Q2 2023 Dutch Bros Inc Earnings Call
[music].
Thank you for standing by and welcome to the Dutch Bros. Inc. Second quarter 2023 earnings Conference call and webcast. This conference call and webcast are being recorded today Tuesday August eight 2023 at five P. M. Eastern time and will be available for replay shortly after it has concluded.
Following the company's presentation, we will open up the lines for questions and instructions to queue up will be provided at that time.
I'd now like to turn the call over to Patti.
Good afternoon and welcome.
I'm joined by Josh Ricky CEO , Christine Barone, as President and Charlie Jim <unk> CFO .
We issued our earnings press release for the quarter ended June 32023, after the market closed today.
The earnings press release, along with the supplemental information deck I'm also now been posted to our Investor Relations website at investors that Dutch Bros. Dot com.
Please be aware that all statements in our prepared remarks and in response 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.
They 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 quarterly report on Form 10-Q.
We assume no obligation to update any forward looking statement.
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 like to now turn the call over to John .
Thank you Patty good afternoon, everyone Q2 results demonstrate continued momentum in the business.
This is the result of the team's collective ability to take the addition of the long term growth plan and adapt to a changing environment.
Our ability to deliver on new unit growth targets quarter after quarter remains a consistent bright spot.
Long term vision is clear and we remain focused as ever.
After five years in working with traveling team in nearly two years. After the IPO I believe that grows as a strong healthy business with a very long runway.
As we set the stage for scaling the company I am pleased to share that Christine Barone Ey will step into the role of President and CEO effective January one 2024.
I believe Christine is the right person to lead Dutch Bros. In its next phase of growth. She is a rare leader with demonstrated abilities in marketing operations and finance since joining us in February her impact has been immediate and action has been decisive as she is focused on our real estate strategy driving traffic improved data analytics and over.
All marketing efforts, we are feeling the impact of her leadership as she executes against the current business and leads the team into 2020 for planning and beyond.
Over the coming months I will work side by side with Christine to best position the business for long term success, we will execute against our plan driving traffic optimizing operations selecting strong sites and building great shops efficiently.
Most important I am excited for what this means for the future of Dutch Bros. And I look forward to seeing how christine's vision and leadership drives our brand towards our goal of 4000 shops in the next 10 to 15 years with that I will turn it over to Christine.
Thank you since joining the <unk> team I have been so impressed with our pro East coast managers operators and franchisees.
And now beginning to execute on quick wins and laying the groundwork for our 2024 priority.
As I discussed in detail last quarter driving traffic has been a key focus over the last six months and we are gaining traction as John mentioned, we saw an improvement of 580 basis points of system wide same shop sales quarter over quarter and substantially all of this was the result of improved traffic trends.
Beyond driving sustainable traffic growth. These last six months have also provided an opportunity to assess our strategy and the strength of the business is foundational building blocks I will provide a brief assessment of these building blocks and discuss how we will focus organizational attention over the near term to position <unk> for long term success.
Yes.
The Great news is that a strong foundation is already in place we have incredible people systems and a rock solid brand two of the hardest foundational elements to replicate which gives me confidence in our competitive positioning.
The team has worked diligently over the course of more than 30 years to build a one of a kind culture that radiates through our frontline and is the key enabler of our success.
Supporting our people and culture is a critical lens in which we evaluate decisions and we plan to keep it that way as we execute our growth plan.
As the market landscape has shifted over the last three years with elevated build cost I see further opportunity to refine our real estate strategy.
I also see opportunity to build on our values of speed quality and service and enhance our marketing capabilities with a continued focus on our rewards program.
We begin any discussion of Dutch growth with our fundamental differentiator our people.
The shop teams, who greet and care for our customers and each other every day are the lifeblood of this organization.
Recruiting developing and retaining people remains our key focus and in this regard the organization is doing great.
In Q2, we saw continued improvements in turnover following to the mid <unk> from about 70% last quarter.
We saw even larger improvements in the markets in which we made proactive wage investments.
Our people pipeline is robust and continues to grow.
We have more than 325 qualified operator candidates in the pipeline with an average tenure of seven years.
Creating opportunity to grow with the company as a cornerstone of our people strategy and is the driving force behind shop expansion.
And many organizations people availability is a limiting factor to growth.
At Dutch growth. This is one of our competitive strengths.
We will continue investing in our people specifically in our shop managers, many of whom will become the next generation of regional operators.
Through these investments we aimed to even more closely align incentives with great customer service and driving traffic.
We're also investing in our leadership team in June we hired Tanner Dibella, as our Chief marketing Officer Tanner brings more than two decades of marketing experience and the multi unit restaurant space.
Her skill set is exactly what we need now to continue our expansion deepen our customer relationships with our rewards program and execute our traffic driving initiatives.
We plan to continue investing in key capabilities to support our growth aspirations and we believe these investments will enable us to compete effectively as we scale.
In Q2, we opened 38, new shops, 35 of which were company operated.
Shops opened in 2022, and 2023, our annualized to approximately $1 7 million in AUC.
