Q4 2022 Dutch Bros Inc Earnings Call
Greetings and welcome to the Dutch Bros. Fourth quarter 2022 conference call. At this time all participants are in a listen only mode. A brief crushed 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.
Pat as a reminder, this conference is being recorded it is now my pleasure to introduce your host Patti warrants. Please go ahead.
Good afternoon, and welcome I'm joined today by John Ricky CEO , and Charlie generally CFO , we issued our earnings press release for the fourth quarter and year end December 31, 2022 after the market closed today.
The earnings press release, along with the supplemental information deck and have also now been posted on our Investor Relations website at investors that Dutch rose Dot com.
Please be aware that all statements in our prepared remarks and in response to your question other than those of historical fact are forward looking statements and are subject to risks uncertainties and assumptions that may cause actual results to differ materially.
Qualified by the cautionary statements in our earnings press release, and the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, we assume no obligation to update any forward looking statements.
We will also reference non-GAAP financial measures on today's call as a reminder, non-GAAP financial measures are neither substitutes for or superior to measures that are prepared under GAAP. Please review the reconciliations of non-GAAP measures to comparable GAAP results in our earnings press release.
With that I would now like to turn the call over to John .
Thank you Patty good afternoon, everyone. We appreciate your continued interest in desperate.
In 2022, we delivered another year of growth with 133, new shop openings system wide, a testament to our team's ability to execute our proven strategy.
Despite the well documented economic disruption, we've exceeded our new shop development targets for the third consecutive year, we have now doubled our shop count since March of 2019.
Although we continue to see signs of broader economic uncertainty, we enter 2023, well positioned to continue building market share and execute against our long term goal of 4000 shops over the next 10 to 15 years.
As we look forward I'd like to share a few points that underscore why we feel confident in our long term positioning of.
Our drive through model is focused on speed quality and service. Our goal is to be the highlight of our customers' day, which we believe helps cultivate lasting relationships.
More than 95% of our sales are beverages, which we believe leads to more daily repetition and if we were serving food.
We enjoy higher uv's without the supply chain and operational complexity of a restaurant.
And our menu evolves to consumer preferences more than 80% of our beverages or cold, which enables high levels of customization and can service. Several day parts. We are particularly excited about the category growth of energy drinks and encouraged by our positioning within this competitive market.
We have now opened at least 30 systemwide shops in each of the last six quarters, demonstrating the strength of our people systems and development pipeline.
In 2023, we are targeting 150, new shops, which positions us to achieve our five year goal of 800 system wide shops by year end we.
We will be within striking distance of $1 billion in revenue in 2023, and 1000 system wide shops by the first half of 2025.
This inspires us and excites us we know this growth creates jobs and opportunities for our employees and the communities we serve.
Our new shops continue to be efficient demonstrating predictable and attractive shop level economics, when they mature quickly.
A group of shops opened in 2019 2020 in 2021, we're approaching our 30% year to contribution margin target in the class of 2022 is maturing in line with our expectations. We are hitting these targets, while we continue entering new trade zones across the country.
This performance gives us confidence in Dutch Bros growth strategy, both in the near term and beyond.
That said, we enter 2023 with opportunities to optimize our operations, we're rolling out a beverage tap system, which we believe will achieve both supply chain and beverage build efficiencies. We're also in the further penetration of our Dutch rewards and Dutch past programs.
Here are a few updates on the five key objectives, we shared as we started our public company journey.
One was to continue to attract.
And develop people who are growth capital.
Two was to open new shops wherever people want great beverages was at INR 4000 shops in the next 10 to 15 years.
As to increase brand awareness and encourage deeper customer engagement.
Or was to invest in and use technology to improve the customer experience and five is to expand consolidated margins through operating leverage.
Let's focus on our people.
Earlier this month, we welcome Christine Barone as our new President.
Thrilled she is onboard and already getting up to speed Christine will be instrumental as we take this business to the next level.
In Q4, our shop level and management turnover remained below industry averages and our shops were fully staffed shop level turnover improved about 3% quarter over quarter and sits in the mid 70% range shop manager turnover remains in the low double digits and operator turnover was once again virtually nonexistent.
We know employee satisfaction takes on many aspects beyond wages. However, we strive to ensure we take home pay is competitive in Q4, we increased wages in select markets and on January one 2023, we made a proactive investment in our people and the increased wages across all jurisdictions that rely upon that.
Federal minimum wage as their standard.
Across all markets. We continue to have a strong applicant pool was far more people interested in working with Dutch bros, and available employment opportunities to be clear our investment in wages in 2023 is proactive not reactive.
<unk> utilizes a grow from within model.
