Dutch Bros - Q2 2023
August 8, 2023
Transcript
Operator (participant)
Thank you for standing by, and welcome to the Dutch Bros, Inc. second quarter 2023 earnings conference call and webcast. This conference call and webcast are being recorded today, Tuesday, August eighth, 2023, at 5:00 P.M. Eastern Time, and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the lines for questions, and instructions to queue up will be provided at that time. I would now like to turn the call over to Patty.
Speaker 16
Good afternoon, and welcome. I'm joined by Joth Ricci, CEO, Christine Barone, President, and Charley Jemley, CFO. We issued our earnings press release for the quarter ended June 30, 2023, after the market closed today. The earnings press release, along with the supplemental information deck, have also now 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 risk, uncertainty, and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We assume no obligation to update any forward-looking statements.
We'll also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP financial 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'd like to now turn the call over to Joth.
Joth Ricci (CEO)
Thank you, Patty. Good afternoon, everyone. Q2 results demonstrate continued momentum in the business. This is a result of a team's collective ability to take the vision of a long-term growth plan and adapt to a changing environment. Our ability to deliver on new unit growth targets quarter after quarter remains a consistent bright spot. In Q2, we opened 38 new shops across eight states, with 83 new shop openings through June 30th. We are more than halfway through our objective of 150 new shops in 2023. This helped propel a 34% increase in revenue year-over-year, including a 580 basis points quarter-over-quarter improvement, as same-shop sales shifted positive to 3.8%, reflecting better traffic trends. In Q2, approximately 90% of our beverages were served cold.
We delivered increased profitability alongside this revenue growth, underscored by a 570 basis points expansion in company-operated shop contribution margin. The second quarter saw shop margins return to seasonally normalized levels as we emerged from the COVID-related inflationary period characterized by 2022 results. Revenue growth, company shop productivity, and disciplined SG&A investments drove almost $49 million in Adjusted EBITDA, more than double what we reported in Q2 2022. We are very proud of the team and what it's accomplishing and are encouraged by our underlying strength. As we look ahead, our long-term vision is clear, and we remain focused as ever. After 5 years of working with Trav and team, and nearly 2 years after the IPO, I believe Dutch Bros is a strong, healthy business with a very long runway.
As we set the stage for scaling the company, I am pleased to share that Christine Barone will step into the role of President and CEO, effective January 1, 2024. I believe Christine is the right person to lead Dutch Bros in its next phase of growth. She is a rare leader with demonstrated abilities in marketing, operations, and finance. Since joining us in February, her impact has been immediate and action has been decisive as she has focused on our real estate strategy, driving traffic, improved data analytics, and overall marketing efforts. We are feeling the impact of her leadership as she executes against the current business and leads the team into 2024 planning and beyond. Over the coming months, I will work side by side with Christine to best position the business for long-term success.
We will execute against our plan, driving traffic, optimizing operations, selecting strong sites, and building great shops efficiently. Most important, I'm excited for what this means for the future of Dutch Bros, and I look forward to seeing how Christine's vision and leadership drives our brand towards our goal of 4,000 shops in the next 10-15 years. With that, I will turn it over to Christine.
Christine Barone (President)
Thank you. Since joining the Dutch Bros team, I have been so impressed with our Broistas, managers, operators, and franchisees. I am now beginning to execute on quick wins and laying the groundwork for our 2024 priorities. As I discussed in detail last quarter, driving traffic has been a key focus over the last six months, and we are gaining traction. As Joth mentioned, we saw an improvement of 580 basis points of system-wide same-shop sales quarter-over-quarter, and substantially all of this was a result of improved traffic trends. Beyond driving sustainable traffic growth, these last six months have also provided an opportunity to assess our strategy and the strength of the business's foundational building blocks.
I will provide a brief assessment of these building blocks and discuss how we will focus organizational attention over the near term to position Dutch Bros for long-term success. The great news is that a strong foundation is already in place. We have incredible people systems and a rock-solid brand, two of the hardest foundational elements to replicate, which gives me confidence in our competitive positioning. The team has worked diligently over the course of more than 30 years, to build a one-of-a-kind culture that radiates through our frontline and is the key enabler of our success. Supporting our people and culture is a critical lens in which we evaluate decisions, and we plan to keep it that way as we execute our growth plan. As the market landscape has shifted over the last 3 years with elevated build cost, I see further opportunity to refine our real estate strategy.
I also see opportunity to build on our values of speed, quality, and service, and enhance our marketing capabilities with a continued focus on our rewards program. We begin any discussion of Dutch Bros with our fundamental differentiator, our people. The shop teams who greet and care for our customers and each other every day are the lifeblood of this organization. Recruiting, developing, and retaining people remains our key focus, and in this regard, the organization is doing great. In Q2, we saw continued improvements in turnover, falling to the mid-60s from about 70% last quarter. We saw even larger improvements in the markets in which we made proactive wage investments. Our people pipeline is robust and continues to grow. We have more than 325 qualified operator candidates in the pipeline, with an average tenure of 7 years.
Creating opportunity to grow with the company is a cornerstone of our people strategy and is the driving force behind shop expansion. In many organizations, people availability is a limiting factor to growth. At Dutch Bros, this is one of our competitive strengths. We will continue investing in our people, specifically in our shop managers, many of whom will become the next generation of regional operators. Through these investments, we aim to even more closely align incentives with great customer service and driving traffic. We're also investing in our leadership team. In June, we hired Tana Davila as our Chief Marketing Officer. Tana brings more than two decades of marketing experience in the multi-unit restaurant space. Her skill set is exactly what we need now to continue our expansion, deepen our customer relationships with our rewards program, and execute our traffic-driving initiatives.
