Q1 2023 Dutch Bros Inc Earnings Call
Thank you for standing by and welcome to the Tesco incorporated first quarter 2023 earnings conference call and webcast.
This conference call and webcast are being recorded today Tuesday may nine 2023 at five P M eastern.
And will be available for replay shortly after it has concluded calling.
Following the company's presentation, we will open up the line for questions and instructions to queue.
<unk> will be provided at that time I will now turn the call over to Patty woman, that's almost director of Investor Relations and corporate development. Please go ahead.
Thank you.
Afternoon, and welcome him.
I'm joined today by John Ricky CEO , Christine Barone, as President and Charlie generally CFO .
We issued our earnings press release for the quarter ended March 31, 2023. After the market closed today the earnings press release, along with a supplemental investor deck have now also been uploaded to our Investor Relations website at investors that Dutch Bros. Dot com.
Please be aware that all statements in our prepared remarks and in responses to your questions. 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.
We are 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 our quarterly report on Form 10-Q, we assume 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 nor superior two measures that are prepared under GAAP.
Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release.
With that I'd now like to turn the call over to John .
Thank you Patty good afternoon, everyone.
Q1 was a solid quarter for Dutch Bros. As we continued to deliver on our vision for long term sustainable growth.
We opened a record 45, new system wide shops in the quarter of which 42 were company operated we continued our expansion eastward, reaching Knoxville, Tennessee and open shops across nine states.
We grew revenue by 29, 6% and drove 590 basis points expansion in shop contribution margin year over year.
We remain pleased with the underlying strength of the business. We responded decisively to the economic climate and focused on accelerating shop level profitability, particularly in labor productivity to deliver a strong company operated shop margin at.
At the same time, we continue to invest in our shop footprint to grow a business delivering on yet another quarter of our new shop growth plan our.
Introduce our new President Christine Barone Eh.
Christine joined Dutch Bros. In February and is already leading the development and execution of both short and long term strategies in this space.
Thanks, Tom it's been one of the great pleasure of my career to integrate into the <unk>.
In tackling our highest priority.
There is so much great opportunity ahead, etc.
Our focus for the remainder of the year on proactively responding to potential macroeconomic challenges and driving traffic.
We're taking several steps to tackle our priorities.
First for leaning into throwback promotions that have served to drive traffic and trial in the past.
One example is our fill of trade promotion in March where we offered for medium drink for $15. This promotion, which lasted six hours on a single Wednesday afternoon resulted in the largest sales day in the Companys recorded history.
Driving same shop sales upwards of 40% higher than a typical Wednesday.
Most importantly, a trip to Dutch Bros became a group event, which is what the brand is all about.
Second we're driving innovation to ensure we are meeting the needs of our customer base, where St. Patrick's day, we released our first ever flavored soft tops.
The Lucky Clover, and Irish cream flavors of our premium add on allowed our customers to celebrate with a special drink, which was great for a couple of reasons.
First an increased overall check by 50 basis points and second and drove approximately 35% higher soft top adoption during the <unk> period.
Finally, we're doubling down on targeted promotions within the Dutch Bros. App to not only drive traffic and to also encourage customers to load funds on the Dutch path.
The rewards refresh announced in Q1 provides us the flexibility to invest more surgically. However, we intend to continue.
And moves us away from a one size fits all approach.
These results tell us our customers remain excited about the brand.
Or months are traditionally some of our best for sales and we intend to build on the momentum.
We plan to.
To continue to drive innovation and launched targeted marketing campaigns into Q2.
For example in April we introduced our mango not at rebel and double Tuesdays and we have been pleased with our customers responses to these efforts.
I look forward to continuing to work with the team to capitalize on these opportunities while also identifying operational efficiencies.
Thanks, Christine and work Kristine and team are doing supports our key business pillars people shop development operating leverage brand awareness and technology.
People remain our focus on January one we made the proactive investment in our people and increased base wages and federal minimum wage markets wherever we used has responded well shop level turnover in those markets improved by about 6%.
System wide shop level turnover fell 3% to about 70%.
Our people pipeline now includes more than 275 qualified operator candidates to support new shop growth.
<unk> for mature company operated shops opened since 2019 were $2 million.
Approximately 20% higher than company operated shops opened prior to 2019.
While 2022, new shop Atvs were down slightly from Q4 trends. It is still early in the maturity of many of these shops.
Estimated sales transfer remains in line with our expectations, indicating limited if any unintentional drag from shop growth.
Jacques classes of 2019, 2020, and 2021 have each achieved our 30% contribution margin target even as we've entered new trade zones across the country shops opened in 2022 are reaching a run rate 30% contribution margin in just three to four quarters.
Like many others, we have been we have seen pressure on build costs and are working actively to value engineer our shops in order to offset some portion of that escalation.
We have a healthy list of actions that we can take and plan to incorporate into our pipeline.
While we can't avoid all the escalation we plan to make improvements going forward.
Despite these market conditions, our shops continued to achieve strong cash on cash returns, which encourages us to keep investing in the long term future.
Continued expansion helps us to accrue the benefits of market scale over time, as we introduce new customers to our brand.