In 2022, we promoted more than 2500 people in the field up from 17 500 in 2021. These promotions create compelling opportunities for our people across our organization this growth and continuity in our ranks allows us to scale, our culture and consistently deliver our unique brand of customer service as we enter into new markets.
<unk>.
To help manage our people development, we maintain a qualified operator candidate pipeline match internal candidates with growth opportunities as operators last year. We had about 200 qualified operator candidates in the pipeline. When you promoted 34, new operators from this list.
Qualified candidate list has now grown to more than 275 individuals' demonstrating that our people pipeline is well ahead of our needs having such a deep bench is encouraging, especially as we look forward to another expected record year of unit growth in 2023.
Now to shop development in 2019, we began accelerating the company operated growth model with a deliberate expansion outside the Pacific northwest.
We continue to be pleased with new shop performance.
For our mature shops opened since 2019 is $2 1 million approximately 25% higher than for shops open in 2018 and prior.
Since 2019, we have executed a variety of new market entry strategies, including fortresses.
Our forging strategy allows us to saturated market.
Entering quickly and going deep to develop scale.
So indeed helps us manage the considerable demand we often see when we enter a new market. If we do not manage this demand skillfully, we risk, allowing long lines to disrupt our customer and crew experience.
Making sure our customers can efficiently and predictably navigate our lines is key to Dutch grows long term success.
In 2022, we executed our purchasing strategy and about 70% of our new shops were infill most notably in Texas.
We believe the Texas market is a key long term growth driver for that growth over the last 24 months, we have opened almost 100 locations in Texas.
<unk> adequate supply to satisfy long term demand as we build our powerhouse brand in the Lone Star State.
For 2022 openings annualized weekly sales were $1 8 million. This falls in our sweet spot balancing volume and customer experience considerations.
A main competent a new shop at UBS as we continued to expand into Texas, and the southwest and southeast.
In 2023 and beyond we plan to continue utilizing both deep and wide development strategies as we craft our holistic portfolio.
This balance helps us saturate markets and positions us to capture large market share while quickly moving into new territories and plant in the Dutch Bros. Flag in 2023, we look forward to entering Alabama and Kentucky.
This morning, we announced changes to our Dutch rewards program.
I almost all metrics. This program has been an unqualified success beginning on or after March 27. Each dollar spent a Dutch Roes will result in rewards members, earning three points instead of the current five points.
This adjustment should help us better align redemptions with current pricing levels and ensure the long term health of the program the.
The changes preserve the value of customer points earned to date, we are not changing the amount of points required to redeem a complimentary beverage instead given the rise in menu prices in the past 18 months, we are adjusting the go forward points, earning rate.
We believe those moves should should.
Create some headroom, enabling us to provide more targeted and customized offers to loyal customers, while allowing us to better focus on key initiatives.
Our Dutch rewards program continues to grow as well in Q4, approximately 64% of our transactions came from Dutch rewards members. We believe there is a runway to expand this program, especially in newer shops, our shops opened since 2019 have about 5% lower rewards penetration compared to our shops opened.
Before 2019.
In 2023, we plan to continue promoting the benefits of pre loading funds and paying through the app from an operational perspective. This is great for customers as it helped speed up line time.
In Q4, we executed a promotion to encourage users to load funds, which doubled the daily average of loads. We look forward to implementing similar promotions going forward to introduce more customers to these ease and simplicity of pain in our Dutch rewards app.
Additionally, we are excited to announce the launch of the Dutch Bros. Creative collective a leading edge grassroots effort that empowers our employees to capture the best growth story.
Creative collective allows us to move away from relying on bottles and agencies and instead partner with breweries to us to create social media and marketing content. So our brand continues to show up in a very authentic way our.
Our employees have always been the true source of our marketing power by providing incredible experiences at the window and reinforcing our unique culture as program puts them in the driver's seat, while creating compelling futures for talented creators in our system.
Now, let's talk about technology.
We are investing in technology to improve both barista and customer experiences in Q3, we added functionality for Dutch past users to share rewards in the form of free drinks in Q4, we launched digital gift cards, our rewards members can share the goodbyes and treat their friends and loved ones to Dutch Bros.
In 2023, we look forward to implementing systems that enable us to move faster make better decisions and remove non value added tasks.
Finally, we are committed to expanding margins over time through operating leverage in Q4, we saw 940 bps year over year contribution margin expansion and our company operated shops, increasing to 28, 5% operational.
Improvements in pricing contributed to this year over year increase.
Charlie will provide additional details in his comments as the portion of this margin improvement is related to our initial breakage estimate booked in Q4.
Furthermore, in Q4, adjusted G&A was 19% of total revenue of 120 bps improvement from Q4 last year, we expect G&A leverage to continue in 2023 and beyond as our revenue growth outpaces, the G&A investments, we need to support rapid growth and scale our business.
