Dutch Bros Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Dutch Bros operates and franchises drive-thru coffee shops and sells coffee-related products. At quarter-end, it had 572 shops in 12 states: 310 company-operated and 262 franchised.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $152.2 million | $98.8 million |
| Company-operated shop revenue | $130.2 million | $77.9 million |
| Franchising and other revenue | $22.0 million | $20.9 million |
| Operating loss | $14.2 million | $3.7 million |
| Net loss | $16.3 million | $4.8 million |
| Net loss attributable to Dutch Bros Inc. | $4.9 million | Not applicable |
| Diluted loss per share | $0.10 | Not applicable |
| Adjusted EBITDA (non-GAAP) | $9.7 million | $18.7 million |
| Operating cash flow | $(0.8) million | $15.5 million |
| Capital expenditures and shop acquisitions | $46.0 million cash use | $7.1 million cash use |
| Cash and cash equivalents, March 31 | $26.8 million | $35.0 million |
Revenue increased about 54% year over year, led by new company-operated shops. Company-operated same-shop sales grew 5.1%; systemwide same-shop sales grew 6.0%. Total shop count rose from 453 to 572 year over year. Average unit volume was $1.892 million systemwide and $1.829 million for company-operated shops.
Company-operated shop gross margin fell to 12.8% from 22.6%; shop contribution, a non-GAAP measure before depreciation and amortization, was 18.3% of revenue versus 26.8%. Overall segment contribution was $39.5 million versus $37.0 million, while reported segment gross profit was $31.0 million versus $32.3 million. Adjusted EBITDA margin declined to 6.4% from 18.9%.
At March 31, 2022, total assets were $884.5 million and total liabilities were $671.1 million. The balance sheet included $127.7 million of term and revolving borrowings and $304.6 million of finance and operating lease liabilities. The company reported $72.4 million of current assets and $112.7 million of current liabilities.
Material changes and notable items
- Company-operated revenue rose 67%, but higher ingredient, occupancy, pre-opening and new-shop costs compressed shop margins. Beverage, food and packaging costs increased to 27.4% of company-operated revenue from 23.4%; occupancy and other costs rose to 17.7% from 15.1%.
- The company opened 34 company-operated shops in Q1 2022, compared with nine in Q1 2021, and acquired five franchised shops. Capital investment and acquisition spending increased substantially.
- Operating cash flow moved from positive $15.5 million to negative $0.8 million, mainly reflecting higher inventory and expansion-related working-capital needs. Financing cash flow was $55.0 million, primarily reflecting the new credit facility and related refinancing.
- On February 28, the company entered a five-year, $500 million secured credit facility, drew a $100 million term loan and approximately $28 million on the revolver, and repaid its prior facility. At quarter-end, $222 million was available on the revolving loans; the company reported covenant compliance. The loans bore floating rates of 2.54% on the term loan and 2.66% on revolver borrowings.
- Effective January 1, 2022, adoption of lease accounting standard ASC 842 added substantial right-of-use assets and lease liabilities. Prior-period lease figures were not restated, limiting balance-sheet comparability. On April 1, the company entered an interest-rate swap covering $70 million of term debt to fix that portion at 2.67% through February 2027.
- A March secondary offering involved sales by the Sponsor; Dutch Bros received no proceeds. The transaction increased deferred tax assets by $63.8 million and tax receivable agreement liabilities by $55.2 million. Total reported tax receivable agreement liability was approximately $164.9 million at quarter-end.
Outlook, risks and contingencies
Management said cash, operating cash flows and the 2022 Credit Facility should be adequate for debt service, lease and working-capital needs for at least the next 12 months. The company expects to fund longer-term cash requirements primarily through the credit facility, while noting that future capital needs depend on expansion and shop reacquisitions. The filing gives no specific quantified revenue, earnings or shop-opening guidance. Management’s forward-looking statements include an expectation of positive cash flow in the foreseeable future.
- Management expects commodity inflation to continue affecting results and said menu pricing actions would be evaluated to help offset costs. Dairy commodity prices rose substantially during the quarter; minimum-wage increases, shipping delays and higher oil and gas prices were additional pressures. Management believes higher gas prices may be reducing customer demand.
- COVID-19 impacts remain uncertain, including potential effects on demand, staffing and supply chains. The company said its drive-thru model had limited adverse impact to date.
- The company corrected an immaterial prior-period error involving sick-leave accruals and revised comparative figures. It also wrote off $1.2 million of prepaid costs for an ineffective virtual engagement platform and incurred $2.4 million in company-wide anniversary event costs.
- Disclosure controls and procedures were determined ineffective as of March 31 because previously identified material weaknesses in financial reporting controls had not been remediated. Remediation efforts were underway but had not operated long enough to demonstrate effectiveness.
- The company disclosed ordinary-course legal claims and approximately $1.7 million of franchisee lease guarantees; management did not expect pending or threatened legal matters to have a material adverse effect.
- Other material risks include commodity and labor cost inflation, supply-chain constraints, rapid-growth execution, competition, geographic concentration in the Western U.S., franchisee performance, variable-rate debt and restrictive covenants, tax receivable agreement payments, and the company’s multi-class voting control structure.
- On April 19, the company sold a shop property for approximately $2.6 million net of closing costs and continued operating there under a leaseback.
Important facts for investors to verify
- Whether same-shop sales, customer demand and new-shop economics can support growth as commodity, wage and occupancy costs remain elevated.
- Whether operating cash flow improves and expansion spending can be funded while meeting debt, lease and tax receivable agreement obligations.
- Available borrowing capacity, covenant headroom, floating-rate exposure and the effect of the April interest-rate swap.
- Progress and testing of remediation for the material weaknesses in internal controls and disclosure controls.
- Comparability of balance-sheet trends after ASC 842 adoption, and the assumptions behind deferred tax assets and tax receivable agreement liabilities.
- Whether the company’s growth plans, franchise network and pricing actions sustain margins without weakening customer demand.