We are forming daily relationships and developing these routines takes time, but often proves to be sticky.
These considerations combined with other traffic driving and operational initiatives Christine mentioned earlier support our continued steady pace of growth.
We intend to drive margin expansion as we grow both through continued SG&A leverage and through operational improvements at the shop level.
In Q1, adjusted SG&A was 18, 6% of total revenue.
220 basis point improvement from Q1 last year.
We expect further leverages our revenue growth continues outpacing the SG&A investments, we need to support rapid development.
We also realized significant contribution margin improvement in our company operated shops, achieving 590 basis points of expansion year over year to 24, 2% of company operated shop revenue.
Improvements in our labor processes were a major driver and we recognized 400 basis points of margin leverage year over year and labor to 28% of company operated shop revenue.
We believe this benefit was a product of steady improvements in scheduling standards and operating tablet tactics and we began implementing in 2022.
Included in this 400 basis points of improvement in Q1 is $3 million of the wage investments we discussed last quarter.
Finally, we are in the process of ensuring we have the right technology in place to support our customers and shops used correctly. We believe technology can be a major traffic driver moving forward, helping us improve reliability speed and customer satisfaction.
Currently we are investing in our infrastructure and payment processing systems as well as the Dutch Bros. App.
Industrial rewards program is a major part of our business and continues to grow with approximately 65% of our transactions coming from Dutch rewards members.
In March we executed a change to our rewards program at <unk>.
<unk> right sized the discount following last year's movement on price as part of the refresh we built in opportunities to reinvest in the program and our members. We now have the ability to provide a more one on one experience based on our customers' wants needs and habits.
We believe our customers can now see how we are reinvesting in the program and to date, we have not experienced any meaningful pushback.
As we look ahead, we plan to continue our focus on execution, specifically driving traffic optimizing operations selecting strong sites and building great shops. We believe we are beginning to see the benefits of these efforts in Q1, as we delivered $23 9 million and adjusted EBITDA of nearly 100.
Third 50% increase year over year.
I want to publicly thank our franchisees and operators who are executing everyday it is their operational focus that underpins. This positive outcome, particularly as it relates to our strong labor and SG&A leverage and its corresponding impact on profitability. We aim to keep our eye on the ball as we navigate the larger business environment on our path to our long term.
We'll have 4000 shops now I'd like to turn the call over to Charlie to review our financials. Thanks, John We just reported our seventh straight quarter of at least 30 shop openings, our team's ability to embrace the challenges inherent with high growth and to operate an expanding portfolio of shops across multiple states.
With increasing profitability has been impressive.
My comments around Q1 financial results center on our retail operations and how they drove excellent company shop profitability and then by extension. Our overall adjusted EBITDA was 150% higher than a year ago. In 2022, we absorbed significant margin impact from the effects of inflation.
The teams were tasked with additional productivity objectives. We're asked to do so in a thoughtful way as to not risk our long term sustainable growth, even with some belt tightening we continued to strategically invest in corporate capabilities and enable growth.
As a reminder, we now have 438 company operated shops after having operated only 37 companies shops at the beginning of 2018, some quick highlights from the quarter.
Revenue of $197 million grew 30% compared to the same period in 2020 to adjust.
Adjusted EBITDA grew nearly 150% over Q1 last year to $23 9 million company shop sales grew 33% and company shop profit contribution grew 76%.
Driving that profit lift was an increase in company operated shop contribution margin to 24, 2% or 590 basis points improvement over the prior year recall that this contribution margin includes 190 basis points of Preopening expenses, the key to this quarter and what.
Bodes well as we move through our next phases of growth with our company operated shop margin expansion rather than walk down the P&L, let's start with the biggest driver.
Labor performance labor as an investment that is critical to delivering our goals around speed quality and service labor costs were 28% of company operated shop revenue, improving 400 basis points from the same period last year.
As the backdrop for this performance recall that last quarter, we announced an $8 million wage investment in states, where the federal minimum wage as the standard further we alerted you to an additional $11 million in incremental wage spending necessitated by legislated minimum wage increases this aggregate $19 million and higher wages.
Would be partially offset by the rollover from 2020 twos menu pricing actions.
In Q1 2023, we enjoyed the full benefit of improved labor operating standards implemented in late 2022, when we began increasing productivity optimizing schedules and resetting standards. We believe this came together in Q1 P&L as retail operations delivered 400 basis points of labor improvement.
In spite of $3 million in incremental wage expense and what can be the negative effects of traffic deleverage.
Cost of goods sold were 28, 3% of company operated shop revenue in Q1 up 90 basis points from the same period last year as well inflation has slowed measurably shop delivered costs remain elevated year over year.
Preopening costs were one 9% of company operated shop revenue in Q1 down 270 basis points from the same period last year.
Preopening costs are a function of the sequence of shops opening within a trade zone first shop within that trade zone requires our highest level of support and as a result, we opened second and subsequent shops with lower levels of support in Q1, we had a higher proportion of Intel shops, which do not require as much support driving.
Down our preopening expense timing for the quarter.
