Dutch Bros Inc. (BROS) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I'm thrilled to introduce our next presenting company, Dutch Bros. With us this morning from Grants Pass, Oregon, we have Joth Ricci, President and CEO; and Charlie Jemley, CFO. And I had to cut into my prepared remarks last night and added an extra sentence, that congratulations are in order. For those not aware, Dutch Bros announced yesterday after the close that Christine Barone will be joining the company as President in the first quarter of '23, presumably, taking the title from Joth. Some more on that in a moment. But by way of background, for those not familiar, Dutch Bros is a drive-through, primarily beverage chain with 640 some-odd restaurants in the U.S. with future growth to be led by company-operated development. Impressively, the brand has had 15 consecutive years of positive comps, while unit development continues to be among the strongest in the restaurant industry with the long-term algorithm calling for mid-teens annual [ EBIT ] growth. And before I begin my questions, I guess, best to address the naming of a new President last night. So Joth, I'd love to turn it over to you. And again, welcome to you guys, but love to get your thoughts on somebody taking half of your business card title.

Yes. Thank you. Well, thank you for having us. It's great to be in New York, and we appreciate all the meetings. Yes, and we were paper and we were very much transacting that way. And I think that, what COVID allowed us to do is push into digital fast in a way that we got very aggressive. We've added millions of users over the last couple of years. Our program is not even 2 years old, and we have a little over 5 million users now. Our 90-day actives are strong, our percent of tenders north of 60%. And so it really overnight kind of pushed us into the digital game. And we think that it can be very additive. We use it more as a power and a tool for our Broista and the customer to transact with, to do things quicker, to be seamless, to improve the service model in the stand, and at the end of the day, speed up our lines because that's really what we need to do. That's been the #1 shift for us in a way that -- I don't think 3 years ago, we would have thought we would be where we are today. It actually wasn't for the acceleration that happened during COVID. I would add that while COVID didn't cause this, it proved it, which was, we have a very resourceful real estate construction team that kind of -- every time we hit a stumbling point that everybody else -- we were able to overcome it. And that's why we sleep really good at last night with the 130 units we're going to open this year and 150 we guided to next year. We're just very comfortable because it's battle-tested group. Yes. We had a little over 4 years ago, Trav and I announced an 800 shop goal by the end of 2023. Now this is in 2018, and who knew what was ahead of us related to COVID and the IPO and the other things that we did. But with our announcement of the 150 million that we'll open next year, we'll be at 825 by the end of next year and achieve all of those markers that we hit along the way. Even through the times of COVID and the other things where everybody else is closing down, we were still able to execute. And so, that real estate team and the work that we've done in development gives a lot of confidence for where we're headed.

You mentioned digital and whatnot. What's the next biggest unlock from digital? Like if we flash forward a year or 2 or 3, is there something that you envision the brand? I know people - not -- maybe everyone has not been to a Dutch Bros but I know when we were visiting through the IPO process, and you see a long line of cars, I would think there's an opportunity somehow, or other -- like is there a vision to use digital to skip the line? Or is there -- like what's the next big opportunity with digital to try and help, like you said with superior service?

