Yahoo Finance Dutch Bros Inc. (NYSE:BROS) Q1 2024 Earnings Call Transcript
Dutch Bros Inc. (NYSE:BROS) Q1 2024 Earnings Call Transcript May 7, 2024
Dutch Bros Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Dutch Bros, Inc. First Quarter 2024 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, May 7, 2024 at 5:00 PM eastern Time and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the lines for questions. Instructions to queue up will be provided at that time. I would now like to turn the conference over to Paddy Warren, Dutch Bros' Senior Director, Investor Relations and Capital Markets. Please go ahead.
Paddy Warren: Good afternoon and welcome. I'm joined by Christine Barone, CEO and President and Charley Jemley, CFO. We issued our earnings press release for the quarter ended March 31st, 2024, after the market closed today. The earnings press release along with the supplemental information deck have been posted to our Investor Relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical fact, are forward-looking statements and are subject to risks, uncertainties and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and Risk Factors in our latest SEC filings, including our most recent Annual Report on Form 10-K and our Quarterly Report on Form 10-Q.
We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP measures are neither substitutes for nor superior to measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Christine.
Christine Barone: Thank you, Paddy. Good afternoon, everyone. We delivered exceptional results in quarter one as the momentum we saw leaving 2023 continued into the new year. Headlining this performance was 10% same shop sales growth, the strongest single quarter since Q4 2021. We delivered $275 million in revenue, an increase of 39% year-over-year. These outstanding top-line results were coupled with excellent flow through as we delivered $53 million of adjusted EBITDA, an increase of 120% year-over-year. Our innovation strategy is working. We released two highly successful new products in the quarter with protein coffee followed by boba, driving strong results in both the morning and afternoon dayparts. Our Dutch Rewards program is working with a record 66% of all transactions coming through the program in the quarter, allowing us to efficiently and effectively provide relevant content and offers to our customers.
Our investments in driving awareness in new markets are working and we are accelerating spending to capitalize on this momentum. Quarter one same shop sales growth featured a combination of ticket and traffic expansion. Our traffic trajectory improved for a second consecutive quarter. Within the quarter, we experienced some weather disruption in January, rebounding strongly in February and March. In April, traffic and ticket growth tempered as we rolled over the refresh of our rewards program, some product outages due to strong demand and the launch of Mangonada at the beginning of April 2023. Bolstered by strong same shop sales growth, system AUVs expanded to $2 million once again, the highest on record. In quarter one, we opened a record tying 45 new shops, marking the eleventh consecutive quarter of 30 or more new shop openings, demonstrating remarkable consistency as we execute our growth plans.
Even when taking into consideration what remains an uncertain and evolving consumer backdrop, the strong start to 2024 gives us the confidence to raise our guidance for the year. Charley will share more context and details in a few minutes. But first, I'd like to walk you through an update on our business. We begin any discussion of Dutch Bros with our fundamental differentiator, our people. Recently, we were awarded a top 10 position in Forbes' first ever best customer service list, one of just two quick service brands in the top 10. Once again, the culture we infuse into each shop, and the skills and abilities of our broistas to make drinks and create relationships are evident. In our view, these are the keys to building brand affinity and fueling growth.
Our exceptional culture, exceptional people and exceptional service speak to customers across demographics and generations. We continue to support growth with robust people pipeline. Our pipeline has over 375 candidates with an average tenure of over seven years' experience, ready to be tapped to lead markets as operators. As we expand across the country and enter into new regions, our people are our superpower. They help us achieve our goal of consistently delivering an exceptional customer experience focused on speed, quality and service. We continue to be pleased with our shop-level turnover, which is in line with our expectations. The expansion of our support center in Arizona, which we announced last quarter, remains on track, and we are excited to ramp up our hiring in that market.