It is important to note that despite moderating aav's newer shops are following a similar profitability curve to what we have seen in prior cohorts demonstrating what we believe are more favorable operating conditions as we continue to expand eastward.
Consistent with what we shared last quarter, we believe moderation in new shop Avs for recent age classes is in part a function of an elevated in fill rate, which in 2023 is about twice the level. It was in 2022.
Elevated in fill as a result of a purposeful decision to push the development pace in Texas.
Since entering Texas in January of 2021, we have invested heavily in the market and as of June 30, We had 131 shops opened in the state.
Texas is a high potential market and a critical component of our eastbound expansion.
Building depth and scale there has moved our operations closer to newer markets in the southeast and we believe securing this foothold quickly enables us to better compete as we move eastward.
Being profitable quickly is important and we are encouraged that company operated shop margins in Texas are following a similar profitability curve to the rest of the system.
As previously announced we chose to position our second roasting facility just outside of Dallas to support this long term expansion.
With bill costs remaining elevated and moderating new shop AUC, we are completing a body of work to adapt and refined our development plan to the conditions. We anticipate over the next few years, we purposely built a robust pipeline, providing us the flexibility to be selective a refined real estate strategy allows us to continue to live up to our <unk>.
Commitment of building the right shops at the right time and expanding our footprint at the right pace on our path to 4000 shops.
To that end, we're taking the following actions.
First we plan to widen our initial reach as we enter new markets and adjust our pace of new market penetration. We believe this will provide market time to curate demand, while balancing the benefits of overhead leverage and distribution efficiency that comes with market density.
Second over the past several years, we've pursued a strategy that favored ground leases, partly in response to supply chain and construction pressures, enabling us to exert greater control over our development process. This enabled us to sidestep some of the well documented industry development delays as we believe these pressures will begin obey.
<unk>, we have greater opportunity to pursue a more diverse range of lease and shop types, while continuing to focus on the drive through channel.
Third we will continue to look for opportunities to value engineer, our existing prototypes, we expect to see this work impact site builds beginning in late 2024.
Finally, we are doubling down on community by partnering with local organizations for targeted give back days, we're continuing a 30 year history of investing in our communities driving trial with promotions and relevant events to build our brand and new shop revenue.
These actions represent a curation of our approach to growth. We don't believe the full impact of these changes will be immediately felt in the short term we anticipate.
Elevated build cost and believe moderated new shop revenue productivity will persist as these changes worked through the system.
The first half of the year demonstrates we can navigate change and deliver excellent profitability.
We saw margin expansion in Q2, driven by a combination of shop level operational improvements and moderating adjusted SG&A growth.
Company operated shop profitability powers, our growth aspirations.
Not only did total company operated shop contribution grow almost 70% from Q2 2022 to approximately $67 million. These.
These shops delivered 570 basis points of margin expansion year over year to 33% of company operated shop revenue.
Strong margins propel our new shop growth, facilitating quick payback periods, and enabling us to reinvest into further development opportunities a.
A strong four wall model allows us a certain level of flexibility to adjust and adapt as we expand.
Adjusted SG&A as a percentage of revenue improved 140 basis points when compared to Q2 of last year falling to 15, 7%.
We are committed to smart investments that support critical capabilities as we expand but anticipate SG&A growth to remain below the rate of revenue growth, which will create leverage.
Last quarter I mentioned, a key focus for the remainder of the year would be driving traffic.
In Q2, we executed against our traffic driving initiatives with improvements in traffic substantially driving all quarter over quarter same shack sales growth.
The team acted quickly to activate our multi pronged approach leaning into innovation leveraging the rewards program scaling up paid media and utilizing promotions to drive trial.
Here's a brief update on each key pillar.
First innovation.
We've been leaning into innovation in a big way in 2023 last quarter I discussed the introduction of our flavor soft tops for St. Patrick's day in Q2, we took innovation to the next level with a nationwide release of our limited time, only mango not a platform.
Mango Nada, which we tested last year outperformed our own expectations in Q2.
Making up more than 10% of our menu mix at launch and resulting in nearly $3 million drink sold in the quarter.
Later in the quarter, we built on this momentum with our Strawberry Whore charter Chi, which demonstrated the success of wider deployment of secret menu offerings.
Also in the quarter, we post a few product drops to deliver quick burst of innovation and Buzz, which included our cookie crumbled topping and pop in candy Firecracker rebel.
Encouraged by customer response, we plan to continue to keep our menu fresh fun and relevant while balancing operational focus and our simple pantry of ingredients.
Second rewards.
We have seen continued momentum in our rewards program. Following the end of March refresh that refresh enables us to invest more surgically, bringing even more exciting promotions to Dutch rewards members, who make up almost 65% of our transactions.
We began deploying this new approach in April with a double Tuesday promotion, providing an extra incentive for Dutch rewards members to join us on Tuesdays, we saw favorable customer reaction for each of the four weeks that we activated this promotion, which was encouraging later in the quarter, we experimented with a variety of time geographic and <unk>.
<unk> based offers helping us to further refine our strategy and expand our toolkit.