As we complete our first full calendar year as a public company. We are encouraged by the acceptance of our new shops as we expand eastward.
Our people systems are strong and our 2023 development pipeline is fully loaded.
We saw meaningful company operated shop contribution margin expansion in Q4 and continued G&A leverage.
Looking towards 2023, despite the larger macroeconomic noise, we remain focused on unit growth plan.
4000, and system wide shops, and 10 to 15 years, and we feel that our four wall model will support our long term ambitions.
In closing I'd like to thank.
Our operators and our franchisees who are at the frontline of executing this every day and all of the people behind the scene in supporting these efforts.
This business is it flexes and changes with the times over the last 30 years, we have moved and adjusted and over the next 30 years, we will continue to do the same thing.
As a team we maintain a long term focus and are excited about our future.
Now I'd like to turn the call over to Charlie to review our financials. Thanks, Josh Here's a quick recap of Q4 financial results quarterly revenue surpassed $200 million for the first time growing 44% compared to the same period in 2021.
Adjusted EBITDA more than doubled compared to the same period in 2021.
And total company operated shop contribution margin was 28, 5% up 940 basis points year over year.
Recall that this contribution margin of 28, 5% includes 220 basis points of Preopening expenses.
In Q4 2022 for the first time since launching the Dutch rewards loyalty program. In early 2021, we were in a position to recognize breakage in late 2021, we notified customers that points earned in 2022 onward would expire in six month increments and that points earned prior to 2002.
Two would be grandfathered and with a one year exploration.
Going forward given this backlog is behind US we expect expirations will be more modest in terms of the impact of breakage note. The following Q4 company operated shop contribution margin was approximately 210 basis points higher as a result of the breakage recognition compressed into the quarter.
For the full year 2022 results company operated shop contribution margin was $4 $9 million higher as a result of the 2021 explorations only where an impact of 50 basis points.
Let's move onto new shop performance, when we assess performance a key aspect is achieving a company operated shop contribution margin of 30% in the second Europe , a shops operations. Despite all the headwinds we faced in 2022, we are on track with this objective we have 172 company operated.
Shops in the class of 2019 and after that we consider mature as they have reached margin efficiency and move past their initial preopening expenses in 2022. These shops achieved a 29, 4% contribution margin.
As a reminder includes all of the disruption we discussed earlier this year.
Please refer to slide seven and eight in the supplemental presentation, we posted on our Investor website.
More details around margins in our newer shops.
We are moving very quickly the reliability of new shop margin performance reinforces confidence in our decision to steadily increase the pace of company shop development.
A combination of a solid four wall model and a growing company operated shop base positions <unk> to fund growth with cash flow from operations within a few years.
Because of extensive forecasting reported comps are weighted down by sales transfer and we're mindful of that as we assess the underlining underlying revenue performance of the business that.
That said it is still important and we walk you through the metrics Q4 system wide same shop sales decreased 0.6%.
Better than our expectations given the challenging lap we had some strong results in the prior year.
Challenging laps from the prior year of 10% plus comes in part due to less impact related to <unk> disruption relative to many of our peers. It is notable that Q4 2022 same shop sales were $16, 2% higher in 2019 as pre pandemic levels.
The negative 0.6% result includes an estimated 130 basis points of impact from sales transfer well within the expectations of our <unk> strategy.
Company operated shops experienced an estimated 160 basis points of sales transfer at the current pace of development, our modeling targets a range of 200 to 300 basis points of company operated sales transfer impact for 2023.
Now moving on to recap 2020 to 133, new shops opened on top of 98 in 2021 revenue grew 48% driven by the strength of new shop openings and positive same shack sales.
These for our mature shops opened since 2019 were 2.15 million.
And our estimates of going forward annualized average weekly sales for the 2022 class are currently $1 8 million.
We aimed to create a diverse and well positioned portfolio.
<unk> of shops in some markets will be higher, particularly when the pace of development is slower due to local market conditions, but also lower in some cases, when we can move opportunistically and executing our fortunate thing strategy, yes advantageous local market conditions are in place.
In 2022, we generated $739 million in revenue and $91 2 million adjusted EBITDA. We are pleased with this outcome having successfully navigated so much uncertainty in 2022 is rising inflation took a bite out of our company shop margins, particularly in the first half of the year.
2022 was really a tale of two halves, while both have had similar revenue growth adjusted EBITDA declined 32% in the first half were recovered to grow 66% in the second half first half was marked by rapidly rising costs for example, dairy rose 25% year over year.
And it makes up about 30% of our ingredients basket, we elected to take a measured approach to menu price increases during the year, maintaining a loyal and healthy customer base, who use us as a good value for the money is paramount we respect the need to deliver a profitable model, but short term margin compression was something we were.