We plan to continue investing in key capabilities to support our growth aspirations, and we believe these investments will enable us to compete effectively as we scale. In Q2, we opened 38 new shops, 35 of which were company-operated. Shops opened in 2022 and 2023 are annualizing to approximately $1.7 million in AUV. It is important to note that despite moderating AUVs, newer shops are following a similar profitability curve to what we have seen in prior cohorts, demonstrating what we believe are more favorable operating conditions as we continue to expand eastward. Consistent with what we shared last quarter, we believe moderation in new shop AUVs for recent age classes is in part a function of an elevated infill rate, which in 2023 is about twice the level it was in 2022.
Elevated infill is a result of a purposeful decision to push the development pace in Texas. Since entering Texas in January of 2021, we have invested heavily in the market. As of June 30th, we had 131 shops open in the state. Texas is a, is a high potential market and a critical component of our eastbound expansion. Building depth and scale there has moved our operations closer to newer markets in the Southeast. We believe securing this foothold quickly enables us to better compete as we move eastward. Being profitable quickly is important. We are encouraged that company-operated shop margins in Texas are following a similar profitability curve to the rest of the system. As previously announced, we chose to position our second roasting facility just outside of Dallas to support this long-term expansion.
With build costs remaining elevated and moderating new shop AUVs, we are completing a body of work to adapt and refine our development plan to the conditions we anticipate over the next few years. We purposely built a robust pipeline, providing us the flexibility to be selective. A refined real estate strategy allows us to continue to live up to our commitment of building the right shops at the right time and expanding our footprint at the right pace on our path to 4,000 shops. To that end, we're taking the following actions. First, we plan to widen our initial reach as we enter new markets and adjust our pace of new market penetration. We believe this will provide markets time to curate demand while balancing the benefits of overhead leverage and distribution efficiency that comes with market density.
Second, over the past several years, we pursued a strategy that favored ground leases, partly in response to supply chain and construction pressures, enabling us to exert greater control over our development process. This enabled us to sidestep some of the well-documented industry development delays. As we believe these pressures will begin abating, we have greater opportunity to pursue a more diverse range of lease and shop types while continuing to focus on the drive-thru channel. Third, we will continue to look for opportunities to value engineer our existing prototypes. We expect to see this work impact site builds beginning in late 2024. Finally, we are doubling down on community by partnering with local organizations for targeted give back days. We are continuing a 30-year history of investing in our communities, driving trial with promotions and relevant events to build our brand and new shop revenue.
These actions represent a curation of our approach to growth. We don't believe the full impact of these changes will be immediately felt. In the short term, we anticipate elevated build costs, and believe moderated new shop revenue productivity will persist as these changes work through the system. The first half of the year demonstrates we can navigate change and deliver excellent profitability. We saw margin expansion in Q2, driven by a combination of shop-level operational improvements and moderating adjusted SG&A growth. Company-operated shop profitability powers our growth aspirations. Not only did total company-operated shop contribution grow almost 70% from Q2 2022 to approximately $67 million, these shops delivered 570 basis points of margin expansion year-over-year to 30.3% of company-operated shop revenue.
Strong margins propel our new shop growth, facilitating quick payback periods and enabling us to reinvest into further development opportunities. A strong four-wall model allows us a certain level of flexibility to adjust and adapt as we expand. Adjusted SG&A as a percentage of revenue improved 140 basis points when compared to Q2 of last year, falling to 15.7%. We are committed to smart investments that support critical capabilities as we expand, but anticipate SG&A growth to remain below the rate of revenue growth, which will create leverage. Last quarter, I mentioned a key focus for the remainder of the year would be driving traffic. In Q2, we executed against our traffic-driving initiatives, with improvements in traffic substantially driving all quarter-over-quarter same-shop sales growth.
The team acted quickly to activate a multipronged approach, leaning into innovation, leveraging the rewards program, scaling up paid media, and utilizing promotions to drive trial. Here is a brief update on each key pillar. First, innovation. We have been leaning into innovation in a big way in 2023. Last quarter, I discussed the introduction of our flavored Soft Tops for St. Patrick's Day. In Q2, we took innovation to the next level with a nationwide release of our limited time only Mangonada platform. Mangonada, which we tested last year, outperformed our own expectations in Q2, making up more than 10% of our menu mix at launch and resulting in nearly 3 million drinks sold in the quarter. Later in the quarter, we built on this momentum with our Strawberry Horchata Chai, which demonstrated the success of wider deployment of secret menu offerings.
In the quarter, we pulsed a few product drops to deliver quick burst of innovation and buzz, which included our cookie crumbles topping and Poppin' Candy Firecracker Rebel. Encouraged by customer response, we plan to continue to keep our menu fresh, fun, and relevant while balancing operational focus in a simple pantry of ingredients. Second, rewards. We have seen continued momentum in our rewards program following the end of March refresh. That refresh enables us to invest more surgically, bringing even more exciting promotions to Dutch Rewards members, who make up almost 65% of our transactions. We began deploying this new approach in April with a Double Point Tuesday promotion, providing an extra incentive for Dutch Rewards members to join us on Tuesdays. We saw a favorable customer reaction for each of the 4 weeks that we activated this promotion, which was encouraging.
Later in the quarter, we experimented with a variety of time, geographic, and frequency-based offers, helping us to further refine our strategy and expand our toolkit. Third, paid media. In Q2, we leaned into enhancing our paid digital media capabilities, which was a meaningful driver of our traffic improvement quarter-over-quarter. Used in conjunction with innovation and our targeted app-based promotional efforts, paid social enables us to reach a wider audience at an attractive ROI. We anticipate continuing to iterate and refine these efforts to create a holistic, full-funnel marketing plan grounded in our robust Dutch Rewards loyalty program. Fourth, promotion. In our last call, I noted the success of the Fill a Tray program we ran in late March. Encouraged by customer response, we reran this promotion in June, experimenting with the promotional offer and timing, and we're just as pleased with the outcome.