Third paid media in Q2, we leaned into enhancing our paid digital media capabilities, which was a meaningful driver of our traffic improvement quarter over quarter used in conjunction with innovation in our targeted app based promotional efforts paid social enables us to reach a wider audience at an attractive ROI we.
Anticipating continuing to iterate and refine these efforts to create a holistic full funnel marketing plan grounded in our robust Dutch rewards loyalty program.
Fourth promotion in our last call I noted the success of the fill of trade program. We ran in late March encouraged by customer response, we reran. This promotion in June experimenting with the promotional offer and timing and we're just as pleased with the outcome.
Bringing friends and family together to experience Dutch Bros. Is what we're all about and we think this is a great way to reinforce these brand values, especially in new markets.
Outside of <unk>, we continue to pulse and experiment with other multiples based promotional activities that encourage trial and group visitation.
Taken together, we made real progress against our traffic driving initiatives, which built momentum throughout the quarter, we plan to keep our foot on the gas, adding capabilities and executing through the back half of the year.
My first six months have been exciting and productive I'm impressed by the team's culture willingness to adapt and the progress we've made.
We have many of the key building blocks in place to create a sustained competitive advantage.
Incurred on our cornerstone people systems.
I appreciate the investments that trap, Josh and a full team have made to immerse me in our culture and help me quickly learn our business over.
Over the next few quarters, we look forward to sharing in greater detail. How these blocks are coming together to shape. This strategy.
With that I'll turn it over to Charlie to review our financials, Thanks, Christine and our decision, making we emphasize profitable growth, while keeping an eye towards the future.
As many of you know the four blade when mill is one of Dutch Bros. Iconic images in Q2, the windmill turned with a step summer breeze and generated outstanding growth and performance across four key aspects total revenue of approximately $250 million, an increase of almost 35% year over year.
Same shop sales growth for the system turned positive in the quarter at three 8% with traffic driving the improvements adjusted EBITDA was approximately $49 million double what we reported in Q2 2022 and 19.
4% of revenue.
Job growth remains on track, we opened 38, new shops system wide of which eight opened in April 13, and May in 2017 in June of 17 shops. We opened on June 11 were in the final week of the quarter and that limited their sales contribution in Q2.
Strong profitability is driven by surging performance in company operated shops.
Net sales grew 38% at company operated shops shop contribution margin reached 33% expanding 570 basis points year over year.
Note. This contribution includes one 5% of Preopening expenses, we continue to see strong labor productivity labor costs improved 280 basis points from the same period last year. This is primarily a result of improved scheduling and deployment.
Better labor productivity more than offsets the significant investments we've made in wages as Christine noted people metrics remained strong speaking volumes for the company culture, and hiring and retention practices in the retail shops cost of goods sold were 26, 8% of company operated shop sales for the quarter.
Slightly year over year as menu pricing helps and some moderation took place and ingredient input costs.
In the last week of the quarter, we began to update our customization pricing, creating a streamlined system for a wider array of modifications. We also moved a number of shops in the higher price tiers to better align and market pricing.
Going into 2023, it was not our intention to take price. However, we made these moves to set our pricing architecture for the future.
In the franchising another segment gross profit improved to $19 2 million compared to $13 8 million in the same period last year.
This segment of our business is more than stable now than.
And then it was a year ago as inflation impacted our coffee and rebel manufacturing businesses adversely.
Shifting now to SG&A for the quarter SG&A was approximately $52 million, which includes about $10 million in stock based compensation. Please make reference to the supplemental slides for a reconciliation between SG&A and adjusted SG&A.
Therefore, with the exclusion of stock based compensation and other nonrecurring expenses adjusted SG&A was approximately $39 million. This declined to 15, 7% of revenue for Q2 2023 compared to 17, 1% in Q2 last year as Christine mentioned we.
We're making investments in people as we build organizational capabilities and better support our operators in the field, but we also expect continued leverage going forward as revenue growth outpaces investment.
Now onto a few comments on the health of our balance sheet liquidity.
Last week, we successfully upsized, our $500 million credit facility, adding $150 million in capacity, expanding our syndicate and a transaction that generated a healthy amount of interest from lenders given.
Given the tightening credit markets, we view this outcome as a strong vote of confidence in the company's long term financial outlook and growth prospects. Our overall credit facility now totals $650 million, which is made up of approximately $100 million of drawn term loans, a $350 million revolver.
Of which approximately $183 million was drawn as of June 32023, and $200 million of Undrawn delayed draw term loans.
As of June 30, we had approximately $256 million of net debt inclusive of this upsizing, we would've had approximately $370 million in liquidity against our $650 million facility up from approximately $220 million and liquidity before our refinancing.
In Q2, our operations generated approximately $43 million in pre tax cash flow prior to capital spending and financing, reflecting expanding company shop productivity and SG&A leverage in the quarter, we consumed approximately $59 million in capex. The vast majority to fund new shop growth.
We believe we have a well capitalized balance sheet and our priority is to position the company to take full advantage of the long growth runway ahead in a responsible and thoughtful manner moving on to 2023 guidance first I'll quickly take you through the specifics highlighting the changes and some <unk>.