As the mix of first in versus subsequent shops ebbs and flows each quarter you will see this expense be a function of that sequence, we manage to a full year number as we have to let the pipeline take on its natural sequence in our franchising and other segment gross profit improved to $16 9 million compared to $14 $4 million in St.
Period last year, we executed a price increase on products sold to our franchisees in Q3 of 2022. This action was designed to show our profitability in this segment, helping offset input cost inflation and the goods, we sell onward to our franchisees, including the high quality coffee, we proudly rose in our plant in grants pass Oregon.
Shifting now to SG&A for the quarter SG&A was $46 million. This includes $9 2 million in stock based compensation adjusted SG&A was 37% $36 7 million and continues to decline as a percent of revenue to 18, 6% for Q1 compared to 28% in <unk>.
Q1 last year, we are pleased with adjusted SG&A leverage in Q1, and we expect continued leverage going forward as an ongoing component of our investment thesis.
Please make reference to the supplemental slides for a reconciliation between SG&A and adjusted SG&A.
Now onto a few comments on the health of our balance sheet and liquidity. We finished Q1 with $235 9 million of net debt.
That represents an increase of $45 2 million from Q4 directly tied to those record openings we reported.
We have $247 million of Undrawn liquidity on the present $500 million credit facility, we are committed to maintaining a well capitalized balance sheet remaining flexible and being ready to take full advantage of the long growth runway ahead.
Finally, we are affirming our full year 2020 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 the range of 952 1 billion same shack sales growth the growth is estimated to be in the low single digits.
Our maintaining our adjusted EBITDA guidance of at least $125 million.
Being just 90 days into our fiscal year. We believe it is too early to translate Q1's results towards any change in our view of the full year. Adjusted EBITDA. For example, despite the underlying improvements in company operated shop margins and the remainder of the year, we may see a moderation in the Preopening favorability, we experienced in Q1.
Furthermore, as noted we will continue investing throughout the remainder of the year and initiatives designed to drive traffic. We will look forward to updating you on our progress in early August when we share Q2 results.
Capital expenditures are estimated to be in the range of $225 million to $250 million, which includes approximately 15 million to $20 million in spending in 2023 for 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 conduct a question and answer session.
Quick question. Please press star one on your telephone keypad.
So maintenance all will indicate your line is there any questions in queue.
You May press Star two.
Can we move to questions on the queue.
Participants.
And maybe not as I said, we could pick up your handset before pressing the star key.
Once again Thats star one at this time, one moment, Bob co preference Carsten.
Our first question comes from Andy Barish with Jefferies. Please proceed.
Hey, guys.
Yes, Christine welcome aboard.
Hey, good I'd I'd ask the first question have you just in your impressions in the first few months.
Back up in the Pacific Northwest.
Kind of what you see as the opportunities in the.
The key areas some of which you touched on today.
We're focusing on for the rest of the 'twenty three and beyond.
Absolutely Thanks, Andy Nice to hear your voice.
Excited to be here today and to be part of this team.
Think going in I heard a lot about the culture and that special sauce that we have here at Dutch Bros.
And I would say kind of walking into the company, that's even even better than I thought it would be and spending a lot of time.
Our shops meeting some of our leased is going to some of our new shop openings.
Really just been awesome to see the energy.
That comes to life in our shops and how much fun people are having is we're making drinks for our customers.
Same energy really translates into.
And to the headquarters and so excited to be here with the team.
As I look forward for the year, the priority is certainly and driving traffic and we're continuing some of the momentum that I spoke about earlier and driving transactions one of the things I wanted to highlight is.
With the move that we made on the rewards program, which really took some of that discount out of the base discount.
It's going to allow us to really use that rewards program in a different way and to focus on areas, where we can drive transactions as we see things.
Soften here and there and so excited about that move and that will be a big area of concentration.
We also are very pleased with the margins that we're seeing there will be continuing to focus on our operational efficiencies.
The sharp well thanks Andy.
Thanks, Christine Charlie one quick.
Question Doug.
The Cogs line, a little bit I think as well.
First time at least that I can remember where cogs as a percentage of sales was higher than labor.
With.
Dairy costs down significantly and rolling over your changes on the <unk> product.
You talked about a little bit of pressure on delivered cost is that.
Some lag going on and how should we kind of think about that in the current commodity environment going forward.
Andy Thanks for that question. So couple of things there on the cost side in Cogs dairy is still up year over year. As we mentioned there is a lag from when the when the price comes down and that commodity when it flows through our system and then for US coffee costs are up year over year low to mid single digits.
Price was elevated many many months ago and that flows into our system and then that rebalancing of of Cogs being hired a labor is more of the product of the labor leverage and efficiency, we got and less about the escalation in the cost of goods percentage.
Okay. Thank you very much.
Youre welcome.
The next question comes from Chris <unk> with Stifel. Please proceed.
Yeah, good afternoon guys.
John You mentioned, you exited the quarter with comp sales momentum. So I'm just curious if it looks like transactions may have been down kind of in that high single digit range in the first quarter, but what level of sequential improvement in transactions have you seen so far in the current quarter.
Well we.
