Dutch Bros Inc. — Q3 2022 Form 10-Q
Period: Quarter and nine months ended September 30, 2022. Unaudited results; dollar amounts below are in millions unless noted.
Business context and reporting period
Dutch Bros operates and franchises drive-thru beverage shops. At quarter-end, it had 641 shops in 14 states: 370 company-operated and 271 franchised. The company held 35.4% of Dutch Bros OpCo’s economic interest; the remaining 64.6% was held by non-controlling members.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $198.6 | $129.8 | $537.2 | $357.8 |
| Operating income (loss) | $5.2 | ($114.7) | ($6.4) | ($104.1) |
| Consolidated net income (loss) | $1.6 | ($116.8) | ($16.4) | ($109.8) |
| Net income (loss) attributable to Dutch Bros Inc. | $1.8 | ($11.1) | ($4.1) | ($11.1) |
| Diluted EPS | $0.03 | ($0.24) | ($0.08) | ($0.24) |
| Adjusted EBITDA (non-GAAP) | $27.8 | $21.0 | $61.4 | $70.3 |
| Operating cash flow | Not presented by quarter | $42.8 | $72.3 | |
| Cash used in investing activities | Not presented by quarter | ($139.4) | ($76.8) | |
| Cash and cash equivalents at period-end | $34.6 | December 31, 2021: $18.5 |
Q3 revenue grew 53.0% year over year, primarily from new company-operated shops. Company-operated shop revenue increased 59.7%; franchising and other revenue increased 18.9%. Q3 systemwide same-shop sales grew 1.7%, while company-operated same-shop sales grew 1.0%. Nine-month company-operated shop gross margin was 17.8%, down from 24.2%; Q3 margin was 20.0%, versus 21.3%. Adjusted EBITDA margin was 14.0% in Q3 versus 16.1%, and 11.4% for nine months versus 19.7%.
Nine-month operating cash flow declined 40.8% year over year, which management attributed mainly to higher cost of sales and inventory. Capital expenditures were $134.6 million; operating cash flow less property and equipment purchases was approximately negative $91.9 million, before other investing activity.
Debt, liquidity, and balance sheet
At September 30, the company reported $98.8 million outstanding on its term loan and $87.7 million on revolving loans, with $162.3 million available on the revolver. The amended five-year credit facility has $500 million of stated capacity, including a $250 million revolver, up to $150 million in delayed-draw term loans, and a $100 million term loan. The company was in compliance with financial covenants at quarter-end. A $70 million interest-rate swap fixes the base rate on part of the term loan at 2.67% through February 2027.
Adoption of lease accounting in 2022 resulted in recognized finance and operating lease liabilities totaling $383.0 million at quarter-end. Tax receivable agreement liabilities were approximately $226.3 million; deferred tax assets were approximately $293.1 million, net of a $1.5 million valuation allowance. Management stated that cash, operating cash flow, and credit-facility availability should be adequate for debt service, lease payments, and working capital for at least the next 12 months.
Material changes, outlook, and risks
- Growth was driven by expansion: 34 company-operated shops opened in Q3 and 94 in the first nine months. Total shops increased 27.4% year over year. Nine-month average unit volume was $1.917 million systemwide and $1.875 million for company-operated shops.
- Cost pressures weighed on shop economics. Nine-month company-operated beverage, food, and packaging costs rose to 27.2% of revenue from 24.7%; occupancy and other costs rose to 16.8% from 14.7%. Management cited commodity inflation, minimum-wage increases, occupancy escalation, and higher operating costs. Menu price increases helped offset some pressure; average menu prices rose 4.4% in Q3.
- Q3 SG&A fell sharply year over year partly because the prior-year quarter included $124.8 million of equity-based compensation, largely related to one-time IPO awards, and IPO-related costs. The comparison is therefore not a like-for-like indicator of underlying cost trends. Current-period SG&A included $10.6 million of equity-based compensation.
- Nine-month investment cash outflow increased with shop construction and expansion. Management expects future capital needs to depend largely on new company-operated openings and reacquiring franchised shops; it may use additional debt or equity financing.
- The filing provides no specific numerical revenue, earnings, or opening guidance. Management expects inflation and minimum-wage pressures to continue, and noted that further pricing actions could weaken demand. It also flagged supply-chain disruption, consumer spending and gas-price sensitivity, labor availability, competition, new-market execution, and interest-rate exposure. A 1% rate increase on the outstanding term and revolving loans would add approximately $1.9 million in annual interest expense.
- The company disclosed that its disclosure controls were not effective as of September 30 because previously identified material weaknesses in internal control remained unremediated. Remediation work was underway, but management said controls needed more time in operation and testing.
- An immaterial prior-period correction removed improperly accrued nonvesting sick leave. The company also reported that 2022 lease adoption and subsequent adjustments materially changed balance-sheet presentation; prior periods were not restated.
- The filing describes routine legal matters and franchisee lease guarantees of approximately $1.6 million; it reported no material legal proceeding and no material liability recorded for those guarantees.
Important facts for investors to verify
- Whether same-shop sales and shop-level margins improve as commodity, labor, occupancy, and new-shop costs evolve.
- Whether expansion can be funded while maintaining liquidity, covenant compliance, and manageable debt and lease obligations.
- How much of the reported Q3 profit and adjusted EBITDA reflects recurring operations, given the tax benefit, non-controlling interests, and non-GAAP adjustments.
- Progress in remediating material weaknesses and the expected impact of losing emerging-growth-company status after December 31, 2022.
- The timing and cash consequences of tax receivable agreement payments, and the assumptions supporting deferred tax assets.
- Whether price increases, consumer demand, supplier reliability, and franchisee performance support the company’s growth plans.