Are willing to absorb particularly given we entered 2022 with healthy margins in the second half of the year, we began to close that gap between the cost environment. We had experienced in menu prices adjusted EBITDA EBITDA grew 66%.
Cash flow from operations also quickly rebounded in the second half, we achieved $60 million for the full year generating more than 70% of that or $43 million in the second half.
And our franchising and other segment gross profit moderated to $15 6 million compared to $17 7 million in the same period last year.
In Q4, 2021, we recovered approximately $2 million of bank fees from Dutch rewards transactions paid by Dutch on behalf of our franchisees to expedite bringing the program to market. Excluding that Q4 2021 item profit in the quarter was flat to prior year, indicating the we have now stable.
How's the profitability of this segment after absorbing inflation in the first eight months on the products, we sell to our franchisees.
<unk> now to SG&A.
For the quarter SG&A was $56 million includes $10 7 million in stock based compensation.
Adjusted SG&A was $38 1 million and continues to decline as a percent of revenue to 18, 9% for Q4 2022 compared to 21% Q4 last year. We expect continued SG&A leverage going forward as anticipated revenue growth outpaces the growth in <unk>.
Associated with people and infrastructure investments.
Please refer to page 12 of the supplemental slides for a reconciliation between SG&A and adjusted SG&A.
Now a few comments on the health of our balance sheet and liquidity.
At year end, we had $191 million of net debt or about two times adjusted EBITDA.
This was an increase of $39 million in Q4, we had $287 million of Undrawn liquidity on our $500 million credit facility.
Our balance sheet remains well capitalized and capable of supporting growth. It's our objective to grow quickly scale, the business and exit the decade debt free or shortly thereafter, our long term financial projections support this outlook.
Finally on to 2023 guidance for the full year 2023, we're issuing the following guidance total system shop openings are expected to be at least 150 of which at least 130 shops will be company operated total revenue in a range of $950 million to $1 billion same.
Soft shell sales growth is estimated to be in the low single digits. At this point in time, our objective is to avoid taking any additional menu pricing in 2023.
Despite an uncertain consumer environment and our present desire to avoid additional pricing. We are cautiously optimistic for 2023 and estimate adjusted EBITDA to be approximately $125 million.
Please note. This includes approximately $8 million in proactive investments in labor related to increases in wages and federal minimum wage markets.
This is in addition to approximately $11 million of increased labor expense from legislated wage increases in non federal minimum wage states, our wage structure indexes to local market conditions.
Capital expenditures are estimated to be in the range of 225 million to $250 million.
Which includes approximately $15 million to $20 million or a second roasting facility, which we project will open in 2024.
Thank you and now we will 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 as a reminder, please limit to one question.
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Okay.
Your first question comes from David Tarantino with Baird. Please go ahead.
Hi, good afternoon.
Charlie I was interested in learning a little bit more about the factors underpinning the profit outlook for 2023 so.
I know you mentioned the labor investments, but could you help us frame up what you're assuming for.
Contribution margin at the at the shop level and and I guess.
Separately, our secondly.
I was hoping that you could.
Maybe elaborate on why you are not pricing against some of that inflation at this point.
Okay, Hi, David. Thank you so on the shop contribution margin with all the puts and takes we expect that to be flat.
We have wage.
Wage investments as I noted in my comments to two big items that will essentially be offset by the rewards refresh benefits we talked about.
There are other inflationary costs as we absorb a full year of those things that happen in 'twenty, two and 'twenty three.
And at this point.
We are not pricing in any big movements in our commodities at this stage.
And then let me let me get to your second part of your question.
Okay.
Okay.
Yeah hang on just a second.
Oh, the pricing piece, yes, sorry.
So.
I think we're all aware of where our traffic trends are right now and what the consumer has been through.
And at this point.
Given that we just refreshed rewards we take prices in typically in two windows in the spring and the fall. We just made the rewards move it wouldn't be appropriate for us to make a pricing move at this stage.
And and also just looking at where our consumer is we'd like to be able to absorb all of these changes without rising prices in 'twenty, three and let the consumer environment settle down it's really important that we maintain a good value for money position and our business.
And not look at that on a short term basis.
Got it and then on the rewards program change I guess can you can you elaborate on what the financial impact of that would be presumably would be.
Less of a discount, but you mentioned some some opportunities to to reinvest.
Behind that so I guess, how should we all think about the P&L implications of that move.
So it starts out as lower discount promotion costs as we will ring the cost of the program back to what we originally intended it to be given we've had a lot of menu price increases. So points earned will go lower as we mentioned from five points to three points that has an effect on discounts going forward.
And then.