So when we talk about momentum coming out of March the fill of trade promotion happened on March 29th.
And we had.
We had no debt.
Days of sequential improvement coming out of that.
<unk>.
We are not.
We're not talking about April today, we're not going to get into Q2, and just kind of <unk>.
Focus on Q1, we feel like.
Overall listen we were lapping a tough Q1 of <unk> from 2022.
I think what Christine did when she first came in was really look at.
Traffic driving opportunities through the balance of the quarter, and we really weren't able to execute those until.
Mid to late March.
And really start to put good plans in place as we go forward.
<unk>.
We're about flat on underlying traffic for Q1 versus Q4. So there was a steady rate there and we will.
We'll kind of see how the balance of the year plays itself out here as we're as we're building our new programs and using some of that investment that Christine discussed coming out of the rewards program and our ability to really dissect an NGO aftermarket opportunities.
That's helpful. I mean, it doesn't sound like you're planning to take any additional pricing. This year. So I guess as pricing starts to roll off presumably you're going to need to rely on that better traffic performance to hit that comp guidance are you seeing success with these programs that gives you confidence that you can.
See that type of improvement in the comp over the course of the rest of the year, especially in the back half.
I think I think.
Everything Chris right now is in evaluation mode.
We are testing some new programs, we've run some new programs.
Related to our rewards program.
We've evaluated some some we ran some local area marketing programs.
We're continuing to evaluate kind of what we see the back half of the year look like.
And the pricing discussion is continues to be something that we're talking about.
But overall, we're pleased with the momentum coming out of Q1 and.
All of these plans that Christina team has started to really kind of put in place.
We are.
We think those will be very positive for the business, but the time time will tell.
Sounds good thanks.
The next question comes from John <unk> with Jpmorgan. Please proceed.
Hi, the question is on new unit volumes I think I picked up in your remarks, Jonathan maybe.
Some of the units started slower as they kind of ramp on their maturity curve and certainly we picked up that in our numbers that the new unit volumes at least on a system wide basis year over year, not a perfect calculation by any means.
But look a little bit lower so can you.
Expand on that topic, I mean, what youre seeing different types of markets. I mean, if you see anything that's really below your expectations or it's just like a series of.
So I was just going to take a couple of months or a couple of quarters.
Get up.
To their averages given you opened so many in the quarter.
Yes, John I think I think the last part of that comment is super insightful I think that we.
Listen we've had some amazing openings as well I mean, if you go to some of the things that we've done in southern California, and some of the volumes we've seen there.
Some of the larger openings in the history of happened in those markets, but as we've we've rolled we've opened 112, new locations in Texas, and basically 27 months and.
I think in some of those cases as we talked about last quarter was our opportunistic real estate 16 locations and in little over a year in San Antonio.
Some of the shops, we've opened in Houston, and Dallas, I mean, theres a lot of infill happening that does take time to.
To build and curated market and.
I think the benefit of Dutch Bros. As we've been doing this for 30 years and.
And we have seen in markets like Las Vegas, and Tucson in Colorado Springs, and some other studies where.
We've had other markets open lower than average and it takes time to build those up and go and a great part I think the one of the things that we feel really confident in is that when you have great margins in our business. It allows you to invest over time and build something for the long term.
And we're trying not to buy customers, we're trying to curate customers bring them into our service model and give them a great experience with Dutch Bros has and move those along so every market is going to be a little bit different and.
And we're very pleased with the reception that we've had in all markets I mean, even we talked about opening Knoxville, Tennessee and being all the way.
At far East now.
Customer reception, we've had everywhere, it's been fantastic and we look forward to continuing to build that.
Okay. Thank you for that and secondly, if I may operationally.
I have in our notes.
You were expected to move to a tap system at around 10 shops, a month from March and every new store from July 1st correct.
Correct me if those numbers are correct correct.
What are you seeing in terms of the taps are you getting.
Operational efficiencies can you talk about the crew customer margin responses that system is still very very new in your system.
Yes, it's still very new we launched the five five caps in Texas.
Since we had our last call, which was our March program was to get those five type systems in place.
Our plan remains intact to launch by the end of the second quarter. We will have 30 locations executed and then we will start to implement and new shops.
Starting in the back and really in July so it's too early for us to be.
Counting on are touting any specific operational efficiencies, but but we like the way the tests are going obviously, we like.
The the plan that we have to execute at the build out and.
I think hopefully on the next call will be in a position to really give some early indicators as far as what that looks like.
Okay look forward to that thank you.
The next question comes from Andrew Charles with PD Cowen. Please proceed.
Great. Thanks two.
Two questions on just reiterated list what is it same store sales guidance.
Walk us through your thoughts on how this will progress through 2023, just given the different dynamics of lapsing, a matter of price with a rebound in that traffic and how you expect that to probably manifest within kind of the same store sales cadence and then just separately just given that <unk> was a bit below.
Our expectations thinking that you guys really positive for the quarter work. We expect this shortfall to be made up for in <unk>.
So in terms of the progress through the quarter first start with the pricing rollover.
Round terms Q1 is eight Q2 is six Q3 is three and then Q4 is flat for a full year of four.
