Q3 2024 Dutch Bros Inc Earnings Call
3 days and welcome to the Dutch Growth, 3rd quarter 2020's Orcuff and Skull
Speaker Change: at this time, all participants are in a listen-only mode. A question and after session will follow the formal presentation. If anyone should require operator assistance.
Speaker Change: Please press the R0 on your telephone keypad as a reminder of its competency being recorded. It is not my pleasure to introduce Paddy Warren, director of his estimations and corporate development. Please go ahead.
Speaker Change: Good afternoon and welcome. I'm doing my Christine Barone CEO and President in Josh Gunther, CFO. We issued our earnings press release for the quarter-ended September 30, 2024 after the market closed today.
The earnings pressure lease along with the Supplemental Information Deck have been posted to our investor relations website at investors.dutchbroath.com.
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 in our subject to risk, uncertainty in assumption that may cause actual results to differ materially.
Speaker Change: They're qualified by the cautionary statements in our earnings press release and the risks factors in our latest SEC filings, including our most recent annual report on Form 10K, and quarterly report on Form 10Q. We assume no obligation to update any forward-looking statements.
Speaker Change: We will also reference non-cap financial measures on today's call. As a reminder, non-gap measures are neither substitute for nor superior to measures that have prepared undercap. Please review the reconciliation of non-gap measures to comparable gap results in our earnings press release.
I would also like to announce that we will be hosting our inaugural Ambassador Day in early 2025. We will plan to provide updates to our key growth drivers and attend the hold of this event in person in the Phoenix Arizona market. We expect to release further details in the coming months.
Christine: With that, I would now like to turn the call over to Christine.
Christine: Thank you, Paddy. Good afternoon, everyone. I want to start by sharing that we are incredibly excited about the strength of our brand, the love from our customers, and our clear path forward.
Christine: As the industry continues to evolve, we expect that our customers will place an even larger emphasis on ice beverages, on personalization, and on speed. We see the increasing relevance of energy, which has been a core component of our menu for over a decade.
Christine: We also see the continued importance of genuine connection.
Christine: which are pro-easters in body, and has been a cornerstone of Dutch Bros since we started with a single push cart in Grants Pass, Oregon in 1992.
Christine: We believe we are uniquely positioned to execute with excellence in this environment, which we did in Q3 as we delivered on key strategic and operational initiatives.
Christine: We have substantial momentum across the board at Dutch Bros.
Christine: Our brand is resonating with customers. In Q3, we had comparatively the highest transaction quarter in two years.
Christine: We accelerated our mobile order rollout, achieving 90% system and 96% company-operated shop coverage as of September 30th. We have received great feedback from baristas and customers, and we are beginning to see the impacts on our business.
Christine: Our real estate strategy is working. We are seeing strong new shop productivity as we have shifted our development focus and elevated our site selection process.
Christine: We see increased white space opportunities as we grow.
Christine: and we continue to demonstrate remarkable consistency in our shop opening cadence with 38 new shops in the quarter. We are making investments in our development and construction teams and our 2025 shop pipeline is strong positioning us to accelerate new shop growth.
Christine: These efforts directly translated to our financial results.
Christine: In the quarter, we drove a 28% revenue increase and a 20% adjusted EBITDA increase compared to the same quarter last year.
Christine: System-wide same shop sales rose 2.7% and company operated same shop sales grew 4%.
Christine: both of which exceeded our expectations.
Christine: System-wide AUVs were $2 million, in line with the all-time record we posted earlier this year.
Christine: Given the strength we saw in the quarter and our growing momentum, we will be raising our guidance. Josh will share more context in detail in a few minutes, but first I'd like to walk you through an update on our business.
Christine: Our people are the cornerstone of our strength. Our exceptional culture, crews, and service resonate with customers of all ages and backgrounds. Our talented baristas and the service they provide drive our growth and set us apart from competitors.
Christine: Our people pipeline includes more than 400 operator candidates, with an average tenure of more than 7 years.
Christine: Each person in the pipeline is ready to lead a market as an operator.
Christine: When these new operators receive their assignment, we invest heavily in their success by sending our exceptional and experienced opening teams to work alongside them in the new market.
Christine: We believe this enables us to scale our culture, seeding new markets with a powerful combination of expertise, energy, and teamwork.
Christine: We continue to be pleased with our shop level turnover indicators which we believe are considerably more favorable than the industry and are in line with our expectations.
Christine: Our best people are staying and growing with us.
Christine: Year-to-date we have received over 400,000 applications to work at Dutch Bros for about 11,000 open field positions.
Christine: We are honored to be an employer of choice and blown away by the excitement of applicants. Hiring into our office in Arizona has also been swift, and we are in the process of building out a permanent location which we expect to open in the first half of 2025.
Christine: Last year, we outlined the key elements of our strategy to continue to drive traffic, which were an enhanced focus on innovation, increased paid advertising designed to build brand awareness and more targeted rewards program efforts.
Christine: We are executing on all elements of this plan and seeing momentum. Here is a brief update of each.