<unk> talked about in his comments that what wed like to do is really move to the next phase of our rewards program and do more targeted incentives and offers to our customers to get them to try different things and experienced new things and we're going to spend a fair portion of that back and incentivizing.
Particular things for customers.
Got it it's also important to know David that we announced this today, but you won't feel the impact of it until the second quarter onward.
Okay understood. Thank you very much.
Thank you.
Next question, Sharon Zackfia with William Blair. Please go ahead.
Oh, Hey, thanks for taking the question.
I guess first question could you give us an update on initiatives that you have to kind of improve efficiencies or speed within the box and maybe unlock some increase throughput and then secondarily Charlie I think you were running maybe 10% of price and in the fourth quarter, maybe I had that mistaken, but it just seems like.
You'd be carrying more price residual into 2023 are in the low single, but I think it was in the press release. So can you kind of walk us through what price it roll off later this year.
Sure that'd be helpful. Thank you.
When you take price and multiple okay, yes, so the price rollover for the full year of 2023 is approximately 4% that will carryover.
Yeah.
Sure.
Yeah.
I'm sorry.
Oh, and there's also so sorry, Sharon if youre trying to map to the low single digit comp number you have got that we guided to you've got a you've got positive pricing rollover, but you've also got the sales transfer piece to factor in.
Yes.
Okay. Thanks for that.
Got it.
The list of operational improvements are long.
Maybe let's touch on a few key ones. One is we've discussed tap systems and implementation of tap systems that Dutch grows.
We have we.
We started with a test in a single shop in the fourth quarter of.
2022, we've just launched.
Five new locations in Texas, where we're testing in San Antonio and another one in Dallas.
We expect.
Everything from from production to delivery to backend inventory to the speed of drink, making to the quality of the product as we hand it to the customer we believe that every one of those shows improvement.
We believe that probably at the next quarter, we'll be able to start to share what we think will happen in metrics related to tap system implementation.
The other big one is around rewards and we did just announce that changes too.
So a point system, but really big unlock continues for us to be our Dutch pass program and the loading of of dollars and continuing to work with our customers to load more dollars into Dutch path. If we can get more people to pay with Dutch paths, we can remove the unnecessary part of the transaction which is.
Bumbling around the credit card or cash and just make it a quick scan a QR code and move through the line. So those are the two big unlocks that we know really help will really affect the business short and long term.
And then I know the teams working on several other smaller operational improvements to continue to work on speed.
Next question, Chris <unk> with Stifel. Please go ahead.
Hi, Thanks, good afternoon.
Charlie you pointed out in your presentation that last year was a tale of two halves. So I was hoping you could maybe help us understand how we should think about the cadence of comp and shop margin performance as you kind of progressed through the year.
Yes so.
Comp will be more front loaded as we rollover as we've carryover pricing from 2022.
Full year, 4% it'll be zero rollover by the fourth quarter.
If you think about the cadence of margin.
When youre, making those labor investments immediately that we mentioned.
We'll feel the margin impact of that on a sequential basis in Q1.
Then the rewards refresh comes in to create some recovery around that and margins will normalize.
The second third and fourth quarter and what we.
I think we're going to see in the business as a more normal seasonality curve to our margins from Q1 to Q4 being our lowest seasonality Q2 to Q3 being our highest seasonality.
<unk> 2022, didnt follow that shape because of all the inflation in the first half and then as catching up on prices in the second half.
Okay. That's helpful. And then I believe you said you are assuming new store opening new stores opened at $1 8 million in annualized sales, but.
The stores have been opening at higher levels. So I'm, just curious why not build in a higher volume into the projections I didn't know if maybe youre seeing anything in terms of variability by geography that caused you to be more conservative.
Yes, no. It wasn't that we're assuming $1 eight going forward. It was that our recent class of stores was averaging $1 8 million or 22, our latest class of 22 stores, whereas the prior classes. It averaged about $2 million. So that was the distinction we made in our comments.
Okay, sorry, I misheard that thank you actual results.
Next question, Andrew Charles with Cowen and company. Please go ahead.
Great. Thanks, Chuck can you talk about how you tested the Dutch rewards accrual changes you know just given how young the program is youre just kind of curious what gives you confidence that the changes won't drive a sour customer reaction.
Well I think that the.
You know as we kind of.
Ben as we've been talking from the day that we we started this program we were really on a on a journey of.
That year, one for Dutch rewards was about launching gathering understanding consumer preference with that was all about near to a lot of time with testing iterating understanding at the market level and the individual customer level, how they have responded to <unk>.
Points, we did several different promotions that we we incentive the customer with different point levels and actually we saw that in many cases lower points drove the same type of behaviors higher points.
