Dutch Bros Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The unaudited quarter and nine-month periods ended September 30, 2023. Dutch Bros operates and franchises drive-thru beverage shops. At quarter-end it had 794 shops in 16 states: 510 company-operated and 284 franchised. The company held 40.3% of Dutch Bros OpCo’s economic interest; the remainder was reported as non-controlling interest.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $264.5 million | $198.6 million | $711.7 million | $537.2 million |
| Operating income (loss) | $24.7 million | $5.2 million | $44.0 million | $(6.4) million |
| Net income (loss), consolidated | $13.4 million | $1.6 million | $13.7 million | $(16.4) million |
| Net income (loss) attributable to Dutch Bros Inc. | $4.2 million | $1.8 million | $3.1 million | $(4.1) million |
| Diluted EPS | $0.07 | $0.03 | $0.05 | $(0.08) |
- Q3 revenue rose 33.1% year over year; company-operated shop revenue increased 36.3%, while franchising and other revenue increased 11.5%. Growth in company-operated sales primarily reflected new shops; comparable-shop sales also contributed.
- Q3 company-operated same-shop sales increased 2.8%; systemwide same-shop sales increased 4.0%. Systemwide sales, which include franchise-partner sales and are not GAAP revenue, were $391.3 million.
- Q3 company-operated shop gross margin improved to 24.1% from 20.0%; contribution margin, a non-GAAP measure, rose to 31.0% from 25.6%. Management attributed much of the improvement to menu pricing and lower cost ratios, partly offset by ingredient costs and other items.
- Q3 consolidated net margin was approximately 5.1%, versus 0.8% a year earlier. Interest expense increased 86% in the quarter to $9.3 million, reflecting higher rates, borrowing and finance leases.
- For the first nine months, operating cash flow was $94.9 million, investing cash outflow was $167.5 million, and capital expenditures were $167.7 million. Operating cash flow less property-and-equipment purchases was approximately negative $72.8 million. Cash increased to $149.8 million, aided by financing activity.
- At September 30, cash was $149.8 million, with $350 million available under the revolving facility. Term-loan principal outstanding was $96.3 million; reported total debt was $98.1 million before unamortized fees and current/noncurrent presentation. Lease liabilities totaled $549.1 million. The $219.2 million tax receivable agreement liability is a separate significant obligation.
Material changes versus comparable periods
- Shop count grew 23.9% year over year, from 641 to 794; 37 company-operated shops opened in Q3 and 114 in the first nine months.
- Nine-month revenue increased 32.5%. Consolidated net income improved from a loss to profit, while net income attributable to Dutch Bros Inc. remained modest because a substantial share of OpCo earnings is allocated to non-controlling interests.
- Operating cash flow more than doubled year over year, while investment spending increased. Property and equipment rose to $498.7 million from $365.5 million, and finance lease liabilities increased substantially as shops were built.
- A September follow-on offering of approximately 13.3 million Class A shares at $26 per share generated $331.2 million net of underwriting discounts and commissions. Proceeds supported working capital and general purposes, including repayment of approximately $202.7 million of revolving borrowings. The offering expanded the share base.
- The credit facility was amended in August, increasing total capacity from $500 million to $650 million. The company reported covenant compliance at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or shop-opening guidance. Management said cash, operating cash flow and credit-facility resources were adequate for debt service, leases and working capital for at least the next 12 months.
- Management expects commodity inflation, minimum-wage increases and labor-market pressures to continue affecting results. Menu pricing, loyalty-program adjustments and operating-productivity measures are being used to mitigate costs; further price increases could weaken customer demand.
- Key risks include coffee, dairy, fuel, packaging and construction costs; discretionary consumer spending; staffing; rapid expansion and new-market execution; supply-chain disruption; and dependence on franchise partners. The company noted that Dutch Bros Blue Rebel accounted for approximately 26% of systemwide net sales in the first nine months.
- Q3 results include $0.2 million of executive transition costs and a $0.4 million gain from remeasurement of the tax receivable agreement liability, reflected as an adjustment in the company’s non-GAAP reconciliation. Nine-month SG&A included an approximately $2.0 million estimated legal expense.
- The company is defending a securities class action alleging misleading statements concerning commodity-inflation impacts in Q1 2022, along with related derivative lawsuits. It said the cases are early-stage and it cannot estimate potential loss.
- Disclosure controls were deemed ineffective because previously identified material weaknesses concerning IT system-change controls and Dutch Rewards breakage accounting had not yet been fully remediated and tested. Remediation work was underway.
- Inflation and economic conditions, seasonality, long-term lease commitments, variable-rate debt and the company’s controlled-company, multi-class share structure are additional investor considerations.
Important facts for investors to verify
- Whether comparable-shop sales, customer demand and shop-level margins sustain gains as pricing and costs evolve.
- New-shop opening pace, profitability and capital needs, especially given negative cash flow after capital expenditures and substantial lease commitments.
- Interest expense exposure, facility covenant headroom and the effect of future borrowing; $70 million of the term loan is covered by an interest-rate swap.
- Progress and independent testing of remediation for the disclosed material weaknesses, and any effect on financial reporting reliability.
- Developments in the securities and derivative litigation, and potential exposure under the $219.2 million tax receivable agreement liability.
- Potential dilution or market impact from the follow-on offering and the Co-Founder-affiliated entities’ Rule 10b5-1 plan covering up to 6,472,456 shares upon exchange.