Christine: First, innovation. We believe innovation plays a foundational role in Dutch Bros growth story. We use innovation to build sales layers and deepen our competitive mode through category defining products.
Christine: Our innovation strategy focuses on three core mini pillars, coffee, energy, and refreshment. In Q3, we introduced a fresh take on fall drinks with the new cookie butter latte and caramel apple rebel and a fan favorite caramel pumpkin brulee returned.
Christine: Our innovation extends to how we surprise and delight with unique sticker drops and special merch giveaways.
Christine: Physical and digital sticker drops create excitement and strengthen brand loyalty by providing a unique opportunity to connect with our customers, many of whom collect these stickers.
Christine: We will continue looking for ways to increase this connection, like when we released a custom Dutch Bros rubber duck to celebrate National Coffee Day, which drove both excitement and sales volume.
Christine: We are encouraged by the results that we are seeing in the productivity of new shops and in the company-operated same-shop transaction growth.
Christine: These efforts are driving what we believe to be a material change in sales trajectory in new markets.
Christine: All be it from a very small base, we have also seen unaided brand awareness triple in Texas. While this is a good start, we have a long runway, with unaided brand awareness still just a fraction of our more mature markets.
Christine: In Q3, we began expanding our paid advertising efforts into additional markets, including mature markets. We are encouraged by what we are seeing here as well.
Christine: and third Dutch Rewards. We continue to see great traction in our Dutch Rewards program. In Q3 approximately 67% of our transactions were from Dutch Rewards members and in the quarter we accelerated our segmentation efforts.
Christine: We are more efficiently reaching our customers and will continue to provide even more personalized and relevant offers going forward.
Christine: In the quarter, we set a record for the greatest number of Dutch Rewards registrations since the initial launch of the program, with over 1 million customers signing up. We believe our rollout of mobile order is contributing to this growth.
Christine: As of September 30th, 858 shops had mobile order functionality enabled, representing 90% system and 96% company-operated shop coverage.
Christine: I want to acknowledge the hard work, both in our shops and in our IT, operations and marketing teams, that made this rollout possible. The completion of this rollout is ahead of our previously communicated timeline.
Christine: I'd like to share some initial observations and learnings from the rollout. First, our customers are enthusiastic about mobile order.
Christine: As of October 31st, our customers have placed approximately 2.8 million mobile order transactions. Our customers love the functionality and service.
Christine: We are achieving high customer satisfaction, with more than 9 out of 10 mobile order customers likely to use the channel again and recommend it to their friends and family.
Christine: Second, our baristas are embracing mobile order and delivering excellent service within this channel. As a people-centric business, getting this right is of utmost importance. We have positive feedback from our baristas and almost 95% order accuracy.
Christine: Furthermore, mobile order tip rates are higher than other channels.
Christine: Third, we are seeing order ahead over index in the morning day part and with coffee based beverages. This gives us confidence that we are on the right track with our strategy to further unlock the morning day part with greater convenience.
Christine: Right now, Mobile Order makes up about 7% of our Channel Mix systemwide.
Christine: and we see runway to steadily grow penetration. In fact, in some of the markets with our newest shops, we see mobile order penetration at more than twice the level of our overall system.
Christine: In these newer markets, we are also seeing same-shop transaction outperformance, which we believe is a combination of paid advertising spend, mobile order usage, and market planning efforts.
Christine: In Q3 we began a limited food test in six shops. In this test we explored a few potential menus including an expanded bakery offering and sweet and savory hot food options.
Christine: Based on the early results, it is likely a more robust food menu will play a role for Dutch Bros in the future, and we will continue our testing in the coming quarters.
Christine: With food making up less than 2% of our sales right now, we clearly see the opportunity.
Christine: We will be very diligent and measured as we determine the timing and role of an expanded food program and how we best support our baristas so that we can execute with speed, quality, and service.
Christine: Shifting gears to development, we opened 38 shops in Q3, bringing our total shop count to 950.
Christine: For the year, we have opened 119 new shops, of which 103 are company-operated.
Christine: We are executing our real estate strategy and are very energized by the results. We believe the combination of enhanced market planning and our elevated paid ad spending in new markets is driving improved new shop productivity which we saw once again in Q3.
Christine: Our confidence in our new shop growth prospects is high. Over the past several months, we have made significant investments in our development and construction capabilities.
Christine: we have invested in new tools, processes, and team members, including doubling the size of our site acquisition team.
Christine: We believe these investments position us to capitalize on an expanding opportunity set and strengthen our competitive moat in new shop development.
Christine: Our development pipeline is deeper today than it was at the same time last year. We expect shop openings to accelerate in 2025 to at least 160 shops and further accelerate in 2026.
Christine: In closing, momentum in the business is strong. We believe our runway is long and our path forward is clear.
Christine: We have top tier growth.
Christine: We delivered 28% year-over-year revenue growth and 38 new shop openings.
Christine: We expect to open at least 160 shops in 2025, and driven by our investments in our development team, we see an opportunity to further accelerate unit growth in 2026.