Well, I think there's a couple of areas. One is that our Dutch Rewards program is really -- when you get into -- there's really 3 levels of a customer. There's one -- there's customer that is not a member of the app or the digital program at all. There's one who has signed up for the app, but actually hasn't loaded anything as far as pre-load on the app. And then the third is the Dutch Rewards program. And we know that the Rewards customer has a double-digit increase over the other 2 customers, is related to value to our transaction and kind of what they mean as far as value to the overall business. And so, one is that how do we get more load and more participation in the Dutch Rewards program. I think that's been one of the big unlocks for us, is that we get them in and -- Charlie talked about it a lot from his experience in Starbucks, like, we know that once we get them in and once we have a very loyal customer come in, those people are going to stay with you and participate and they understand speed and efficiency. Two is we've talked about, we're not going to be a skip-the-line business. We're not going to be a pre-order business because we think that, that fundamentally goes away from our service model. And to come to Dutch Bros actually -- what a lot of customers say to us is we actually enjoy -- I enjoy my break in the day. I enjoy the fact that I get to be in my car, I get to kind of check out for a minute, catch up on my phone, whatever those things are, get my drink and move on. So there's actually this idea of like -- Too much speed, actually, I think, works against us and can create a challenge for our service model. So we'll have a fine line of that. I think a big area for us of the app is customer to customer, and we just launched the ability to share points between customers. So mom and -- you send your kids off to college and you're thinking about that morning and you want to send them a free drink. After app, we now can do that between Dutch Rewards members and be part of the app. So I think more of a network and more of a community of people that are working within the app, and it's almost -- it's our inside kind of social network. I think there's ways for us to continue to build that speed, like you mentioned, in people, to load more money on the card and transact through the phone versus traditional order punching and taking a credit card, right? If you're doing 45 to 50 seconds per car popping out of the nose, 5 seconds is huge, so that we don't have to have people order ahead and they can rely on their service times and take that little break, but it's a reliable break. That's so key.

And from a comp perspective, I know I mentioned at the opening, 15 plus years of positive comps. It looks like '22 is going to be flattish. So just the greatest headwind do you think in 2022, was that COVID related? Or was it the economy related? Like what gives you confidence that we should resume a more normal reversion to strong positive comps in '23? Like what's the biggest unlock there?

Well, I'll answer the theory side and let Charlie answer to the specifics. But the -- one of the things in the reality of kind of where we sit is that -- one is that we were open last year. So when you think about comps of '21 to '22, we're coming off of a year where we were open, we were available. We were a drive-through. We were a model that people were visiting when a lot of other concepts were being challenged through operating hours. They didn't have people, they had to close their doors. But being a 100% drive-through, we were the business actually that everybody else is now talking about where they need to go to versus where they've been to. So I think that's one as we're comping a situation that's very different than a lot of other people in our channel have experienced. So I think, two is that, we had a natural tailwind last year from a very successful IPO. We had -- and I don't think -- I think our PR team did some work on this. We had hundreds of millions of dollars of PR related to this concept that went public last year in the fourth quarter. And in a way that like we can't -- we couldn't ever create that type of media related to the things, the news that we got and what that generated for the brand and how positive that was for the brand. And so -- and we're still going to have a great year. I mean, 2022 is going to be a fabulous year given all the conditions that we've seen in the correction market and what's happened with gas and commodities and some of those other areas. It's just like a confluence of a lot of factors here. So, listen, we're very pleased with 2022. And honestly, comps are comps, and everybody has their own circumstances for how comps -- what generates those things. And given what the markets look like the last couple of years, it's pretty hard to kind of put your finger on and say -- compare that one to that one because if you go back to a year ago, no one looked the same. Yes. I think I'd add to that, the swell from the Rewards digitization last year, which really created a consumer engagement tailwind. But we don't want you to infer is, okay, we had all this stuff stack up in our favor, and now it's gone, and we won't be successful. If you just look at absolute traffic counts and absolute volume, the business is really healthy. And I don't think we articulate this strongly enough when you look at reported comps, and make sure you back out that sales transfer piece from the fortressing we're doing and look at that number, right? And we want to be accountable for comps. We don't want to make excuses, but we want to be factual. The business is healthy. We -- I know there's some concern about the fourth quarter and how we guided flat for the year, and I want to address that because the lap in the fourth quarter last year is pretty heavy. So we're just cautious. We're just trying to err on the side of caution, but we're confident going into next year, that we're in really good shape and the absolute economics are in good condition.

