Q3 2023 Dutch Bros Inc Earnings Call
Speaker 1: Ladies and Gentlemen, Greetings and Welcome to the Dutch Bros Inc. 3rd Quarter 2023, Morning's Conference Call.
Ladies and gentlemen.
Greetings and welcome to the Dutch Bros, Inc. Third quarter 2023 earnings Conference call.
Speaker 2: At this time, all participants are in a listen-only mode.
At this time all participants are in a listen only mode.
Speaker 3: A brief question and answer session will follow the formal presentation.
A brief question and answer session will follow the formal presentation.
Speaker 4: If anyone should require operator assistance during the conference, please press start and zero on your telephone keypad.
If anyone should take while pay test that's just hearing the conference. Please press star and Vito on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker 5: It is now my pleasure to introduce your host, Paddy Warren, Director of IR and Corporate Development. Please go ahead.
It is now my pleasure to introduce your host Patti Barton director of IR and corporate development.
Go ahead.
Thank you.
Speaker 6: Thank you. Good afternoon and welcome. I'm joined by Joth Ricky, CEO , Christine Barone, President, and Charlie Jimley, CFO . We issued our earnings press release for the quarter ended September 30th, 2023, after the market closed today. The earnings press release, along with a supplemental information deck, have been posted to our Investor Relations website at investors.dutchbros.com.
Good afternoon and welcome.
I'm joined by John Ricky CEO, Christine Barone, eight president and Charlie Jim <unk> CFO.
We issued our earnings press release for the quarter ended September 32023, after the market closed today.
The earnings press release, along with the supplemental information deck has been posted to our Investor Relations website at investors that Dutch Bros. Dot com.
Speaker 7: Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical facts, are forward looking statements and are subject to risk, uncertainties, and assumptions that may cause actual results to differ materially.
Please be aware that all statements in our prepared remarks and in response to your question other than those of historical facts are forward looking statements and are subject to risks uncertainties and assumptions that may cause actual results to differ materially.
Speaker 8: 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.
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 statements.
Speaker 9: We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP measures are neither substitutes for nor superior to measures that are prepared under GAAP.
We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP measures are neither substitutes for north superior two measures that are prepared under GAAP.
Speaker 10: Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Jock. Thank you, Patty.
Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release.
With that I would now like to turn the call over to John.
Thank you Patty good afternoon, everyone.
Speaker 11: By all accounts Q3 was a fantastic quarter. We are extremely pleased with our unit openings, name shop sales, revenue, and profitability.
By all accounts Q3 was a fantastic quarter, we're extremely pleased with our unit openings same shop sales revenue and profitability results.
Speaker 12: We opened 39 new shops and System Same Soft sales grew 4%.
We opened 39, new shops and system same store sales grew 4%.
Speaker 13: We delivered record performance since our IPO across both our top and bottom line with $265 million in revenue and $53 million in adjusted eva-
We delivered record performance since alright.
Both our top and bottom line with $265 million in revenue and $53 million and adjusted EBITDA.
Speaker 14: reflecting increases of 33% and 91% respectively year over year.
Selecting increases of 33% and 91% respectively year over year.
It was also strategically important quarter for the liquidity flexibility of the company, we upsized, our credit facility by $150 million and executed a follow on equity offering that we believe positions our balance sheet the long runway of growth.
Speaker 15: It was also a strategically important quarter for the liquidity flexibility of the company.
Speaker 16: We upsized our credit facility by $150 million and executed a follow-on equity offering that we believe positions our balance sheet are a long runway of growth.
Speaker 17: Dutch Bros will continue to confidently pursue high quality investments in new shops in the past of 4,000 years.
Rose will continue confidently pursue high quality investments in new shops in the past the 4000.
Speaker 18: I'm very proud of the team for what they accomplished, and I'm more encouraged than ever by the strength of the underlying business. This is the last time I'll be...
I am very proud of the team for what they accomplished and I'm more encouraged than ever by the strength of the underlying business.
This is the last time I'll beyond this call with CEO.
Speaker 19: When I joined our co-founder Travis Borsma and the Despero team in 2018, it was clear to me that there was something special about this company and brand.
I joined our co founder of <unk> and the Dutch Bros. Team in 2018. It was clear to me that there was something special about this company and brand.
Speaker 20: In September of 2018, we laid out five key initiatives that would guide us through the next five years.
In September of 2018, we laid out five key initiatives that would guide us through the next five years with 317 shops, we set a goal to reach 800 shops by the end of 2023.
Speaker 21: With 317 shops, we set a goal to reach 800 shops by the end of 2023. We use data to inform better decision making, to execute a disciplined brand strategy, utilize and leverage technology to improve customer experience, and to add new talent to the industry.
We use data to inform better decision, making to execute a disciplined brand strategy to utilize and leverage technology to improve customer experience.
And to add new talent to our experienced team.
Speaker 22: At the center of it all, we set the goal of continued connection with the communities we serve.
At the center of it all we set the goal of continued connection to the communities we serve.
Speaker 23: Over the subsequent 5 years, we have accomplished each and every 1 of those goals while managing through a series of events. It challenged our teams and made us better in the long run.
Over the subsequent five years, we have accomplished each and every one of those goals, while managing through a series of events. The challenged our teams and made us better in the long run the.
Speaker 24: The success of those initiatives is evident, and we've reached several important milestones.
The success of those initiatives is evident and we reached several important milestones.
I am pleased to announced that in October we opened our 800th shop.
Speaker 25: I'm pleased to announce that in October we opened our 800th shop. A testament to the team's discipline and the capacity we have created in the business.
A testament to the team's discipline and the capacity we have created in the business.
Speaker 26: As of September 30, more than 22,000 people are employed at the shops across our system.
As of September 30, more than 22000 people are employed at the shops across our system.
Speaker 27: Since 2019, we've also increased our AUVs by almost 20% and opened nine new states, demonstrating that the Dutch Bros brand resonates far beyond our hallmark.
Since 2019, we've also increased our <unk> by almost 20% and opened nine new states demonstrating that brand resonates far beyond our home markets in.
Speaker 28: In Q2 of 2022, we surpassed $1 billion in trailing 12-month system-wide sales, a milestone that few beverage-focused brands have ever seen.
In Q2 of 2022, we surpassed $1 billion in trailing 12 months systemwide sales milestone that few beverage focus brands have ever achieved.
Speaker 29: Notably, we've generated this exceptional top-line growth while further improving our market.
Notably we've generated this exceptional top line growth, while further improving our margins.
Speaker 30: Our company operated shop contribution margins have expanded considerably and we're approximately 31% in queue.
Our company operated shop contribution margins have expanded considerably.
Approximately 31% in Q3.
Speaker 31: We achieved another milestone in the quarter by opening our 500th company-operated shop, representing 38% more shops at the end of Q3 compared to a year earlier.
We achieved another milestone in the quarter by opening our 500th company operated shop.
Presenting 38% more shops at the end of Q3 compared to the year earlier.
Speaker 32: To put this in perspective, we started 2018 with just 37 company operated jobs. This is really incredible.
To put this in perspective, we.
Started 2018 with just 37 company operated shops. This is really incredible.
And we've been able to develop the systems and capacities, scale the segment quickly and properly.
And we've been able to develop the systems and capacity to scale. This segment quickly and profitably.
Through all of the changes and progress we've made over these past five years, it is important to remember that we're growing in order to share opportunities for our crews, brighten our customers' days, and bring connection to our community.
Through all of the changes and progress we've made over these past five years. It is important to remember that were growing in order to share opportunities for our crews.
And our customers days and bring connection to our communities. We do this while recognizing the responsibility to build long term shareholder value.
We do this while recognizing the responsibility to build long-term shareholder value.
Finally, I am pleased with the stability at the leadership level of this company.