<unk>.
Our expectation for total system shop openings in 2023 remains unchanged, we expect to open at least 150, new shops of which at least 130 will be company operated.
Given the sharp opening outlook is unchanged guidance regarding capital expenditures also remains unchanged capital expenditures are estimated to be in the range of $225 million to $250 million, which includes approximately $15 million to $20 million and spending in 2023 for a new roasting facility.
Which is projected to open in 2024 are.
Our estimate of system same shop sales growth remains in low single digits, we believe improved traffic trends and pricing actions will offset the negative same shack sales growth, we reported last quarter.
Having seen six months of performance, we have greater clarity in our full year revenue expectations, which we now believe will be at the lower end of the previously communicated range of $950 million to $1 billion.
This expectation considers the revenue moderation in the 2022 and 2023 age classes, partially offset by recent traffic trends in price pricing actions as a reminder, seasonality our back half of the year is typically lower than the first half when modeling our revenue.
Adjusted EBITDA is now estimated to be between $135 million and $140 million.
Up from at least $125 million.
This reflects stronger than expected year to date profitability trends, partially offset by our revised expectation of revenue at the lower end of our range our.
Our expectations for full year adjusted EBITDA also reflect increased levels of investment to support key priorities outside of what has been previously communicated.
Thank you and now we will take your questions operator, please open the lines.
Thank you we will now be conducting the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And the first question comes from the line of Chris <unk> with Stifel. Please proceed with your question.
Thanks for taking the question Christine Congrats on the promotion and John Congrats on the successful career burrows.
Thank you.
So.
Christine I was hoping you could elaborate on your comments about changes to the development strategy and specifically as it relates to the widening the reach and maybe pursuing a different type of shop.
And or lease structure.
Yeah, absolutely so as we look to refine our real estate strategy. A couple of things we are working so Bryan as we move into new markets.
Think that as we widened our penetration it will allow the brand really some time to build.
As we go into these new market that is the piece on widening.
And then your second question.
And looking through shop types and lease types, so weak today.
Have a variety of shop and lease types.
And when you look at those we have increased our ground leases over time really to react to the market conditions that we've been seeing and so we believe over time as those market conditions and kind of all of the COVID-19 supply chain pieces work their way.
There is an opportunity to to pull back a teensy bit on the ground leases as we move forward.
We also have.
Variety of different shop types within our portfolio.
And we.
We will continue to experiment.
Recently, we've had a couple of openings.
With some in caps and so we will we will continue to look at that.
As a part of our portfolio going forward.
Okay. That's helpful. And then it's encouraging to hear the profitability curve for new stores is similar to the rest of the system, but can you provide an update on the average investment cost and maybe how new unit returns.
The target may have changed from the IPO.
Yes, Chris it's Charlie.
So as it relates to returns on investment.
We haven't specifically shared the return results since the IPO, but if you look at the shape of what's happening.
Historically, we had outsize returns.
Take our <unk> relative to the investment costs and the profitability of shop model.
At the time of the IPO, we targeted a 35% return on ground leases and 75% on build to suit.
Pleased with that result, but as noted going forward.
In the short term, we've got elevated build costs, which are up between 30% and 40% on a project cost basis, and those moderating new shop volumes as we are in filling so heavily so we'll see what was.
Highly likely excessive returns relative to the IPO coming more coming down are moderating.
In the near term.
Okay, Okay, great. Thanks, guys.
And the next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Hi, good afternoon.
Following up on the real estate strategy refinement.
It sounds as if perhaps there's some ramifications from Texas and the refinement strategy I just want to clarify if that's the case is there anything you've seen in Texas as you.
Kind of infield and fortress there. So quickly that if you had a do over or you might not want to replicate and I'm trying to also think through.
The ramifications for the P&L as you go in maybe a little bit slower into new markets is it fair to think that's an <unk> enhancement, but maybe a bottomline drag Charlie if you could give us any thoughts on that.
Great I can start with learnings from Texas. So I think one of the things as we grow we are growing very quickly. So we are constantly taking in the learnings from each of the new shop openings and understanding how to get a little bit better each time right. So that's that's a constant improvement.
For US, Texas is a really important landmark in part of the country.
Two really have gone into in a big way. It really provides that launching pad for the rest of the country for us and we've been incredibly pleased with the customer response from our growth in Texas I think in terms of the P&L the profitability call. It a drag we noted that our Texas shops.
Margins are very productive as productive as our existing portfolio. So as we look to widen our reach and go out a little further it doesn't mean, we're going to slow our development pace. It means we are going to change the shape of it but we shouldnt see.
Drag on profitability other thing Thats very notable this year beyond the margin productivity, we're seeing as we've refined our opening approach and we are saving dollars on a like for like basis on Preopening costs. So all of those refinements as we go forward should help us move through this the shifting of how we're going about this.
Okay. Thank you for that.
And the next question comes from the line of Andrew Charles with Cowen <unk> Company. Please proceed with your question.
Great.
Christina job congrats to both of you.
Charlie just touched on this but I just want make sure it's a confirm that.
