Kansas City market and $1 8 million in the greater Oklahoma City market. Our 2020 in 2021 classes produce trailing 12 month average unit volumes of $2 1 million, which is approximately 10% higher than our system average our success across these.
<unk> markets gave us confidence in our decision to accelerate openings in 2022 and increase the pace into 2023.
And as we grow we are committed to being good stewards of our planet's resources since 2020, Dutch Roses purchase renewable energy credits to op source of energy use the first year of those credits covered nearly all of the electricity in our headquarter buildings in 2021. The program expanded to include all of our shops in.
In 2019, we installed solar panels on our roasting facility and this summer we began taking water saving measures that are now integrated into every new shop Bill moving forward all new shops will have an improve instrument cleaning process that will reduce the number of water consuming dipper wells.
Together these moves help us conserve energy and water, but we know these steps alone are enough. We're in the process of identifying executing other sustainability measures to ensure we're doing our part for the environment.
Dutch rewards, it's continued to grow along with shop, count increasing brand awareness and creating a stickiness the customer engagement that we believe comes with the feeling of inclusion and membership.
As of September 30, Dutch Bros. App at $2 9 million 90 day active users. This is up from $2 6 million at the end as at the end of June .
On average we now have approximately 4600 active members for each shop.
In Q3, approximately 63% of our transactions came from Dutch rewards members. We believe there is a runway to expand this program, especially in our newer markets.
When our members preload funds and pay with Dutch passed their average spending is 23% higher than non members. When we achieve additional operational benefit from faster payment times, yes, that's the power of membership.
We believe there is an opportunity to enhance our members' experience and earn price do personalization within the Dutch rewards program.
Specifically employing one to one targeting to encourage users to explore customize and create their own everyday perfect drink for you drink or treat in the perfect window or the day before.
For example.
We have the opportunity to target offers to encourage coffee years, you should try cold brew and encourage rebel drinkers to try soft top.
We are well positioned to provide customers with high levels of customization cold beverages, which are inherently more customizable made up over 90% of our menu mix in the last 90 days and over 80% in the last 12 months, our Pos and op systems are designed to accommodate high levels of flexibility in the order taking and drink build.
Process in Q3 soft top was added to 16% of our drinks up from 10% last year. We also saw success with the launch of the real modifier, which customers loved adding to rebel Ts eliminates in Dutch sodas to create customized and spun beverages unique to them and only from <unk>.
<unk>.
We are investing in technology to improve both <unk> and customer experiences in Q3, we innovated by giving Dutch rewards members to capability to share the goodbyes by sending their redeemed rewards to other members informs a free drinks in Q3 tens of thousands of free drinks with shared amongst our customers our power.
<unk> extension of the word of mouth engagement. The brand is so good at creating in the near future. We plan to further expand this capability by allowing users to buy sand and utilize digital gift cards through the app.
Finally, we are committed to expand margins over time through operating leverage.
<unk> agile and responding to input cost headwinds utilizing both pricing and productivity measures to navigate macroeconomic uncertainty.
In September we completed a four 4% price increase since November 2021, we have taken approximately 10, 3% and total price. We believe our measured strategic approach to pricing remains a competitive advantage for us as we believe we offer our customers a strong value, especially with modified beverages.
Our efforts to bring repair and maintenance in line and refinement of our labor matrix and staffing standards begin to show results in Q2 and continued throughout Q3. Additionally.
Additionally, in Q3, we began adding resources to our procurement function to help achieve greater purchasing efficiency that will come with our growing scale optimizing as we move eastward. These.
These efforts have yielded 730 bps of company operated shop contribution margin expansion in the last two quarters, we are continuing to see leverage in our newest shops, which are demonstrating predictable margin progression typically maturing in three to four quarters and reliably generating profits thereafter.
A 2020 approaching our target of 30% year to contribution margin on a trailing 12 month basis in Q3.
Reflecting over our first 12 months as a public company, we have witnessed many changes in the macroeconomic and the macroeconomic environment and within our industry. We are resolute in our core strategy to grow the desk gross brand and remain focused on delivering great experiences to our customers.
Earlier this year inflation for some of our key inputs, including dairy reached record levels and hampered our profitability when.
When it was evident that price increases where necessary we chose to take a measured small moves.
I always top of mind has been allowing our customers to adjust to the changes keeping the long term interest of our customers remains a guiding light for us, allowing us to better manage periods of uncertainty.