Finally, I'm pleased with the stability at the leadership level of this company.
Trav's continued involvement, combined with decades of experience from internal leaders and franchisees, matched with fresh perspectives from new additions to the team, provides Dutch Bros an amazing foundation upon which to make a difference.
<unk> continued involvement.
Combined with decades of experience from internal leaders and franchisees.
That's with fresh perspectives from new additions to the team.
<unk> is an amazing foundation upon which to build.
The list is long, but to everyone who has been involved in this journey over the last five plus years, I want to say thanks.
The list is long, but to everyone who has been involved in this journey over the last five plus years I want to say thank you.
Our incoming CEO Christine Barone, a recognizes the power of this brand.
Our incoming CEO Christine Barone recognizes the power of this brand and has immersed herself in the business since coming on board.
Immersed herself in the business since coming on board in February excuse.
She is a fabulous leader and brings to the experience necessary to take us on the next phase of our career.
She is a fabulous leader and brings that froze the experience necessary to take us on the next phase of our journey.
I couldn't be more excited for her and for the company. And now for the last time, I will turn it over to Christine for some reason.
Be more excited for her and for the company and now for the last time I will turn it over to Christine for some remarks. Thank you Jos on behalf of all of Us at <unk>.
Thank you, Joss. On behalf of all of us at Dutch Bros, I want to extend my heartfelt congratulations and thanks to you on a personal level for all you have done for me and for Dutch Bros.
I want to extend my heartfelt congratulations and thanks to you on a personal level. So all you have done for me and for Dutch breath, you prepare this company to compete on a national stage and have set us up for the growth that lies ahead. Thank you.
You prepared this company to compete on a national stage and have set us up for the growth that lies ahead.
I share JOP's excitement for the exceptional performance we delivered in Q3 across our key metrics. We once again delivered on our new unit growth target as we have quarter after quarter.
I shared jeff's excitement for the exceptional performance, we delivered in Q3 across our key metrics once again delivered on our new unit growth targets.
We have quarter after quarter in Q3, we opened 39, new shops across 11 states.
In Q3, we opened 39 new shops across 11 states and entered Kentucky and Alabama. We now have Dutch Bros. shops operating in 16 states.
Kentucky, and Alabama, we now have Dutch first shops operating in 16.
Yes.
We also demonstrated continuing momentum, delivering 4% system same shop sales growth. A 20 basis point improved.
We also demonstrated continuing momentum.
<unk>, 4% system same shack sales growth, a 20 basis point improvement quarter over quarter combined.
Combined with sales contributions from new shops, we saw a 33% increase in revenue over a year.
Combined with sales contributions from new shops, instead of a 33% increase in revenue.
Over here.
We are extremely pleased with the profitability we delivered in Q3, headlined by $53 million and adjusted EBITDA for the quarter.
We are extremely pleased with the profitability we delivered in Q4.
Headlined by $53 million and adjusted EBITDA for the quarter.
This is almost double the 28 and adjusted EBITDA.
We reported Q3 2022.
And reflects our commitment to growth with profitability.
I will now spend a few minutes discussing our key priorities and how they ladder up to these outcomes.
I will now spend a few minutes discussing our key priorities and how they ladder up to these outcomes.
We begin any discussion of Dutch growth with our fundamental differentiator, our people.
We began any discussion of that growth with our fundamental differences there are people.
The shop teams who greet and care for our customers and each other every day are the lifeblood of this organization.
The shop piece.
We care for our customers and each other every day are the lifeblood of this organization.
recruiting, developing, and retaining outstanding people in the needs of our primary focus and our greatest.
<unk> developing and with outstanding people, who is our primary focus and our greatest strengths are.
Our people pipeline is robust.
More than 325 qualified operator candidates in the pipeline.
The average tenure of seven years.
At scale, we anticipate that each operator will be capable of leading 3-7 shops on Apple.
At scale, we anticipate that each operator will be capable of frequency to seven shops on average over.
Over the past two years, we've noted nearly 50 people to the position of operator. These new operators started out for releases with Dutch Bros, working their way up to the ranks and embodying our brand values of speed, quality and ease.
Over the past two years.
Nearly 50 people to the position of operator these new operators started ask for just a desk.
Working their way up to the rank and embodying our brand values of speed quality and service.
We love this model because it allows us to reward our highest performing and most committed employees with an opportunity to continue to advance within the organization while cementing our culture and values as we grow.
We love that model because it allows us to reward our highest performing and most committed employees with an opportunity to continue to advance within the organization of cementing our culture and values as we grow.
Our shop expansion strategy is motivated by our commitment to create opportunities for.
Our shop expansion strategy is motivated by our commitment to create opportunities for our people.
We intend to continue to look for opportunities to open profitable shops led by strong homegrown leaders at what we believe are top tier return outcomes.
Intend to continue to look for opportunities to open profitable shops led by strong homegrown lasers at what we believe are top tier return outcome.
Furthermore, our expanding margins allow the flexibility to continue to make proactive investments in crew wages and benefits.
Furthermore, our expanding margins allowed us flexibility to continue to make proactive investments in crew wages and benefits.
As discussed last quarter, we are committed to making further investments.
<unk> discussed last quarter, we are committed to making further investments in our people on November one.
On November 1, we made changes to our shop manager pay structure in recognition of the critical role youth leaders play in building our business.
And as to our shop manager pay structure.
Ignition of the critical these leaders play drilling our business.
We also reimagined our incentive structure, more closely aligned with both sales growth and great customer service. We believe these changes will more closely align manager pay with my internal sales growth in customer service.
We also re imagined our incentive structure more closely align with the sales growth and great customer service. We believe these changes will more closely align manager pay with our internal sales growth and customer service objectives.
Like many of our peers in the industry, we have managed through a difficult development environment, are characterized elevated build cost and rate of investment.
Like many of our peers in the industry, we have managed through a difficult development environment characterized by elevated build costs.
supply chain shocks, permitting delays, and rising interest.
Supply chain shock permitting delays and rising interest rates.
We continue to work diligently to manage these headwinds, and we remain confident in our 2023 development target.
Continue to work diligently to manage these headwinds and we remain confident in our 2023 development target.
We have also engaged in a purposeful strategy to rapidly gain share in new markets and achieve a fish.
We have also engaged in a purposeful strategy to rapidly gain share in new markets and achieve efficiencies.
As we have discussed in the past, we believe this approach to market entry and its associated higher levels of infill has been a key driver in the moderation of new shop A-DZ.
As we have discussed in the past we believe this approach to market entry and associated higher levels of Intel that's been a key driver in the moderation of new shop AVB.
Last quarter, we outlined a shift in our real estate strategy, which we believe will position us for long term success. This new approach is underpinned by three key elements.
Last quarter, we outlined the shift in our real estate strategy, which we believe will position us for long term success.
This new approach is underpinned by three key elements.
First, widening our initial reach as we enter new markets and allowing our brand awareness to build. We expect to achieve the same ultimate density, though our TAM remains unchanged at 4,000.
First widening our initial niches, we enter new markets and allowing our brand awareness to bill.
We expect to achieve the same ultimate density nor our Tam remains unchanged at 4000 shops.
Second, shipping back toward more built-in suitcases would require a lower upfront cash commitment.
Second shifting back towards more build to suit leases, which require a lower upfront cash commitments.
Third, developing new prototypes to efficiently and effectively penetrate markets and generate strong goods.
We're developing new prototypes to efficiently and effectively penetrate markets and generate strong alright.
We anticipate beginning to feel the effects of these changes in 2025 with the impacts worked through our robust pipeline.
We anticipate beginning to feel the effects of these changes in 2025 as the impacts work through our robust pipeline. As we grow, we believe maintaining financial discipline and strict underwriting standards allows us to balance creating opportunities for our people while supporting long-term unit development.