Bringing friends and family together to experience Dutch Bros is what we are all about. We think this is a great way to reinforce these brand values, especially in new markets. Outside of Fill a Tray, we continue to pulse and experiment with other multiples-based promotional activities that encourage trial and group visitation. Taken together, we made real progress against our traffic-driving initiatives, which built in momentum throughout the quarter. We plan to keep our foot on the gas, adding capabilities and executing through the back half of the year. My first six months have been exciting and productive. I'm impressed by the team's culture, willingness to adapt, and the progress we've made. We have many of the key building blocks in place to create our sustained competitive advantage, anchored on our cornerstone people systems.
I appreciate the investments that Trav, Joth, and the full team have made to immerse me in our culture and help me quickly learn our business. Over the next few quarters, we look forward to sharing in greater detail how these blocks are coming together to shape this strategy. With that, I'll turn it over to Charley to review our financials.
Charley Jemley (CFO)
Thanks, Christine. In our decision making, we emphasize profitable growth while keeping an eye toward the future. As many of you know, the four-blade windmill is one of Dutch Bros' iconic images. In Q2, the windmill turned with a stiff summer breeze and generated outstanding growth and performance across four key aspects. Total revenue of approximately $250 million, an increase of almost 35% year-over-year. Same-shop sales growth for the system turned positive in the quarter at 3.8%, with traffic driving the improvement. Adjusted EBITDA was approximately $49 million, double what we reported in Q2 2022, and 19.4% of revenue. Shop growth remains on track. We opened 38 new shops system-wide, of which 8 opened in April, 13 in May, and 17 in June.
Of the 17 shops we opened in June, 11 were in the final week of the quarter, and that limited their sales contribution in Q2. Strong profitability is driven by surging performance in company-operated shops. Net sales grew 38% at company-operated shops. Shop contribution margin reached 30.3%, expanding 570 basis points year-over-year. Note, this contribution includes 1.5% of pre-opening expenses. We continue to see strong labor productivity. Labor costs improved 280 basis points from the same period last year. This is primarily a result of improved scheduling and deployment. Better labor productivity more than offsets the significant investments we made in wages. As Christine noted, people metrics remain strong, speaking volumes for the company culture and hiring and retention practices in the retail shops.
Cost of goods sold were 26.8% of company-operated shop sales for the quarter, down slightly year-over-year as menu pricing helped and some moderation took place in ingredient input costs. In the last week of the quarter, we began to update our customization pricing, creating a streamlined system for a wider array of modifications. We also moved a number of shops into higher price tiers to better align in market pricing. Going into 2023, it was not our intention to take price. However, we made these moves to set our pricing architecture for the future. In the franchising and other segment, gross profit improved to $19.2 million, compared to $13.8 million in the same period last year.
This segment of our business is more than stable now than it was a year ago, as inflation impacted our coffee and Rebel manufacturing businesses adversely. Shifting now to SG&A. For the quarter, SG&A was approximately $52 million, which includes about $10 million in stock-based compensation. Please make reference to the supplemental slides for a reconciliation between SG&A and Adjusted SG&A. With the exclusion of stock-based compensation and other non-recurring expenses, Adjusted SG&A was approximately $39 million. This declined to 15.7% of revenue for Q2 2023, compared to 17.1% in Q2 last year. As Christine mentioned, we continue making investments in people as we build organizational capabilities and better support our operators in the field. We also expect continued leverage going forward as revenue growth outpaces investment.
Now on to a few comments on the health of our balance sheet and liquidity. Last week, we successfully upsized our $500 million credit facility, adding $150 million in capacity, expanding our syndicate in a transaction that generated a healthy amount of interest from lenders. Given the tightening credit markets, we view this outcome as a strong vote of confidence in the company's long-term financial outlook and growth prospects. Our overall credit facility now totals $650 million, which is made up of approximately $100 million of drawn term loans, a $350 million revolver, of which approximately $183 million was drawn as of June 30, 2023, and $200 million of undrawn delayed draw term loans. As of June 30, we had approximately $256 million of net debt.
Inclusive of this upsizing, we would have had approximately $370 million in liquidity against our $650 million facility, up from approximately $220 million in liquidity before our refinancing. In Q2, our operations generated approximately $43 million in pre-tax cash flow prior to capital spending and financing, reflecting expanding company shop productivity and SG&A leverage. In the quarter, we consumed approximately $59 million in CapEx, the vast majority to fund new shop growth. We believe we have a well-capitalized balance sheet, and our priority is to position the company to take full advantage of the long growth runway ahead in a responsible and thoughtful manner. Moving on to 2023 guidance. First, I will quickly take you through the specifics, highlighting the changes and some context. Our expectation for total system shop openings in 2023 remains unchanged.
We expect to open at least 150 new shops, of which at least 130 will be company-operated. Given the shop opening outlook is unchanged, guidance regarding capital expenditures also remains unchanged. Capital expenditures are estimated to be in the range of $225 million-$250 million, which includes approximately $15 million-$20 million in spending in 2023 for a new roasting facility, which is projected to open in 2024. Our estimate of system same-shop sales growth remains in low single digits. We believe improved traffic trends and pricing actions will offset the negative same-shop sales growth we reported last quarter.
Having seen 6 months of performance, we have greater clarity in our full year revenue expectations, which we now believe will be at the lower end of the previously communicated range of $950 million-$1 billion. This expectation considers the revenue moderation in the 2022 and 2023 age classes, partially offset by recent traffic trends and price, pricing actions. As a reminder, seasonality in our back half of the year is typically lower than the first half when modeling our revenue. Adjusted EBITDA is now estimated to be between $135 million and $140 million, up from at least $125 million. This reflects stronger than expected year-to-date profitability trends, partially offset by our revised expectation of revenue at the lower end of our range.