Phoenix is a terrific market for us, where we enjoy high-brand recognition and affinity. We look forward to capitalizing on this excitement as we continue to build out capabilities in this support center. We anticipate moving into our permanent office location in early 2025. Our leadership team transition continues to go smoothly. Today, we announced Josh Guenser will be officially assuming the CFO role on May 9th. And in April, we announced Sumi Ghosh officially assume the role of president of operations. Both Josh and Sumi have spent significant time in our shops, passing their flow checks, becoming fully certified as broistas and developing a strong understanding and respect for our operations. Our CMO, Tana Davila, has been in her position since June of 2023, and she and her team have been focused on delighting our customers in executing our traffic driving initiatives.
We are beginning to see the results of this focus. We have been executing on a multipronged plan to drive traffic, an enhanced focus on innovation, more targeted rewards program efforts, and increased paid advertising design-to-build brand awareness. We saw progress in each of these areas in the quarter as evidenced by traffic growth across our dayparts and continued momentum as these efforts began to take hold. Here is an update on our key traffic driving initiatives. Innovation. We believe innovation plays a foundational role in the next stage of our growth at Dutch Bros. Over the past year, our innovation strategy has evolved from one primarily focused on highlighting items from our extensive secret menu to one with a greater focus on category innovation.
While we continue to believe there will be a place for quick fun product drops to keep our menu fresh and exciting, we also recognize the opportunity we have to drive category innovation. The launch of protein coffee and boba exemplified this new approach. Through our research, we determined there was an opportunity to address a customer need state with a high-protein functional beverage. Our protein coffee beverage delivers at least 20 grams of milk protein in each medium-sized serving and quickly resonated with our customer base. It was exciting to see how our customers recognized the value of this new occasion and made it a part of their routines, evidenced by higher repeat purchase behavior than our typical LTO. Encouraged by the high-sustained customer demand, protein coffee is now part of our regular menu.
We followed up the success of protein coffee with the launch of boba in March. Boba surpassed all of our expectations. We recognized the recent category growth driven by boba, how nicely this overlaps with our large Gen Z customer base and how seamlessly boba can be integrated into our existing offering. Similar to protein coffee, we saw repeat purchase trends and positive customer response. Beyond driving traffic, boba boosted average ticket and drove what we believe was an increase in group buying behavior. Based on the strong customer and crew response, I am pleased to announce that we will continue to offer strawberry boba as a premium add-on to our regular menu going forward. We intend to continue developing category defining products to help us build sales layers and deepen our competitive moat.
As we do so, we plan to remain focused on throughput and customer experience, striking a good balance between innovation and the complexity that often comes with new product launches. Dutch Rewards. Last year, we took some big steps with this program, moving toward more targeted offers and segmenting Dutch rewards members for the first time. Last summer, we began designing offers to bolster performance in the afternoon daypart. This work is off to a great start, and we are beginning to see how it is resonating with customers and driving our business. The afternoon daypart, where we have been channeling our focus, continues to see strength. When we turn those efforts toward our morning daypart in Q1, we saw a great customer response there as well.
We also reintroduced an offer of a free drink to new rewards customers in late 2023. This has allowed us to continue to grow the program and deepen rewards penetration even as we continue to enter new markets. Ultimately, we aspire to become even more sophisticated with our targeting efforts, aiming for more personalized marketing. This will take time and continued investment and iteration, but we believe our program will continue to strengthen our relationship with our customers. Pay advertising. We continue to focus on utilizing paid media to raise awareness, particularly in new markets. Brand awareness is lower in new markets when compared to more mature markets. In some cases, this difference is substantial with mature markets having twice the brand awareness.
We began making investments in our new market awareness late last year and have been encouraged by our initial progress. We plan to accelerate these efforts in 2024, which represents an incremental investment and we will focus these efforts in new markets, including Texas, Florida and Tennessee. Earlier this year, we announced that we would begin testing order-ahead capabilities within our Mobile Rewards app. The initial phase of the test is going well and we have expanded it to include several stores in the Arizona market. We have gathered a lot of employee and customer feedback as we work through our stage gate process. We are optimistic that we will have mobile order capabilities in a majority of our shops by the end of 2024. Getting this right before a broader launch is important for us.
