Dutch Bros Inc. ($BROS)

I'm Sharon Zackfia with William Blair. Thanks for joining us today. Really excited to have with us from Dutch Bros, Christine Barone, President and CEO; and Josh Guenser, who is the CFO. For those of you who don't know Dutch, you can now go and see them in the suburbs of Chicago. It's hard to explain Dutch if you haven't been there. We're going to try. But they're very well known for just the kind of the experience and the extremely kind and friendly customer service that they have. And I would encourage all of you to try to make it out to one of the Chicago suburbs or elsewhere to see Dutch. But certainly, one of the most exciting things is the rate of expansion of the brand. So they have less than 1,200 today. We have been promised 2,029 by 2029.

In 2029.

And then on their way to -- I think it's 7,000 is the TAM right now, which may be understated because I think that was based on brand awareness about a year ago, and that continues to rise. So a very exciting story. Christine is going to go over a few slides, and then we're going to do some Q&A.

Great. Thanks so much, Sharon. I'll just intro a few things about the brand, so you can learn more and you can advance the slide.

This is a complete list of research disclosures and potential conflicts of interest, yes.

Okay. So we are 1 of the fastest growing brands out there as Sharon shared. We have about 1,200 shops right now. We did just open in Melrose Park. So that's the closest to where we are today. And there's still very long lines there. So if you do go out and venture out there to see it, I would add a little time for to wait in our fun and friendly line. We continue to grow into more states as well. So we are now in 25 states. So continue our march across the country. We are incredibly intentional about how we grow. So we really plan to flag and then plan to densify into those neighborhoods that we go into so that we can really become that everyday occasion, and that is how we are growing. We have incredible innovation too as we grow. So we are really leading the beverage market in innovation. We were the first to launch protein coffee back in 2024. I'm sure we will get into it later, but we launched -- just launched Mist, which is a great add to our energy platform. So as customers are coming into the beverage market, they're drinking a lot of customized energy, and we have an incredibly complete offering across that. So then our strategy. So as we're growing, we're really focused on a number of different things. So the first thing is we always start with our people. We are growing from within. So as we open all of these new shops, we've shared that we'll open about 185 shops this year. We are growing with our own people. So we have about 500 operators that is our first level right above our shops who are ready to go and open those new shops. They have about 7 years of average tenure with the brand. So they know our brand. They love our brand, and they oftentimes will have a tattoo of our brand as well as they grow with us across the country. And it's very lucky and enviable place to be in to really be able to grow your brand with people that know and love your brand have invested in the culture and are invested in bringing on [indiscernible] that can really represent that culture. The second piece, we're growing our shop base. So as Sharon shared, we are planning to open 2,029 shops by 2029 or in 2029. And as we look at that growth, we're growing from people but we have an incredible pipeline now of shops to go and open across the country, super intentional about how we're growing. So we really have the country mapped out. So before we go into a market like Chicago, we'll actually know where we want to go. So we'll be very thoughtful about putting those seeds, what we call them, our shops as we go into these markets and make sure that we are maximizing that opportunity we have. Beverage is very driven by convenience and location. So as you think about your daily routine, you want a coffee shop to be close to you as you grow those occasions. Then we're growing our transaction. So we're doing that in a number of different ways. So as I shared, we are an innovation leader in beverage, continue to both offer great LTOs where we have new and exciting flavors to offer our customers. We just brought back our Mango [indiscernible] yesterday, which is one of our Rebel beverages, and we brought back a coconut latte as well. We also are growing our Dutch Rewards program, so that helps us grow transactions. 74% of our transactions come through that program. So we have a really great way to talk to our customers, interact with them, tell them about all the new news that's coming. We also have additional drivers, things like we are rolling out a food program right now. So we started with a bakery platform, had 4 SKUs. We now -- as we roll out a hot food program, we'll have 9 SKUs in our shops. So we are very much a beverage company, but do want to have that add-on of food for our customers as we grow. We also launched mobile order a couple of years ago and continue to invest in that experience, really making it great for our customers that continues to grow. It's about 15% of our sales now, are coming through mobile order. So it's a really convenience play for our customers. And then finally, we grow our margins. So we have a long-term goal to have about 30% margins in our shop. We're close to that goal, but coffee, the agricultural crop has had a lot of fluctuations lately. So we've got a little room there right now, but we plan to continue to expand our margins, really keeping that shop margin continuing to invest in our people and our labor line as we grow, but we can leverage G&A. And so that's a little bit of the introduction of Dutch Bros, and now we'll dive in with you, Sharon. Thank you.