And then really year three I think we can define it as execute and refine and as we think about that we're not taking really the learnings over the last couple of years.
And all of the data points that I think our team has looked at to have confidence in and how we take the 5% to three program. How we have basically maintained the free drink offering with points that are in the bank and now we basically moved forward to basically it's a price adjusted program. So.
We don't we're not too concerned about the change there in <unk>.
Feel like that we think this is fair to the customer we think this is fair.
Two the initial program that we launched in 2021.
Got it Thats helpful.
My other question Charles for you just with the 2023 adjusted EBITDA guidance it might be semantics, but flight call out at least $125 million and adjusted EBITDA in 2023 totally get you know obviously the labor investments you guys are being proactive on but just trying to think about if I bridge, the consensus where it perhaps the conservatism guidance within gist.
Slide probably had 125 million plus.
At around that as flat shop margins.
Is it around potentially G&A sales based on year to date performance, if you're just trying to better understand kind of a flex as we do we try to bridge the consensus numbers.
Yes, some of the flexes as we're not price in any commodity upsides.
We're watching dairy prices closely so those have come down a little bit, but we don't feel its wise to take that to the bank.
Till we see it set in and be real.
We're making about a $5 million investment in our technology platforms all of the platforms across the business on a year over year basis. So that's part of the factor and then I think you just take the the additional wages that we built in the 8 million dollar move.
And that's really outside the scope of what we normally would have to do and the fact that we're being careful not to price and you can pretty quickly walk yourself up to a number beyond 125 and why we've been.
Thoughtful about investing and careful about how we guide.
We don't want to come back to you.
Makes sense thanks, guys.
Thank you.
Next question Sara Senatore with Bank of America. Please go ahead.
Great. Thank you very much.
Quick question on the.
On the accounting for the debt breakage, and then I'm sorry.
A more in depth question on me.
New units in Canada, how to think about margin with Karen So just so I understand that.
Break it does that was that a tailwind to comp and so you sort of basically just have this topline there is no cost associated with it and that's why it was.
As to margins I'm, just trying to think about sort of normalized margins in that context and then.
I guess, if I step back on the margin will return to the business and Capex is going to be a bit higher.
And then we may have thought.
You are being I think appropriately conservative on EBITDA, but volumes are perhaps a bit lower than they were I guess is there anything that structurally different is there any reason to think that yeah. The economics at that.
You've talked about in the past no longer apply just trying to understand how much of this is transitory versus.
Just you know what what it means to be growing in new markets. Thanks.
Thank you so on the rewards accounting it does not affect comps, but to the point you made it is in the revenue number and then the profit number.
And.
$4 9 million and we disclose this in the release is related to.
A lot of sign on points and things that we gave offers we gave back in 2021.
So we distinguish between that.
Best way to look at is the way we put it in the release for 2022 that that prior year piece was about 50 basis points, if you normalize for that.
In terms of your question around the go forward cost structure.
Our objective was to get.
Our weighted 30% cash return on a ground lease rates. So that's the most severe return we have when we have to build the entire unit ourselves.
Those $2 million <unk> and our margins, we were well in excess of that 30% return.
And I think as we look at things potentially moderating, meaning the cost side going up we saw double digit build cost inflation will probably continue to see double to mid double digit inflation going forward that will eat into some of the excess return we had in our investment thesis, but we still believe.
And our numbers tell us that.
The strong four wall model, we have the high margins, we have is able to absorb any punishment from build cost in the near term.
Okay. Thank you and just the 182 is that because of the infill Marvin can fill in more new markets is there anything to start with.
Attention to that.
So it's a we are going deep, especially in Texas, where we've had some opportunistic places where we can build out very quickly one particular market in 12 months, we opened 14 shops.
So we see some of that it's also the portfolio it depends on the timing when shops opened sometimes we have high volume volume, California, Arizona shops waiting in in the fourth quarter, we had less of that and more of the deeper penetrating markets like the Texas markets. We went in so that will ebb and <unk>.
Flow over time.
Understood. Thank you so much.
Next question, John <unk> with Jpmorgan. Please go ahead hi.
Thank you. The question is on labor, which is actually down quite a lot relative to your expectations. Both on a percentage of sales and a.
Per operating week basis could you talk about what if anything changed in the fourth quarter is that your go forward model for labor I understand traffic would have been down but did you find some efficiencies on labor in the system in the fourth quarter.
That really do make sense going forward and I'd also like to ask about hourly turnover and also also hourly tips as well if I can.
Yeah, Hey, John I see the same numbers you are looking at in the fourth quarter. There were four and a half about 450 basis basis points of improvement in labor from Q4, this year to last year.
It's really three things.