Last quarter, we began to see margins rebound.
This trend continued into Q3 cost escalation in commodity inflation stabilized and our measured approach to menu pricing begin to pay benefits. Meanwhile, we sharpened our pencils on key controllable we've made moves to invest in labor more wisely by limiting overtime, when we built schedules more efficiently.
Balance is important too because at times our lines along the win we're careful not to reduce labor in a manner that we're constrained revenue growth.
In short, we doubled down on being resourceful as a 30 year old company, we have the good fortune of our operating teams executing executing through many economic cycles throughout all of the uncertainty of the past year. The fundamental strength of the desk Rose four wall operating model has held firm.
I couldnt be more proud of this team and what we've accomplished together I couldnt be more excited for the next phase of growth on our path to 4000 shops over the next 10 to 15 years and as we like to say we had Dutch Bros. Are here to make a massive difference we are here for the long run and we're just getting started.
Now I'd like to turn the call over to Charlie to review our financials.
John Johns comments provide perspective on the massive change this business has experienced over the past 12 months and indeed over a period of several years I will take a moment and build upon that perspective with some facts.
<unk> surpassed $1 billion in annual system wide sales in Q2.
Achieved four successive quarters of strong revenue growth three of which were 50% or greater.
Approaching 400 company operated shops are 370 company operated shops at the end of Q3 or 54% more than just a year ago fast growth has not come at the expense of our high operating standards, because we're always focused on the experience of our people and our customers. We are executing our sales transfer fortune.
<unk> strategy delivering on our commitments to infill underpenetrated existing markets rapidly expand new markets and evenly spaced demand for the convenience of our our customers deserve and new shop <unk> performance remains strong openings from the first half of this year are on track to deliver $1 nine.
Million.
In Q3 openings are trending similarly, as a reminder, we are targeting new shops to perform at or above our company operated shop SUV at present, that's approximately $185 million.
New shops are ramping towards cash flow efficiency in line with our expectations typically it takes new shop margins three to four quarters to reach average efficiency and this trend continued in Q3, we target, 30% plus year to contribution margins for our new shops, and this metric removes depreciation and <unk>.
The impact of Preopening expenses, which are typically born in the first year of operations.
See page 10 of the supplemental earnings slides posted on our Investor Relations website with this release.
Our classes of 2020, one are delivering gross profit margins of 24% inclusive of 5% depreciation expense. Remember. This also includes depress margins from the first half of this year as commodity costs escalated ahead of our menu pricing actions.
Comparable shop sales increased one 7% in Q3 after declining three 3% in Q2 as John mentioned, we saw a recovery in the afternoon and strengthen our KOL differentiate beverage categories. For example, rebel and freeze for context, our one 7% Q3 same store sales result.
Is lapping a seven 3% same store sales increase in Q3 of 2021.
Q3 same store sales are 11, 4% higher than 2019 as pre pandemic levels are.
Our planned sales transfer fortresses NGL strategy created a 150 basis points drag for the system and 240 basis points drag for company operated shops in Q3.
This remains in line with our expectations overall company operated shop profitability is recovering since Q1, we have seen 730 basis points of margin recovery now at 25, 6%. In Q3. This is 100 basis points higher than last quarter, despite moving to a period.
Of lower average unit volume seasonality.
Despite cost pressures company operated shop contribution in Q3 is now essentially level with last year 40 basis points ahead of Q3 2021.
Page 11 of the supplemental slides provides a detailed look at year over year margins in quarter three.
Key takeaways are ingredient and packaging costs increased year over year 400 basis points dairy, which is the most significant single item in our ingredient and packaging cost basket has increased over 25%. This year sharp operating expenses increased by 120 basis points labor expenses increased.
By 70 basis points in total that is 590 basis points of cost pressure pricing actions have now really 570 basis points of this total cost pressure.
We have been very careful not to X to be excessive or to profit from inflation.
Our objective has been to recover costs and preserve what we see as a top tier four wall model that four wall model as the economic engine behind the thousands of shops, we intend to open over the next decade, plus so we're taking the long view as we serve many existing customers are quickly introducing Dutch bros to many new ones.
Through rapid shop growth.
It is important we maintain a strong value proposition with all our customers relative to the competitive set service quality and speed at a good value.
Our franchising and other segment, we instituted a price increase September one on the coffee blue rebel products, we provide to our franchisees similar to our approach on menu pricing, we chose to wait until we had a more clear view of the operating environment.