As we grow we believe maintaining financial discipline and strict underwriting standards allows us to balance creating opportunities for our people, while supporting long term unit development.
In Q3, you continue to see margins expand, driven primarily by a combination of pricing, shop level operational improvement, and moderating SG&A.
In Q3 and continue to see margins expand driven primarily by a combination of pricing shop level operational improvements and moderating SG&A growth.
Not only did total company-operated shop contribution almost double from Q3 2022, approximately $73 million this quarter, these shops delivered 540 basis points of margin expansion year-over-year to 31% of company-operated shop revenue.
Not only did total company operated shop contribution almost double from Q3 2022.
Accidently $73 million. This quarter. These shops delivered 540 basis points of margin expansion year over year to 31% of company operated shop revenue.
Strong margins propel our new shop growth, delivering quick payback periods and enabling us to reinvest into further development opportunities. We believe our 4-wall model also provides us a certain level of flexibility to adjust and adapt this week.
Strong margins propel our new shop growth.
They bring quick payback period, and enabling us to reinvest into further development opportunities. We believe our four wall model also provides us a certain level of flexibility to adjust and adapt as we expand.
Moderating growth in SG&A spending is an opportunity for leverage. We intend to make smart investments that support critical capabilities that we scale. We expect to see leverage as revenue growth outpaces SG&A spending.
Moderating growth in SG&A spending as an opportunity for leverage and we intend to make smart investments to support critical capabilities. At this scale, we expect to see leverage as revenue growth outpaces SG&A spending growth.
We also remain committed to introducing more customers to the Dutch Bros brand. In Q3, we saw system-wide same-shop sales growth expand to 4%, an improvement of 20 basis points from Q2. We successfully...
We also remain committed to introducing more customers to the <unk> brand in Q3, we saw system wide same shack sales growth expanded 4% an improvement of 20 basis points from Q2.
We successfully executed through a variety of tactics.
First innovation, keeping the brand fresh and fun launched seasonal LTE adds in the quarter, beginning with the chocolate Crunch cold brew freeze and frost.
First, innovation keeps the brand fresh and fun. We launched three seasonal LTOs in the quarter, beginning with the chocolate crunch cold brew freeze and frost, topped with soft top and Oreo crumbles, and rounding out the quarter with a caramel pumpkin brulee and sweater weather chai. We intend to use innovation to drive excitement and trial and leverage our unique customization advantage.
With soft top and Oreo crumbles, and rounding out the quarter with a carnal pumpkin boule and sweater, whether chi we intend to use innovation to drive excitement and trial and leverage our unique customization advantages.
Second, we are continuing to enhance our rewards program and find new ways to delight our customers.
Second we are continuing to enhance our rewards program and find new ways to delight, our customers rewarding and recognizing customers as part of a 40 year legacy of touch growth.
rewarding and recognizing customers as part of the 40 year legacy at Dutch Bros.
In Phase 1, we digitized our existing program and rapidly scaled it by converting to a spin-based approach. Introduced in early 2021, Ward's members accounted for 60% of transactions in less than 12 months.
In phase one we digitize our existing program and rapidly scaled it by converting to a spend based approach.
Introduced in early 2021 rewards members accounted for 60% of transactions in less than 12 months.
Impressively, this metric has continued to grow even as we are entering into new geoc and new
Impressively. This metric has continued to grow even as we are entering into new geographies.
We began laying the groundwork of the second season of our warred journey in March. We moved from a broad-based feedback program to a more targeted approach where we are using consumer insights to drive behaviors that we expect will create more lasting value.
We began laying the groundwork of the second season of.
Our rewards journey through March.
From a broad base give back program to a more targeted approach.
Consumer insights to drive behaviors that we expect will create more lasting value.
We are beginning to activate specific campaigns and target day parts. For example, in Q3, we ran double point Tuesdays and a visit frequency challenge. You believe that customers are responding to our efforts and that we are beginning to see green shoots.
We are beginning to activate specific campaigns and targeted day part.
For example in Q3, we ran double Tuesdays and visit frequency challenge.
We believe that customers are responding to our efforts and that we are beginning to see green shoots.
As we look forward, we plan to continue to use our increasing capabilities to influence specific behavior. We are still at the beginning of our journey and we believe we have significant runway to continue refining personalized offers.
As we look forward, we plan to continue to use our increasing capabilities to include specific behavior. We are still at the beginning of our journey and we believe we have significant runway to continue refining personalized offers.
Third, selective promotion helps open new experiences. You're enjoying success with our fillet tray program, which we have now run quarterly since March.
Third selective promotion helped to open new experiences.
Success with our <unk> program, which we have now run quarterly since March.
continue to experiment with offer design and timing and remain pleased with both the execution and
Continue to experiment with software design and timing and remain pleased with both the execution and results in.
In our most recent iteration, we once again drove substantial sales.
In our most recent iteration, we once again drove substantial scale.
Outside of the military, we will continue to execute a multiple-based promotional activities on courage, trial, and group invitations. Next, Lawrence.
Outside of pellets, we will continue to execute on multiple based promotional activities to encourage trial include simplification.
Next please.
These media brings awareness.
While approximately 63% of our transactions were attributable or rewards numbers this quarter, we recognize an opportunity to connect with a wider range of customers from various stages of their journey.
While approximately 63% of our transactions were attributable to our rewards members. This quarter, we recognized an opportunity to connect with a wider range of customers.
<unk> stages of their journey with you.
We have increased paid media spend in an effort to bring new customers to Dutch Bros, hold brand awareness in new markets, and keep the brand top of mind for existing customers. We look forward to continuing to scale this spend over time and are optimistic about the long-term impact of these sustained events.
<unk> increased paid media spend in an effort to bring new customers to Dutch growth or brand awareness in new markets.
The brand top of mind for existing customers, we look forward to continuing to scale the spend over time and are optimistic about the long term impact and sustained effort.
We have high expectations for ourselves and our business. We are proud of both our third quarter results and the steps we're taking to build on our strong foundation for the long term.
We have high expectations for ourselves and our business. We're proud of both our third quarter results and the steps, we're taking to build on our strong foundation for the long term.
We have terrific customer engagement with rewards members driving 63% of our transactions. We are excited about opportunities in front of us to further accelerate this platform.
We have top tier growth. We delivered record revenue in Q3 and a 33% year over year increase. This growth has been consistent, demonstrated by nine consecutive quarters of opening three or more shops on our way to 4,000 plus.
We have top tier growth.
We delivered record revenue in Q3, and a 33% year over year increase this growth has been consistently demonstrated by nine consecutive quarters of opening more shops on our way to 4000 plus.
We have excellent shop margin yes.
We have demonstrated that we can drive this exceptional growth with profitability, culminating in this quarter delivering record-adjusted EBITDA since our IPO.
Emmons traded that we can drive this exceptional growth with profitability.
Anything in this quarter delivering record adjusted EBITDA since our IPO.
We are well capitalized. We believe our recent primary offering and credit up-sizing provides a long runway and plenty of flexibility upon which to execute our growth plan and capitalize on our considerable length.
We are well capitalized we believe our recent primary offering and credit upsizing provides a long runway and plenty of flexibility upon which to execute our growth plan to capitalize on our considerable space.
Most importantly, we have great people. We have outstanding and engaged rooms in our shops and a strong pipeline of operators ready to open our new work.
Most importantly, we have great people, you have outstanding and engage Bruce just in our shops and a strong pipeline of operators wanting to open a new market.
These factors give us great confidence in our future. With that, I'll turn it over to Charlie to review our finance.
These factors give us great confidence in our future.
That I will turn it over to Charlie to review our financials.