Christine: We've demonstrated our ability to deliver transaction growth through a combination of our innovation, paid ad spending, desk rewards, and our growing mobile order capabilities.
Christine: We have excellent shop margins, delivering this top-tier growth profitably.
Christine: We are well capitalized. We believe we have plenty of flexibility upon which to execute our growth plans and capture a considerable white space.
Christine: Most importantly, we have great people, anchored by outstanding, engaged baristas with a strong pipeline of operators ready to grow with us. With that, I'll turn it over to Josh.
Josh Gunther: Thanks, Christine. Our financial results in Q3 were outstanding.
Josh Gunther: Revenue grew 28%. We delivered $338 million in revenue for the quarter, an increase of $74 million year-over-year.
Christine: As a reminder, our long-term growth algorithm targets roughly 20% annual revenue growth.
Christine: We are very pleased with our continued top line momentum.
Christine: New shop growth was 20% year over year. In the quarter, we opened 38 new shops, of which 33 are company operated, representing continued steady progress.
Christine: We are encouraged by both our new shop productivity and our overall system AUVs of two million dollars, which is in line with the L-10 markers we set earlier this year.
Christine: Denshot sales performance in Q3 exceeded our expectations.
Christine: We deliver 2.7% system same shop sales growth.
Christine: of which 80 basis points came from transaction growth and 190 basis points from ticket growth.
Christine: We are pleased with the underlying transaction trends of the business and transaction growth was the highest in two years excluding the impact of weekday and Q1.
Christine: Adjusted ETH at that group, 20%.
Christine: We delivered $64 million in adjusted EBITDA, an increase of $11 million year-over-year.
Christine: Our adjusted EPS was $0.16 per share, up $0.02 per share from Q3 last year.
Christine: Moving on to our company-operated shops. Revenue was $308 million, an increase of $72 million year-over-year, or 30% growth.
Christine: Company-operated same-shop sales growth was 4%, of which 2.4% was transaction growth.
Christine: Company operated shop contribution was 91 million dollars, an increase of 18 million dollars year-over-year or 24 percent growth.
Christine: In the quarter, company-operated shop contribution margin was 29.5%.
Christine: In Q3, beverage, food, and packaging costs were 25.3% of company-operated shop revenue. This is 60 basis points favorable year-over-year, driven primarily by pricing.
Christine: Labor costs were 27.6% of company-operated shop revenue, 160 basis points higher than Q3 of 2023.
Christine: This is primarily attributed to increased compensation expense in California.
Christine: Occupancy and other costs were 16.4% of company-operated shop revenue, which was 110 basis points higher than Q3 of 2023, driven primarily by elevated repair and maintenance costs on our existing shop base.
Christine: Pre-opening expenses were 1.2% of company-operated shop revenue, safety basis points favorable year-over-year.
Christine: Moving on to other P&L line items, franchising and other revenue was $30 million, up $2 million or 7% year-over-year.
Christine: Franchise and Other Contribution was $23 million, up $3 million, or 16% year-over-year.
Christine: Adjusted SG&A was $50 million, up $10 million or 25% year-over-year.
Christine: as the percentage of total revenue adjusted FG&A was 14.9%.
Christine: This represents approximately 30 basis points in margin leverage.
Christine: We are pleased by the leverage we have driven in adjusted SG&A during the year while we continue to staff our new office in Arizona and make targeted investments in marketing.
Christine: In the quarter, interest expense net declined $2.5 million from one year ago to $6.9 million.
Christine: The decline is primarily driven by income received on our investments in marketable securities and reductions in interest paid on outstanding balances in our credit facility.
Christine: This is partially offset by an increase in interest expense related to finance leases of $786,000, which rose from $4.8 million in Q3 2023 to $5.5 million in Q3 2024.
Christine: Regarding our balance sheet, as of September 30th, we had $281 million in cash and cash equivalents.
Christine: and $238 million in drawn term notes, yielding a net cash position of approximately $43 million.
Christine: As of September 30th, we have $382 million in finance lease liabilities and $306 million of operating lease liabilities.
Christine: During the quarter, we added $3 million in finance lease liabilities and $23 million in operating lease liabilities.
Christine: I'd like to spend a moment on cash flow and liquidity.
Christine: With approximately $678 million in total liquidity at our disposal, we believe we have more than sufficient liquidity to support our current growth plans.
Christine: In the quarter, we added $20 million in cash to the balance sheet.
Christine: given by our operations and aided in part by timing the working capital.
Christine: This is very encouraging as we move towards having a self-funded business and look forward to providing an update at our Investor Day.
Christine: We are pleased with the continued expansion of our large base of profitable shops.
Christine: We continue to shift the composition of our development pipeline towards more capital-efficient lease arrangements, but we still have work to do as we attempt to lower the per-unit development cost.
Christine: In Q3, average capex per shock was approximately 1.7 million dollars.
Christine: Finally, I'd like to provide an update on guidance.
Christine: Given the outstanding performance which came in above our expectations for Q3, we are providing the following updates.