Passing along cost increases to our franchisees gross profit for the franchise and other segment held flat at $15 8 million compared.
Compared to $15 9 million in the same period last year. This was after declining in the first half of 2022.
Full impact of the price increase will be realized in Q4 and onward shifting.
Shifting now to SG&A for the quarter SG&A was $45 4 million and includes $10 6 million in stock based compensation.
Adjusted SG&A was $34 7 million following to 17, 5% of total revenue in Q3 2022 as compared to 18, 6% in Q3 of last year.
Annually, we expect adjusted SG&A leverage as anticipated revenue growth outpaces, the growth and the costs associated with people and infrastructure investments refer to page 13 of the supplemental slides for a reconciliation between SG&A and adjusted SG&A. This is as an additional page added this quarter for clarity.
Moving to overall profitability Q3's, adjusted EBITDA results strengthen to $27 8 million.
33% higher than prior year importantly, this is 16% higher than Q2 a.
A few comments on liquidity, our balance sheet is strong and well capitalized as of September 30, we had $35 million in cash and equivalents and $312 million of Undrawn liquidity on our $500 million credit facility or.
Our net debt was $152 million and has remained consistent with Q2.
I'll shift now to guidance for the full year 2022, we are raising our revenue guidance and affirmed and affirmed our shop openings same shop sales adjusted EBITDA and Capex guidance total system shop openings in 2022 are expected to be at least 130 of which at least 110 shops will be company operated in.
2023 total system shop openings that are expected to be at least 150.
Total revenues are now projected to be at least $725 million same shop sales growth as estimate estimated to be approximately flat.
Adjusted EBITDA is estimated to be at least $90 million capital expenditures are estimated to be in the range of $175 million to $200 million, which includes approximately 15 million to $20 million for our new roasting facility that we project will open in late 'twenty three early 'twenty four.
With that I'll turn it back over to Jack for closing remarks.
Thank you Charlie.
30 years <unk> has been in the business of building and nurturing relationships.
And we have all the building blocks to remain successful and enduring company.
Including a powerful authentic brand strong people systems that drive company culture and fuel our shop growth.
Highly engaged customer following customizable and uniquely curated beverages.
Highly consistent and highly attractive unit level economics.
Our portable model that is successful across geographies are strong and well capitalized balance sheet that provides ample liquidity.
And in engage cofounder and an experienced leadership team.
We have been there and we will continue to be there for our people and our customers as we execute through a difficult operating environment, 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 we now be happy to take your questions. Operator, Please open the lines.
Thank you Sir.
We will now be conducting a question and answer session.
I would like to ask a question Keith.
And then one on your telephone keypad.
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One moment, please will be poll for questions.
Okay.
The first question comes from Andrew Charles from Cowen. Please proceed with your question Andrew.
Great. Thanks, Charlie I wanted to talk about the pricing dynamic and I know that you guys look at three year trends on an asset basis, but if we look at it more on achieve metric two year basis. That's the way I think investors look at a little bit more from Q2 to three two we can see that same store sales sequentially salary by about 260 basis points, but there's about 380 basis points of increase.
Pricing from <unk>. So perhaps you can just talk about the traffic in September and what you observed in October and the ability for consumers Digest as I know you're trying to be measured with it. It's really outside these numbers do seem a bit high well recognize that sales transfer has been pretty similar between Q3 Q.
Yes so.
Sales transfer of 240 basis points.
We definitely have negative traffic.
Both sequentially and year over year as you're pointing out.
Okay.
Can you just talk a little more I know that you guys are being measured with this but can you talk about the efforts in place to make sure.
Especially just given the afternoon skews to more discretionary occasion that the pricing is being layered in.
It's trying to be gentle on traffic as possible.
Well, if you isolate that negative traffic there is a geographic element we refer to this last time.
So definitely in the California market, where disposable income is more constrained.
The driver of the traffic drag that we're seeing.
In the non California markets, we aren't seeing that sort of decline. So I think if it were a broad decline we'd have a different response than we have with an acute specific decline.
Got it and just my last question you on page 10 of the supplemental it looks like gross profit. Most recently opened stores improved to 15, 8% from eight 4% a quarter ago, what's driving that improvement with the new store volumes remained kind of similar on $2 million.
As we continue to move east the economics are accretive.
We've opened a lot of shops in Texas. So if you look at that on a portfolio basis.
The driver of the margins moving upward.