Our expectations for full-year Adjusted EBITDA also reflect increased levels of investment to support key priorities outside what has been previously communicated. Thank you, now we will take your questions. Operator, please open the lines.
Operator (participant)
Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Chris O'Cull with Stifel. Please proceed with your question.
Chris O'Cull (Managing Director and Equity Research Analyst)
Thanks for taking the question. Christine, congrats on the promotion, and Joth, congrats on the successful career at Bros.
Charley Jemley (CFO)
Thank you.
Christine Barone (President)
Thank you.
Chris O'Cull (Managing Director and Equity Research Analyst)
Christine, I was hoping you could elaborate on your comments about changes to the development strategy, and specifically as it relates to the widening the reach and maybe pursuing a different type of shop and or lease structure?
Christine Barone (President)
Yeah, absolutely. As we look to refine our real estate strategy, a couple of things we are working through. One, as we move into new markets, we think that as we widen our penetration, it will allow the brand really some time to build as we go into these new markets. That is the piece on widening the reach. And then your second question, in looking through shop types and lease types. We today have a variety of shop and lease types, and when you look at those, we have increased our ground leases over time, really to react to the market conditions that we've been seeing.
We believe over time, as those market conditions and kind of all of the COVID supply chain pieces work their way, there's an opportunity to, to pull back a teensy bit on the ground leases as we move forward. We also have a variety of different shop types within our portfolio, and, you know, we'll continue to experiment. Recently, we've had a couple of openings with some end caps, and so we will, we will continue to look at that as a part of our portfolio going forward.
Chris O'Cull (Managing Director and Equity Research Analyst)
Okay, that's helpful. Then it's encouraging to hear the profitability curve for new stores is similar to the rest of the system. Can you provide an update on the average investment cost and maybe how new unit returns, how the target may have changed from the IPO?
Charley Jemley (CFO)
Yeah. Hey, hey, Chris, it's Charley. As it relates to returns on investment, we haven't specifically shared the return results since the IPO, but if you look at the shape of what's happening, historically, we had outsized returns. If you take our AUV relative to the investment costs and the profitability of shop model, at the time of the IPO, we targeted a 35% return on ground leases and 75% on build-to-suit, and we're pleased with that result. As noted, going forward, in the short term, we've got elevated build costs, which are up between 30% and 40% on a project cost basis, and those moderating new shop volumes as we are infilling so heavily. We'll see what was highly likely excessive returns relative to the IPO coming more, coming down and moderating in the near term.
Chris O'Cull (Managing Director and Equity Research Analyst)
Okay. Okay, great. Thanks, guys.
Operator (participant)
The next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Sharon Zackfia (Partner and Group Head of the Consumer Sector)
Hi, good afternoon. I guess following up on the real estate strategy refinement, it sounds as if perhaps there's some ramifications from Texas in the refinement strategy. I just wanna clarify if that's the case. You know, is there anything you've seen in Texas as you've kind of infilled and fortressed there so quickly, that if you had a do-over, you might not want to replicate? I'm trying to also think through the ramifications for the PNL as you go in maybe a little bit slower into new markets. Is it fair to think that's an AUV enhancement, but maybe a bottom-line drag, Charley, if you could give us any thoughts on that?
Christine Barone (President)
Great. I can start with learnings from Texas. You know, I think one of the things as we grow, we're growing very quickly, so we are constantly taking in the learnings from each of the new shop openings and understanding how to get a little bit better each time, right? That's, that's a constant improvement. For us, Texas is a really important landmark and part of the country to really have gone into in a big way. It really provides that launching pad for the rest of the country for us, and we've been incredibly pleased with the customer response from our growth in Texas.
Charley Jemley (CFO)
I think in terms of the, the P&L, the profitability, you call it a drag. We, we noted that our Texas shops margins are, are very productive, as productive as, as our existing portfolio. As we look to widen our reach and go out a little further, it doesn't mean we're gonna slow our development pace. It means we're gonna change the shape of it, but we shouldn't see a drag on profitability. The other thing that's very notable this year, beyond the margin productivity we're seeing, is we've refined our opening approach, and we are saving dollars on a like-for-like basis on pre-opening costs. All those refinements as we go forward, should help us move through this, this shifting of, of how we're going about this.
Christine Barone (President)
Okay, thank you for that.
Operator (participant)
The next question comes from the line of Andrew Charles with Cowen and Company. Please proceed with your question.
Andrew Charles (Managing Director and Senior Research Analyst)
Great. Christine and Joth, congrats to both of you. You know, Charley, you just touched on this, but I just wanna make sure it's confirmed that, you know, with the refinements to the real estate strategy, do you guys still anticipate you'll be able to support your prior targets for mid-teens annual growth in 2024 and beyond?
Charley Jemley (CFO)
Absolutely. Yes.
Andrew Charles (Managing Director and Senior Research Analyst)
Okay. Thank you for that. Okay, Charley, just a quick bookkeeping one. Can you provide the price, traffic, and mixed components of Q2 performance?
Charley Jemley (CFO)
Yeah. When you break down our, our system comps, you've got a +6 approximately on price, and net of sales transfer, you have a, a, a flat traffic number. Sales transfer is estimated to be approximately 300 basis points.
Andrew Charles (Managing Director and Senior Research Analyst)
Very good. Then, Christine, one question for you. Can you talk a little about the gap in same-shop sales between company-operated and franchise locations in Q2? You know, what do you attribute that to, and, what are the opportunities to help make that a bit more consistent?
Christine Barone (President)
Yeah. So as, as we look at that gap, I think, you know, one of the things is, is we are still growing our rewards program. Over time, our newer shops, they are ramping up really nicely and adding rewards programs. As I noted, in Q2, we really increased the rewards promotions. We also did a lot of what we would call throwback promotions, so things that we've done in the past that our customers get really excited about. We have seen great success in new markets with these that are franchise markets, which are some of our older markets, are more familiar with some of these promotions.