Christine: Total revenues are now projected to be between $1.255 billion and $1.26 billion.
Christine: This represents an increase of $35 million from our guidance last quarter at the midpoint of the range.
Christine: We expect to open 150 new shops in 2024, which is consistent with the guidance we provided last quarter.
Christine: Capital expenditures are now estimated to be in the range of $245 million to $265 million.
Christine: system same shop sales growth is estimated to be approximately 4.25% for the full year 2024.
Christine: We remain encouraged by the underlying transaction trends we have seen so far and expect Q4 same shop sales growth of 1-2%.
Christine: We expect adjusted FG&A to be between $195 million and $200 million.
Christine: Given the strong performance in the quarter and our outlook for the remainder of the year, adjusted EBITDA is now estimated to be between $215 million and $220 million.
Christine: Thank you, and now we'll take your questions. Operator, please open the lines.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Christine: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Christine: First question comes from Dennis Geiger with UBS. Please go ahead.
Christine: Thank you for joining us. Thanks for having us. I appreciate it.
Dennis Geiger: Great. Congratulations on the results and thanks for all of the insights on mobile order. Just curious if you could share any insights on those shops that have the
Speaker Change: I believe it was the 2x channel mix and the even stronger outperformance relative to the rest of the system. Is there any commonalities there that you were able to share?
Speaker Change: One of the things we're seeing with mobile order is that in some of our newer shops,
Speaker Change: As we think about our new shops and what mobile order is doing, we're really establishing new routines. And so it could be that in new markets, as we're getting new customers in, they're really excited to use this.
Christine: and using it quickly. The other thing that we're seeing is we're actually seeing an increase in the registrations in our Dutch Rewards Program. So when we see that Dutch Rewards Program usage and then a mobile order, we believe we could be bringing new customers into the brand as well.
Josh Gunther: That's great. Appreciate that color, Christine. Then just on the food side, recognizing it's super early, but also exciting that you rolled that out to some of the stores. Anything more there to share as far as how you think high level about that opportunity, where you can go, what permission you have from a food perspective, recognizing early days? Thank you.
Speaker Change: Yeah, absolutely. Definitely early days from a food perspective. I think how we think about this strategically, as we look across our business, we have an opportunity to lift the entire business, and we also have a very specific opportunity to build morning routine.
Speaker Change: One thing that's important for building morning routine is mobile order, which we have rolled out this year and believe that we have a long runway with. The second big thing there is food. And so as we look at the importance of food in that morning routine, we believe we could be missing a beverage occasion.
Speaker Change: and so as we think strategically about food we believe it's not only an opportunity to drive a catch but the more important opportunity might actually be for that beverage occasion.
Speaker Change: As we look at food, we really believe it's more of an opportunity for 2026 and beyond. It is super important to us that we get this exactly right for our teams, for our shops, for our customers, and so we expect to expand the test as we go into 2025.
Speaker Change: Thank you and congrats to the team.
Speaker Change: Thank you.
Speaker Change: Next question, Chris O'Cole with Stiefel. Please go ahead.
Speaker Change: Thanks guys. Good evening. This is Patrick on for Chris. Josh, the guidance implies flat comps for the fourth quarter, I believe, and I know in the presentation it said it was reflective of the current trends of the business, so I was hoping you could provide a bit more color on just maybe how comps
Speaker Change: Thank you. We'll be right back.
Speaker Change: Yeah, thanks for the question. So I guess maybe just to clarify, in my remarks we did guide Q4 to be between 1 to 2 points of comp.
Speaker Change: What I'd say is, you know, we were very pleased by the performance of traffic during the quarter. Certainly came in ahead of our expectations. We did see that continue into Q4. We've been pleased with what we've seen so far in October. What I'd say is that has us trending to the higher side of that one to two points for the full quarter. So feeling good about how Q4 is shaping up so far.
Speaker Change: In terms of what we've layered in for mobile order, what I would share is we've certainly factored in the trends that we saw in Q3.
Speaker Change: It is still early days. We still have more to learn. So we factored in what we saw in Q3 going into Q4 But certainly, you know, if trends were to change dramatically, that's not factored into the guidance that we provided
Speaker Change: Yeah, I think the other thing is we thought about that guidance, too, is if we do have about a point harder lap in Q4 So just reflecting all of those things together
Speaker Change: Great, thank you.
Speaker Change: Next question, Andrew Charles with TD Cowen. Please go ahead.
Andrew Charles: Great, thank you. Very helpful commentary on mobile order and the 7% mix that's off to a quick start. I was wondering if you could help us quantify the incrementality behind this and how you are measuring incrementality.
Speaker Change: Yeah, so if we look at mobile order, I think that there are, you know, three dynamics that we're looking at. So the first is the existing customer and what happens when someone makes their first mobile order transaction. And so what we're seeing with existing customers is we're seeing that 5% frequency lift.
Andrew Charles: The second thing we're seeing is we're also seeing new customers come into the brand with mobile order. So we're seeing that uptick in Dutch Rewards registrations.