Very good thanks Charlie.
You are welcome.
Thank you. The next question comes from Sara Senatore from Bank of America. Please proceed with your question Sir.
I have a quick follow up and then a separate question just to clarify.
The traffic versus.
Ticket question.
I think you had probably 400 basis points more price on the menu and <unk> and Keith I just wanted to make sure I was getting at.
Sort of sequential change in pricing right.
And also to ask you if theres anything besides negative traffic, especially in mix or anything like that going on and the composition of the comp.
And then I'll have a separate question. Please.
So Sarah we took just over 4% menu price in September September one so the effect on the quarter is actually quite small right. So it's much less of that just over 1%.
So I want to make sure you make note of that its really going to be the fourth quarter that build.
Uptick from that.
Okay, sorry, Thank you you've had roughly similar pricing between two Ken Thank you.
Yeah.
Well, let me.
When we consider that.
While we took we took just took under four and May June .
Late in the quarter.
And then we took 4% late in the quarter in Q3, so roughly the same.
Each quarter.
Okay, and then I did wanted to just ask about the.
To your point your California continues to see a drag that you saw some more normalization.
Across day parts.
Can you talk about what that.
What that reflects is there are there things that youre getting with the loyalty program.
Is it just sort of more people kind of getting used to this idea of gas gas prices being high.
To be more of a discretionary day part.
A related question to that on the new units is there anything.
About geography.
One nine versus 185.
Historically had very high volumes.
Trying to understand if you're seeing anything different as you enter these new markets versus what you saw in the first couple of stores you are opening up.
Further east so just trying to understand kind of the complexion of.
The topline growth.
Sure it's Jonathan.
The components of menu I think a couple of real positive things.
We saw growth.
Across all day parts, except what we call late night in.
In Q3, so we did see.
Recovery across the board in day parts, we saw strong growth in our freeze and rebel business those are our two SaaS.
SaaS growing businesses those are big categories for us and.
The movement by the team to continue to attract people into those categories was strong and we like those categories. Another element of growth that we didn't touch on that.
38 of the 39 markets that we track grew grew in Q3.
The one market that didn't grow as that Sacramento area, we've cut the decline in that market about in half from where it was in Q2.
But real strong growth across the board is still isolated down on that one market that we're still working through.
As it relates to comps and things of that nature I think that we are opening up we're opening up a lot of trade zones, and we're opening up a lot of new shops that.
That may also contribute to some sales transfer that we're seeing in the market. So it's.
And the way that we're modeling things out not every store were going to open is going to be at two one because in many cases.
Dropped store one into a market, but other shops are coming into a trade zone to knock those things down and it wont open up as strong as that to one number. So that's why we kind of look at that total market growth and make sure that we've got a handle on how thats doing.
Perfect. Thank you very much.
Okay.
Thank you. The next question comes from David Tarantino from Baird. Please go ahead with your question David.
Hi, good afternoon.
Charlie I wanted to ask you to clarify a comment I think you mentioned that traffic was down.
Year over year and sequentially. So I just wanted to understand how.
How to interpret that so I guess, what did you mean by sequentially when you talked about traffic.
So sequentially from quarter two to quarter three.
Now we have seasonality in there as well, but but we've seen some decline in traffic counts from quarter to quarter, three and then certainly year over year, we have seen a decline.
Excluding sales transfer.
These are small decline.
They're not significant.
Got it so.
Is that adjusted for seasonality or I guess, if you think about the year over year change or however.
Typically think about it.
There was a little softer in Q3 than in Q2 is that what youre trying to say.
So seasonality wouldn't be a year over year effect to your point it can be an effect as you move from quarter to quarter quarter. Two is typically our highest seasonality.
Pretty.
The best way to characterize quarter suite of quarter three outside the price advance is pretty much all.
Call it running in place not a lot of change in <unk>.
Traffic.
Slightly okay.
Yeah.
Got it okay.
That helps and then on.
I guess I just wanted to understand how youre thinking about the fourth quarter because.
The full year guidance implies a pretty decent range of.
But I guess taken literally it would imply a step back to negative.
Comps in the fourth quarter, so I wanted to.
I understand that a little bit better.
So.
One is that is that accurate is that how youre thinking about it and why why are the comps.
If thats the case.
Turning back negative what with more pricing in the equation.
So we are we are positive through three quarters, we're projecting flat. So yes. You are correct that we are expecting a small decline in the fourth quarter and reported comps.