The refinement to the real estate strategy do you guys still anticipate youll be able to support your prior targets for mid teens annual growth in 2024 and beyond.
Absolutely yes, okay. Thank you bet, Okay, and then just a quick bookkeeping. One can you provide the price traffic and mix components of <unk> performance.
Yeah. So when you breakdown our system comps, you've got a plus six approximately on price.
And net of sales transfer you have.
Flat traffic number sales transfer is estimated to be approximately 300 basis points.
Very good and then Christine one question for you can you talk a little about the gap in same store sales between company operated and franchise locations in Q2, what you attribute that to.
What are the opportunities to help make that a bit more consistent.
Yes.
As we look at that gap I think one of the things is we are still growing our rewards program and so over time, our newer shop, they are ramping up really nicely and adding rewards programs and so as I noted in Q2, we really increased.
That rewards promotions.
Also did a lot of what we would call throwback promotions, so things that we've done in the past that our customers get really excited about.
We have seen.
<unk> seen great success in new markets with these that are.
Franchise markets, which are some of our older markets are more familiar with some of these promotions.
Yes, and so so christine to sort of dovetailing off of that higher promo costs and in the company's shops particular lending markets as we see it in the brand. So therefore, a higher <unk>.
Awards costs.
Sales transfer is higher of higher rates and company and the company portfolio versus the franchise because were going faster there.
And then theres some geographical differences between where the franchisees are and where the company shops are and the relative growth rate of that and I'll kind of lays out.
Allow for the difference that we're seeing.
We don't see an operational difference we have no data that would say there is an operational difference between the company and franchise portfolios.
Very helpful. Thanks for the color.
And the next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.
Great. Thank you.
A clarification and then and then a question. Please so in terms of.
The margin.
Trying to understand from a restaurant level perspective, I know you did a really nice contribution bridge, but to what extent.
Are there any influences from like the shift from build to suit to ground lease.
That tends to have higher margins or.
From.
Opening in lower cost states, just sort of like an apples to apples basis.
As we think about it as I think about the margins I want to make sure I understand kind of what what any kind of mix impact might be and then and then a question on the marketing initiatives.
Yes, so the lease type.
Around lease or build to suit has no effect on the company's shop reported margin. So it is not a factor.
And the rest of it so that margin walk upward again, nothing to do with the lease type it is.
About half of that walk ahead as the menu price impact of things. We've done and then the rest of it is operational efficiencies and labor savings and Preopening and savings in operating expenses.
We do have lower.
Wage costs as we move east bound.
So thats also a factor as the portfolio weights in.
Okay, just to clarify my understanding was that.
Ground leases had lower part of the B sort of philosophy behind doing the ground leases was that perhaps lower rent expense because you werent kind of reimbursing the.
Landlord FERC P&I is that is that not the case.
They do have lower cash rent, but from GAAP for GAAP accounting purposes that.
Part of that gets inferred that difference gets inferred as interest and gets re classed down the interest expense.
Right, Okay, Alright, I will take that offline and then.
And then in terms of kind of the some of the marketing.
Changes like the sort of paid media.
Some of the initiatives seem like kind of more traditional.
Traffic driving initiatives.
What does that mean in terms of how much or how youre thinking about media as a percentage of revenues are or how you're thinking about the marketing mix going forward versus what we what maybe you had done previously.
So as we look forward I think one we've just brought in a new CMO Tanner and so she's really beginning to ramp up in her job in looking at the mix of things that we're doing.
But I would share that I think from a from a percent spend what we're looking at right. Now is we're specifically looking at the return on all of our initiatives and I think with the data that we have from our rewards program.
That we can see the performance of our different AD types and what we put in them and all of those things that we're not actually targeting a percentage what we're looking for is really looking to expose our brand to new customers were in so many new markets and bring them in and so rather than.
And targeting an actual percent, we're really looking at.
What can drive growth what can drive trial and what is an effective ROI in our marketing spend.
Got it thank you.
And the next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much.
Two questions first one just.
Christine.
These being perhaps down a little bit from what you were initially expecting for new units as you mentioned the cost to build up.
I know you are working diligently on both fronts to mitigate that but I'm. Just wondering if there was even the consideration of slowing down the near term unit growth from what's already industry, leading levels to give you more time to kind of absorb maybe work through the headwinds you're dealing with on both fronts or whether that was not even a consideration.
Hey, Alex This is Charlie I'll speak to the new unit <unk>, So Jeff if you remember.
The IPO.
<unk>, the $1 7 million.
<unk>.
We are seeing that moderate from well over $2 million and the recent class two seven and we also want to reinforce that felt a lot of heavy until going into Texas, which we talked earlier about we wouldn't necessarily.
Pete that as we go a little wider.
In terms of the build cost well, that's pretty sticky the elevated bill costs. There are things, we can do that we talked about earlier.
<unk> doing an end cap, which is lower project costs versus of ground up freestanding buildings, maybe using some different lease types too.
Seem less cash upfront and so at this stage, we don't feel like that should really change the shape of our growth trajectory.
Going through the next few years.