So.
And then the.
Traffic rollover kits.
A little bit easier as we move through the year. So that's how we would expect things to progress through the balance of the year.
In terms of your question about Q1 being below on a comparable sales basis.
That's for the most part anchored in the afternoon day part.
It's not a product or a geography per se. It is that afternoon day, part, which does have a tendency to be a bit more discretionary.
Okay.
And then I am.
Remember at the time of the IPO you guys were talking about investing in cost per store construction cost about $1 5 million. They were up double digit in 2022 to about $1 six five ish or so $1 seven ish.
In 2023 can you tell us what's embedded in your Capex in terms of cost per new store.
Yes, we do have the elevated cost embedded in our capex guidance and.
In the upper ones so.
So those numbers you quote of around $1 five with Preopening those those have escalated to around $1 million eight to $1 nine depending on where the site is for an all in project costs, but we feel like our guidance covers that additional capex and we should be well funded for this year in terms of what we guided on the capital.
Syed.
And just lastly, Charlie.
You referred on the call too.
Funding that you're open minded.
Two new sources, just with interest rates picking up what would lead you to be a bit more proactive.
Looking into more longer term liquidity sources versus the current use of the revolver.
Well I think I think given we have our cap our capex plan for this year has elevated build costs built into it.
And we saw <unk> between Q4, and Q1 moderating in terms of those the revenue that's coming in and margins being higher there's nothing pressing.
Present that would cause us to change our tact.
But we're always evaluating that and I think as we get through the high season of Q2 into Q3 and.
We will look at our liquidity needs look at the performance of our shops.
And always reassess.
That's very helpful. Thank you.
Thank you.
Next question comes from Sharon Zackfia with William Blair. Please proceed.
Hi, Ken sorry about my voice, hopefully I'll make it to the question.
So I had two questions I appreciate the commentary on March.
March and the momentum it will be coming into April , but I'm also curious because I seem to recall in the year ago period, you had a little bit of a slowdown related to gas prices. So when youre thinking about momentum in the business.
Are you looking at that on a multiyear basis as opposed to just kind of a natural lift you might get from lapping the gas impacted comparison, and then I have a follow up.
Okay.
Absolutely so.
When we look at momentum I think we are looking at.
With the stack of comp over several different years, we're looking by week, what's happening and we're looking at the impact of the different promotions. We have during the time period that we're offering this promotion.
As we look at that positive momentum.
We do think it is.
What we were seeing at the end of March it's more than just lapping something positive.
Alright.
Yeah.
That's really helpful. Thank you and then I just wanted to kind of inquire on how your average customer frequency has been trending well, obviously have a lot of data now.
And I'm curious how that has kind of evolved.
Time of the IPO.
As we look at our frequency.
As we kind of break down our cohorts.
And kind of with what's going on in the consumer environment and also with what's happened in the market as far as.
For the first time now we actually have everybody open.
Everybody is back doing business lifestyles seem to be kind of getting back into a regular routine and what's interesting is that our top cohort that top 20% group actually we haven't seen much.
Much change from that group at all it's actually held the frequency is held.
And really through the first quarter it actually held up.
Very well and we're seeing more softness and kind of that lower.
Lower quartile.
Cohorts, so like that bottom kind of bottomed third group seems to be where the softness has come in.
And frequency so.
We're constantly looking at that and we actually have about we have about 10 different tiers of cohorts that we that we look at and manage.
And then also have to look at how the infill.
And some of the sales transfer has played out related to the impact on that as well, but the good news is is that our loyal sort of oil.
And maintained at a very strong rate.
And then a reminder that 65%.
The transactions.
We're coming through the App and.
That's a really another strong indicator.
Of our customers' interactions with us and how they're using.
The app to really be part of the Dutch Bros family.
Thank you.
The next question comes from Jeffrey Bernstein with Barclays. Please proceed.
Thank you.
Two questions. The first one just so we think about the macro outlook.
I think you mentioned, maybe you are more discretionary or more vulnerable in the afternoon day parts.
And clearly as a beverage focus brand it just seems like more broadly you're more vulnerable than most.
I'm just wondering how you think about your brand positioning.
And maybe what tools do you have to mitigate if you were to see accelerating sales pressures and then I had one follow up.
So.
Yes, I mean, that's a.
It's a long answer to that question I think Jeff I think that the.
I think that some of the ways that we've responded I mean, I think that by running that fill a tray program from noon to six on a Wednesday.
That was absolutely targeted towards a very specific customer base. It was targeted towards a specific part of the day, where we were seeing softness.
And what was great about that day is it actually was the single largest day and the Companys recorded history for sales grew sales by 40%.
And had spillover double digit transaction growth. So we know that we can drive traffic, we know that we can attack.
Different needs of the business based on the market because again I mean, when you're running a 30 year business. There are some markets for us that are that are.
<unk> going to be stable and execute very well and there's other markets, where we're still teaching.
The customer about Dutch Bros, how to interact with Dutch Bros, and how to make <unk> part of your daily routine.
That's not a new thing for us, it's something that we've been through and I think for us when you add <unk>.