<unk> sales transfer to consider through that.
And then in terms of.
The lap the lap in Q4 is pretty aggressive versus Q3. So make note of that when you look at the comp stacking data that we provide in the supplemental.
Moving parts are.
That we're going to to add stores, we're going to go into a lower period of seasonality, we have a full quarter of pricing.
We're expecting a little soffer, a little tougher lap in traffic year over year, and that's how we kind of ended up guiding where we guided.
Understood and then.
John .
I was interested in hearing more about the one to one marketing.
You mentioned you have that capability now.
Like in <unk>.
Hoping you could elaborate on what your plans are.
In the near term and whether you are planning to use that vehicle.
More aggressively to try to protect the traffic.
Okay.
<unk>.
We have done.
Several different programs I think the team has created a nice playbook of how to look at the varying degrees of what the customer is going through so literally you can you can create a customer engagement and see us.
Is it a day part issue is it a is it a trade down issue is it a promotional opportunity to convert them into another beverage category.
What's the behavior that we're seeing.
Through the Dutch rewards program that would maybe.
Give us the opportunity to communicate with that particular customer a certain way so yes.
We're driving frequency, it's introducing them to other parts of the menu so that they come back on different day parts.
We're still mining through the data to figure out what that looks like so.
You could almost pick any scenario, David and say that that's one that we're using.
The way that we can promote utilizing the app.
I think the ability to drive.
To utilize the sharing of points program that we put in place. We also in the in Q4, we have a big.
Sure.
Digital card that we're going to be launching through the app.
<unk>.
Big.
Gift item for the holidays, which we like that.
The other thing I want to speak on just quickly related to Charlie's comments is that Q4 of last year was really that last run.
Of Covid challenges I think that we saw in the marketplace and we had a very strong.
Fourth quarter of last year, because we were opened we were run and we're doing very well at that time.
So I think theres still some settling down happening in year over year numbers related to who was opened who wasn't what was going on in the market and what's happening now so I think that some of our our hesitancy to be more positive about the fourth quarter as we know what we're up against versus last year. It's the highest two year stack we face.
Makes sense. Thank you very much.
Thank you. The next question comes from John <unk> from Jpmorgan. Please proceed with your question John .
Alright. Thank you very much the question was on what Youre seeing with taps and certainly I.
I think about this speed of consistency.
Certainly it fits in with some of the environmental goals that you have could you give us an update.
What youre seeing new stores any opportunities that you have to retrofit some of the existing stores and I have a follow up.
We have our cultural tap system, Jonathan Foley shops, right now and we're going to plan right now to kind of roll that out we actually just launched.
A new tap design stand here and grants pass.
Looking at our Revlon tap and we're testing that program and really look to probably the back half of 2023 as we begin to scale up on that we've kind of picked up we pick the shop.
A new shop and kind of as we look at new design and new programming. We are working on that right now to roll that into let's say July through.
Through the back half of the year as we as we launched the new tap systems.
And anything that you can share operationally I mean does it in terms of its significant spleen why youre doing it.
Certainly again, we see that the waste aspect, but anything from a customer and employee perspective.
I think I think the feedback has been tremendous I think that the.
It's simple it's easy we're removing the can and really just now we're hitting a button and the ability to pour the perfect drink.
In many cases, it's so much faster so that we can deliver to that customer online on time and improve efficiency there not to mention the backend benefit of not shipping cases of <unk>.
Full product so cases of cold brew cases of rebel cases of even our sparkling water business and we will continue to reduce.
The finished good line and we will do more of a concentrate business as we get to the back half of the year, but we haven't we've tested it we've got to kind of model, but until we actually see it in.
And personally I'm not haven't been committing to really putting any numbers out.
Thank you very much second question on turnover I think I wrote down hourly turnover went from 66 to 78.
No not on expected, but that's not a small increase especially for you. So.
Kind of go through.
Why I guess employees are leaving at an accelerated rate relative to the second quarter versus last year, I know new markets might be a part of it but.
Or are we seeing a similar phenomenon in existing markets and I'm curious I don't know this to be the reason.
A lot of hourly workers have opportunities to earn tips.
Were they didn't before and I think quite frankly, you have led the industry and shown some others. The way of how good that can be from both I guess the profitability, but also more importantly, an employee perspective, so just wanted to get some more.
Color in terms of that increase in turnover and whether if you see it as an issue that you guys need to I guess make sure it doesn't get any worse.