We have the opportunity to establish a new channel that increases customer convenience while maintaining the high levels of hospitality that have defined our brand for over 30 years. We do not intend to take labor out of our shops despite likely saving considerable time from the order process. Instead, we intend to reinvest this time in production and hospitality. We would hope to more often be a part of the consideration set of potential customers, who may love Dutch Bros, but may be apprehensive of our sometimes long lines. We launched a strategic partnership with Olo to provide the backend technology integration to support this initiative. We are encouraged by the fact that 66% of transactions in Q1 were attributable to Dutch Rewards members.
As we continue to roll out mobile order functionality, having such a robust digital penetration will likely provide us a strong foundation, upon which to scale. New shop development continues to be a bright spot. As a high growth company, Dutch Bros has been able to achieve remarkable opening cadence consistency, despite a challenging backdrop over the past few years. Dutch Bros is now a coast-to-coast brand as during the quarter, we opened two shops in our 17th state, Florida. In the Orlando suburbs, these early shops are exceeding our expectations. Our first Florida shop, which are 3,000 miles away from our original start in Grants Pass, Oregon, have been met with enthusiastic customer demand, a testament to the strength of our brand. Texas will continue to be an important growth market for us in 2024, as we expect approximately 30% of new shops will be in Texas, compared to approximately 45% in the past two years.
We expect our overall rate of infill will remain elevated in 2024. We believe the refinements in our real estate strategy, which we anticipate to begin taking hold in 2025, along with increased investments in brand awareness and a continued focus on our overall traffic driving initiatives will allow us to strike a good balance as we scale the brand. As we have shared before, we are shifting our real estate strategy to lessen the pace of future deep infill, instead focusing on casting a wider net in new markets and allowing more time to build awareness and for shops to season. We believe the beverage occasion is reliable and habitual. and that it takes time to form new habits. Our existing markets have demonstrated this time and time again. As our learnings evolve, we are placing a greater emphasis on market planning.
Evaluating density and other relevant variables and potential new markets, and sequencing of shop openings optimally within new markets to efficiently build excitement and facilitate awareness as we grow. It will take time for these refinements to make their way through the real estate pipeline and we will likely begin seeing an impact in 2025. Concurrently, we have been increasing our advertising investments in these newer markets in an effort to increase awareness. So far, we are pleased by the initial results. Finally, last quarter, we mentioned the intention to begin shifting to a greater mix of build-to-suit leases in 2025 relative to 2024. We would expect this approach provides a more capital-efficient development strategy. That said, we believe we are uniquely positioned given strong cash-on-cash returns that work in both ground lease and build-to-suit lease arrangements.
We are pleased with the excellent start to 2024 and we continue to build a strong foundation for growth. We have terrific customer engagement through our rewards program and are excited about opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered 39% year-over-year revenue growth in Q1 and yet another quarter of at least 30 plus new shop openings, demonstrating remarkable consistency. We have excellent shop margins and have demonstrated that we can drive exceptional growth profitably. We are well capitalized. We believe we have plenty of flexibility, upon which to execute our growth plan and capture a considerable white space. Most importantly, we have great people, anchored by outstanding engaged broistas, and a strong pipeline of operators ready to open new markets and continue to expand in existing markets.
With that, I'll turn it over one last time to Charley to review our financials and give more details on our guidance. I want to take a moment to acknowledge Charley and all he's done for Dutch Bros. Charley has worked tirelessly to help this company make a massive difference, one cup at a time, and has spent the last few months ensuring our new leadership team understands not only the financial aspects of Dutch Bros, but the field focus culture as well. I have had the great pleasure of knowing Charley for almost 15 years and having his guidance, mentorship and friendship has been a highlight of my career. I want to personally thank him for all he shared and everything he has done for this company.
Charley Jemley: Thank you, Christine and the Dutch Bros team for those kind words. I would like to add my welcome to Josh as our new CFO. One word for Q1's financial results, outstanding. Here's a brief recap of the financial results Christine just shared with you. Revenue growth accelerated to 39%. System AUVs reached $2 million a record. Same shop sales were 10%, which did include roughly a 1% benefit from February 29. Company net sales grew 43% with very good leverage driving 77% growth in company-operated shop contribution. Four-wall productivity remains strong with company-operated shop contribution margin reaching 29.8%, expanding 560 basis points year-over-year. Adjusted SG&A fell below 15% for the first time since our IPO to 14.7%, 370 basis points lower than Q1 of 2023.