And you don't want to take into to this as well, yes, Jeff what I would add to that is that we have a really robust real estate pipeline and so what that allows for is that allows for us to take our learnings over time and adjust in places where we think it makes sense, but continue that same approach and I think the robustness of that pipeline.
And how many sites we have lined up to still to still go will allow us to keep our shop growth on please.
Understood and then my follow up is just on the restaurant margin.
So the 30% margin this quarter of 500 somewhat basis points.
That's really incredible.
Just wondering Christine as you look at this business with a fresh set of eyes haven't come from others within retail and whatnot.
Is there any thought to maybe the business thing over earning well maybe willing to reinvest some of those benefits in store I mean, it just seems like those are.
Well above industry level margins and maybe there is an opportunity to reinvest some of that to just further strengthen the platform. Thank you.
Absolutely. So a couple of things I think one as Charlie mentioned this is seasonally our highest revenue quarter.
So that also helps with profitability in the quarter and then as we think about reinvesting absolutely and again. This this brand was really built on investing in local communities, bringing new people in investing and driving trial and so we are really going to continue doing that work to to allow new guests.
To fall in love with Us.
Thank you.
And the next question comes from the line of David Tarantino with Baird. Please proceed with your question.
Hi, good afternoon.
I had a question about the traffic trends and certainly a lot of improvement from the first quarter, but I was wondering if you could maybe talk about how much of that improvement might have been related to just lapping over.
A lower comparison versus kind of real underlying improvement based on the initiatives.
You called out I guess, how much I guess.
The traffic improvement was was it related to each of those factors.
Yes, we look at the traffic improvements quarter over quarter.
We believe about a third of that traffic improvement is due to the easier lap from Q2 of 2022.
Then evenly split really over the rest of the pieces, so innovation Dutch reward and an increase in the advertising spend really I'll split the rest of that improvement more traffic.
Got it Okay, and then I guess.
How did that inform the outlook for the second half of the year I guess, what's your expectation for the traffic picture of the rest of the year evolve.
From a we don't we don't break it down in the full year from a guidance perspective, but we mentioned low single digit total comp.
There is an element of pricing in there as well that we've noted.
And then you've got sales transfer right. So.
We're just going to keep pushing the gas on the traffic lift and try to get that is as high as we can.
And we talked about the investments.
No.
Yes, I think one of the things I would add to that is that we've learned a lot with what we've done in Q2, and so we've experimented again from a rewards perspective with different types of offers different day parts different geographies. We've done the same on the promotion front and so I would say we are as we move forward we'll.
<unk> doing similar activities.
But with the learnings that we've had from Q2 to really enhance the profitability and understand.
Where are those.
Actions have made the biggest differences.
Great and if I could squeeze one more in Charlie I might have missed it but.
Pricing.
Reese's that you implemented at the end of Q2 I guess what.
What amount of pricing.
<unk> did that lead to.
What type of pricing.
To be running in the second half of the year.
On a full year basis, we're now going to range from about a 4% up to two approximately a 6% full year price slap.
With that price move that we just took.
Got it okay. Thank you very much.
And the next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question right.
Just looking to better understand the sales volume curve of some of these infill development shops.
I guess more specifically to the <unk>.
Sent that youre willing to share on these units.
Our shops and are in the comp base as a same store sales headwind or a tailwind at this point.
Right now there's so few of the shops for example in the Texas market. That's in the comp set it's really very de Minimis at this point now as we hit the first day of the 16th month going forward that will start to ratchet up as we go forward I think.
Second quarter, we had may be approximately.
40 shops or 50 shops in the in the comp base from Texas.
So going forward you will see that more.
Okay. So I'll back up from the comparable store units for a second but just in terms of thinking about.
I think we all understand that the infill shop volumes are lower but in terms of the growth rate.
You can share there in terms of your one year or two or three in terms of the EV growth trajectory of those infill locations.
So too early right, we're talking about 'twenty two late 'twenty, two and 'twenty threes class being the high rate of infill. So they haven't they haven't annualized over themselves and remember we don't.
We had a comp number until the first day of the 16th month rollout shops to climb over their launch curve subtle.
So it's just too premature to even know.
Okay, and then last one I apologize I'll sneak one more in just sort of I think early on in the year you guys had.
Broadly guided to the shop level EBITA margin for 2023, I think you basically said your expectation was that it would be flat.
Any update there in terms of your expectation for the full year 2023 shelf level EBITA margin.
We're very confident in the flat and we feel like we will probably outperform that going forward. It's our belief given the strong results. We've demonstrated in the quarter. The fact that we've taken some pricing and we are beginning to see the green shoots of commodity.
Commodities, helping us okay. Thank you.
And the next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Hey, guys.
And I guess first Christine specifically.
As you.
<unk> gotten involved then looked at the pipeline is there anything there.
That.
Makes you uncomfortable with that $1 $7 million, new store productivity number kind of stabilizing at these levels.
Yeah.
So no I mean, as we look forward. So we've got a lot of work as I as I shared on the real estate pipeline. It's obviously an important part of what we're working on here every day.
And as we look at that I think there is things that are ups and downs. So we know that.