Clearly a lot of pricing and if you look at one of the aspects of our cost structure that has some fixed costs in it the way we staff our shops labor allows us to do that we also really worked hard this year to do our staffing better to take out over time dramatically take out overtime, because we're so well positioned.
Well staff. So we got some good leverage out of that and productivity.
And going forward something similar to this will stick because we have made all of these improvements in how we operate having said that we're also going to have the wage investments that I noted.
So you'll see you'll see us come off of this number that we developed that we delivered in Q4 than in the first quarter watch that number it's going to go back up because of the wage investments that we just announced.
And can I ask about hourly turnover and also the level of hourly tips.
Yeah.
Hey, John It's John What's your question.
The hourly turnover year over year, I mean, I know at one point it was going up in tips are actually going down at one point for the employee level I mean, if those are stabilized or if that's still something that youre looking at.
Q4 turnover actually is down about 300 bps from it was in Q3.
And so kind of stabilize in that mid Seventy's range. What's interesting is that November and December monthly turnover was the lowest that we've had in the last 19 months.
So we're definitely seeing continue.
Continue to see a strong labor impact.
Across our shops, which I think is a really good sign.
From a tip standpoint.
We're.
We think that tips is actually stabilizing.
And non federal minimum wage states are actually showing a slight increase in recent quarters. So a lot of the tip noise that was out there seems to have settled down in the fourth quarter and obviously, we're tracking that closely as we get into 2023.
That's great. Thank you.
Next question, Jeff Farmer with Gordon Haskett. Please go ahead.
Thank you on the labor investments and mandated minimum wage increases just have a couple of follow up questions. So the first would be.
What level of sort of blended wage inflation does this equate to in 2023.
Sort of the two.
Two increases.
I can I can talk in margin points.
I don't have in front of me the exact percentage increase but it's about two margin points.
The combination of both of those will be about two margin points.
Okay.
And then.
Just again thinking forward on this.
Theoretically you you'll find some mandated minimum wage increases.
Appearing again in 2024. So is this just a dynamic where.
We're going to see more of these increases as we move forward or was this.
Specifically unique year and that you guys decided to actually raise wages.
And the federal minimum wage and the federal minimum wage states, which again that's at your own discretion. So it was just 2023 are you going to be an outlier in terms of the size of wage rate inflation or is there more to come in terms of what's mandated.
Out there in 2024.
Okay. So separate the two things, which you've done kind of in your question, which is a proactive thing we're doing with wages and federal minimum wage states.
We wouldn't expect that to continue beyond this year. So there's always going to be wage escalation, but that sharp move we made us as kind of a onetime move.
The the mandated wage escalation is going to continue to your point, it's going to continue onward in a similar fashion unusual situation I would say against that is typically we would have used pricing moves to pay for part of that.
And because of other factors, we talked about were really trying to get through 'twenty, three without having to take our prices up.
So going forward 'twenty four 'twenty five you would expect us to absorb some of that through normal price increases and productivity.
And then just one more follow up I believe this one will be a little bit more straightforward. So you guys had said on commodities not much movement I think was the quote.
It's been touched upon on this call, but exactly what does that mean for dairy and coffee in terms of inflation for both of those commodities for you guys in 2023.
The slope of the increase is definitely slowed down, but if you reflect on 'twenty to the sharp rise in the first half we are planning a full 12 months of those higher cost for first of all right.
And versus a less than 12 months impact in 'twenty two.
We are seeing dairy come down, but it is not.
It has not been there long enough for us to really take that to the bank and dairy is the biggest piece of this frankly.
So that's our view is annualizing over a partial year of inflation, that's a reality for us.
Hope is not a strategy, but some hope that dairy moderates downward and we get some upside out of that.
And I apologize just one more follow up I. Appreciate you guys sort of giving me. Some some latitude here, but this is the last one you mentioned $5 million technology investment.
I'm just curious if that shows up as capitalized.
Or is it was expense to how does that show up on the P&L the balance sheet, where are we going to see that $5 million tuck investment than.
And the SG&A line.
Okay I appreciate it thank you.
Next question question, Nick <unk> with Wedbush Securities. Please go ahead.
Thank you.
I Wonder if you could just break down the transaction growth versus the average check in the quarter.
Yes.
So here's the <unk> comp on Q4 same shop sales I mentioned negative six tenths.
Reported.
I'll use some round numbers to make it easy plus 11 on menu pricing.
Minus one from estimated sales transfer that was actually 130 bps.
Minus one from higher discount promo costs too.
2% mix shifts notable we didn't see any sizing trade down there. It's just a mixture of goods that we sold.
And so whats left is the 7% underlying negative traffic Q3 was negative three.
But on a on a report so on a reported basis.
Q4.
We decelerated so more negative traffic, but we also want everybody to understand we are lapping.