So I think we will start out with competition because that has been the topic of 2026 within this market space. So we may be talking [indiscernible] You've been in this business a long time, Josh, you've been in the beverage business as well. Can you talk about how the competitive landscape has evolved and where you think Dutch's biggest differentiation is? Maybe delve into what you're seeing, particularly on the QSR side and whether you think that has impacted your business either now or when it was in test? .

Yes. So a couple of things there. So just kind of starting big picture. We've been around since 1992. And we grew up in the Pacific Northwest. So we are no stranger to competition and have not been really for our entire life as a company. And as we look at competition, I think the beverage market is something that lots of customers are coming in. It's continuing to be a bright spot in the consumer space that we are still seeing growth within the beverage market. We are certainly outpacing that growth. We -- in Q1, we grew our revenue at 30%. So very, very high growth overall. But as we look at the overall competition, that trends are changing in the beverage market. So what we continue to see is a need for customization and need for cold, a real growth in the energy space and then all with great service. So as we look across those things, we think we are incredibly well positioned. Our biggest differentiator is our people. We are oftentimes ranked really as the leader across the broader food and beverage industry on the service dimension. And we want our [indiscernible] to make everyone's day brighter as they come through that line to delight them both with the high-quality beverages we have, the speed that we serve it with and that smile that you get from coming through our line. And then looking at the different parts of competition, we do have competition from traditional QSRs who are maybe more food focused but do come into beverage. There's also lots of large beverage players out there. And I think given the growth and the direction in the market, we continue to see smaller players as well. One of the things that we look at is actually competition overall probably hasn't changed that much. It -- certainly in the last 3 or 5 years. As some players get bigger, maybe it feels like it's changed or some players come more directly into the energy space. But it's actually always been quite competitive. And I think you really need to operate and deliver your best service as you look at this market.

You talk -- I mean, it tends to be a view that this is a stable pie, right? So company is growing, another company has to be shrinking. We know that's not the case because the [indiscernible] is growing quite quickly. But where is your incremental customer coming from? And where do you see the most white space for the brand? .

Yes. So as we continue to grow as you know, the market itself is growing and energy and iced are particular areas that are really growing in beverage. We're also taking share. So the market is growing. It's not growing at 30%. And so we are taking share. And I think as you look at what customers want, we're just incredibly well positioned to take that share, not only in energy but also on the coffee side of the business as well.

If I think back to 2022, so it was shortly after the company went public, it was before either of you joined. But there was a clear impact from gas prices on the business in March of '22, when Russia invaded Ukraine. You haven't seen that this year. What has changed in the business? Like why are you more economically resilient in 2026 than 4 years ago?

Yes. So we've really built out a lot of capabilities over the last 4 years in the business. And so some of the big places that we've been investing in is 1 in the Dutch Rewards program. So we launched that program as a digital program back in '21. By '22, we really just had the ability to -- you had the ability to collect points within the program. What we have built now is that back and forth, we've got the app that you can download in mobile order now. We really have segmenting capabilities so we can watch what is happening with our customers' patterns and understand, hey, when might they need an extra offer or when would it be cool to introduce a new beverage to them that they haven't tried before. So we've built a lot of capabilities out and really to talk to our customers. We've also invested a lot in building brand awareness over this time. So a couple of key things we've done there is, one, build out our paid media capabilities. So we were largely doing retargeting before. Now we are actually focused on finding customers that have not been to a Dutch Bros before and then rapidly getting them into that Dutch rewards program. We find that once you've try Dutch Bros for the first time, you actually very often come back. And so really making those investments to be able to talk to you, get you in the program and find you in the first place. We've also done things like launched CPG. So now in the markets where we have a physical Dutch Bros, we also have grocery stores and other large retailers that have Dutch Bros products. And so when you're walking down doing your grocery shopping, you see the Dutch Bros logo, and it really helps drive brand awareness. So we've done a lot of things to actually on building the resiliency within our base. The other piece I would note is from a value proposition perspective, we've really invested in continuing to enhance our value proposition. We're really the leading player in the beverage industry from a value proposition. So we've taken very little price over the last couple of years. We continue to invest in things that really drive value for our customers, things like mobile order, investing in food as we continue to roll that out.