I think like a point worth noting is may be investors spend too much time focused on comp growth, but when you have a business that is yours is generating the kind of returns or generating off of new stores, it's not all about comp and it's not necessarily you have all these franchisees. You're a [ comprehensive ] business. You can grow at the pace you want, and if the returns are there…

Yes. I think that's well said. I think we've talked about how comps, probably from how do you look at this business. I think comps set somewhere in the top 10 list. It's somewhere about the middle of the pack as far as how you really look at a business that's growing from 640 some locations today to 4,000. We have a long runway ahead of us. And right now, every -- for the last 4 years, we have nailed our development plan. We're hitting our revenue targets. In fact, we even took our revenue number up as far as how we were going to guide. And I think that we look forward to driving that total business, and we understand that in a market when we had the sales transfer we do -- and some of the challenges is that we have a business that we have very long lines. So we're in an operating business that -- like how do we manage the consumer experience to make sure that they have a very positive experience versus being a demand gen business where I'm trying to run people through a line with a bunch of LTOs that drive margin and discount rate down, which isn't healthy. We're fortunate that we're not in that position. We're more about kind of balancing out volume and making sure that the operating side of our business runs very well.

From a competitive standpoint, because you guys are primarily focused on beverages, like who do you benchmark yourself against? I mean, is there a certain key competitive set that you look at to say how they're doing versus how we're doing? Or do you look at the broader restaurant industry when you think about relative positioning?

Well, because we're beverage, 90-plus percent of our business in the third quarter was cold. And so, I look at our business as actually -- we look against multiple channels versus just having a competitor. Obviously, we're a mile or 2 for many Starbucks in the country, and we've been that way since 1992. Remember, these 2 c2ompanies grew up on the West Coast and have basically followed each other around the country. They just moved a little bit faster than we did along the way. But also, I can tend that anybody -- anywhere a consumer goes where they grab a beverage, they open a lid for immediate consumption. That is basically who we're in the business of competing with. So it might be a 7-Eleven or a QuikTrip or a Circle K depending on the markets of convenience stores. It might be a grab-and-go section at a Whole Foods where you grab and go, grab some lunch. You're having a quick take up before you go back to work, things like that. It can be Starbucks. And we've -- anybody in this industry know Starbucks has had challenges with their afternoon dayparts of those treat receipts and other things that they've done. So I think anywhere where somebody is literally doing an immediate consumption of a beverage, I think that's where Dutch Bros plays, which is why our opportunity is so good. The beverage market itself is massive when you start to count all of those fountain drinks. You start to look at all those grab-and-go locations. You look at all the energy business. You look at -- to put us up just against the restaurant segment is actually pretty limiting for what the Dutch Bros opportunity is.

All right. And just on the unit growth side, because it is more stable, and the fact that you're going to hit your targets that you laid out 4 years ago despite a more little COVID headwind there. Can you talk about the current pipeline and maybe the real estate environment? I'm wondering, we hear from everybody that they'd love to open more, but there's permitting and construction and all these little delays. It seems like you have maybe less of them based on the unique nature of your box or whatnot. But maybe you could just talk a little bit about the pipeline going into '23 and '24 and why your brand might be a little easier to avoid some of those headwinds?

I think you can't dismiss experience and talent, and everybody's got that. But we -- I mentioned earlier, we have real estate leader and a construction leader and teams under that, that are just -- have been around the block. They've been in every manner of challenge. We have those landlords and developers we work with. They are very helpful and like us and like what we're doing, and our box is pretty simple. It's a 900 square foot rectangle. It can fit in a lot of places. And we've been good at when we see a supply issue coming in a particular material or our aspect of the business. We have been aggressive to jump in and commit early to supply because we're confident that stores will go into motion and get open. So we know we're not going to get hung with some commitment we can't keep. So it's a combination of all those things that we found. And we're controlling more of the development ourselves now by doing more ground-up construction versus build-to-suit with developers. That takes more cash, but it's a better outcome for us. We have clear visibility to opening the site and building the site, and then our rent is lower, frankly, forever. So in many ways, the sorting out of that situation has worked in our favor.

And I think of you guys as somewhat unique in that you're going into new markets every day for the first time. And then obviously, it's a challenge to see how well will our brand be accepted here? Who is the competitor in this market? Presumably it sounds like when you open up, you open up with big fanfare, and you do extremely well. So how do you look at it from a disciplined perspective to say the brand has been accepted versus, oh, we're at 5 stores or 10 stores, and we're not seeing what we like? Like have you run into situations like that just because so many new markets for you guys? I think that's the biggest concern investors have, is just how well will they succeed when they face Dunkin' or when they pay somebody else? Like how do you think about that in a new market?

