Dutch Bros Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Dutch Bros operates and franchises drive-thru beverage shops. At quarter-end, it had 754 shops in 14 states: 473 company-operated and 281 franchised.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $249.9m | $186.4m | $447.1m | $338.5m |
| Operating income (loss) | $19.6m | $2.7m | $19.3m | $(11.6)m |
| Consolidated net income (loss) | $9.7m | $(1.8)m | $0.3m | $(18.0)m |
| Net income (loss) attributable to Dutch Bros Inc. | $2.8m | $(0.9)m | $(1.1)m | $(5.9)m |
| Diluted earnings (loss) per share | $0.05 | $(0.02) | $(0.02) | $(0.12) |
| Operating cash flow | Not presented quarterly | $45.8m | $16.7m |
- Q2 revenue rose 34.1% year over year; company-operated shop revenue increased 37.7%. Management attributed most of that shop revenue increase to shops opened in 2022 and 2023. Franchising and other revenue increased 11.8%.
- Q2 operating margin was approximately 7.8%, versus 1.4% a year earlier; consolidated net margin was approximately 3.9%, versus a loss. For the first half, operating margin was approximately 4.3%, compared with a loss margin of approximately 3.4% in 2022.
- Q2 company-operated shop gross margin improved to 23.6% from 19.4%; company-operated shop contribution, a non-GAAP measure, was 30.3% versus 24.6%. Management cited pricing, labor and operating cost management, and lower pre-opening costs as contributors.
- Q2 systemwide same-shop sales increased 3.8% and company-operated same-shop sales increased 1.6%. For the first half, those measures were up 1.1% and down 0.8%, respectively. Systemwide sales were $375.2m in Q2 and $678.0m for the first half; these include franchise shop sales and are not GAAP revenue.
- First-half adjusted EBITDA, a non-GAAP measure, was $72.5m (16.2% of revenue), versus $33.6m (9.9%). Q2 adjusted EBITDA was $48.6m (19.4%), versus $23.9m (12.8%); adjustments include equity compensation and certain legal and other items.
- First-half investing cash outflow was $102.1m, including $102.3m of property and equipment purchases; financing cash inflow was $59.8m. Cash increased $3.5m to $23.7m. Operating cash flow less property and equipment purchases was approximately negative $56.5m.
Financial position, debt and liquidity
- At June 30, cash was $23.7m and current liabilities were $294.1m, including $181.1m of line-of-credit borrowings. The company reported $67.3m available on its revolving facility at quarter-end.
- Credit-facility principal outstanding was $182.7m on revolving loans and $96.9m on the term loan. The term loan and revolver rates were approximately 7.45% and 7.47%, respectively. Long-term debt, including the term loan and other items, was $98.7m before unamortized fees and current classification. The company said it was in compliance with financial covenants.
- Lease liabilities totaled $504.3m, including $325.3m of finance leases and $179.1m of operating leases. Tax receivable agreement liabilities were $218.8m.
- On August 4, 2023, after quarter-end, the company amended its facility, increasing total capacity from $500m to $650m, including a $350m revolving facility and a delayed-draw term loan facility of up to $200m.
Changes, outlook and risks
- The shop base grew approximately 25% year over year. Dutch Bros opened 35 company-operated shops in Q2 and 77 in the first half. Systemwide AUV for the first half was $1,928, versus $1,900; company-operated AUV was $1,880, versus $1,862.
- Interest expense rose to $9.1m in Q2 from $3.6m, and to $16.9m for the first half from $6.1m, reflecting higher rates, borrowings and finance leases. Management cited continuing inflation in coffee, dairy, fuel, packaging, labor and construction costs; pricing and operating changes are intended to offset pressures, but could weigh on demand.
- Management stated that cash, operating cash flow and credit-facility proceeds should fund debt service, leases and working capital for at least 12 months. The filing gives no specific revenue or earnings guidance. It identifies growth through new shop openings as a key strategy and expects inflationary pressures to continue affecting results.
- The company accrued approximately $2m for certain legal disputes. A securities class action and three derivative suits allege claims related to statements about commodity inflation and 2022 results; the company intends to defend them and cannot estimate potential loss.
- Disclosure controls were deemed ineffective as of June 30 because of unremediated material weaknesses involving IT system change management and Dutch Rewards breakage accounting. Remediation efforts were underway, but management had not completed testing.
- Other material risks include variable-rate debt and interest exposure, sensitivity to discretionary spending and commodity/labor costs, execution of rapid expansion, supply-chain disruptions, and the company’s concentration in the Western U.S.
Key facts for investors to verify
- Whether same-shop sales, pricing and customer demand can sustain growth as new-shop openings drive a large share of revenue increases.
- Whether shop-level margin improvements persist amid commodity, wage, construction and financing costs.
- Capital spending, cash generation and borrowing needs relative to the expansion plan and the enlarged credit facility.
- Progress in remediating the disclosed internal-control material weaknesses and any developments in the securities and derivative litigation.
- The distinction between consolidated net income and the loss attributable to Dutch Bros Inc.; the majority economic interest in OpCo was held by non-controlling interests.