Thanks, Christine. Both Jock and Christine noted what a strong quarter we had. Now pleased we were with our unit openings, same shop sales, revenue and adjusted EBITDA results.
Thanks, Christine both Johnson Christine noted what a strong quarter, we had and how pleased we were with our unit openings same shop sales revenue and adjusted EBITDA results. The company operated shop segment delivered outstanding performance generating $236 million in net sales and $73 million in shop contributions and.
The company operated shop segment delivered outstanding performance, generating 236 million in net sales and 73 million in shop contribution in the quarter. This represents a year over year net sales increase of 36% and company operated shop contribution growth of more than 65%.
The quarter. This represents a year over year net sales increase of 36%.
Company operated shop contribution growth of more than 65%.
As a percentage of net sales, company operated shop contribution was 31%, an expansion of 540 basis points year over year. These strong four wall economics give us flexibility and position us to invest in areas that support and sustain growth.
As a percentage of net sales company operated shop contribution was 31% an expansion of 540 basis points year over year.
Strong four wall economics give us flexibility and position us to invest in areas that support and sustained growth.
Margin expansion is taking place up and down the P&L, including 120 basis points in cost of goods, 230 basis points in labor, and 110 basis points in occupancy and other. We believe this margin expansion is primarily a function of pricing. The efficiency improvements we have made in key areas throughout shop operations, and the portfolio effect of moving into lower operating cost marks.
Margin expansion is taking place up and down the P&L, including 120 basis points in cost of goods 230 basis points and labor.
Hundred 10 basis points in occupancy and other we believe this margin expansion is primarily a function of pricing.
Vinci improvements we have made in key areas throughout shop operations and the portfolio effect of moving into lower operating cost markets labor was 26% of net sales down from 28, 3% in 2022.
Labor was 26% of net sales down from 28.3% in 2022. The benefit from the changes we began implementing in Q4 2022 continue, as well as leverage from near-over-year pricing assets.
Benefit from the changes we began implementing in Q4 2020 to continue as well as leverage from year over year pricing actions. These gains were partially offset by our decision at the beginning of 2023 to increase starting wages in federal minimum wage markets.
These gains were partially offset by our decision at the beginning of 2023, who increased starting wages in federal minimum wage markets. And in ongoing initiatives, just sure our retail teams are the best in the business, they're continuing to make meaningful system-wide investments in those.
Ongoing initiatives to assure our retail teams are the best in the business, we're continuing to make meaningful system wide investments in those teams specifically this will take the form of investments in shop manager wages and incentives that began November one.
Specifically, this will take the form of investments in shop manager wages and incentives that began November 1st. We estimate these investments will cost between 1.5 and 2M dollars in the 2 months They are in place in the 4th quarter alone and continue to be part of our cost structure going forward.
We estimate these investments will cost between one five and $2 million in the two months that they are in place in the fourth quarter alone. We continue to be part of our cost structure going forward.
Shifting now to SG&A. For the quarter, SG&A was approximately $50 million, which includes about $10 million in stock-based compensation.
Shifting now to SG&A for the quarter SG&A was approximately $50 million, which includes about $10 million in stock based compensation.
Therefore, with the exclusion of stock based compensation and other non-recurring expenses, just as SG&A was approximately $41 million falling to 15.3% of revenue, near the 17.5% of Q3 last year, the
Therefore, with the exclusion of stock based compensation and other nonrecurring expenses adjusted SG&A was approximately $41 million following to 15, 3% of revenue.
17, 5% in Q3 last year.
While we are still scaling and adding resources, we are making a concerted effort to stage them in over time.
While we are still <unk>.
Scaling and adding resources, we're making a concerted effort to stage them in over time.
Now, onto a few comments on the health of our balance sheet and liquidity. Last quarter, I commented that having a well-capitalized balance sheet is a priority to position the company to take full advantage of the long growth runway ahead in a responsible and thoughtful manner. During the quarter, we not only upgraded our credit facility by adding an additional $150 million in capacity, it also raised approximately $330 million in primary equity proceeds, net of discounts, fees, and expense.
Now onto a few comments on the health of our balance sheet and liquidity last quarter I commented that having a well capitalized balance sheet.
Priority to position the company to take full advantage of the long growth runway ahead there.
Responsible and thoughtful manner during.
During the quarter, we not only upgraded our credit facility by adding an additional $150 million in capacity and also raised approximately $330 million in primary equity proceeds net of discounts fees and expenses, we proceeded to pay down our revolving credit facility, which at the time was approximately $203 million.
We proceeded to pay down our evolving credit facility. We kept the time was approximately $203 million. And retained approximately $130 million of cash on our balance.
<unk> retained approximately $130 million of cash on our balance sheet. We will use this cash infusion for general corporate purposes, including funding our growth over the coming quarters.
We will use this cash infusion for general corporate purposes, including funding our growth over the coming court.
The primary equity capital raise achieved three outcomes. First, we believe that transaction will be a creative, given the projected reduction in interest expense under our credit facility. Second, it provides the flexibility we believe will be required to manage through the total project cost escalation. We have experience at the time of our rights.
The primary equity capital raise achieved three outcomes first we believe the transaction will be accretive given the projected reduction in interest expense under our credit facility second it provides the flexibility we believe will be required to manage through the total project cost escalation, we have experienced since the time of our IPO and <unk>.
And third, in enabling a reset to our capital structure, additionally, the company to have both ample liquidity and optionality. With the belief that our four-wall economics are some of the best in the industry, the ability to execute without undue capital constraints is vital to reaching our growth.
<unk> enabled a reset to our capital structure positioning the company to have both ample liquidity and optionality with the belief that our four wall economics are some of the best in the industry the ability to execute without undue capital constraints is vital to reaching our growth potential.
As a collective result of all these actions and under current assumptions and market conditions, we do not currently foresee a need to raise additional primary equity capital.
As the collective result of all these actions and under current assumptions and market conditions, we do not currently foresee a need to raise additional primary equity capital.
Total liquidity is now around $700 million, consisting of $150 million in cash and equivalents and $350 million undrawn revolver, plus $200 million in undrawn delayed draw term loans.
Total liquidity is now around $700 million.
Consisting of $150 million in cash and equivalents.
$350 million Undrawn revolver, plus 200 million in Undrawn delayed draw term loans.
At the end of the quarter.
The net cast position was approximately $54 million, made up of 150 million in cash and cash equivalents, 96 million in turn ones. Moving on to...
The net cash position was approximately $54 million.
<unk> of $150 million in cash and cash equivalents and $96 million in term loans.
Moving on to 2023 guidance, 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 our expectation for capital expenditures remains unchanged, which we expect to be in the range of.
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. Our expectation for capital expenditures remains unchanged, which we expect to be in the range of $225 million and $250 million.
$225 million or $250 million this.
This includes approximately 15 million to 20 million in spending in 2023 for a new roasting facility which is projected to open in 2020.
This includes approximately $15 million to $20 million and spending in 2023 for a new roasting facility, which is projected to open in 2024 hour.
Our estimate of system, same shop sales growth remains in low single digits. Our expectation that revenue would be at the lower end of the range of 950 million to 1 billion remains unchanged.
Our estimate of system same shack sales growth remains in the low single digits, our expectation that revenue would be at the lower end of the range of $950 million to 1 billion remains unchanged given strong growth in company operated shop revenue and its contribution to our bottom line along with the continuance of SG&A.
Given strong growth in company-operated shop revenue and its contribution to our bottom line, along with the continuance of SG&A leverage, we now estimate adjusted EBITDA will be between $150 million to $155 million, up $15 million from last quarter's-
<unk>, we now estimate adjusted EBITDA will be between $150 million $155 million.
$15 million from last quarter's guidance the increase in adjusted EBITDA reflects stronger than expected year to date profitability, partially offset by the increased shop labor investments and as we noted earlier, we intend to execute a series of business building initiatives throughout the fourth quarter. These initiatives include aggressively.