Wondered some locations over the course of 12 months.
We still have a lot of work to do as we're kind of building brands and I think as Christine talked about freeing up the rewards program that allows us to invest more.
In the business and go after very specific needs of the business and that's the beauty of the App and we've been testing it we've been running it.
And driving new programs.
Christine mentioned, the mango not a program that was actually a program that we tested in a few markets last year.
Before we took it system wide, which we launched in early April So we're excited to share with you more about.
Kind of what's happening with that business and how we're taking trends.
That are more on brand and mango not is anchored by <unk>.
Which is such a hot addition to beverage flavor right now that it's a great way for Dutch grows to flex in.
Something that's on trend and important to the consumer.
Understood and then just a follow up I know you mentioned.
The economic climate that teams responded quickly and decisively I'm just wondering.
What in particular about the climate changed in your view or are you just referring to maybe headlines.
Because it does seem like some of the more traditional quick service food and beverage peers. They haven't really noted.
A change in climate or some of them talk about how that could be a beneficiary of maybe a little bit of a trade down. So I'm just wondering what in particular did.
Did the team respond to perhaps youre talking more about margins on sales, but just trying to get some color as to what in particular, you're referring to in terms of their response. Thank you.
Okay, I think I think in response on on.
It's probably more of the headlines than it is anything specific I think that the.
The challenges in the market and some of the challenges in labor and driving labor improvement I think that honor.
Honestly, I think whether it's macroeconomic trends or challenges.
Great business should be looking at how they improve.
Across all facets of their income statement so I.
I think last year, when we saw labor creeping up and getting into a spot where it was becoming.
Too large of a percentage of our business I think the team attack that and.
It's running much more efficiently today and doing a better job across the board.
Second area, where we listen to our employees was around the minimum wage investment.
Not just in the mandated markets, but also in what we took on.
For the.
Federal minimum wage states and by seeing a turnover in those states come down 6%.
In total companywide turnover now at 70%.
Afterwards is down another 3% I.
I think those are all strong indicators about how were attacking.
Not just the customer trend, but also how we continue to make <unk> a great place to work.
Thank you.
The next question comes from Sarah Senatore with Bank of America. Please proceed.
Thank you.
Two clarifications. Please the first is <unk>.
Just on the.
Commodity costs and I know, Charlie you mentioned coffee and dairy were still up.
I look ahead at least features markets it looks like.
Those should be tailwind.
So is that the right way to think about that margin going.
Going forward are there other offsets that we should be thinking about I know you know.
Sugar for example is one that that's actually been inflationary this year so.
What kind of direction, you can give and thinking about inflation and how that flows through given that you're by contract or by forward. So.
That was the first question and then I'll.
The second thank you.
Okay.
Sugar on the input cost of sugar and coffee there is about a 15 month lag from the time that price moves to the time it flows into our system.
So, even though youre seeing see price moderate.
You wouldn't see much or any of that in the current.
<unk> year.
When it comes to dairy, while we're thankful that dairy has moderated.
Mindful that production is best in the spring.
It's more volatile than the summer depending on hot summer or not in the production area. So we're cautious just looking at that.
And and we just have to wait and see whether that plays out or not.
And you had about you had a follow up.
Yes. Thank you and this one is actually on the new unit volumes and slightly lower and I know you said.
Entered other markets, where they ramp but I guess.
Volumes being lower than some of the newer markets like Texas and still very high in California.
I think bears watching so I was just wondering.
What you would be looking for would you contemplate slowing the pace of growth in the past been less opportunistic.
And some of those newer markets.
Until you sort of have a sense of exactly what that ramp looks like.
Just any kind of sort of flags that you pay attention to.
Hey, Sarah this is John I'll start with that answer one is that we do not have any intention of.
Slowing down.
Gearing as we kind of look ahead.
We're actually very pleased.
With the way that our new units have been executed we're pleased with the way they are.
Response that we've had and in every community in Texas has actually been fantastic.
Given the unit economics of our shops in the way we can operate we can flex related to how these businesses open and we can continue to invest.
To build a strong customer base.
And you have great margins and you've got great.
Four wall numbers the way, we do it gives us some great flexibility to be able to go in and so whether you are in lubbock, or Houston, or Dallas, or Waco, or fort worth or everywhere in between.
We're very pleased with what's come out of the gates. There I was just down in that market.
About three weeks ago, and really enjoyed tremendous shops and seeing the customer responses and it feels like that for us and we will take a long approach to that and we will build an amazing business. The same way we did in California. The same way we've done in Colorado in the same way we've done in Arizona. So we're very pleased with that.
So if you look at 'twenty, one and you move into 'twenty two new units there was significantly less infill in those years. It was a lot of launching into new markets, particularly to launch in Texas now if you look at Q4 openings, which got to nearly 30% infill and then Q1, which got them.
Nearly 60% infill.
That's part of the moderation the ebb and flow we will see as we go out we got in the Knoxville, then we'll go backfill things and then we will take another try to go out again into new markets and then backfill so that the <unk> will ebb and flow as we move through our pipeline over time.
Got it okay. Thank you very much. Thank you Beth example.