It's a good segue. Maybe, Josh, can you talk about the dynamics of really lagging the coffee market increase in price because you're clearly playing for the long game and not trying to necessarily optimize margins in 2026. And then help us understand how food plays into the margin structure as that fully rolls off this year?

Yes. Yes. So to your point, coffee has been elevated now for probably about 18 months, and that does take some time to flow its way through our P&L. We really saw that spike in our P&L here in Q1 of this year. and coffee has remained quite elevated. To your point, though, on our overall pricing perspective, we do feel like we have a very strong value proposition. We do lots of surveys with our customers to understand our relative value proposition. We look at how we're priced relative to others, the size of our beverage and the relative price point, knowing that we have actually quite a bit of room and feel we have quite a bit of pricing power that we could take if we wanted to with our customer, but felt like just given the strength of the business, given the strength of our overall P&L, we have the opportunity and the ability to absorb we thought would be a temporary price or cost increase in coffee costs. Historically, if you were to look at the coffee market over a lot of years, you see spikes like this happen, and they'll typically normalize back down to your more average range. So we're still at an elevated coffee cost today. We anticipate, I think, with many others that at some point, it will normalize here. But given that, we felt like we're in a really strong position not to have to take price to be able to cover those coffee costs and feel like we're we've been able to navigate that very well. We had margins of north of 28% in Q1, which we feel really proud of, despite having some pretty heavy coffee headwinds. As it relates to food, food certainly is a lower gross margin product. So as you think about the cost of goods, specifically for food that generally is a bit higher than that of a beverage. But the next thing is it's adding attachment to our business. It's adding some incremental transactions. So we expect to see that lift help drive leverage in other lines. So that will help mitigate some of those pressures.

And Christine, can you talk about -- so having lived through other beverage brands. Really, the key with food is to make sure it's additive and not substitutive of the beverage, right? So can you talk about what you've worked on operationally to make sure that food in no way slows that line so that you lose that incremental leverage at the end of the line?

Yes. Incredibly important. So a couple of things as we started to think through rolling out food. One is we're talking to our customers a lot and asking them what they want. Food was one of the largest request that customers were sharing with us. I love your beverage, but I sometimes have to go somewhere else when I want a breakfast sandwich in the morning, and would love for you to have that option for me. When we roll out any initiative, we look at a number of things. The first is [indiscernible] who who are making and serving and delivering all those great beverages, do they love this? Are they excited about it? Because if our [indiscernible] are excited about what we're doing. It always ends up working. And so as we rolled out food and especially as we were testing it really did a lot of surveying of our [indiscernible]. And then we do have long lines at many of our shops. And so it is 1 thing that we're incredibly focused on is making sure that the throughput really works, especially as we add food or any other new initiative, a new beverage to the venue is we're very focused on speed of service. So as we've rolled out food and tested food, we've been consistently testing that really understanding kind of how are our shops operating out of peak? Are they continuing to grow those peak times. And as we did testing of food made sure that we are offering products that the cycle times fit within the beverage cycle time. So very, very thoughtful operationally to ensure that food fits in with what we're doing overall.

Josh, we had a very strong first quarter with comps up 8%. Of course, everybody did the math and the implication is 3% to 5% for the rest of the year. So can you talk about that outlook? Why 8% goes from 3% to 5%? And as you think about that 3% to 5%, what are the biggest wildcards there that you think of either positively or negatively?

Yes. I mean, so certainly, we had a fantastic Q1, and I think that even exceeded our expectations. The guidance we provided for Q1 definitely below that. We really had a strong LTO offering in the back part of the quarter that exceeded our expectations and helped drive some of that outperformance in addition to some of the great merch offerings that we offered during the quarter. All of that really drove that outperformance. So as we think forward, certainly, we don't plan on it exceeding our expectations by definition. We have a very thoughtful approach of how we plan for all the different offerings that we have for the balance of the year. feel great about those initiatives, but certainly expect those to perform along the lines of what we've seen in the past. So still fantastic performance, I'd say, but maybe not to the full elevated levels that we saw in Q1. The other side of that is we are starting to lap some harder comparison as we move throughout the year. We -- the transaction compare actually steps up 2.5 points heading into Q2 and then steps up sequentially even from Q3 to Q4. So just on basic math, even with a really strong underlying transaction trend, you see just the compares get a bit harder. So I feel really good about the momentum of the business that we saw in Q1 and feel really good about the outlook for the balance of the year, considering all that. We are rolling out food. So as we shared, we're also -- we'll complete the rollout in our company-operated shops by the end of Q3. So that will add to some of the comp lift [indiscernible] year as well. But there's a variety of factors. Certainly, we have -- I think we do a really good job at estimating what our overall comp performance will look like based on all the initiatives we have Obviously, in Q1, we significantly exceeded it, but there's always variability on how that can perform, which is why we provide the range that we did.