Andrew Charles: And then finally, we are just beginning to see a little bit of impact from throughput. So one of the things we measure is we measure in our peak hour how many cars we drive through the line, and we are starting to see an uptick in that as well.
Speaker Change: So if you think about it, that's really three different dynamics. You've got new customers, you've got existing customers, and then the hope is, is that because we are switching some of our volume from the drive-thru to the walk-up window, that that volume relief allows customers to feel more confident to get into the drive-thru line.
Speaker Change: Thank you. Bye.
Speaker Change: Okay, great. And then, Christine, we get the question from investors with some concern that your traffic is benefiting their term.
Speaker Change: for your largest coffee shop competitor's headwinds and that they're actively enacting a turnaround. So can you really help dispel these concerns, the traffic gains you are seeing are in fact organic?
Christine Barone: Yeah, absolutely. So I think if you look at what's happening right now, our brand is really resonating with customers, and I think we are super focused on being who we are.
Speaker Change: So when I look at what's happening in the industry right now, it is increasingly going to ICE. The importance of customization and personalization, and being able to do that very quickly is something that's also increasing.
Speaker Change: I think customers also want great, authentic service, and we're seeing continued growth in our customized energy business.
Speaker Change: And so when you look at all of those things, we really believe what's working for us is being Dutch Bros. We created kind of a drive-through in this category where we're delivering service with convenience.
Speaker Change: And I think what we've been doing all year is executing on our playbook, and it's working really well for us.
Speaker Change: That's very helpful. Thank you for that.
Speaker Change: Thank you.
Speaker Change: Thanks, I think you just now shed a little bit of light on this but I was wondering you know to the extent that this the quarter exceeded your expectations if you could talk a little bit
Speaker Change: about what exactly went better than you thought. It doesn't sound like you think it was necessarily the demand environment that changed dramatically.
Speaker Change: but was it the advertising was more effective? I know there was a little bit of a gap between your stores and franchise, even if I adjust for more difficult comparisons. I wasn't sure if that's where you saw that, or if you had just initially maybe guided conservatively because of the volatility in the environment. I'm just trying to understand what exactly you could point to that drove the better than expected results.
Speaker Change: Yeah, I would say that, you know, one, it was everything resonating together and coming together. So I do think we saw a really nice lift from paid advertising. We're just starting to experiment in also doing paid advertising in mature markets. As a reminder, we started in new markets.
Speaker Change: So we're seeing some nice returns in both of those places.
Speaker Change: We certainly saw outsized registrations in our Dutch Rewards Program, so new customers coming into the brand. And then finally, as we started the quarter, we were still pacing out the mobile order effort, and so towards the end, as we were able to accelerate that,
Speaker Change: You know, we're really encouraged by what we're seeing there.
Speaker Change: Great, and if I may just follow up, when you talk about the paid advertising, are you talking about more dollars spent or just different? If you could just again remind us kind of is this about allocation or dollars and maybe how you think about that with respect to, you know, increasing the unaided awareness?
Speaker Change: Yes. So, we... Thank you.
Speaker Change: kind of done both actually, but what I'd say is really leaned in more dollar spend. We talked a bit about that in terms of the investments we're making in G&A. So that's certainly a step up in dollars, and I would say there has been a more targeted effort in the segmentation work that we've done to be more effective with the dollars we are spending. So I think the sum of those two is really helping to drive some of our results.
Speaker Change: Thanks.
Speaker Change: Next question, Gregory Frankfurt with Guggenheim Partners. Please go ahead.
Gregory Frankfurt: Hey guys, one just housekeeping question. Can you give pricing and mix for the quarter in the check? And then I have another question.
Speaker Change: Yeah, so we had, ticket was 1.9%, that was about, sorry, about 4 points of price overall, offset by about 2 points of mix-in discounts.
Speaker Change: Thank you. Thank you.
Speaker Change: Can you just maybe double click on the new store productivity a little bit? Christine, I think a lot of this are changes you put in place
Speaker Change: in the second half of last year. Can you maybe just go through a little bit more of what you changed, how it's having an impact, and are you seeing significantly better sales transfer as well because of this? Just any thoughts on that would be great, thanks.
Christine Barone: So taking a step back on our real estate strategy, so you know we took a look at our at our pipeline last year and a couple of things. So one, we have significantly more data than we had in the past, right? We are growing very quickly so we are more we are more quickly ingesting the data.
Speaker Change: from new shops and getting that into our models as we think about what it looks like going forward.
Speaker Change: The second thing is that we are building a new process out, and so we've brought on a market planning team and ingesting more data into our models to get just tighter around AUVs and what we expect.
Speaker Change: are new shop openings to look like. And so when we continue to look at what's happening, it really gives us confidence going forward in our pipeline that we just have a lot more. We will know what a shop looks like when it opens.
Speaker Change: And I think that what you're seeing from a new shop, shop productivity standpoint, is just a reminder that a pipeline is usually developed like 12 to 18 months out before we're going to open the shop.