Adjusted EBITDA increased to $53 million growing 120% year-over-year. Adjusted EBITDA margin of 19.1% is up to 700 basis points over quarter one last year. Company-operated shops saw strong leverage up and down the P&L, driven primarily by strong comparable sales results and continued strong margins from newer shops. Cost of goods sold improved 260 basis points year-over-year, driven by strong ticket growth, as well as year-over-year moderation in underlying costs. We continue to keep a close watch on key commodity costs as we did see some increases in ingredient costs as the quarter progressed. In particular, we are watching sugar and cocoa prices in the near to medium term. We make note of the elevated coffee seed price, which could become a factor down the road given the lag time from bean to cup.
Labor costs improved 160 basis points year-over-year, where the impact of strong comparable sales outweigh the considerable wage investments we have made in the past 12 months. Moving forward, the California minimum wage action that took place April 1 may weigh on our ability to deliver similar leverage in the future. Occupancy and other costs improved 90 basis points year-over-year, driven by sales leverage as well. Pre-opening costs remain moderate as we take advantage of the efficiency in these costs that come from infill. For the quarter, SG&A was approximately $46 million, which includes about $2 million in stock-based compensation. With the exclusion of stock-based compensation and other non-recurring expenses, adjusted SG&A was approximately $40 million or just 14.7% of revenue, compared to 18.4% in Q1 last year.
We continue to support a high-growth business with the proper level of investment and resources, while achieving leverage and support costs as we scale. Regarding our balance sheet and liquidity, as of March 31, we had approximately $662 million in total liquidity, compared to approximately $683 million at the end of 2023. And we believe that we have sufficient liquidity at our disposal to support our currently-contemplated growth plans. As of March 31, that liquidity was comprised of the following elements: $263 million in cash and equivalents, $349 million in undrawn revolver, $50 million in undrawn delayed draw term loans. In the quarter, interest expense net declined $1.5 million from one year ago to $6.4 million. This decline is driven by a $3.5 million reduction in interest paid for outstanding balances in our credit facility less the interest income we received on our investments in marketable securities.
That decline is driven by an improved net cash position and is a product of the September 2023 follow-on offering. Partially offsetting the decline in interest expense net is an increase in interest expense related to finance leases of $2 million, which rose from $3.5 million in Q1 2023 to $5.5 million in Q1 2024. That increase is a product of new company-operated shop openings and the portion of those openings, where leases have been classified as finance leases for accounting purposes. Not discounting the continuing potential of uncertainty in the consumer landscape going forward, we are updating guidance for the balance of the year on the strength of our Q1 performance. As we look forward, it will always be our desire to remain nimble. In that respect, we are seeing attractive returns on both our people and marketing investments, and we believe the strength of our four-wall model enables us to make and accelerate investments that bolster our brand.
With this backdrop, we are issuing the following update to our original 2024 guidance. Total revenues are now projected to be between $1.2 billion and $1.215 billion, or an increase of $10 million from our original guidance. Adjusted EBITDA is now estimated to be between $195 million and $205 million, or an increase of $10 million from our original guidance. When we look at the remainder of the year, we expect to see quarterly adjusted EBITDA results, more close to one another than we have seen in prior years. We would expect Q2 and Q3 will remain slightly stronger quarters seasonally than Q4; however, less pronounced. There are no changes to our original guidance as it relates to the following aspects: total system shop openings remain in the range of 150 to 165, same shop sales growth remain in low single digits, capital expenditures are estimated to remain in the range of $280 million to $320 million.
In summary, it was an outstanding first quarter and start to 2024. These results demonstrate that improvements made last year are beginning to take hold and help position us to navigate the dynamic consumer environment. We look forward to a review of our quarter two results in early August. Thank you. And now, we will take your questions. Operator, please open the lines.
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