And what do you think I mean there's always a lot of moving parts. What do you view as the long-term kind of durable comp for the business?

Yes. So our long-term growth algorithm has included low single-digit comp growth. And that's really -- we're very focused on continuing to go after the large white space market share that we can capture here really through unit growth, creating greater convenience for our customers. and feel really good about the ability to continue driving transaction growth over the longer term and healthy comp growth as we build this business out for several years to come. .

Christine, you have a new Chief Shops Officer who's been there several months now.

Yes, almost 6 months.

Yes, lose track of time every year in the market, feels like 7 years right now. I mean what -- when you are making that hire, what were the key priorities that you may have for her as she kind of helps you get to this much more scaled business.

Yes. So as we look ahead, our biggest priority is growing shops. And so ensuring that we make that as easy as possible for our teams. And -- so that is really Jen's highest priority is thinking through what are the things we can put in place to really make it easy to continue to grow our shops. How do we support our travel team, which we call the mob that goes out and trains all those shops helps open those shops. How do we make sure that they're incredibly supported as we move across the country. How do we put in initiatives that continue to help us drive throughput. So again, we always focus on speed, quality and service, sometimes with the demand we have, we need to continue to focus on speed and drive throughput so that more customers can come through our lines and experience Dutch Bros. So she's very focused on that. She's very focused on labor deployment. So ensuring that we always have the right number of Broistas at the right time. So we're getting better both on the demand side and understanding kind of exactly what is the day going to look like and how can we best staff to those demand patterns across the system. So really, all of that blocking and tackling and ensuring that we can open our new shops in the best way possible.

It does look like new productivity ticked up last year. at least the math that all of us do on the outside. Can you talk about whether you're hitting your payback targets faster more recently and kind of what you would attribute that to? And how you're really seeding particularly new markets when you enter like Chicago.

Yes. Yes. So certainly, it did elevate as you pointed out. The -- really, a lot of that was a function of the cooling of the pipeline that we did a couple of years ago, really going through as we -- for those who don't know the whole full history, we went quite deep and quite rapidly into some new markets, in particular in Texas, where we saw some high rate of sales transfer and learnings from that was we still would open those shops and still would find them to be great sites, but we might sequence them a little bit differently. So as we went through those learnings, we cooled our pipeline of sites that we're in, our longer-term real estate pipeline. And left in that pipeline, some of the highest performing shops. We -- on top of that, during that time, also rolled out order capability, we've been rolling out enhanced marketing initiatives that have really driven our AUVs up that left us with really, really strong performance of those new shop openings. I think in hindsight, we've made not as [indiscernible] as many of the shops out of the pipeline given the overall performance, but feel really good about the return profile we've seen on those shops that we're opening. And as we continue to go into new markets, we see a really strong performance, certainly the lines here at [indiscernible] would evidence that we have a very exciting customers as we come into some of these new markets. So we continue to see fantastic returns on the [indiscernible] and we've outlined our longer-term growth algorithm that includes our long-term TAM as we'd be targeting shops doing $1.8 million in year 2, we see fantastic returns even at that level. So with elevated AVs, certainly, the returns are even higher. But our goal is, over the long term, to create that convenience to make sure that we're densifying a market so that we can become here every day. So our sole goal isn't just to drive elevated AUVs in those new shops, it's really to create that convenience in that longer-term durability of the brand. So I expect that to normalize over the long term as well.

You have -- from a day-part perspective, you have the inverse opportunity of a lot of other brands where typically, if I was sitting up here with another company, I might be talking about the afternoon of the opportunity for you, it's more than morning. So can you talk about the morning as a percent of your sales and how you're optimizing that with things like mobile order and pay and food and where eventually you think that could go? Because I think many investors are wondering how high is high. I mean that's additive to the ultimate AUVs.