The increase in adjusted EBITDA reflects stronger than expected year-to-day profitability, largely offset by the increased shop labor investment. And as we noted earlier, we intend to execute a series of business building initiatives throughout the fourth quarter. These initiatives include aggressively using our rewards program to attract new customers and retain existing ones with a particular focus on building engagement in New York.
And our rewards program to attract new customers and retain existing ones with a particular focus on building engagement and newer markets. In addition to using rewards as a key lever. We also intend to bring even more focus investments to building capability and our consumer facing technologies and investing in the talent required to grow the business.
In addition to using rewards as a key lever, we also intend to bring even more focused investments to building capabilities in our consumer-facing technologies and investing in the talent required to grow the business.
To summarize, it is important we balance profit delivery with wise investments in our future.
To summarize it is importantly balanced profit delivery with wise investments in our future growing at this pace and through a company led model requires the ability to flex and adjust as needed.
Growing at this pace and through a company-led model requires the ability to flex and adjust as needed, always taking a long term take.
He is taking a long term view.
Thank you, and now we will take your questions. Operator, please open the line.
Thank you and now we will take your questions operator, please open the lines.
Yes.
Yes.
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session.
Thank you.
Ladies and gentlemen, even and I will be conducting a question and answer session.
If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
If you would like to ask a question. Please press star and one on your telephone keypad.
A confirmation tone will indicate your line is it the question queue.
You may press star and 2 if you would like to remove your question from the chat.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Ladies and gentlemen, we will wait for a moment while we poll for questions.
Our first question is from Chris O'Call with Stevell. Please go ahead. Hello, this is Ella on for Chris.
Our first question is from Chris <unk>.
With Stifel. Please go ahead.
Okay.
Hello, This is <unk> on for Chris.
I was hoping we could dig into traffic trends during the quarter and whether you saw some meaningful.
Meaningful change in cadence over the course of <unk> and then as you step back what do you believe has really being most effective in driving incremental visits in recent periods.
What do you believe has really been most effective?
Yeah, absolutely. So we're very pleased with our 4% same shack sales growth in the quarter and as we look at traffic specifically, we saw a little bit of deceleration between Q2 and Q3.
Yeah, absolutely. So we're very pleased with our 4% same shop sales growth in the quarter.
And as we look at traffic specifically, we saw a little bit of deceleration between Q2 and Q3, but are really pleased with the overall direction in which traffic is headed. When we look at Q2 versus Q3, we saw a couple of things. One, we had a little bit of a harder lap than we had last year.
But I'm really pleased with the overall direction in which traffic is headed when we look at Q2 versus Q3, we saw a couple of things one we had a little bit of a harder lap than we had last year.
The second thing is we took pricing in Q3. As we take pricing, we typically see a little bit of dip in traffic as we first take that pricing, but we're very pleased with the results of the pricing that we took.
Second thing is as we took pricing in Q3 as we take pricing, we typically see a little bit of dip in traffic as we first take that pricing, but we're very pleased with the results of the pricing that we took and so what we would've expected to see from a traffic perspective with that pricing.
And so what we would have expected to see from a traffic perspective with that price.
We also had a really strong LTO in Q2 with the Mangonada. As we look forward, we want to continue that unique type of momentum that we have in that type of LTO.
We also had a really strong <unk> in Q2 with the mango Nahda and as we look forward I would want to continue kind of that unique type of momentum that we have in that type of LCL.
Going forward as we look at ways to drive traffic and think through the things that are most effective in doing that, one, is really innovation.
Going forward as we look at ways to drive traffic and think through the things that are most effective in doing that.
One is really innovation.
And we've done a number of things to enhance our innovation over the last couple of quarters, dropping in some short-term LTOs like the Popping Candy Firecracker Rebel. And then as we look forward into next year, we're going to continue doing that. But we're also going to be looking tightly at consumer trends, what's going on in the market, to look at longer-term offerings that are truly innovative and new to the market.
And we've done a number of things to enhance our innovation over the last couple of quarters dropping in some short term LTM it looks like the pop in Candy Firecracker rebel and then as we look forward into next year, we're going to continue doing that.
But we're also going to be looking tightly at consumer trends whats.
What's going on in the market to look at longer term offerings that are truly innovative and new to the market.
Secondly, as I shared in my prepared remarks, we believe there's a lot of momentum with the awards program. We're really on a journey within rewards, thinking about starting with a high-just spin-based program.
Secondly, as I shared in my prepared remarks, we believe there is a lot of momentum with the rewards program. We're really on a journey within reward thinking about starting with a high just spend based program.
that in March of this year we took some of that rich base reward out and moved it to really incentivize customer behavior.
And that in March of this year, we took some of that rich base reward out and moved it to really incentivize customer behavior.
As we continue to progress in a rewards program, we're learning a lot about the types of offers that our customers respond to. And what you'll see going forward is really more and more personalization in that rewards program. So, sake many, our customer-based further for offers, looking at different points levels and different rewards levels that will really drive our customers in that program.
As we continue to progress in our rewards program.
A lot about the types of offers that our customers respond to what youll see going forward, it's really more and more personally personalization and that rewards program. So segmenting our customer base further for offers out looking at different points levels in different rewards levels that will really drive our customers in that program.
Third in paid media, so we have increased spend a little bit in our paid media. We've really been focused on driving sales at the bottom of the funnel so that immediate return of showing someone an ad and getting them into the shop. As we continue to expand our paid media, but what we'll be looking at is really driving brand awareness as well. When we look at the number of shops that we have in the markets, we think there's a significant opportunity to continue to drive brand awareness in those.
Third in paid media. So we have increased spend a little bit in our paid media.
Really been focused on driving sales at the bottom of the funnel. So that immediate return of kind of showing someone in AD and getting them into the shop as we continue to expand our paid media that what we'll be looking at is really driving brand awareness as well.
When we look at the number of shops that we have in new markets. We think there's a significant opportunity to continue to drive brand awareness in those markets and finally.
And finally, we've been doing a number of things with promotions really to drive trials. So we think the best introduction to Dutch Bros is through a friend who already loves Dutch Bros. And so we're going to continue doing promotions that allow friends to share with friends. We're also learning that as we kind of learn more from the rewards program, we can shift some of those promotions into our rewards program. And so we'll continue to be doing that as we move forward with TRAP.
<unk> been doing a number of things with promotions really to drive trials. So we think the best introduction to Dutch Bros. As a friend.
Who already love Dutch Bros. Until we're going to continue doing promotions and allow friends to share with friends. We're also learning that as we.
Kind of learn more from our rewards program, we can shift some of those promotions into our rewards program and so we will continue to be doing that as we as we move forward with traffic.
We also believe that we have a significant opportunity as we move forward to build different sales layers into our business, specifically looking at different channels that we could drive business through. Thank you. I hope that answers your question.
We also believe that we have a significant opportunity as we move forward to build.
Different sales layers into our business specifically.
Specifically looking at different channels that we could drive business through <unk>.
Thank you I hope that answered your question.
Thank you Kristine that's really helpful and I have another question about performance.
Performance in Texas, So maybe.
If you can provide an update on store performance in Texas, and whether you continue to deter.
Deterioration you expect an EAC performance.
Yes, so we actually don't provide regular updates on state level performance. We did provide some updates when we did our follow on offering in early September . And as we shared at that point, we're very pleased with kind of how the Texas market is developing.
Yes, so we actually don't provide regular updates on state level performance. We did provide some updates when we did our follow on offering in early September and as we shared at that point, we're very pleased with kind of how the Texas market is developing.