Charley Jemley (CFO)
Mm-hmm. Yeah, Christine Barone, just sort of dovetailing off of that, higher promo costs in the company shops, particularly in the markets as we seed in the brand, so therefore, a higher rewards cost. Sales transfer is higher, a higher rate in the company portfolio versus the franchise because we're going faster there. There's some geographical differences between where the franchisees are and where the company shops are, and the relative growth rate of that. It all kind of lays out to allow for the difference that we're seeing. We don't see an operational difference. We have no data that would say there's an operational difference between the company and franchise portfolios.
Andrew Charles (Managing Director and Senior Research Analyst)
Very helpful. Thanks for the color.
Operator (participant)
The next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.
Sara Senatore (Managing Director and Senior Research Analyst)
Oh, great. Thank you. Just a clarification and then, and then a question, please. In terms of the margins, trying to understand from a restaurant-level perspective, I know you, you did a really nice contribution bridge, but to what extent are there any influences from, like, the shift, you know, from build-to-suit to ground lease, to your earlier point, you know, that tends to have higher margins or from, you know, opening in lower-cost states? Just sort of like on an apples-to-apples basis, is, you know, as we think about-- or as I think about the margins, I wanna make sure, you know, I understand kind of what, what any kind of mix impact might be. Then, and then I'll have a question on, on some of the marketing initiatives.
Charley Jemley (CFO)
Yeah, so the, the lease type, a ground lease or a build-to-suit, has no effect on the company's shop-reported margin, so it's not a factor. That margin walk upward is, again, nothing to do with the lease type. It's about half of that walk ahead is, is the menu price impact of things we've done, and then the rest of it is operational efficiencies and labor and savings in pre-opening and savings in operating expenses. We, we do have lower, wage costs as we move eastbound, so that's also a factor as the portfolio weights in.
Sara Senatore (Managing Director and Senior Research Analyst)
Okay, just to clarify, my understanding was that, ground leases had lower... Part of the sort of philosophy behind doing the ground leases was that, you know, perhaps lower rent expense because you weren't kind of reimbursing the landlord for TI. Is that, is that not the case?
Charley Jemley (CFO)
They do have lower cash rent, but, from GAAP, for a GAAP accounting purposes, that part of that gets inferred, that difference gets inferred as interest and gets reclassed down to interest expense.
Sara Senatore (Managing Director and Senior Research Analyst)
Right. Okay. All right, I'll, I'll take that offline. Then, and then in terms of, you know, kind of the, some of the marketing, you know, changes, so like the, the sort of paid media, you know, this, some of the initiatives seem like kind of more traditional traffic-driving initiatives. You know, what does that mean in terms of, you know, how much how you're thinking about media as a percentage of revenues or, or how you're, you know, thinking about the, the marketing mix going forward versus, you know, what maybe you had done previously?
Christine Barone (President)
... Yeah, as we look forward, I think, one, we've just brought in a new CMO, Tana, and she's really beginning to ramp up in her, her job and looking at the mix of things that we're doing. I would share that, you know, I think from a, from a percent spend, what we're looking at right now is we're specifically looking at, at the return on all of our initiatives. I think with the data that we have from our rewards program, the way that we can see the performance of our different ad types and, what we put in them and all of those things, that we're not actually targeting a percentage.
What we're looking for is really looking to expose our brand to new customers, we're in so many new markets, and, and bring them in. Rather than in targeting an actual %, we're really looking at, what can drive growth, what can drive trial, and what is an effective ROI on our marketing spend?
Speaker 15
Got it. Thank you.
Operator (participant)
The next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Jeffrey Bernstein (Managing Director and Senior Research Analyst)
Great. Thank you very much. Two questions. First one, just Christine, with the, with the AUVs being perhaps down a little bit from what you were initially expecting for new units, and as you mentioned, the cost to build up, I know you're working diligently on both fronts to mitigate that, but I'm just wondering if there was even the consideration of slowing down the near term unit growth from what's already industry leading levels to give you more time to kind of absorb or maybe work through the, the headwind you're dealing with on both fronts, or whether that was not even a consideration?
Charley Jemley (CFO)
Hey, I'll. This is Charley. I'll speak to the new unit AUV. Jeff, if you remember, at the IPO, we projected $1.7 million new AUVs. We are seeing that moderate from well over $2 million in the lease of class to $1.7 million, and we also wanna reinforce that's a lot of heavy infill going into Texas, which we talked earlier about. We wouldn't necessarily repeat that as we go out a little wider. In terms of the build costs, well, that's pretty sticky. The elevated build costs, there are things we can do that we talked about earlier. Prototypes, doing an end cap, which is lower project cost versus a ground up freestanding building, maybe using some different lease types to consume less cash upfront.
At this stage, we don't feel like that should really change the shape of our growth trajectory, going through the next few years. I Christine wanna tag into this as well.
Christine Barone (President)
Yeah, Jeff, what I would add to that is that we have a really robust real estate pipeline. What that allows for is that allows for us to take our learnings over time and adjust in places where we think it makes sense, but continue that same unit growth. I think the robustness of that pipeline, how many sites we have lined up to still, to still go, will allow us to keep our shop growth on pace.
Jeffrey Bernstein (Managing Director and Senior Research Analyst)
Understood. Then my follow-up is just on the, the restaurant margin, north of a 30% margin this quarter, up 500 and some odd basis points. That's really incredible. Just wondering, Christine, as you look at this business with a fresh set of eyes, having come from others within retail and whatnot, is there any thought to maybe the business being overearning and well, maybe willing to reinvest some of those benefits in store? I mean, it just seems like those are, you know, well above industry level margins, and maybe there's an opportunity to reinvest some of that to, to further strengthen the platform. Thank you.
