Dutch Bros Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Business context and reporting period
Dutch Bros operates and franchises drive-through coffee shops and sells related products. At quarter-end it had 603 shops across 14 states: 336 company-operated and 267 franchised. It opened 26 company-operated shops and five franchised shops during the quarter. Company-operated shops accounted for 55.7% of locations.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $186.4 | $129.2 | $338.5 | $228.0 |
| Operating income (loss) | $2.7 | $14.3 | $(11.6) | $10.5 |
| Net income (loss) | $(1.8) | $11.9 | $(18.0) | $7.1 |
| Adjusted EBITDA (non-GAAP) | $23.9 | $30.7 | $33.6 | $49.4 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $16.7 | $56.2 |
Q2 revenue rose 44.2%, led by company-operated shop revenue, up 55.9%; franchising and other revenue declined 1.4%. Q2 gross margin was approximately 24.1% versus 37.0%, operating margin 1.4% versus 11.0%, and net margin (0.9)% versus 9.2%. Company-operated shop gross margin fell to 19.4% from 28.6%. Diluted loss per Class A and Class D share was $0.02 for Q2 and $0.12 for the six-month period.
Six-month net cash used in investing was $88.6, primarily reflecting $83.9 of property and equipment purchases and $6.1 for franchise-shop acquisitions. Financing provided $74.7, including credit-facility proceeds. Cash increased $2.8 to $21.3. At June 30, current assets were $75.3 and current liabilities $139.5. The company disclosed $100.0 of term-loan and approximately $47.7 of revolving borrowings, with $202 available on the revolver; it reported compliance with credit-facility financial covenants. Total finance and operating lease liabilities were $333.9.
Material changes versus the prior comparable period
- Rapid shop expansion drove revenue growth, but same-shop sales weakened: systemwide same-shop sales declined 3.3% in Q2, while company-operated same-shop sales declined 4.3%. For the first half, the respective measures increased 1.0% and 0.3%.
- Q2 company-operated shop costs rose faster than revenue. Beverage, food and packaging costs were 27.1% of company-operated revenue, up 230 basis points; labor was 29.4%, up 120 basis points; occupancy and other costs were 16.6%, up 340 basis points.
- Higher product costs sold to franchisees reduced franchising-and-other gross profit 24.6% in Q2, despite revenue being nearly flat.
- Q2 net loss and adjusted EBITDA deterioration contrasted with revenue growth. First-half operating cash flow fell $39.5, or 70.3%, year over year.
- Adoption of ASC 842 on January 1, 2022 added substantial lease assets and liabilities; prior-period lease figures were not restated, limiting direct balance-sheet comparison.
Outlook, management commentary, risks and unusual items
The filing provides no specific revenue, earnings, or shop-opening guidance. Management said it expects commodity inflation and legislated minimum-wage increases to affect results in the foreseeable future. Gradual menu-price increases are intended to offset costs, but could reduce demand. Management cited traffic declines that stabilized later in Q2 and closely monitored gas prices and consumer behavior.
Management said cash, operating cash flows, and credit-facility proceeds should be adequate for debt service, lease obligations, and working capital for at least the next 12 months. Long-term cash needs will depend substantially on expansion and shop reacquisitions; the company expects to rely on its credit facility and may seek additional debt or equity financing.
Notable items include a $64.4 deferred-tax-asset increase and $55.2 increase in tax-receivable-agreement liability associated with a March 2022 secondary offering; total TRA liability was approximately $164.9. The company also disclosed an immaterial correction of previously reported sick-leave accruals. Q2 results included $10.4 of equity-based compensation; first-half SG&A included a $1.2 write-off of a prepaid corporate engagement platform and $2.4 of company-wide milestone-event costs.
Disclosure controls were deemed ineffective at June 30 because previously identified material weaknesses in accounting staffing, manual journal-entry review, segregation of duties, and risk assessment had not been remediated. Remediation efforts were underway but still required implementation and testing. Other risks include supply-chain disruption, commodity and labor inflation, competition, growth execution, franchisee dependence, variable-rate debt, and the company’s concentrated voting structure. The company reported no material legal proceedings and stated that pending or threatened routine claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether same-shop sales, customer traffic, and shop-level margins recover as new-shop growth continues.
- Whether pricing can offset coffee, dairy, packaging, labor, and occupancy inflation without materially reducing demand.
- Expansion capital needs and cash generation relative to capital spending, debt service, and lease commitments.
- Revolving-credit availability, interest-rate exposure, covenant headroom, and the impact of the $70 interest-rate swap.
- Progress in remediating material weaknesses and whether controls become effective after sufficient testing.
- Actual timing and amounts of tax-receivable-agreement payments and realization of related tax benefits.