Speaker Change: And so the changes that we're seeing now are really those very initial changes that we were making to the pipeline last year. And then some of the things we did this year, which we shared last quarter, where we took a couple of shops out of the pipeline to really make sure that we had great confidence in what we had and what we were going to open.
Speaker Change: Thank you.
Speaker Change: Next question, Andy Barish with Jeffery's. Please go ahead.
Andy Barish: Thank you.
Speaker Change: Sales transfer would be in the transaction number. So included in our transaction number is about 260 basis points of sales transfer. So if you actually look at the underlying traffic, it's quite strong for the quarter.
Speaker Change: Understood. And then, Christine, if you could.
Speaker Change: Maybe just give us kind of an early explanation in the marketing between a newer market like, you know, Texas, where you're maybe talking about the energy business, where your mix is a little bit lower than the system, and then how that looks in a more mature market as you start to spread those dollars, you know, moving into next year.
Speaker Change: Yeah, absolutely. So, you know, we are definitely experimenting with the right messages and the right creative all the time from an advertising perspective.
Speaker Change: And as we think about what we're doing with paid advertising, it's to bring those new customers into the funnel and then get them into the Dutch Rewards Program where we have 67% of our transactions and then can very effectively...
Speaker Change: talk to them through that channel.
Speaker Change: And so as we look at what we're doing from a new market and a more mature market, in a new market we're really introducing a brand. We're sharing who we are, the types of products we have. And in an existing market we're still doing some of that because we absolutely still have room and brand awareness even in our more mature markets. And we're also just reminding people who we are. And so that's kind of how we think about it across markets.
Speaker Change: Great. Thank you very much.
Speaker Change: Next question, David Tarantino with Baird. Please go ahead.
David Tarantino: Hi, good evening.
David Tarantino: My question, Christine, I just wanted to kind of step back on the unit growth outlook that you gave, and if you could maybe elaborate on your thought process and on kind of accelerating the growth in the next year, I guess, what's
David Tarantino: giving you the confidence that you're ready to do that and
David Tarantino: You know, it might be a little early to see a big change in the build-to-suit versus ground lease, but any thoughts on kind of what the mix of that could look like in 2025 and 2026?
Speaker Change: And then we can back-test that as we've been opening shops all year. And so if we look at the confidence in going forward and accelerating that growth, it's really what I would say is our processes, our data, our analytics, our team is all at the right pace.
Speaker Change: to be able to accelerate that growth.
Speaker Change: We've also made big investments both on our site acquisition process, so bringing in folks to really analyze the sites we want to go after. So there's part of real estate is analytics, the other part is finding an awesome site that has the right entrances, the right exits.
Speaker Change: is next to other places that might help drive traffic for Dutch Bros. And so all of those investments are giving us confidence and having a really tight site selection process.
Speaker Change: Secondly, we've also been investing in our construction team.
Speaker Change: and feel very confident about both our pipeline and our ability to accelerate that pipeline.
Speaker Change: And maybe, David, I'll take the second part of your question relative to build a student ground lease. You know, we are making progress in that shift. You know, as I've said before, we're starting with making sure we're picking the best possible site.
Speaker Change: And when we can do that through a more capital-efficient lease arrangement, we will do that.
Speaker Change: We have seen our per unit cost come down below what we had originally planned in the year, which contributed to us dropping our CapEx guidance as well. But we're making, what I say, steady progress in improvements, and I would expect that to continue.
Speaker Change: Certainly still work for us to do though, to hit numbers we'd like to see.
Speaker Change: Got it, and then maybe just a follow-up, you know, as you accelerate the number of openings...
Speaker Change: You're also increasing the cash flow from operations. So do you have any any sort of guidance you can offer on when you might get to breakeven or positive on free cash flow?
Speaker Change: Something that maybe you want to wait until the analyst day to share with us, but I guess any any thoughts on Whether you have line of sight to that
Speaker Change: Yeah, it is something we would provide to you guys when we meet for our Analyst Day early part of next year. We were very pleased by the fact that we added $20 million to our balance sheet during the quarter. We are making progress, as I said, in bringing down that per-unit CapEx.
Speaker Change: And we're heading in the right direction, but not quite ready to provide that date to you yet, but we will at our investor day.
Speaker Change: Excellent. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Next question, Nick Sutton with WebBush Security. Please go ahead.
Nick Sutton: Thank you.
Nick Sutton: Thank you. Can we just talk about the mix a little bit and how the mobile order and pay is impacting that and how we should think about it, you know, going forward? Are we seeing a lot of preloads, you know, is it maybe the lower number of transactions per ticket because of this?
Speaker Change: It's one where a ticket is looking similar to what we see in the rest of the system. If you think about our overall portfolio, where beverage concept, as Christine mentioned, there's not a lot of food attachment that's happening there, so really what we see is a fairly consistent ticket across the channels. We have seen tips a bit higher in the mobile order channel, which is great for our breweries, but otherwise it looks pretty similar to the rest of our transactions.