The next question comes from David Tarantino with Robert W. Baird. Please proceed.
Hi, good afternoon.
My questions.
The margin performance that you had in Q1 and really what youre assuming for the rest of the year. So I guess, Charlie can you remind us what some of those changes were that drove the productivity improvements at the unit level and and I guess are you know I think you might've mentioned.
But I wanted to confirm you said that youre seeing the full extent of those now and those started in the second half of the year, but what exactly was changed and I guess how.
How would you describe it is it just simply less hours or something else.
So a couple of things there first of all last year, we had a reasonable degree of overtime, we've removed a lot of that out of the system with better scheduling.
A better way to look at our scheduling and yes on a on a relative basis less hours are being deployed versus where we would have deployed last year. At this time. So that's just straight productivity.
We started mobilizing against that in the latter part of last year saw some of that benefit in Q4 did.
Didn't see enough of it to bank on it and we saw a fair degree of that in Q1. So that's going to we think play itself out as we move through the rest of the year from a margin perspective.
And then <unk>.
These have moderated as spoke to that earlier as far as what our view of dairy and coffee is but commodities have slowed down in terms of the escalation. So all of that bodes well for our company shop margins to stabilize now and be very good going forward.
Great and then.
The reduced hours is that.
Really tied to reduce traffic levels I guess, how are you accomplishing.
This while still providing the same level of hospitality and customer experience.
Yes, sure guests have been accustomed to.
Beyond reducing hours when you have less drinks to be made we actually are specifically going in and scheduling labor more appropriately to the forecast and then working those schedules matching so working matching that schedule. So it is direct productivity.
Versus a product of lower traffic.
And we've looked at how we measure that track it we're looking at it specifically on a weekly basis at a micro level, which we didn't have the ability to do necessarily last year, yes.
I would add as well that.
We are scheduling based on sales dollars and so as we took price increases last year that sometimes can take a little bit of time to come in come out of that.
And really what the teams to come along with you on that.
As the teams adjusted to those pricing.
That we were able to leverage that labor investment as well.
Great.
Very helpful. Thank you and then the last question on this front I'm Charlie it doesn't.
Seem like Youre, assuming this.
Margin performance continues if I look at your full year guidance literally take the mid points of your ranges.
On revenue and EBITDA, it's assuming maybe 50 basis points or so of margin improvement on the adjusted EBITDA line.
<unk> delivered nearly.
600 in the first quarter. So I guess what is it about the balance of the year, that's going to be less good on a year over year basis.
I guess related to that.
This dynamic.
So the wage investments that we talked about making $19 million for the full year, that's going to ramp as we go through the year. It gets bigger the legislated wage increase increases add on top of themselves and then we are building in more federal minimum wage markets on a relative basis.
So the.
So that piece will get larger as we go through the year and the productivity benefits that we have today that will take a little bit of an edge off of that going forward. So in the guidance, we're not assuming any margin accretion.
Relative to last year and also remember that we're climbing over in the fourth quarter.
The 2021 points breakage that was $5 million, we have to lap that from a margin perspective.
Got it thank you very much.
The next question comes from Nick <unk> with Wedbush. Please proceed.
Thank you.
Just in the context of the reiterated full year.
Low single digit comp guidance.
And then obviously the Q1 comp performance.
What gives you the confidence to reiterate.
The full year targets in terms of top line sales is it.
Quarter to date performance.
Something else that you have planned.
Well I think there are several things that I'll highlight a few one is that.
The seasonality of this business.
Q2 and Q3.
Index.
At a much higher rate in Q1 and Q4.
We have.
Plans in place to continue to be the thing.
Christine talked about to be able to drive more traffic and build more of that business. We think it's still too early.
We think it's still too early to be predicting anything related to the balance of the whole year.
So we feel like investments.
And traffic driving initiatives.
The work that we've done to be able to build margin to allow us to do that the programming that our teams are working on to identify soft markets and build in day parts or or drink mix is another one so.
We think it's early.
We love our team and we love kind of the opportunities that we think we have in front of us.
Thank you and then just again on this food and beverage 28, 3% in Q1.
Sequentially, there was a big uptick there and I guess the question. We're all trying to figure out now is what drove that uptick if inflation is moderating as it beverage mix was it some of the promotions that you were running and then second going forward Q2, Q3 Q4 is this 28% level.
What we should think about or are there. Some other drivers, particularly you hope to get that lower particularly on pricing.
As though year over year pricing benefit declines.
Well first remember.
<unk> had very sharp inflation in the early part of last year and we are anchored so heavily in dairy costs and that that moved up.
25% last year. So when you when you look at margins year over year, even though people are feeling inflation has slowed down from a rollover perspective, we.
We've had that impact in our Cogs.
Coffee is up as I mentioned earlier.
So both coffee and then the.
The full year annualized <unk> of the dairy costs increase.
That's what that's what youre seeing in the Cogs in terms of the way forward.
We're not expecting a lot of change there, but we're not also expecting any any real change or benefit in that.
And so just to clarify the 28% sort of level is as like a fair way to think about it that cogs level going forward, the beverage and food cost level going forward for the rest of 'twenty three.