Fill rate is going to take the AAV is down a little bit but going into a new market, where we are fresh in that market.
We're going to see higher Evs and so when you look at kind of.
The way that we can shape, our pipeline and really build demand in these new markets. While we're then going in and in filling and by the way I don't think it's a very long time between building that demand and then coming back and feeling that it's going to take so as I look at the pipeline and all of the richness of the data that we.
Now after having.
Opened so many shops in Texas I am very confident as we go forward.
And what this pipeline will look like what our growth will look like.
Great I appreciate that and then.
Maybe finally just on the.
On the updated guidance for the <unk>.
Full year adjusted EBITDA.
In like at least from.
Analysts expectations.
By about $10 million here in the <unk> and flowed that through I know theres, a lot of puts and takes but.
What are some of the key investment areas that you called out it if youre willing to share.
Yeah. So.
Christine sort of outlined a lot of those areas that we've been investing in but going forward those will be things around the capability to support growth going forward, making sure we have a solid team in place.
Using our rewards program and targeted promotional activity to keep driving traffic in the future.
And making sure we see new markets, even more productively as we go forward. So.
Good observation that were flowing through the 10, plus a little more and I will go back to the commentary about our 30% margin and being very mindful that we have the firepower to reinvest and we're going to do that.
Thanks, very much guys nice results.
And the next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.
Okay. Thanks.
Last call you shared that the frequency in that top cohort of customers had held in really nicely.
While it was maybe the lower quartile, where you had seen a little bit of softness so as it pertains to the second quarter could you speak to what you saw with both of those cohorts in terms of frequency and then maybe what are your expectations on that for the for the balance of the year.
Yes. So we saw in Q2, we saw some improvements across cohorts ethylene.
As we look forward again, we will continue to increase our rewards activity.
We are seeing really great customer response from that rewards activity and with that we would we would hope to continue to see.
And the frequency.
Thank you.
Okay.
And the next question comes from the line of Nick <unk> with Wedbush Securities. Please proceed with your question.
Thanks to everyone on the line on the margin first.
You guys kind of.
System pricing is that in line for the company owned stores in Q2.
Got it.
It's not.
Just similar system pricing move versus the company pricing.
Okay, and then Q3 pricing sounds like it's going to be closer to 30% is that fair.
Sorry, 6% for the full year last quarter, we reported that pricing would be 4%, 6% for the full year rollover, it's not a 6% price and move I just wanted to make sure you understood that.
Was approximately a 4% price move on an annualized basis that we just took.
And then please go ahead with your question.
Oh, sorry.
The OLED menu price was what just to be clear.
Year over year to oil in menu price.
The.
In Q2 only.
All in versus last year.
Is about 6% year over year.
Okay.
Then going forward, what does that translate through inclusive of the recent price increases year over year.
So it's now.
<unk> at approximately 7%.
Effect for Q3 year over year.
Got it.
So at 7% pricing in Q3.
Okay.
Really big year over year.
Four wall margin increase.
In the first half.
It sounds like.
Perhaps some decent leverage.
Why shouldn't we see meaningfully above flat.
For the full year and by that I mean.
5200 bps above above last year, I mean is Q4 going to be that much of a drag.
So you've got about 6% price.
So we shot you guys guide of low single digits.
6% is coming from price.
And we're running.
Around 300 basis points from sales transfer.
Okay. So youre plus six minus III from sales transfer kind of puts you in that low single digit range that we're talking about.
Luca.
Sure and then for the four wall EBITDA margin.
It should be at least flat for the year, but it just seems like.
Given the performance in the first half we should be meaningfully above flat year over year is that fair.
For the full year record low margin rollover in the fourth quarter, we took a large entry for breakage income in the fourth quarter got the climb over that.
We reported that last year, the breakage for 'twenty, two and 'twenty, one was $7 million that we have to climb over in profit from breakage last year in the fourth.
That's a big client.
Fair enough. Thank you very much.
And the next question comes from the line of Rahul Crow with Jpmorgan. Please proceed with your question.
Good afternoon, guys. Thanks for taking my question.
I just wanted to check on the tap system rollout can you guys had an update on where or how much of the system has.
Rolled out now and then I'm also curious on how much of the 180 bps leverage have gotten labor came from the efficiency of this rollout within the system you have exiting <unk>.
Yeah, absolutely I can take that so our tap system is it's still in a testing phase. We are currently in 16 shops that are operational right now.
So as far as labor efficiencies, it's really not driving any of that labor efficiency in our markets when I look across at what's driving the labor piece.
It's really investments we've made in our labor scheduling systems investments we've made in.
And educating our teams on how to best schedule labor looking at scheduling against peaks and things like that so that's really the result.
That's what we're seeing from a labor perspective.
No no no.
To follow up on the pricing side I think you guys talked about two different components here, one is higher pricing type of customization.
Being more number of sharps moving to higher priced peers. So I'm just curious like how much of the pricing taken was on the base menu. What's this what does the component mix, which is contributing to this price step up between the two guide together yourself customization pricing moves.
Moving shops to high SBS.