Nick Sutton: Yeah, and I would just share that 7% was towards the end of the quarter as we had everything rolled out. And again, we're seeing more of those transactions in the morning as well. I think over time we could expect that mobile order might be more single drink transactions, just given the way that that channel is used oftentimes on a commute or sometimes when you're in a hurry.
Speaker Change: And so can we...
Speaker Change: I assume that the...
Speaker Change: the sort of negative mix we saw in Q3, which sequentially was higher than Q2, you know, that moderates as we go into Q4 into 2025. I guess what was the reason why we saw a mix a little bit, the negative mix, you know, down two versus say down one in Q2.
Speaker Change: Yeah, we've seen that next trend.
Speaker Change: To your point, we've seen that trend downwards over the past several quarters. It came in largely in line with what we expected. I would expect to get to look similar in Q4 to what we saw in Q3.
Speaker Change: Okay, and then just menu pricing and your thoughts going forward.
Speaker Change: Yeah, so I think if you look at where we are, we are in a very strong value proposition right now. So we've done a lot of survey work as we think about what we want to do for pricing next year and in talking to our customers and we feel really good about where we are from a value proposition standpoint. We do believe we have opportunities in the portfolio to make some changes given the environment we're in right now. I think we'll be very thoughtful about how we think about price for next year. And wouldn't expect, you know, big moves on price.
Speaker Change: Yeah, the only other thing I'd add to that is we typically evaluate that as a couple times during the year, be it the start of the year, really tied to when minimum wage changes take effect. So it'd be at the start of the year in January and the midpoint of the year. Certainly, we're not at the point yet where we're providing guidance for next year on that.
Speaker Change: Thank you.
Speaker Change: Next question, Raul Crow with J.P. Morgan, please go ahead.
Raul Crow: Good afternoon, guys. I have a two-part question on the mobile order and pay. 7% mix is great at launch. Is this all from the Dutch rewards and email marketing? And when does it make sense to do more store-level or at a broister level and also paid media marketing for MOP? And I have a follow-up.
Speaker Change: And really the growth right now is coming from word of mouth, it's coming from seeing signage as you're going through the drive-thru at point of purchase.
Speaker Change: We did do a little bit of digital marketing pushes later in the quarter, but I would not say it was significant. The other piece we are using here is really the app itself, and so having kind of always-on messaging on that app home screen of the ability to mobile order.
Speaker Change: Perfect. And there are many examples of mobile order and pay overwhelming the systems. What lessons have you guys learned from others who have done over the past years and maybe can you discuss an example where it was suboptimal initially and then what mechanisms you guys had to put in place to fix?
Speaker Change: Yeah, so I think as you think about how we've approached mobile order this entire time, it really is from the lens of why are our customers coming to Dutch Bros? What makes us special? And it's our service. It's the service that we provide to our customers. And so a couple of things that we're doing from a mobile order perspective to ensure that. One, we are handing the drink to the customer every single time. So with mobile order, you still always have an opportunity to have a service interaction at the same time.
Speaker Change: The other piece we've been really thoughtful about is, although mobile order does have the potential to reduce some of the labor required in our shops,
Speaker Change: We have continued to invest in labor and ensure that we we've not taken any labor out We've reinvested the labor savings kind of back into service
Speaker Change: And so just ensuring that we have great production, we have great service as we go through.
Speaker Change: I think the other thing that's made this really seamless for us
Speaker Change: is we have kitchen display units within our shops. And so we've got a production bar both at the drive-thru window. We also have a production bar at the walk-up window. And so mobile orders are coming in to our shops the same way one of our baristas who's out running a drink would put a drink into the system. And so all of those things, I think, have really allowed it to be a seamless experience.
Speaker Change: And then, as we've rolled this out, and our timeline has been really dependent on getting feedback back from our shops.
Speaker Change: and adjusting with that feedback. So if we had the confidence to roll this out more fully in September, it was with all of that feedback and all of those fixes that we were making along the way.
Speaker Change: Thanks Christine, congrats on the great results.
Christine Barone: Thank you.
Speaker Change: Next question, Jeffrey Bernstein with Barclays. Please go ahead.
Jeffrey Bernstein: Great, thank you very much. Two questions. One, just following up on the Unicruz topic, I know at the start of this year you guys were thinking I think 150 to 165.
Jeffrey Bernstein: So you tempered it to 150. Sounds like you're comfortable, as you talked about earlier, to bump that up to 160, which seems to be like a mid-teens growth rate. Just wondering if you could talk a little bit more about
Jeffrey Bernstein: you know, how you think about new versus existing markets and maybe what the gating factor is to...
Jeffrey Bernstein: faster growth. I mean, it seems like you've got 400, I think you said 400 people ready to lead markets, so that doesn't seem like it's an inhibitor.
Jeffrey Bernstein: The pipeline is much stronger, and obviously you have a lot of white space, so just curious to take the opposite side of the argument and discuss the potential for a further uptick than the 160 you talked about, and then I had one follow-up.
Jeffrey Bernstein: Thank you. Bye.