We entered the Texas market in January of 2021, so less than three years ago. We have 148 shops now in Texas at the end of Q3. As we've gone into that market, we've rapidly been able to build scale, and we believe that our brand awareness is catching up with us a little bit in that market. So again, given the rapid, rapid growth that we've had in the state, we're quite pleased with where the AAVs are.
We entered the Texas market in January of 2021 to less than three years ago.
We have 148 shops now.
In Texas at the end of Q3 as we've gone into that market is rapidly been able to build scale and we believe that our brand awareness is catching up with us a little bit in that market. So again, given the rapid rapid growth that we've had in the state we are quite pleased with where the agencies are.
So much.
Thank you. Our next question is from Jeffrey Bilanstein with Barclays. Please go ahead.
Thank you.
Next question is from Jeffrey Bernstein with Barclays. Please go ahead.
Yes.
Great. Thank you very much. Two questions as well. First one just a follow on in terms of the traffic trends.
Great. Thank you very much.
Two questions as well first one just a follow on in terms of the.
The traffic trends.
I think you noted a little bit of easing from the second quarter to third quarter.
noted a little bit of easing from the second quarter to the third quarter, oftentimes in conjunction with that price increase. So I'm just wondering if you can share maybe how much pricing you're running in the third and fourth quarter.
Sometimes in conjunction with that price increase so I'm just wondering if you can share maybe how much pricing you are running a.
Third and fourth quarter.
And maybe how you think about that I don't know how you measure the affordability here.
Maybe how you think about that, I don't know how you measure the affordability or how you think about pricing into a slowing macro just trying to size up. Maybe you have data on. You know, trends by income cohort, just trying to get a sense for your confidence in your ability to take that incremental price without degradation of traffic over time. And then I had 1 follow up.
How you think about pricing into a slowing macro just trying to.
Is that maybe you have data on trends by income cohort just trying to get a sense for your confidence and your ability to take that incremental price without degradation of traffic over time, and then I had one follow up.
Okay, so Jeff, I'll, uh, Charlie, I'll talk about the pricing facts and then I'll kick it over to Christine. They'll give the qualitative answers. So pricing impact on cents, shuts, and the third quarter is approximately eight to nine percent. That is then going to drop to between four and five percent or the fourth.
Thanks Lou.
Jeff It's Charlie I'll talk about the pricing facts, and then I'll kick it over to Christine give the qualitative answers so pricing impact on same store sales in the third quarter is approximately 8% to 9% that is then going to drop to between four and 5% for the fourth quarter.
Yes, and then as we as we think about pricing and look at where we have opportunity.
Yeah, and then as we think about pricing and look at where we have opportunity, we're actually building in a new layer to the work that we do from a pricing perspective.
Actually building and a new layer to the work that we do from a pricing perspective.
So we're looking at willingness to pay kind of by size, by product, by geography.
So we're looking at willingness to pay kind of by size by product by geography.
And we believe that we're in a really good place from a pricing perspective and feel comfortable with what we've taken.
And.
We believe that.
We're in a really good place from a pricing perspective, and feel comfortable with what we've taken and.
And although that we don't have plans right now to take additional price, I do believe that we have room.
And although that we don't have plans right now to take additional price do believe that we have room for that.
Okay are you able to look at your or look at your customer base by income level, its a bit of size up maybe traffic trends across different income levels like how do you.
Okay, are you able to look at your or look at your customer base by income level to be able to size up maybe traffic trends across different income levels? Like how do you how do you test that just to get confidence that you have that price?
How do you test that just to get confidence that you have that pricing power.
Yeah, so we don't look at our base by income level right now, but the couple of cuts that we do is we're looking at things by geography. This last pricing we took, we actually took in tranches.
Yes. So we don't we don't look at our base by income level right now, but the couple of cuts that we do do is we are looking at things by geography. This last pricing move we took we actually took in tranches and so we were able to look pretty surgically at what we did with it the pricing move and look specifically at how.
And so we were able to look pretty surgically at what we did with the pricing move and look specifically at how different geographies responded as we did into those pricing moves over those different times.
Geographies responded as we did each of those pricing moves over those different times and the other thing that we look at it as we look a lot at our rewards data and just understand kind of what's happening with frequency over those customers. We look at different frequency that they come in with and what happens when you take different pricing moves into different promotions things like that.
And the other thing that we look at is we look a lot at our rewards data and just understand kind of what's happening with frequency over those customers. We look at different frequency that they come in with and what happens when we take different pricing moves and do different promotions, things like that.
So we're looking at price from a number of different angles.
<unk>.
So we're looking at price from a number of different angles.
Yes.
Got it and just my follow up you mentioned some new markets.
And just my follow-up, you mentioned some new markets. I'm sure it's too new, but Alabama and Kentucky being most recently. But whether it's those dates or whether new markets over the past 12 months, the receptivity into new markets can you talk qualitatively about what you've seen versus perhaps your expectation. Obviously, it's a brand going into new markets. So.
I'm sure, it's too, new but Alabama, and Kentucky, being most recently, but whether it's those states or whether new markets over the past 12 months the receptivity into new markets can you talk qualitatively about what you've seen versus perhaps your expectation obviously, its a brand going into new markets. So.
get some mixed results depending on where your head is. I'm just curious over the past year, the newest market you've entered into, whether it's cities or states, if you can just share any, you know, best or worst, you know, how
Probably get some mixed results, depending on where youre headed so I'm just curious over the past year the newest markets you've entered into whether its cities or states. If you could just share any.
Best or worst.
How those how the performance has gone thus far thank you.
Yeah, we're absolutely still super excited by what we're seeing with response as we go into new markets, new cities, new states.
Yeah, we're absolutely still super excited by what we're seeing with response as we go into new markets New cities New States.
and have just an incredible responsiveness to the brand. We send pictures around about the awesome long lines that we get to see. It's really like a party when we open a new Dutch Bros. And in love to see how excited both the BROEF desire and the customers are when they get to visit us for the first time. And it's pretty amazing to be 800 shops in and still have this really awesome reception as we go and enter new markets.
And have just an incredible responsiveness to the brand.
We send pictures around of how the awesome long lines that we get to see it is really like a party when we opened a new Dutch bros.
And love to see how excited at both the <unk> and the customers are.
When they get to visit us for the first time, and it's pretty amazing to be 800 shops in and still have this really awesome reception as we go and enter new markets.
Great. Thank you.
Thank you.
Our next question is from Sarah Canatory with Bank of America. Please go ahead.
Okay, thank you. I have a question on the units and then just to follow up on the pricing and the margin construct. So the unit grows, I guess, you know, you mentioned that the TAM is unchanged.
Does the rate of growth change? I know last year around this time you gave, you know, for guidance on unit growth. I was just wondering if this sort of rule you have of increasing the number of new units by 15% every year still holds or if having to widen out the development, you know, radius, if you will, kind of changes the rate of growth. So that's the first and then, like I said, just the second question.
So a couple of things just on changing kind of the overall TAM. When we look at what we're doing from a development strategy, it really is just
taking a little bit more time in many cases, maybe just a matter of months as we go into a new market. And that's really just to allow the brand to, that brand awareness to build a little bit. I think the lines are our double edged short, right? So we have, that our customers learn about us sometimes from seeing those awesome long lines as we go into a market. And then they also become the thing that they want us to change. And they want us to shorten our lines so that they can come more often. And so we, but we do think that that's an important element of brand building as people kind of seeing that brand, seeing others love the brand and coming into the market that way.
You have follow up there.
Yeah, it was about margins. So I can the question actually about the margins and I would happy to hear both from you, but this margins are kind of as high as I've seen in the industry kind of above 30%. So I guess maybe you could just talk a little bit about that view. You talked about IU of room to reinvest. What is kind of a steady state margin at the four wall level?