I think we've -- there's good examples like Las Vegas Tucson areas where we've started out hot . We've had some spacing of the revenue out between units and then we've grown off of that. And ultimately, we look at those 2 or 3 examples that we know and we see when we're kind of at the midpoint of our growth, our average unit volumes are stable. The volumes spread out. The service levels are reliable. I think it's just given us confidence again that we can keep doing this and not dilute our average unit volumes. We've been accepted. Like it's just -- touchwood, all signals tell us that it's wise to keep going. We've had -- and if you go back to the last 3 years, I mean, the run rate of the new openings that we've had in the new markets, I mean -- for example, tomorrow, we'll open our fifth location in College Station, Texas, and shop #1 opened in January of last year. And so, we go in and we quickly have a feel -- We have to go in -- we go in with the assumption that we are going to work. We're going to work at the model that we've created, and we build out that fortressing strategy ahead of time to go do those things. So in Texas, we'll -- of the 150 million we talked about next year, we'll open 60 plus of those next year in the state of Texas alone. And so we've seen -- we're very confident in our ability to go into new markets. We haven't found a situation -- and there's a few of them every once in a while that you kind of run into that maybe don't work as well as you wanted them to , but we're very confident in places like Nashville that has gone very well this year. And in many of the markets in Texas and what we just did in Oceanside, California, right? So we really just broke into Southern California within the last 2 years, and Oceanside served as more or less the largest grand opening that we've had in the company's history. And that Charles what do you say it is?

Almost $90,000 a week before Thanksgiving.

Yes. So week before Thanksgiving, 4 months after it's opened, it did $90,000 in the week before Thanksgiving. So...

We had $5 million run rate for store.

Yes, which is not a great consumer outcome, which is why we have to fill in fast.

We'll open quickly in that area as well.

Yes.

Yes. I think, Charlie, you mentioned earlier, one of your first comments was, you think you're well positioned from a pricing standpoint relative to peers and maybe [ compelled ] that investors big concern is restaurants and beverage players like yourself have been overly aggressive on price. At the same time, we're encouraging it. So we recognize we're playing both sides at this point here. But the fact that you are running elevated pricing versus historical, like how do you assess your pricing power versus your competitive set? Because clearly, some people would say, well, there's food purveyors that you have to eat every day, but you have a product maybe you don't have to necessarily have every day. So maybe you had less pricing power. Like how do you assess your pricing power versus the competition?

We came into this year where we had not taken hardly any pricing for essentially 1.5 years. So we had been opening a gap in affordability through COVID. We just -- we were -- we had other levers we pulled and we just let our prices set. And now we've caught up pretty quickly, but we still have space. So if you look at over the last 3 years, our prices are up about 15%. That's not dramatic over a 3-year period with inflation running where it's running. So our spacing between us and our competitor and in key things where you can add a flavor with us, and we don't charge you for that, and so customization. So it feels like, if you take a long view, we're positioned well. If you take the short view, you get concerned, but if you [ have ] a long affordability. We feel pretty good [Technical Difficulty]. Before we price, we look at and test and [ size ] things, but we also have a pretty frequently used product. So we learn pretty quickly. Some of our most frequent customers come 13 to 15 times a month. So we can get a pretty decent judge of where things are through just what traffic [indiscernible] about where we -- what we've priced on and what we've done, as we look at our new mix and where we've taken pricing, we've been selective how we fit -- [ we'll ] do that. We have talked internally about using the term that we earn price instead of taking it. And so, we're going to be careful about how we do that, what customer is shopping, how it impacts that customer. For example, we -- in the last round, we took up more of anything that you would premiumize your product. We took price in all of those elements versus taking it on an Americano, as that Americano drinker, we think is more of a value shopper, is a very different shopper. So we're going to be very particular about that. We've also -- we've watched some activity by some of our franchisees who have been more aggressive in pricing, and it's worked against them. And so we're going to have all of that in front of us, and making sure that we're doing it selectively in the right way so that we're also -- we feel like we want to take care of the customer. The things that we need to do to run the business are important, but we're also remindful of how the customer is impacted.