Yes, so one of the reasons why we took price was really to set up this long term pricing architecture and the right way.
And so little more than half of the pricing increase was to make moves in pricing tiers and customization or modifiers.
And so about two 5% of that that price is actually for those news and then the rest.
Is is drink pricing moves really related to drinks that have those modifiers included in them and so when you look at that there's a couple of reasons why one when we looked at our pricing regions and where we were priced versus competitors.
We felt like there's obviously been some movement during COVID-19 of where people have moved and kind of where how prices have changed so that was really just catching up with that as we looked at.
Moving into these new pricing tiers, and then from a customization standpoint.
It's really allows our customers to kind of pick and choose what they do and sets up our long term pricing architecture in a nice way.
Understood that's really helpful to understand.
One last follow up if I may on the rewards members cohort did you see any change in frequency of store visitation over the past few quarters. So you can pick up like one specific cohort within the 6 million numbers. You have now is there any change notable change in the frequency of this addition.
Yes, so as we track our rewards data that's not exactly how we track it right now.
And when we're looking overall at traffic improvements I think with the number of new shops. We have we're both looking for those frequency changes, but we're also looking to add new customers in and so those cohorts do have changing members within them and so what we're really looking for is we want to bring new customers in.
That are quickly increasing their frequency over time, and then also increasing the frequency of our existing existing customers.
Perfect. Thanks, a lot for answering my questions and congratulations on the road.
Thank you.
Okay.
And the next question comes from the line of Gregory Frankfurt with Guggenheim Securities. Please proceed with your question.
Hey, Thanks for the question.
Two quick follow ups. The first is maybe just as we think about the changes on the leases how are you going to finance new stores.
Within the $225 million to $250 million of Capex for this year, what would that have looked like under under maybe the new mixture considering.
Okay.
Yes.
Couldnt speculate going forward like that I mean, I understand the question, but on the fly I Couldnt tell you what that would be.
Okay.
No I think it's important to note too is is our pipeline as planned 18 to 24 months out and so we are currently now for the majority of our time looking for sites in 2025, as we look at continuing the growth here this will be a gradual change versus versus something more.
Abrupt and so just want to make sure. We're very clear that this is really a refinement and our continued.
Focus on learning from every new shop that we're opening.
Got it understood understood and then maybe just going back to the labor.
<unk> put in place these changes.
Two how you guys kind of schedule labor and some of them in the middle of the fourth quarter.
So I guess it has now been around.
Around nine months.
How has that gone I mean, do you feel like you've gotten it to the right level or do you think you maybe have an opportunity more labor out where maybe reinvest.
It was a big change, but I'm curious.
Where you think that's settled out versus where you might want to go.
Yeah, well when we look at the change we made it was really our labor scheduling system last year catching up with the pricing moves that we made.
So if you think about it at the shop level, we werent actually changing.
The amount of labor that within our stores, we were just catching it up with the pricing moves.
And as we as we look over time I think one of the great parts of our brand is really our people and our systems really strong turnover number that we have within our stores and we believe that the investments that we make in labor ensuring that our <unk> have an awesome working.
Mint and have the right number of people within the shop to please our customers is super important so.
So we are not looking to to make changes in labor other than things that will make our shops.
More efficient from a line speed perspective, but we're not looking to cut labor in our shops.
Understood maybe one last one just just Charlie I know, it's been really topical about about the fund raising with without a debt financing versus the equity financing I'm just curious any any.
Updates or thoughts on that front would be helpful. Thank you.
We wouldn't comment on any future action, but we're very pleased that we upsized through the accordion and as we noted very pleased that we had a broad syndicate join us.
In that effort.
It was it was it turned out great.
Thanks, guys.
And the next question is a follow up from Nick <unk> with Wedbush Securities. Please proceed with your question.
Thanks for the question, just what was embraced and labor inflation on input cost inflation.
Order.
What do we expect it to be in Q3 and Q4 now.
So we don't we don't guide that forward Nick.
So.
Wage inflation.
Outside of the moves we made for the quarter was low single digits.
And remember as we move east our wage rate is waiting down so that helps debate any wage inflation, but we don't we don't give those figures out by quarter going forward.
And what about food cost inflation could be too.
So ingredient input cost went down about 1%.
They were actually elevated in Q1, they've now shifted from 1% higher to about 1% lower input costs.
Thank you very much.
Ladies and gentlemen at this time there are no further questions now I'd like to turn the floor back over to Jonathan Mckee for any closing comments.
Okay.
Thank you for your questions as we look ahead, our goals are clear and we are focused.
We plan to continue executing against our plan driving traffic optimizing operations selecting strong sites and building great shops efficiently.
We plan to be smart learn adapt and run our playbook.
We're playing offense and our efforts to deliver profitable growth has begun to bear fruit throughout the quarter, we saw sequential progress in our traffic and our top line grew 34%, we delivered approximately 100% adjusted EBITDA growth year over year.
We continue to build quarter after quarter, creating a strong foundation of growth.
Most importantly, I'd like to thank you for your time and your continued support of desperate.
Yes.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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