Christine Barone (President)
Yeah, absolutely. A couple of things. I think one, as Charley mentioned, this is seasonally our highest revenue quarter. That, that also helps with profitability in the quarter. Then as we think about reinvesting, absolutely, and again, this, this brand was really built on investing in local communities, bringing new people in, investing and driving trial. We are really going to continue doing that work, to, to allow new guests to fall in love with us.
Jeffrey Bernstein (Managing Director and Senior Research Analyst)
Thank you.
Operator (participant)
The next question comes from the line of David Tarantino with Baird. Please proceed with your question.
David Tarantino (Director of Research and Senior Research Analyst)
Hi, good afternoon. I, I had a question about the traffic trends and, and certainly a lot of improvement from the first quarter, but I was wondering if you could maybe talk about how much of that improvement might have been related to just lapping over a, a lower comparison versus kind of real underlying improvement based on the initiatives, you know, that you, that you called out. I, I guess how much, you know, I guess, of the traffic improvement was related to each of those factors?
Christine Barone (President)
Yeah, as we look at the traffic improvements quarter-over-quarter, we believe about a third of that traffic improvement is due to the easier lap from Q2 of 2022, and then evenly split really over the rest of the pieces. Innovation, Dutch Rewards, and an increase in the advertising spend, really all split the rest of that improvement in our traffic.
David Tarantino (Director of Research and Senior Research Analyst)
Got it. Okay. I guess, you know, how did that inform the outlook for the second half of the year? I guess, what's your expectations for the traffic picture as the rest of the year evolves?
Charley Jemley (CFO)
We, we don't, we don't break it down in the full year from a guidance perspective, but, you know, we mentioned low single-digit total comp. There's an element of pricing in there as well that we've noted. Then you've got sales transfer, right? We're just gonna keep pushing the, the gas on the traffic lift and try to get that as, as high as we can. We talked about the investments.
Christine Barone (President)
Yeah, I think, you know, one of the things I would add to that is that we've learned a lot, with what we've done in Q2. So we've experimented, again, from a rewards perspective, with different types of offers, different day parts, different geographies. We've done the same on the promotions front. So I would say as we move forward, we'll continue doing similar activities, but with the learnings that we've had from Q2 to really enhance the profitability and understand where, where those actions have made the biggest differences.
David Tarantino (Director of Research and Senior Research Analyst)
Great. If I could squeeze one more in. Charley, I might have missed it, but the pricing increases that you implemented at the end of Q2, I guess, what amount of pricing, I guess, effectively did that lead to? What type of pricing are you gonna be running in the second half of the year?
Charley Jemley (CFO)
Well, on a full year basis, we're now gonna range from about a 4% up to approximately a 6% full year price lap with that price move that we just took.
David Tarantino (Director of Research and Senior Research Analyst)
Got it. Okay, thank you very much.
Operator (participant)
The next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.
Jeff Farmer (Managing Director and Senior Analyst)
Great, thank you. Just looking to better understand the, the sales volume curve of some of these infill development shops. I guess, more specifically, to the extent that you're willing to share, are, are these units or shops entering the, the comp base as a same-shop sales headwind or, or, or a tailwind at this point?
Charley Jemley (CFO)
Right, right now, there's so few of these shops, for example, in the Texas market that's in the comp set. It's, it's really very low. It's de minimis at this point. Now, as we hit the first day of the 16th month going forward, that'll start to ratchet up as we go forward. I think in the 2nd quarter, we had maybe approximately 40 shops or 50 shops that's in the, in the comp base from Texas. Going forward, you'll, you'll, you'll see that more.
Jeff Farmer (Managing Director and Senior Analyst)
Okay. I'll, I'll, I'll back off from the, the comparable store units for a second, but just in terms of thinking about, I think we all understand that the, the infill shop volumes are, are lower, but in terms of the, the, the growth rate, anything you can share there in terms of year one, year two, year, year three, in terms of the AUV growth trajectory of those infill locations?
Charley Jemley (CFO)
So too early, right? We're talking about 2022, late 2022 and 2023's class being the high rate of infill, so they haven't, they haven't annualized over themselves. Remember, we don't report a comp number till the first day of the 16th month to allow shops to climb over their launch curve, settle. It's just too premature to even know.
Jeff Farmer (Managing Director and Senior Analyst)
Okay. Last one, I apologize. I'll sneak one more in. Just sort of, I think early on in the year, you guys had broadly guided to the shop level EBITDA margin for, for 2023. I think you basically said your expectation was that it would be flat. Any update there in terms of your expectation for the full year 2023, shop level EBITDA margin?
Charley Jemley (CFO)
Yeah, we're, we're very confident in the flat, and, and we feel like we'll probably outperform that going forward. It's our belief, given the strong results we've demonstrated in the quarter, the fact that we've taken some pricing, and we are beginning to see the green shoots of commodity, commodities helping us.
Jeff Farmer (Managing Director and Senior Analyst)
Okay. Thank you.
Operator (participant)
The next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Andy Barish (Managing Director and Senior Equity Research Analyst)
Hey, guys. I guess first, Christine, specifically, just as you've gotten involved and looked at the pipeline, is there anything that makes you uncomfortable with that $1.7 million new store productivity number kind of stabilizing at these levels?
Christine Barone (President)
I mean, as we look forward, we've done a lot of work, as I, as I shared on the real estate pipeline. It's obviously an important part of what we're working on here every day. You know, as, as we look at that, I think, you know, there, there's things that are ups and downs. You know, an infill rate is gonna take the AUVs down a little bit, but going into a new market, where we are fresh in that market, we are gonna see higher AUVs.