Well, they are elevating as you've noted, and we did note some investments we're going to make that we made starting November 1st and will continue through the end of the quarter and all the way through next year. So you'll see the margin.
Moderate as a result of that. This is our highest seasonality quarter. So be mindful of that when you're looking at the shape of our margins.
But largely where we're sitting today is a general expectation of a good place to be. We also talked about having flexibility and the power of this four-wheel model being so strong and allowing us to adapt to conditions changing in the market. And that's our view of our margin situation right.
Yeah, and then I wanted to go back and just answer your question on guidance. So we're planning on doing holistic guidance at the end of our fiscal year. And but we do feel good about our long term growth target.
And you'll sort of address the rate of growth then. Just, understood that the TAM is unchanged, but just the pace of growth.
Absolutely, yeah. We'll do that holistically at the end of the year. Okay, thank you both.
Our next question is from Jeff Farmer with Gordon Haskett. Please go ahead. Thank you. I might have missed it, but as it relates to the Q3 savings for sales number, did you guys share the fortress scene driven, I guess it would be the sales transfer impact that was seen in Q3?
Didn't in our script or comments decomp the comp I did share the pricing piece as the earlier follow up question
So from a comparable sales buildup.
Um, we're pleased with the 4%. We had high single digit, positive pricing. About 100 of positive from discount next net. The estimated sales transfer drag is right inside our range of 200 to 300 basis points. And then the balance of that is going to be our.
Okay, that's helpful. And then as they follow up to the broader margin question, which was more of a, you know, restaurant level margin or shop level margin.
Just sort of drilling down on the labor line, you guys touched on this, but it's been impressive. I think it looks like at least five quarters that you've seen, 200 plus basis points of year over year favorability. How should we be thinking about labor costs heading into 2024?
I think a couple of things on that. First of all, what we noted was our investment in shop manager labor that we're going to make. September 1.
And then certainly we have the California wage incoming at us as of April 1 of next year. And we'll continue the thoughtfully examine our wage and incentive structure at the shop level and make appropriate investments there. And again, that's why a 31% margin that we're showing today is so powerful because it does allow us the flexibility to deal with. And so we're going to continue the thoughtfully examine our wage and incentive structure at the shop level.
I would also share we're really proud of our teams and how they've navigated labor. Our broistas are also our sales force and so we are really thoughtfully navigating through labor being careful where we spend but also making sure we're making the right investments in labor to grow our sales to make sure that we keep our lines at the length.
that our customers enjoy. And so I think that it's a really good partnership with very thoughtful tracking and super proud of just our operations teams for all of the work we're doing in this area.
Thank you. Our next question is from Brian Mullin with Piper Sandler. Please go ahead.
Okay, thank you. Just to follow up question on the stores and tech. And the last call I think you indicated those stores were still following the same profitability curve as the rest of the system despite that you see the little lower than the system average. I'm just wondering if that still holds true today, whether you think that would continue to hold true as you look out over the next 12 months. And then just related back, just talk about how you plan to approach development there next year. Will you still be opening more stores and tech?
I'll go reverse first. We will open more shops, obviously in Texas next year. The pace at which we open in Texas won't change dramatic.
the question about productivity of new shops. So on a like for like, AV adjusted basis, our newer shops.
St. you know, like volume, new shops are more productive than existing shops.
As we've moved east, we've benefited from lower operating costs on the average than our existing West Coast mark.
Okay, thanks. And just to follow that, you know, last call, I think again, today in the Parade March, you mentioned potentially value engineering, the cost of the prototypes.
which is, you know, exciting or interesting to hear about. I'm just wondering if you could discuss any progress that has been made on that front, you know, how far along are you on that work and when.
you expect to see some benefits to the system from undevelopment.
So there's really three ways to get our our investment down. One is the mix of mold suits and ground leases. More build the suits, text down your upfront.
There are prototype changes, there are freestanding minutes or looking at inland end caps to bring your total capital cost down. And then there's just like for like on the, on the,
The actual prototype itself taking costs out. We have made some progress taking part of that cost escalation out.
But we're realistic to know that we won't get any significant measure of that cost back. 30 to 40% escalation would be hard to get back, but we are working diligently to cut around the corners. We can to take a portion of that out and we have some good ideation on that and things in motion in our product.
Those won't show up until our pipeline kind of exhausts itself out 18 to 24 months. I just want to be practical and realistic with the listener that even if we took all those costs out today we wouldn't get those into our pipeline.
Yeah, and I think the place where we've seen a little bit of shorter-term progress is in really thoughtfully thinking about the equipment that goes into each of our shops. Because we have more shops in an area, we don't need extra equipment in a shop, and so really being thoughtful about that. I think we've also shared our pre-open numbers, and as you look at pre-opening, as we have an existing shop in the market, we're really taking advantage of that to train our employees up, and so we've seen a drop in those numbers as well.
Thank you.
Thank you. Our next question is from Sharon Zaxia with William Blair. Please go ahead.
Hi, this is Tanya Anderson on Sashiram's Ex-Yah. I just wanted to follow up on that California William Creed.
You know, what is your average wage and how do you plan to offset it? And if it's price, how much do you think would be necessary? And would you like look to protect any profit or percent money?
So as you know, the wage is going to 20. We are in the $0.16 an hour.
We have not yet determined what moves we make from a pricing perspective, but we are actively looking at. Productivity and other options such that pricing becomes. The default that we have to make.
And we're also really looking wisely at whether it is a margin percentage protection strategy or a penny profit protection strategy. As we get to our guidance for 24 and we really articulate the full context of that.
When we're finished with our evaluation, we'll share what our thinking is on that.
Thanks. And then just anything that's driving the greater the strength in the franchise versus company.
Nothing I would say executionally, operationally, that's different, which would be really the spirit of wanting to understand that question. It's really just the mix of GR, these et cetera, of where they are versus where we are. But nothing really we can point to that.
That would tell you anything is different operation between the two groups.
Yeah, I think the other piece, the sales transfer piece that Charlie spoke about is we obviously with the infill that we have in Texas that those are all company-owned shops. So we do have a greater impact of sales transfer in the company-owned shops. Yeah.
Our next question is from Gregory Frankfurt with Google and security.
Hey, thanks, thanks for the question. I had two quick ones. The first is just the investment in the shop manager wages. I'm curious what drove that. Was that just maybe compression versus crew wages over the last 12 to 24 months for any other reason for that investment today?
Yeah, I think a number of things. I think for us it's really important to stay ahead of the market and where we where we think investments are needed.
We looked at responsibilities in that role and were thoughtful about making some changes to responsibilities in those roles and wanted to reflect that in some of the added pay. We also thought we had an opportunity to align incentives with revenue growth and with thinking through the profitability of the shop. So we made those changes for those reasons. And I think as we looked at the strength of our performance and where our shop managers wore this felt like a great time to make those investments. Got it. Maybe just to follow up there. What were the changes in metrics?
Got it. Maybe just a follow up there. What were the changes in metrics in terms of the incentive? Are you incentivizing them more in the bottom line or the top line than you were before?
Yeah, so I think when we look at our overall priorities, it's to align our shop managers to those overall priorities.
And we're certainly very focused right now on driving traffic and driving revenue. So that is the biggest piece. And then we also look at some of the shop level profitability things like looking at labor. Again, it's a very delicate balance. We also don't want our shops to under schedule in labor. So we're thoughtful about making sure that they hit just the right balance on that line.
Thank you. This is back acting on Franjo. Could you give us an update on where the new shop biomes are tracking relative to that 1.7 million U.S. disclose? And then separately, is there anything you can do to re-accelerate those biomes outside of some of those broader sales drivers you've been talking about?