And amazingly good Q4 2021, it was our best quarter in 2021.
That's very helpful. Thank you.
And just given.
Really solid January and February to date.
Data across the industry that we're seeing in terms of the topline trends.
Any sort of early commentary around how Q1 has started.
I think one thing to remember that's different about Dutch is how we've reacted to the various virus events. So we largely stayed open.
Through the episodes in the winter of 'twenty, one and the winter of 'twenty two open meaning we were fully staffed and operating.
Many of the much of the data you're seeing from a rebound perspective is something we won't have we won't have a rebound because we never had outages related to that.
So our lap is.
It is what it is because we didn't go down in those episodes.
We've seen some negative weather impact, especially as we come out to the West coast in December of this year and right now.
So we're just we're not going to see that omicron balance we call. It that many of our peers, we'll see in Q1.
Now what's going to happen in Q1 is we will start to move through the March period, where we talked about last may that was a difficult period for us. So we may see some better sales lap in the back half of March.
Okay, that's very helpful.
And then in terms of just the change in the loyalty any way to quantify.
The lesser discount going forward starting in Q2.
Yes, so it'll ramp it'll start to flow through the P&L in Q2.
And and.
And build in.
And peak in Q3.
So we're looking at about 100 to 200 basis points of margin improvement that will come through that.
Now we talked about.
<unk> are using we're paying for.
Paying for that with this benefit alright and.
And not taking price.
Understood and then just last question on the clarification.
When you said I think you said that again earlier in the call in terms of pay for the labor.
Investments with this change in their in the loyalty program.
Should we take that out.
Across the entire company margin or labor could be flat year over year.
Well Theres two labor pieces right. So there's the wage fluor piece that we talked about the $8 million and there is $11 million in minimum wage.
I would say that if you take the if you take the rewards refresh the value of that less the spend back we're going to do on it.
Still not going to cover that wage investments.
Okay understood. Thank you very much.
Obviously.
Once again, if you would like to ask a question. Please press star one on your telephone keypad as a reminder, please limit to one question.
Your next question comes from Gregory Frankfurt with Guggenheim Securities. Please go ahead.
Hey, guys.
For the question I had to I know I should only be doing one but the.
The first one is just your rule of thumb on what G&A should be growing as a portion of revenue either in 'twenty three in the out years, just as we think about that and then my other one is.
It just christine's role in her coming in.
What responsibilities do you think.
She's going to take over and kind of what do you think.
What do you expect her to focus on in her early days as president.
Yes, thanks for that as Charlie so.
What we're trying to do right now is drive that adjusted SG&A number and you can see the reconciliation in our release.
Down below 18% in 2023.
When we went public in 'twenty, one that number was was almost 24% so thinking about it right. We want to drive that percentage down which means of course, we want G&A to grow slower than the rate of revenue.
Ultimately how slow it grows down the road.
Don't want to don't want to get locked into that but do want to lock into driving that number below 18% and 23.
And I think it's a great tie in to the question about Kristine because I think that for us.
Kristine will run all the day to day operations of the business. So everything from a retail team to marketing efforts to offer to our operating team to people systems.
Really executing.
We really are a op.
The thing that we looked for and Christine and we really feel like we have landed the best candidate in the country for this job.
Wanted somebody who could look out.
Who has been through a larger operating business like this and be able to build our systems to scale. So.
So the number that Charlie speaks to as a key component to that we will continue to grow and execute the business at scale and we look at some of our other peers in the industry and I understand some of the numbers that we'd like to get to long term. So christine's ability really to come in look at the business as a big picture lead are.
Team so that we can.
Be big and be small at the same time our.
Our important aspects so.
So really executing everyday driving the rewards program building on <unk> hitting the new shop program.
Driving our operating and logistics systems behind the scenes to be able to serve.
Across 4000 locations long term and then building people systems to really operate it.
With employee base that runs between 50 and 75000 people I mean, those are all things that we will rapidly be getting too if we follow our growth plan correctly.
And she's got the experience to do that.
Thank you.
Thank you I would like to turn the floor over to Jos Richey for closing remarks.
Thank you.
For more than 30 years <unk> has been in the business of building and nurturing relationships and we have all the building blocks to remain a successful and enduring company, while creating real value for our shareholders.
These attributes include a powerful authentic brand strong people systems that drive company culture and fuel our shop growth a highly engaged customer following customizable and uniquely curated beverages are highly consistent and highly attractive unit level economics affordable.
Portable model that is successful across geographies, the strong and well capitalized balance sheet that provides ample liquidity and an engaged cofounder and an experienced leadership team.
And for our investors. Thank you for your time and as always the continued support of Dutch Bros. Thank you everybody.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.
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No.
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