When you look at kind of, the way that we can shape our pipeline and really build demand in these new markets while we're then going in and infilling. You know, by the way, I don't think it's a very long time between building that demand and then coming back and infilling, that it's going to take. As I look at the pipeline and all of the richness of the data that we have now, after having, you know, opened so many shops in Texas, I'm very confident as we go forward, in what this pipeline will look like, what our growth will look like.
Andy Barish (Managing Director and Senior Equity Research Analyst)
Great. Appreciate that. Maybe, Charley, just on the updated guidance for the full-year Adjusted EBITDA, it seems like, at least from analyst expectations, you know, you beat by about $10 million here in the 2Q and flowed that through. I know there's a lot of puts and takes, but, what are some of the key investment areas that you called out, if, if you're willing to share?
Charley Jemley (CFO)
Yeah. Christine sort of outlined a lot of those areas that we've been investing in. Going forward, those, those will be things around the capability to support growth going forward, making sure we have a solid team in place, using our rewards program and targeted promotional activity to keep driving traffic in the future. Making sure we see new markets even more productively as we go forward. You know, good observation that we're flowing through the 10 plus a little more. I'll go back to the commentary about our 30% margin and being very mindful that we have the firepower to reinvest, and we're going to do that.
Andy Barish (Managing Director and Senior Equity Research Analyst)
Thanks very much, guys. Nice results.
Operator (participant)
The next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.
Brian Mullan (Director and Senior Research Analyst)
Okay, thanks. last call you shared that the frequency in that top cohort of customers had held in really nicely. while it was maybe the lower quartile where you had seen a little bit of softness. as it pertains to the second quarter, could you just speak to what you saw with both of those cohorts in terms of frequency, and then maybe what are your expectations on that for the, for the balance of the year?
Christine Barone (President)
Yeah. We saw in Q2, we saw some improvements across cohorts. You know, as we look forward, again, we're going to continue to increase our rewards activity. We, we are seeing really great customer response from that rewards activity, and with that, you know, we would hope to continue to see improvement in the frequency.
Brian Mullan (Director and Senior Research Analyst)
Thank you.
Operator (participant)
The next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.
Speaker 15
Thanks. I really want to hone in on the margins, first, you guys kind of said 6% system pricing. Is that in line for the company-owned stores in Q2?
Charley Jemley (CFO)
It's not dissimilar, the system pricing move versus the company pricing move.
Speaker 15
Okay. Then Q3 pricing sounds like it's going to be close to 3%. Is that fair?
Charley Jemley (CFO)
Sorry, it's 6% for the full year. Last quarter, we reported the pricing would be 4%, 6% for the full year rollover. It's not a 6% pricing move. I just wanted to make sure you understood that. It was approximately a 4% price move on an annualized basis that we just took. Please go ahead with your question.
Speaker 15
in Q2, Q2, the all-in menu price was what? Just to be clear. Year-over-year, the all-in menu price.
Charley Jemley (CFO)
The in Q2 only, all in versus last year is about 6% year-over-year.
Speaker 15
Okay. Then going forward in Q3, what does that translate to, inclusive of the recent price increases year-over-year?
Charley Jemley (CFO)
It's, it's now estimated at approximately 7% effect for Q3, year-over-year.
Speaker 15
Got it. With 7% pricing in Q3, you know, really big, year-over-year forward margin increases in the first half. You know, sounds like Q3, we should have some decent leverage. Why shouldn't we see meaningfully above flat, you know, for the full year? By that I mean, 150, 200 basis points above, above last year. I mean, is Q4 going to be that much of a drag?
Charley Jemley (CFO)
You've got about 6% price. We shot you guys a guide of low single digits. 6% is coming from price, and we're running around 300 basis points from sales transfer. Your +6, -3 from sales transfer, kind of puts you in that low single digit range that we're talking about.
Speaker 15
Sure. Then for, for the four-wall EBITDA margin, you know, you, you said it should be at least flat for the year, but it just seems like given the performance in the first half, we should be meaningfully above flat year-over-year. Is that fair for the full year for the margin?
Charley Jemley (CFO)
Well, over in the fourth quarter, we took a large entry for breakage income in the fourth quarter. We got to climb over that. We reported that last year, the breakage for 2022 and 2021 was $7 million, that we have to climb over in profit from breakage last year in the fourth quarter. That's a big climb.
Speaker 15
Fair enough. Thank you very much.
Operator (participant)
The next question comes from the line of Rahul Krotthapalli with J.P. Morgan. Please proceed with your question.
Rahul Krotthapalli (VP and Equity Research Analyst)
Good afternoon, guys. Thanks for taking my question. I just wanted to check on the tap system rollout. Can you guys tell a bit on where or how much of the system has this rolled out now? Then I'm also curious on how much of the 180 basis points leverage you got in labor came from the efficiency of this tap rollout within the system you have exiting 2Q?
Christine Barone (President)
Yeah, absolutely. I can take that. Our tap system is still in a testing phase. We are currently in 16 shops that are operational right now. As far as labor efficiencies, it's really not driving any of that labor efficiency in our markets. When I look across at what's driving the labor piece, it's really investments we've made in our labor scheduling systems, investments we've made in educating our teams on how to best schedule labor, looking at scheduling against peaks and things like that. That's really the result that's what we're seeing from a labor perspective.
Rahul Krotthapalli (VP and Equity Research Analyst)
I have a follow-up on the pricing side. I think you guys talked about 2 different components here. 1 is higher pricing for the customization, and the other being more number of shops moving to higher price tiers. I'm just curious, like, how much of the pricing taken was on the base menu versus what is the component mix, which is contributing to this price step up between the 2 categories of customization, pricing, and moving shops to higher tiers?