Yes.
Great question than just that.
The case study that is the labor market right now is fascinating. So a couple of comments one is that our turnover in the third quarter is always going to be higher.
Just the nature of summer ending back to school type of employee base that we have.
We always see higher turnover in the third quarter.
The reason why the trailing 12 months number is higher is actually more driven by the phenomenon of the first quarter in the second quarter, which were higher than the first quarter and second quarter of 2021, and the first and second quarter of 2021, we had the lowest turnover, we've probably ever seen just because we were open and people had a job.
And they were Spain, but we did see increased turnover in the third quarter of last year and what will happen is we'll see that drop off in the fourth quarter, we will kind of bounce around with us for the first and second quarter and then it will increase again in the third quarter.
The tipping question is a great one.
Think that we've all seen an increase in.
And the opportunity to tip across all segments of business.
In the last six months.
And we've seen a reduction in that number.
At the same time I think that.
I think it's an interesting phenomenon as well that I'll stay away from my opinion on that but I do think that we need to make sure that we're keeping great service.
And we're acknowledging people that are doing amazing work and I hope that everybody in every job does amazing work so they get a great kit.
Thank you.
Okay.
Thank you. The next question comes from Nicole Miller from Piper Sandler. Please proceed with your question Nicole.
Thank you good afternoon.
On comp last quarter, if I have this down.
You talked a lot about California, and I think it was something like if you could exclude I think it was both California and sales transfer comps would've been down very very modestly so.
Can you give some context for the third quarter comp around the impact of California.
And if California was a driving force to the positive.
There was an earlier question about that consumer absorbing inflation, which is a great one or is it the fact that they had a stimulus.
And I guess with technically brilliant October not in <unk>, but if you just had any line of sight into like maybe they knew that was coming so they started to feel better.
And if that is the last thing.
Event or phenomenon or.
Sentiment kind of.
Yes, great Great question, Nicole and you're right. The stimulus was in October so we didn't see the.
In the value of that so far.
But back to the California question, and I want to isolate the California situation actually into the Sacramento area.
And what we would just call a Sacramento DMA.
If you remove that DNA from our entire system. Our total system wide same store sales were up four 1%.
That's how much of an impact that that market has on our same store sales.
Related to the system so.
So four 1% would be the gross number if you take that out in in the second quarter that market was down nine 7% in the third quarter that that market was down four 8%. So we've seen an improvement there, but we still have work to do and it's kind of back to that 38% to 39 markets that we talked about.
Being up.
Again, we're isolating that we're looking at that figuring out ways that we can kind of work in that market, but also being focused on everywhere else.
Going what we would consider to be very well.
Okay and the recovery was.
<unk> drinks, they're covered with the afternoon I think mix shift was a drag in the first half of the year has mix shift turned back positive.
Not necessarily.
Okay. So it really is traffic then okay.
Traffic and price is it negative.
It's still a drag.
Mix or traffic mix, sorry about that sorry, Charlie mix.
Yes.
Sure.
Mix is yes mix our mix is a drag.
Slight drag.
Some trade down there.
Which is logical.
And then <unk> was asked earlier, so for the whole year being flat and you kind of said.
If I have this down.
Negative comp so with price again, just the same kind of level same kind of level, a little bit more price. So a little bit more negative traffic is that the way to think about that given those reasons that you you kind of cited.
I don't know if at least one question of three questions ago, but is that right.
Yes on a year over year basis, but again I'd encourage you to look at that slide eight because you can see the two year stack for Q4 is really right at 58%.
And so.
You all know that comp is a two part equation what you deliver in the current.
Frame and what Youre comparing it to so that's why we're not concerned about reporting a negative traffic number.
With that big a lap.
And then a real question then.
And then just put me on mute, but a real question the roasting facility.
The alleviate any pressures anywhere.
Does that make things happen faster cheaper.
What benefits do you have from the roasting facility ultimately.
When you think about our supply chain.
We're shipping.
Most everything that we make out of the most expensive markets in the country on the West coast.
So we are currently using a.
A third party in the Dallas market to offload some of the pressure that we have from our roasting facility in grants pass.
And right now we produced probably 97% of our of our roasted bean volume coming out of the grants pass market as we move those things, Texas will start a supply chain that comes up through Houston and directly goes into the Dallas market that allows us to ship throughout the Midwest market and then and then to the East co.
So one is we'll get out of.
We will get out of a third party situation, which is.
