Dutch Bros Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with the three months ended March 31, 2023. Unaudited, consolidated GAAP results. Dollar amounts below are in millions unless stated otherwise.
Business context and operating performance
Dutch Bros operates and franchises drive-thru beverage shops. At quarter-end it had 876 shops across 17 states: 582 company-operated and 294 franchised, up 22.3% from 716 a year earlier. It reports Company-operated shops and Franchising and other as its two operating segments.
- Revenue was $275.1, up 39.5% from $197.3. Company-operated shop revenue rose 43.3% to $248.1; Franchising and other revenue increased 12.1% to $27.0.
- Systemwide same-shop sales increased 10.0%, compared with a 2.0% decrease in Q1 2023. Company-operated same-shop sales increased 10.9%, versus a 3.5% decrease. Systemwide AUV was $1,995 thousand.
- Operating income was $25.6, compared with an operating loss of $0.2. Net income was $16.2, versus a net loss of $9.4. Net income attributable to Dutch Bros Inc. was $7.1, or $0.08 per diluted share, versus a loss of $3.8, or $0.07 per diluted share.
- Company-operated shop gross profit margin improved to 21.9% from 16.7%; company-operated shop contribution, a non-GAAP measure, was $74.0, or 29.8% of company-operated revenue, versus $41.9, or 24.2%.
- Adjusted EBITDA, a non-GAAP measure, was $52.5 (19.1% of revenue), compared with $23.9 (12.1%). GAAP net margin was 5.9%, versus negative 4.8%.
Cash flow, debt and liquidity
- Operating cash flow was $41.2, up from $3.1. Capital spending was $57.5, compared with $43.3; operating cash flow less property and equipment purchases was therefore negative $16.3.
- Cash and cash equivalents totaled $262.7 at March 31, up from $133.5 at year-end. Financing cash flow included a $150.0 delayed-draw term loan; the company reported a $129.2 net increase in cash during the quarter.
- Term-loan principal outstanding was approximately $244.1; no revolving loans were outstanding, and $349.2 of revolving capacity was available, net of a letter of credit. Term loans bore interest at approximately 6.93%, before the effect of the interest-rate swap. The company reported compliance with credit-facility financial covenants.
- Total debt was $247.5, including finance obligations and an unsecured note. Finance and operating lease liabilities were also significant; the balance sheet reported $378.9 of finance lease liabilities and $236.3 of operating lease liabilities, including current portions.
- Management believes cash, operating cash flows and credit-facility proceeds are adequate for debt service, lease and working-capital needs for at least the next 12 months.
Material changes, outlook and risks
- Growth in revenue and shop count, improved same-shop sales and better company-operated shop cost ratios drove the turnaround to GAAP profitability. Cost of sales rose to $203.3 from $151.5, while SG&A was nearly flat at $46.2. SG&A included $2.6 of restructuring charges; lower stock-based compensation also affected the year-over-year comparison.
- Other income was $5.8, up from $1.3, primarily due to remeasurement gains on tax receivable agreement liabilities. Interest expense, net declined to $6.4 from $7.9. The effective tax rate was 35.1%; management attributed higher tax expense primarily to state earnings mix and deferred-tax effects.
- A January 2024 organizational realignment will expand support operations in Phoenix, with approximately 40% of support staff expected there by January 1, 2025. The company estimates total charges of $24–$31, including $19–$26 of employee-related costs and approximately $5 of other charges. It recorded $2.6 in Q1 and had approximately $2.1 accrued at quarter-end.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects commodity inflation and minimum-wage increases to continue affecting results. It cited California’s $20 hourly minimum wage for covered industry employees effective April 2024; pricing, loyalty-program adjustments and productivity measures are intended to help offset costs, but price increases may reduce demand.
- Key risks include consumer discretionary spending and demand, persistent coffee, dairy, packaging and labor cost inflation, shop-opening execution and construction costs, supply-chain disruptions, and interest-rate exposure. The company estimates a 1% rate increase could raise annual interest expense by approximately $2.4, excluding swap effects. Summer typically brings higher system sales, making results seasonal.
- The company recognized $395.8 of tax receivable agreement liabilities; under those agreements it generally pays specified holders 85% of certain realized or deemed tax benefits. A securities class action alleging misleading statements about commodity inflation and related derivative suits remain unresolved; the company says it cannot predict the outcome or estimate potential loss.
- In February and March, the Sponsor sold shares in secondary offerings following unit exchanges and share conversions. The company received no proceeds. Management reported disclosure controls were effective as of March 31, 2024.
Investor verification points
- Check whether same-shop sales growth, AUV and new-shop economics persist as the comparison base expands and new markets mature.
- Track company-operated margins against wage, commodity and occupancy inflation, and assess whether pricing actions affect traffic or transactions.
- Reconcile cash generation with the pace of shop construction and capital spending; distinguish operating cash flow from debt-funded cash increases.
- Review debt costs, remaining credit availability, lease commitments and covenant headroom, including the effect of variable rates and the interest-rate swap.
- Monitor actual restructuring charges and progress on the Phoenix relocation against the $24–$31 estimated total cost.
- Assess the tax receivable agreement liability and potential cash-payment timing, as well as developments in the securities litigation.
- Consider the distinction between consolidated net income and the $7.1 attributable to Dutch Bros Inc., given the 47.4% non-controlling economic interest in Dutch Bros OpCo at quarter-end.