We've got another 5 minutes or so and I've got a bunch of more questions, but I figure I'd open it up to the audience and see if there's any questions in the room before I continue. Inflation going into next year? Endless topic of conversation between commodities and labor. I feel like just post IPO, you guys are talking about how we're in a great spot because we don't really have the inflation that others are dealing with. And then, like you said, all of a sudden, coffee and [ data ], you can go in a different direction. So how do you see, without necessarily using a crystal ball or given formal guidance, but would you expect to see less inflation from a commodity standpoint in '23, but still inflation? Or do you see the opportunity for that [ revert ]? Like how is your purchasing team and whatnot thinking about positioning going into next year from a commodity standpoint?

Yes. I think, like anybody we wouldn't expect prices necessarily to go down, but certainly to get back to a more normal increase on ingredient costs. We've been fortunate thus far, if you look at our 2 biggest cost items, ingredient packaging and then labor. We've not had the pressure in labor. We've not had the turnover pressure. We've managed through the people dynamic pretty effectively. We have had minimum wage escalation and other things we had to do, but it's not been severe for us. So we've been able to contain that appropriately and still have 20 applicants for every job we need. On the ingredient side, again, dairy and coffee are very volatile commodities. We've seen that escalation moderate, maybe gets a little better, but other things inflate utilities and energy and repair and maintenance, services, things like that. So I mean, I think we're not going to have 0 inflation, but certainly, I wouldn't expect it to be double digit. [indiscernible] is going to make sure that doesn't happen somehow, some way, right?

From a labor standpoint, you're definitely more of an anomaly than the norm. If I took somebody else they had 20 applicants for every position they fill, that's incredible. So how much do you attribute the -- and not everyone maybe is aware of this, but just the tipping aspect that maybe your workers get and the outdoor fun, music playing environment that you guys have? It just feels like you're in a permanent competitive advantage. I'm just wondering how -- what do you think are the primary drivers why your retention and turnover has been at better levels, and maybe you can share some of those levels with us?

Yes. I mean I think from a -- I think Dutch Bros has a history of being thought of as a strong employer. I think that our -- the culture that we drive in our stand is a very different type of culture than what you would see maybe in other jobs of that category that you might get in other places in the market. We do drive a strong, fun, dynamic culture when you come to work every day. There's a -- we take [ dub shots ] before a shift. We play music that's selected by the stand that works for that community and that culture of the stand. The team is interchangeable parts. So they all know each other's job. They all understand that it takes a team environment to work together, great communication and great service, right? So in order to provide good service, you can't just like turn the switch on every time a customer shows up. You have to be on the entire time, and that's part of the expectation of coming to work for Dutch. Along with that, I think great service. We've had a history of a strong tipping environment from our customers. I think that some of that's gone down a little bit here. You've seen tipping with the -- coming out of COVID, I think you've seen tipping becomes almost commoditized a little bit now, or it's become like this expectation of every time you pay a bill, there's a tip all of a sudden to put down there. But I think our tipping environment has been strong. I think we will watch the wage environment. We've seen as we've come into some of our -- maybe our [Technical Difficulty]. We've seen some areas where a lot of competition have taken up their base minimum wage. And so, we've got to make sure that we're responding to that. And we're really looking at that kind of trade zone right now to make sure we're responding and offering up a good wage in a healthy way for people to make money working at Dutch Bros. And you definitely -- you might see some of the commodities level out, as Charlie said, but I think you're going to see, wage inflation is going to continue to be something that everyone's going to be watching, I think, in 2023.

Understood.

But we are an awesome place to work. I'll just put it that way. Even as CFO.

Yes, it's hard to get those guys to smile sometimes.

He is curious about his numbers. He is. Yes. Well, I think we've fully utilized over time, but I wanted to thank Dutch Bros from making the trip across the country for us, Joth and Charlie. And congratulations on your new hire. Hopefully, you have good meetings throughout the day.

We will. Thank you, Jeff.

Thank you.