Yeah, thanks so much, Zach. So we don't we don't actually share that. We did that, I think, for the for the offering that we just did, but we don't share those figures on an ongoing basis. You know, what I would say is we think we have a number of different levels levers that we can use to drive AUVs. So a number of the things that I talked about just in general of what we're doing to drive traffic.
believe it's a brand awareness opportunity that we can go after. So we're doing all kinds of things to really further invest in the communities, make sure that people know that we're there, thinking through how we can partner with the local high schools and make sure that we have some disabilities, like let's say in their sports stadiums, things like that. So we're excited about the things that we can do in these new markets. Okay, thank you. And then as you look towards 2024, are you going to run the fillet right around once a quarter again? Are you going to replace it with separate promotions? Anything on the promotional cadence for next year would be helpful. Yeah, look, we haven't planned our promotional cadence for next year yet. We are really looking at our
Okay, thank you. And then as you look towards 2024, are you going to run Philatry around once a quarter again? Or you're going to mix that with separate promotions? Anything on the promotional cadence for next year would be helpful.
Yeah, look, we haven't planned our promotional cadence for next year yet. We are really looking at our sales kind of on a daily and weekly basis as we decide which things to do and what will most benefit from. The reason why we like filetray so much is, is it really is a deal on four separate drinks. And so we think especially in new markets where we're building just so much customer love that it's a great way to share with your friends.
when you come into Dutch Bros. And it also just feels a lot like us. I think the Brodies does continue to comment that, hey, this is what it really feels like to be at Dutch Bros when I'm at a fillet tray day. And so we like to have those parties in our shops, but I think that's not the only thing that we do. We love that promotion. I think we'll continue to look at it, but we have a number of other things that are working really well as well.
Thank you. Our next question is from Nick Seltien with Red Busch Securities. Please go ahead.
Thank you. Just to clarify, the A2 9% pricing in Q3 that the system price, right? Can you just tell us what the company owned pricing was in Q3 and what that should be in Q4?
You don't disclose that company price, but there's not a lot of difference between company price access.
Got it. And then, you know, just to update the doc guide, and obviously with the breakage last year, it would imply a pretty big.
you know, desaleration and the amount of leverage, not just in the labor line, but in occupancy and other. Even with the investments in labor, I guess what's the...
What's the driver behind occupants in other in terms of the decelerate?
I don't know how you would get to an occupancy or other number moving on the fourth quarter since we didn't guide the fourth quarter, but I would just characterize the investment in labor we talked about. We'll have some additional S&A investments around capability building that we'll use to both
drive traffic and drive our ability to activate on all these things and growth through the coming quarters. So that's really what tempers our EBITDAG guide to 150 to 155, given the over delivering the third quarter, we'll have some spendbacks. We'll go to shop level and we'll be SGNA level.
Thank you. Our next question is from Rahul Kratapalli with JP Morgan. Please go ahead.
Good afternoon guys, thanks for taking my question. On the personalization journey with the rewards program and loyalty, can you guys like elaborate on where you are here with 63% transactions?
Coming in how large is the average exercise from the members versus non-members? And also, if you can comment on the frequency of the rewards members change, and I have a follow-up.
Yeah, so we don't share that detailed level of data about the rewards program. What I would say is, again, it's a program that's really in its infancy, if I can say it that way, that the significant change we made and how we allocate kind of the spend against it at the end of March has really allowed us to start.
sending out things like frequency challenges, day parts, different, you know, attracting folks at different day parts into the program.
And so as we do all of those things, we're also experimenting with different points levels of which
We have customers come in to the shops. And so I think that we will just continue to learn from that program and get more sophisticated with the level of offers that we're doing within this program.
Got it. And on the built-as-soot shift back in the development pipeline, did you guys discuss the mix going forward as you increase them over ground leases to reduce capillain density? And can you also discuss how it can impact the rent to an extent possible?
So we haven't discussed the next as we look at 2024 objectives and targets. We'll give you some context and just to temper your expectations, you don't make dramatic shifts in least type. We make refinements and that's what we're doing. In terms of what it does to grant, it builds a suit, grant is higher than a ground leased.
But what you're really doing is the trade off of less upfront cash intensity to build a build a suit versus a ground lease. You're trading that for having more rent on a go forward basis. And you just we thoughtfully make
Yeah, I would just add, as we've shared before that we really expect any of the changes in the pipeline to be in the 2025 pipeline that the 2024 pipeline has really been built out for some time. And so you would expect to see minimal changes to the 2024 pipeline.
Thank you. Our next question is from Drew North with Robert W. Baird. Please go ahead.
Great, thanks for taking my question. It's on the topic of cash flows. Wondering if you could provide some additional perspective on how you are thinking about free cash flow for the next couple of years. And then when you think you may return to free cash flow positive, when considering all the changes you have underway with your development dress.
So, the best way to think about that is a, we have. Ample liquidity to get through this investment phase.
Secondly, the store-based, the company shop-based is continuing to scale up its cash flow generation.
That cash flow generation is going faster than the CAPEX required to make the store investments. So over time, as the company business scales in size and scope, it's going to become more and more self-funding. We have not shared when we think we'll be free cash flow positive. Largely going to depend on the rate of shop growth.
A build-a-suit rent is higher than a ground lease rent. What you're really doing is the trade-off of less upfront cash intensity to build a build-a-suit versus a ground lease. You're trading that for having more rent on a go-forward basis. And we thoughtfully make those trade-offs.
how many shops we build, et cetera. And when we get to guiding 24, and we can give some CAPEX guide and some adjusted eBIC guide, you'll see how those factors are playing out.
Yeah, I would just add, as we've shared before, that we really expect any of the changes from the pipeline to be in the 2025 pipeline, that the 2024 pipeline has really been built out for some time, and so we expect to see minimum changes to the 2024 pipeline.
As there are no further questions, I would now hand the conference over to George Ricky for closing comments.
Thanks a lot guys.
Thank you
Thank you. Our next question is from Drew North with Robert W. Baird. Please go ahead.
In final, it's been the honor of my career to lead Dutch Bros through this transformative period.
Great, thanks for taking my question. It's on the topic of cash flows. Wondering if you could provide some additional perspective on how you're thinking about free cash flow over the next couple of years. And then when you think you may return to free cash flow positive when considering all the changes you have underway with your development strategy.
from a regional drive-through beverage brand to an emerging national competitor with locations from Oregon to Kentucky.
to our customers, employees, franchisees, suppliers, communities, and investors. Thank you.
That's pro's success wouldn't be possible without each of you and it's been an absolute pleasure to be by your side.
So the best way to think about that is A, we have ample liquidity to get through this investment phase.
Secondly, the store based, the company shop based is continuing to scale up its cash flow generation. Thanks for tuned!
Thank you. The Conference of Dutch Paroles Inc. has now concluded. Thank you for your participation. You may now disconnect your line.
that cash flow generation is going faster than the capex required to make the store investments. So, over time as the company business scales in size and scope.
it's going to become more and more self-funding. We have not shared when we think we'll be free cash flow positive. Largely going to depend on the rate of shop growth.
how many shops we build, et cetera, and when we get to guiding 24, how many shops we build,
And we can give some CAPEX guide and some adjusted eBIC guide. And you'll see how those factors are playing out.
Got it. Thanks, Charlie.
Thank you.
As there are no further questions, I will now hand the conference over to Jot Riki.
for closing comments.
Thank you everyone for your questions.
In final, it's been the honor of my career to lead Dutch Bros through this transformative period.
I'm a regional drive-through beverage brand to an emerging national competitor with locations from Oregon to Kentucky.
It's been a great ride.
To our customers, employees, franchisees, suppliers, communities, and investors.
Thank you all for your continued support.
Best Pro's success wouldn't be possible without each of you, and it's been an absolute pleasure to be by your side.
Thank you.
Thank you.
The conference of Dutch Bros Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.