Absolutely more expensive to make.
And we will get into our own situation and then we'll be able to off load and also take some risk out of the equation.
With having one roasting facility on the grid in one location with what's happening in the summers.
With fires and the other things that we're facing on the West coast, we want to make sure that we're able to to supply regardless of any situation ultimately out of our original roasting node will lose we're going to run out of capacity and we don't want to add capacity in a single risk environment like that.
Thank you.
Okay.
Yeah.
Thank you. The next question comes from Jeffrey Bernstein from Barclays. Please proceed with your question Katherine.
Great. Thank you just following up on the menu pricing.
9% I guess that we're talking about in the third quarter, which seemingly would go up a little bit in the fourth quarter I'm just wondering how do you go about.
Arriving at the price increases I know you said.
More smaller increases but.
Is that just the price increase.
And based on your need to hold margins at a certain level or I mean, how do you test it to make sure that there's not going to be outsized pushback from a lower income consumer in this environment.
Yes. So every every price move.
Moves that we've made in the last year. The three that we've made have really been measured to that degree one is that.
We're going to go slow we want to continue to create a value proposition for our where our menu.
Across just about most of the categories that we're in.
<unk>.
We want to be.
Careful about how we do it so we basically what we say is we want to earn price.
As we put that on our menu versus taking price. So we've been careful about the impact of the consumer during this time and we've also been careful about where we put price. So we've done things on a lot of our.
Our products that your premium is an item with we've done that so.
The customers choosing an item that would actually.
You would take price on we also look at other places in our menu.
We feel like that there is a price opportunity there and we are also protected other parts of our menu.
Against the customer base that we may not be able to take price. So so far we're very pleased with the way that that's worth we've seen.
Just about all of it flow through in the last year and we will continue to be measured as we get out at the end of this year and then look again kind of at the first half of next year.
Yes.
Got it and obviously the pricing is in place to mitigate inflationary pressures I'm. Just wondering if you can quantify the basket of commodity and labor inflation for the third quarter and maybe what your outlook is for the.
The fourth quarter or more importantly, directionally into 'twenty three hopefully we're expecting these things to ease in 'twenty, three but any kind of color on the current quarter in the near term outlook would be helpful.
Our overall year over year cost of goods basket inflation in the third quarter was just shy of 11%.
Our wage inflation is.
Just below 1% right now.
We don't anticipate a lot of change.
Right now we don't think its wise to bank on that but dairy is the as.
We've stated it's a huge driver of that.
Over 25% escalation in dairy coffee is up was up in the third quarter high single digit.
And Jeff we're not we're not hearing anything that gives us.
High degree of hope things are going to shifting differently anytime soon I think Gary is projected to stay where its at until the spring of next year. The C price. We're all watching is starting to come down unusually.
That's helpful, but if we play in the futures game on that Youre out a little bit more on that so.
So we're watching that and I think we'll watch we'll watch labor I think labor is the one that we're watching closely obviously, we've had a good run with our hiring.
One out of every 21 applicants, we hire and that feeling pretty good, but we're going to have to watch.
Wage inflation as we kind of get through this and get into the first part of the year.
Yes.
Understood. Thank you.
Yeah.
Thank you. The next question comes from Sharon Zackfia from William Blair. Please proceed with your question Shannon.
Good afternoon.
Pretty impressed by the labor leverage that you saw in the quarter and I know you mentioned labor scheduling and I think less overtime is there anything else that went into that metric.
There's really good leverage, particularly for the comp you put up in the quarter and then secondarily curious if you could talk about what new markets you might be looking at opening and 2023.
On the labor side. The team has done a really good job of making sure that we forecast sales.
Accurate as we can.
All right a schedule of close to that sales level and get the day parts right and then work the schedule that we write.
Given that we are still relatively low turnover and we have a reliable staffing model, we're able to just fine tune that and set our schedules more effectively remove overtime.
Limit the training expenses that we had so we just got better at our craft in the third quarter because environment was less disruptive.
Yes, Sharon if you look at the markets for for next year, a couple of pieces of color on that one is about <unk>.
60% of the shops that we plan for next year, we'll open in California, and Texas as we continue to build.
Out of that so that's about right now we've got 92 locations plan for those two areas and we will be dealing a lot of infill into existing markets.
New markets and.
In Alabama, Tennessee, and then also in Kentucky, So places like Huntsville places like Knoxville.