The.
There is really nothing about product mix.
That changes from quarter to quarter, we promote different things so the level of cost of goods.
We would see going forward Q1 is a little bit higher than what we'd expect going forward, but it's not significantly higher.
Got it thank you very much.
Our next question comes from Gregory Frankfurt with Guggenheim. Please proceed.
Hey, guys. Thanks for the question.
I think it was Charlie you May have mentioned earlier that you guys have not seen a lot of regional disparity in the comps.
I guess I'm just.
A bit surprised but.
Excuse me sorry.
By that I am curious what your thoughts on what Youre seeing in Oregon, where it maybe you are not opening stores anymore.
Are you seeing similar levels of.
Down a couple of points on comp and down high single digit traffic I'm. Just curious have you seen that different than maybe taxes or some of the other markets.
Okay.
Let us get to the Oregon data and.
And actually.
Q1, Oregon.
Actually the comp group was up slightly.
Oregon was flat to actually up slightly.
You have Washington actually.
<unk>.
Let's see the tracking group was basically call it flat so so.
So those those basis of stores that are in that.
More of the 30 year history, I would say that's been flat traffic. So in a market without much development, if any Oregon, we did not see at veer off or be a positive relative to the rest to jon's point.
So there is no indication there that tells us anything oregon's kind of like everybody else.
Got it understood and then and then just I Wonder if you could expand on your strategy of entering Texas.
How you are building brand awareness, there and how youre entering different cities just just.
Who do you view as the competitive set you would you could take share from and as you've kind of grown and grown sales. There is that where your customers are they coming from C stores or are they coming from quick service are they coming from at home I'm just curious what what the evidence has suggested in terms of where the market share opportunity.
Yes, so when we modeled Texas.
Our original modeling.
Really.
<unk> hundreds of locations that we could go into the marketplace. So we feel like we're actually still in the early innings of building out market share in that state I think that the.
As we look at the market, we're going to go in and and as we build awareness some of it is actually just.
Opening and word of mouth is a key driver for Dutch Bros business.
We do a lot of work in a very local kind of what we call it trade zone to build.
Community awareness to build brand awareness in.
Local give backs that we do through through providing back to philanthropy. We do work in community, we do work and we.
We do a lot of friends and family are not a lot. We do have friends and family opening where we again use word of mouth to open.
Through hiring parties, where.
In many cases you might have.
You might have 10 times the amount of people.
Client for a job that actually get hired so there are several ways that we open.
And so really what we look for is word of mouth to help build the awareness and how do you interact with Dutch grows from a shopping experience.
<unk> is where you're getting share from and I think that what's interesting about the beverage business is that this is a daily routine right. So.
So really our competition has anywhere where youre going to have immediate consumption of a beverage.
That could be a convenience store it could be a grab and go section in a grocery store it could be a starbucks it could be really anywhere there is promoting <unk>.
Strong beverage and I think that's the beauty of the of the of the market set is it.
The competitive set is so big.
The opportunities to go grab.
And different day parts and different product categories.
Our outstanding So that's why you don't really ever stop you actually continue to build it because youre building into people's routine.
And the way that people consume beverages every day.
Yes, thanks for that and maybe if I can sneak one last one and you made some comment on the funding.
Funding your free cash negative free cash flow can you just remind us when your expectation is flipping to free cash flow positive and in terms of funding that I think you basically funding with seven 8% debt right now.
Why is that rather than maybe an equity raise or something like that I'm. Just curious your thoughts I appreciate it.
Well as we said a couple of times and it's a.
Very good question.
First of all.
We may see some delay in our ability to get to free cash positive given the elevated build costs, but we're going to work hard to try to knock some of that back and knock it down.
So we will activate on that and then in terms of the type of funding I guess I would say, we have a very good and sizable credit facility in place today.
We're not <unk>.
Forrester compelled to do anything different right now, but we're always open to exploring what makes the most sense and what we are doing with that very efficiently.
Is not sitting with a lot of fallow cash on the balance sheet. We're drawing is we need.
Versus when an equity raise may do initially so again we're open.
To what our options are going forward and we will absolutely make sure. This business is well funded to get to that 4000 unit shop Tam.
Awesome. Thank you for the thoughts.
Thank you at this time there are no further questions in queue I would like to turn the call back over to management for closing comments.
Thank you operator, and thank you everyone for your questions as we close I wanted to highlight an upcoming cornerstone event for Dutch Bros. In about two weeks, we look forward to hosting our annual drink one for Dan event in honor of our cofounder Dane Boersma and his battle with ALS.
Though Dan is no longer with us we memorialize his legacy by hosting an annual companywide get back data support the muscular Dystrophy Association and its efforts to find the cause and cure for the disease. Typically this is our largest and most exciting give back day of the year for those of you that are in our market areas. We invite you to participate by visiting us on May <unk>.
19.
And for our investors. Thank you for your time and as always the continued support of <unk>.
Thank you.
Yes.
Thank you. This concludes today's teleconference and webcast you may disconnect. Your lines at this time and thank you for your participation.