Speaker Change: As we look at what we're looking at for next year, we really share that 160th floor for next year, so the plan is really to update that guidance as we go into 2025.
Speaker Change: And then as far as, you know, what we're seeing is, you know, we are seeing a lot of things that give us confidence, you know, to continue to build our pipeline. We've always said that all of our real estate growth is driven by our people. And so you're exactly right that the pipeline that we have of operators who are ready to open new markets is very, very strong. And that will continue to guide our growth. But it certainly is not something that allows us to have more opportunities to grow because of the size of the pipeline.
Speaker Change: Thank you for joining us. Thank you.
Speaker Change: We also will open a number of new units into existing markets, and with all of the learnings that we've had from a market planning and a site planning, there is a piece of, we want to allow a shop to kind of build its customer base.
Speaker Change: and all of those things as we open, so we don't want to put a shop too close, too fast. But we can certainly, as we build up that line, we build up the community involvement that we have, we can then quickly come in and really fill out that market.
Speaker Change: Thank you.
Speaker Change: Understood. And my follow-up is just on the early thoughts around the food test. I'm just wondering what the consumer feedback has been.
Speaker Change: I mean, I'm...
Speaker Change: We've been inside the restaurants, it doesn't really have necessarily a kitchen. So I'm just wondering, you know, what options you're considering. And I know from...
Speaker Change: back in the IPO days, there was talk that, you know, periodically franchisees actually tried food and came back and said, you know what, not worth it. So I was wondering maybe what the franchisee pushback had been or maybe how that's, you think, been overcome to make food a viable option. Thank you.
Speaker Change: Thank you.
Speaker Change: Yeah, absolutely. So, you know, we are, as we're looking at the food test, it's very initial thoughts, but obviously, you know, we are seeing some great enthusiasm from our customers, even in the initial shops.
Speaker Change: And, you know, I think as far as our franchisees, our franchisees have been, you know, quite eager and excited to hear more about the plans that we have for food. So I would say we've got a lot of enthusiasm from our franchisees.
Speaker Change: David Tarantino, John Ivankoe, John Ivankoe, John Ivankoe,
David Tarantino: Great, thank you.
Speaker Change: Thank you. Next question, Jeff Farmer with Gordon Haskett. Please go ahead. Thanks, just diving a little bit more deeply into some of the things you've already touched on, but with the rewards customers at roughly two-thirds of transactions
Jeff Farmer: Can you shed any light on the same-source sales trends for that customer cohort relative to the non-rewards customers? Even if it's qualitative, I'm curious if there is a pretty big spread or a modest spread.
Speaker Change: So I just we don't segment our customers or don't share the segmentation of our customers in that way so what I'd say is we've been very pleased by the growth of the program and the adoption of the program as people certainly as we spread into new markets. This quarter we had a million signups which is actually the biggest addition we've had since the launch of the program so an impressive addition and present growth to the overall program itself.
Speaker Change: and remain pleased by what is contributing to the business. But like I said, we don't show the segmentation of the customers.
Speaker Change: Okay understood on that not providing the segmentation just one quick follow-up
Speaker Change: Some of your peers have pointed to outsized consumer pressure in California.
Speaker Change: just with a lot of the inflation that's going on and some of the increase in restaurant prices. But what's your view on how the Dutch Brothers California consumers are holding up relative to the rest of either the West Coast or the rest of the country?
Speaker Change: Yeah, so as we look at California, you know, we are quite pleased with the results. We've actually opened a number of new shops in California within the quarter and are seeing strong growth there. So I think that, you know, although there is some labor pressure there and that we have taken price,
Speaker Change: We are still really pleased with our performance in California. It's some of the highest volume shops in our system, and the brand really seems to be resonating with our customers in California.
Speaker Change: Okay, thank you
Speaker Change: David Tarantino, John Ivankoe, John Ivankoe, John Ivankoe,
Speaker Change: Thank you. I would like to turn the floor back to Christine Barone for closing remarks.
Christine Barone: Thanks for your questions. As I mentioned in my prepared remarks, our business saw strong momentum in the quarter, which translated into our financial results. That momentum is connecting with customers as well. Last week, we were ranked number one in the coffee category in Newsweek's America's Best Customer Service list.
Speaker Change: This would not be possible without the efforts of our people who deliver on our mission and values every day. To all of our teams, I say thank you.
Speaker Change: Our success enables us to give back to our communities, which has been a core tenet of our organization since the beginning. In Q3, we were proud to hold our annual Buck for Kids Give Back Day, where we supported more than 200 local organizations that enable compelling futures in the communities in which we serve.
Speaker Change: Furthermore, we announced a generous donation in Grants Pass to aid early childhood education in the families of Southern Oregon.
Speaker Change: The future of Dutch Bros is bright and we have confidence in our direction. We look forward to discussing our vision and plan with you in greater detail in early 2025 at our first Investor Day. Thank you for all of your support.
Speaker Change: Thank you, this concludes today's teleconference. We thank you for your participation. You may now disconnect.