Yes. So as we look at our business, about 1/3 of it is the morning, 1/3 midday and then 1/3 afternoon. the beverage market overall is a little bit more like 50% in that AM daypart as you share. And we believe we actually have opportunities really still throughout the day. but that warning daypart is definitely an opportunity for us. And as we look for our customers and ask them, hey, what is what would drive you to come more often in the morning. The #1 thing is convenience because none of us want to wake up early to drive an extra 10 minutes to a shop. So the closer a shop is, the more likely a customer is to come. Food is also important as that attached to beverage in the morning. So having those protein options and really breakfast sandwich options are quite important. So rolling that out. And then mobile order is also more important in the morning than in other dayparts again because we're a little bit more time sensitive in our mornings than we are throughout the rest of the day. So we've been very focused on things that really enhance and grow that morning daypart, but we're also focused in the afternoon. We have a really large leadership position in the afternoon. And that is -- a lot of that is driven by our very strong energy business. So we continue to enhance that. We have a proprietary product called Rebel that you can customize. You can blend it. You can add toppings to it, all different types of things, and we've recently rolled out Mist, which is a plant-powered energy with antioxidants, electrolytes, it's truly refreshing. And it is a different need state really than our Rebel product. And so as we can -- we always look for ways to enhance those things that were already the category leader in.

Can you talk about scaling culture as you grow because it's obviously a very important part of the business, and we've seen so many companies stumble at some point. I guess, what systems you also have in place to try to detect any kind of red flags early to course correct?

Yes. So I think the most important thing we have is just such a strong base and foundation of people ready to grow with us. So I shared we have those 500 operators above shop. So they start in a market with 1 shop, but then they can grow to multiple shops. So that allows us to scale our culture because we're scaling with our people who have experience with our brand. We also have very strong training programs. So we invest a lot, especially as you come on and as a new Broista and learning all of the recipes and all of the new drink builds and learning our culture, learning about the history of the company. So we really invest a lot in that as well and growing our culture and growing our people. And then we do a lot of things just making sure we're listening really well. So we have a great field support system. And Josh and I have a weekly meeting with all of our area vice presidents who run all of our shops across where we have really open dialogue about things that are working well and then things we can do better. And our entire team is incredibly focused on serving our field exceptionally well that when something comes up from the field, we always know that, that is a high priority to get right. So I think the culture is something that is incredibly intentional. It's been built over time. And then I think one of the most important things we do is we invest the right amount in labor in our shops. So we ensure that we have enough time for that training. We have enough time to really successfully serve our customers. And we've always shared that we -- as you see leverage in other parts of our business, the labor line is something that we will continue to invest in both from an hours perspective and from a dollars perspective as we continue to grow, and it's something incredibly important that our teams have an incredible environment to come to work and really choose to come and be with us.

I think it was interesting on your last call, I believe you put out some stats and some of us did the math and it's a fun fact. So if you [indiscernible] with anything today. It's harder to become a Broista than to get into Harvard. So I'd just like to take that with you. I guess the last thing is throughput. So to me, from the outside, it feels like there's a delicate balance for you with throughput because you can become a transactional brand versus a relationship ramp. And I tend to think that's why you don't throw out throughput numbers that often with Wall Street because you are walking that fine line. But as you look at the overall base, are you seeing moving to the right of the curve on throughput? And what are your best tools in the toolbox to move that?

Yes. So as we look overall, I think you're exactly right. It's a delicate balance. And so our teams, we focus on speed, quality and service, all at the same time, right? You want your drink, right? You want it in the time you want it, and you want to deliver it with a smile. And so how do we make sure that we balance all those -- we do survey our customers quite often to make sure we are hitting that balance correctly in all of our shops. And throughput is something where we want to make sure that we're not rushing the part of the experience that our customers love. So that connection with the Broista, making sure that we're not only looking you in the eye, but we're also looking at your passenger in the eye then maybe you have a dog with you. We're delivering them an awesome Pup Cup, and we're also looking at them in the eye. So making sure that we never shortchange the service part of what we're doing, but there are opportunities where we can get faster. So what are those things in the shop that just take extra steps, where can we put the boba closer to where it's being made? How do we think about the things that don't work exactly perfectly within the system and how do we make sure we invest in those. How do we invest in making sure that we have great training on at -- what car should you take the order depending on how many cars you have in line. Like when do you want to be a line buster versus when do you come back into the building to help and assist making drinks. So all of those things around the edges are things that we can continue to invest in service but we can also drive that throughput faster.

So we're out of time, but we're having a breakout over the river and through the woods in [indiscernible] room.

Thank you. Great. Thank you.