Christine Barone (President)
Yeah. One of the reasons why we took price was really to set up this long-term pricing architecture in the right way. A little more than half of the pricing increase was to make moves in pricing tiers and, and customizations or modifiers. About 2.5% of that, that price is actually for those moves. The rest is, is drink pricing moves really related to drinks that have those modifiers included in them. When you look at that, there's a couple of reasons why. One, when we looked at sort of our pricing regions and where we were priced versus competitors, we felt like there's obviously been some movement during COVID of where people have moved and kind of where, how, how prices have changed.
That was really just catching up with that as we looked at moving into these new pricing tiers. From a customization standpoint, this really allows our customers to kind of pick and choose what they do and sets up our long-term pricing architecture in a nice way.
Rahul Krotthapalli (VP and Equity Research Analyst)
Understood. That's really helpful, Christine. If one last follow-up, if I may. On your rewards members cohort, did you see any change in frequency of store visitation over the past few quarters? If you take up, like, one specific cohort within the 6.6 million members you have now, is there any change, notable change in the frequency of visitation?
Christine Barone (President)
Yeah. As we track our rewards data, that's not exactly how we track it right now. When we're looking overall at traffic improvements, I think with the number of new shops we have, we're both looking for those frequency changes, but we're also looking to add new customers in, and so those cohorts do have changing members within them. What we're really looking for is we wanna bring new customers in that are quickly increasing their frequency over time, and then also increasing the frequency of our existing customers.
Rahul Krotthapalli (VP and Equity Research Analyst)
Perfect. Thanks a lot for answering my questions, and congratulations on the role.
Christine Barone (President)
Thank you.
Operator (participant)
The next question comes from the line of Gregory Francfort with Guggenheim Securities. Please proceed with your question.
Gregory Francfort (Managing Director and Senior Equity Research Analyst)
Hey, thanks for the question. I had two quick follow-ups. The first is maybe just as we think about the changes on the leases, how you're gonna finance new stores. Within the $225 million-$250 million of CapEx from this year, what would that have looked like under maybe the new mixture considering?
Charley Jemley (CFO)
I, I couldn't speculate going forward like that. I mean, I understand the question, on the fly, I couldn't tell you what that would be.
Gregory Francfort (Managing Director and Senior Equity Research Analyst)
Okay.
Christine Barone (President)
Yeah, one thing on that. No, I think it's important to note, too, is our pipeline is planned 18-24 months out, and so we are currently now, for the majority of our time, looking for sites in 2025. You know, as we look at continuing the growth here, this will be a gradual change versus something more abrupt. Just wanna make sure we're very clear that this is really a refinement and, you know, our continued focus on learning from every new shop that we're opening.
Gregory Francfort (Managing Director and Senior Equity Research Analyst)
Got it. Understood. Understood. Maybe just going back to the labor, I think you guys put in place these changes to how you guys kinda schedule labor and sometime in the middle of the fourth quarter. So I guess it's now been, I don't know, around nine months. How has that gone? I mean, do you feel like you've gotten it to the right level? Do you think you maybe have an opportunity to take more labor out or maybe reinvest? Just, 'cause it was, it was a big change, and I'm curious kinda where you think that's settled out versus where you might wanna go.
Christine Barone (President)
Yeah. Well, when we look at the change we made, it was really our labor scheduling system last year, catching up with the pricing moves that we made. If you think about it at the shop level, we weren't actually changing the amount of labor that was in our stores. We were just catching it up with the pricing moves. You know, as we, as we look over time, I think one of the, the great parts of our brand is really our people and our systems, the really strong turnover number that we have within our stores. We believe that the investments that we make in labor, ensuring that our baristas have an awesome, you know, working environment and have the right number of people within the shop to please our customers, is super important.
We are not looking to, to make changes in labor other than things that will make our shops, you know, more efficient from a line speed perspective, but we're not looking to cut labor in our shops.
Gregory Francfort (Managing Director and Senior Equity Research Analyst)
Understood. One last one. Just, Charley, I know it's been really topical about, about the fundraising with, with either debt financing versus equity financing. I'm just curious, any, any updates or thoughts on that front will be helpful. Thank you.
Charley Jemley (CFO)
we wouldn't comment on any future action, but we're very pleased that we upsized through the accordion, and as we noted, very pleased that we had a broad syndicate join us, in that effort. It, it was, it was it turned out great.
Gregory Francfort (Managing Director and Senior Equity Research Analyst)
Thanks, guys.
Operator (participant)
The next question is a follow-up from Nick Setyan with Wedbush Securities. Please proceed with your question.
Speaker 15
Thanks for the question. Just what was inflation, labor inflation and food cost inflation in the quarter? What do we expect it to be in Q3 and Q4 now?
Joth Ricci (CEO)
We don't, we don't guide that forward, Nick. Wage inflation, outside of the moves we made for the quarter, was low single digits. Remember, as we move east, our wage rate is weighting down, so it helps to abate any wage inflation. We don't, we don't give those figures out by quarter going forward.
Speaker 15
What about food cost inflation for Q2?
Joth Ricci (CEO)
Ingredient input costs went down about 1%. They were actually elevated in Q1. They've now shifted from 1% higher to about 1% lower of input costs.
Speaker 15
Thank you very much.
Operator (participant)
Ladies and gentlemen, at this time, there are no further questions. Let's turn the floor back over to Joth Ricci for any closing comments.
Joth Ricci (CEO)
Thank you for your questions. As we look ahead, our goals are clear, and we are focused. We plan to continue executing against our plan, driving traffic, optimizing operations, selecting strong sites, and building great shops efficiently. We plan to be smart, learn, adapt, and run our playbook. We're playing offense, and our efforts to deliver profitable growth have begun to bear fruit. Throughout the quarter, we saw sequential progress in our traffic, and our top line grew 34%. We delivered approximately 100% Adjusted EBITDA growth year-over-year. We continue to build quarter after quarter, creating a strong foundation of growth. Most importantly, I'd like to thank you for your time and your continued support of Dutch Bros.
Operator (participant)
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.