<unk> like Lexington will be core places will grow and we'll use a similar approach that we took.
Really in Texas, where we opened in places like Lubbock and College station.
It could end markets that maybe you would consider to be secondary but thats, how we will go into a market like that.
Built in good presence. So we're excited about about next year and that $1 50 of the team is just.
Honestly, the chomping at the bit to get started.
Thank you.
Yeah.
Thank you. The next question comes from Chris <unk> from Stifel. Please proceed with your question Chris.
Thank you Hey, guys. This is Patrick on for Chris I wanted to quickly follow up on California. You mentioned was a key driver of the traffic declines, but I was curious if you could clarify if you've seen.
And impact from the stimulus payments that rolled out in California.
At the beginning of the fourth quarter.
And then I had a follow up.
Yes, I don't know that we have anything to point to right now related to Q4 numbers.
And we just haven't really we haven't seen that or nor have we really spent a bunch of time kind of analyzing what kind of effect that's had so far so.
I wish we could say more but I don't have really much to speak on that topic.
Got it no that's helpful. Thank you.
And then also Jeff the company have.
A higher level of promotional activity during the third quarter than maybe it did last year and then as we think about the fourth and I. Appreciate the comments on the lab, but I'm curious if you could provide some color on.
With the level of promotional activity might be around the holiday season.
Compared to last year as well.
We're pretty the thinking.
Thinking about our promotion strategy as it were.
We are not a big promotional company and part of that is that we have.
The lines that we have and the traffic that we manage we're not in the business of driving.
Honestly driving more big volume into a store because.
Because we're kind of managing our operating efficiency and in many cases, if we drive our lines to be too long we lose people.
Because people don't want to wait on those lines. So that's why we think our one to one promotion strategy is so important and I can tell you that our discount rate in promo has stayed pretty even all year and the way that we manage it and we've kind of managed or how we drive promotions kind of specifically within that discount percentage.
And not doing any sort of large promotions that can honestly you can really trip us up operationally if we're not careful so.
So nothing out of the ordinary from last year, I would say and we've been pretty disciplined in the way that our team has run that.
Got it and then lastly, I mean, I know you mentioned or you highlighted modifiers and customization like soft top as a driver of incremental revenue opportunities in your prepared remarks, and I was just curious if you have any product innovations in the pipeline or additional beverage enhancements that you think you could rollout that will provide additional options for.
Customers to sort of self select an add on.
Our high margin beverage modifiers.
So we have done some.
A variety of work, which is how soft tops kind of gotten to that 16% number here over the summer I think when we launched off top.
And I think we had any idea that basically two plus years later it would be on 16% of our beverages and growing as we are starting to see consumers.
And really our belief is doing a nice job of offering that product on you can put it on cold brew you can put it on rebel you can put it on eliminated you can put it on a hot drink you can do so many different ways and then real fruit has been a great.
Way too flavor up your drink without maybe putting a syrup and there you actually put a real scoop of real of real fruit in there. That's also kind of expanded beyond the original idea and now we're seeing it and it used to be just for Ts eliminated when we launched it and now we're seeing it in rebels and.
So in a variety of different beverages that we run we're careful about too much innovation again because of the nature of the way the inside of our shops work and the operational efficiency that we need in order to get the volume through so we did launch a mango nada, we tested our product with the heat on it.
In the third quarter that did very well and got great feed.
Feedback not just from our consumers, but also from our stands in our releases.
We will look at a few products like that in the next year, but and then finish it.
Our menu is loaded with innovation currently our secret menu inside our menu is loaded with hundreds of amazing drinks that really arent offered by by other people in and so I think what we will continue to do is try to showcase those beverages to.
To our customers, especially in our new markets that are still learning how to shop interact and half the desktop experience.
Great. Thanks, guys.
Thank you.
No further questions at this time I would now like to turn the call back to Dr. <unk> for closing remarks, Thank you Sir.
So we once again want to thank.
Everyone on the call I also want to thank.
Our thousands of <unk> and our teams in the shops.
Hundreds of people here.
Support our HQ that it makes such a great experience for our customers and our employees out in the marketplaces.
This has been an amazing year 2022 is against run to us.
Challenges that we've taken on and developed in.
Work done, but we've created.
Record numbers, along the way so I want to thank everybody for joining us on the call and wish everyone, a very happy safe and great holiday season, and we'll look forward to speaking to you again.
In our Q4 call in the first quarter next year. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you very much for your participation.
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