Dutch Bros Inc (BROS) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Dutch Bros, Inc. Third Quarter 2021 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Paddy Warren. Thank you. You may begin.

Good afternoon, and welcome to the Dutch Bros inaugural conference call and webcast. I'm joined today by Joth Ricci, President and CEO; and Charlie Jemley, CFO.

We issued our earnings press release for the quarter ended September 30, 2021, after the market close today, and we will file our 10-Q in the upcoming days. Those documents will be made available on our Investor Relations website at investors.dutchbros.com.

Please be aware that all statements in our prepared remarks and in responses to your questions, other than those of historical fact, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are inherently subject to risks, uncertainties and assumptions and are not guarantees of performance, and are expressly qualified in their entirety by cautionary statements.

The forward-looking statements made are as of today's date, and we undertake no obligation to update them to reflect events or circumstances after today or to reflect new information, actual results, revised expectations or the occurrence of unanticipated events, except for as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance upon our forward-looking statements. For more details, please refer to our earnings press release and to the risk factors in our other SEC filings, particularly the risk factors described in our prospectus filed on September 16, 2001 (sic) [2021], and in our Form 10-Q for the third quarter of 2021, to be filed in the upcoming days.

Finally, while we have prepared our consolidated financial statements in accordance with generally accepted accounting principles of the United States, we will also reference non-GAAP financial measures today, which can be useful in evaluating our core operating performance. However, these non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are not substitutes for measures that are prepared under generally accounting -- generally accepted accounting principles. Rather, they are presented to enhance investors' overall understanding of our financial performance, but should not be considered a substitute for or superior to the financial information prepared and presented in accordance with GAAP.

Investors should therefore review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings press release, and not to rely on any single financial measure to evaluate our business.

With that, I would like to turn the call over to Joth.

Thank you, Paddy. Good afternoon, and welcome to our inaugural quarterly earnings conference call and webcast. Thank you for taking an interest in learning more about Dutch Bros. Here is a brief review of today's agenda.

Given that this is our first earnings release following our September 14 IPO, I'd like to begin with an overview of our people-first culture at Dutch Bros, how it's critical to our success, and how we match that culture with a disciplined brand strategy. Charlie will follow with a review of our financial results, provide guidance for the remainder of the year, along with some preliminary thoughts for 2022. I will then wrap up our prepared remarks with a few final thoughts and turn the call over to Q&A.

Just 8 weeks ago, we listed on the New York Stock Exchange. When we started our journey as a public company, we promised to stay focused on a few key areas, including disciplined growth and people development. Over the course of the last 2 quarters and into the current quarter, we've seen our strategy deliver strong results. Two months after our IPO, we're proud to report that we are meeting or, in many cases, exceeding our targets and remain committed to the long-term strategies we discussed in our S-1 and with our investors and research analysts. We believe Dutch Bros is uniquely positioned within our industry to not only reach our 10- to 15-year goal of serving great beverages at 4,000 locations across the U.S., but to also continue developing that people pipeline that enables that unit growth and supports communities and investments.

A little background for those of you who aren't familiar with our company. Dutch Bros has been serving high-quality hand-crafted drinks across the Western U.S. for nearly 30 years. In 1992, Dane and Travis Boersma started Dutch Bros with a double-head espresso machine and a push cart in downtown Grants Pass, Oregon. Today, Trav plays a daily visionary leadership role at Dutch Bros and serves as our Executive Chairman. While Dutch Bros is already recognized as one of the fastest-growing brands in the United States, foodservice and restaurant industry by location count, we are still in the early stages of a long-term growth story and believe Dutch Bros has enormous potential.

Since 2015, shop count has nearly doubled to more than 500 drive-through shops across 11 states. This year, we entered 2 new states, Texas and Oklahoma. Numbers have shown the brand translates well across regions, and we look forward to our continued expansion. In fact, our average unit volume in the most recent states we entered are well above our system average. And that is in spite of very little marketing in those markets. While roughly half of our shops today are managed by a core group of trusted franchisees who may continue to open stores in their existing markets, the vast majority of future growth for Dutch Bros will be through company-owned shops.

Several years ago, we made the decision to stop offering traditional franchise opportunities. We've instead focused on working with our field leadership and existing franchise partners to codevelop a people pipeline of potential operators for company-operated shops. Great people are truly what drives the Dutch Bros culture and experience, and what fuels our shop growth. That's why we have an uncompromising and consistent focus on identifying individuals we believe will exemplify our culture, live our values, and are eager to share the Dutch love. These values are based on authentically caring for each other, our customers and our communities.

Unlike most drive-through experiences that begin with maybe a muffled speaker at a faceless menu board, every Dutch Bros experience starts with an in-person human connection. This comes either through a personalized greeting by a runner who takes your order on a tablet or directly at the window. We place a premium on quality, speed and service without bypassing the personality of our brand, the Broista. Our Broistas are genuinely excited to serve. They excel at personalizing every experience and crafting a great drink and monitoring car throughput in the drive-through lane to ensure operational consistency throughout the day. I hope all of you will get to a Dutch Bros soon to experience this energy from our people for yourself.

Our promote from within philosophy is made possible through the Dutch Bros Leadership Pathway program, which provides a clear path from Broista to manager to regional operator. First, we focus in on hiring the right people, provide them with leadership training and ongoing mentorship and then offer them the opportunity for longer-term careers with real prospects of advancement. There are currently more than 900 people in the Dutch Bros Leadership Pathway program and more than 200 people in our regional operator pipeline, each with an average tenure of 6.5 years. That pipeline alone can support the next 750 to 1,000 company-operated shops that we will open.

The strength of the relationship with our employees has resulted in our ability to attract great candidates and then outstanding retention, which we believe is a real differentiator for the Dutch Bros compared to an industry that is contending with significant staffing headwinds. All of our shop managers for the 200-plus shops, opened system-wide since January 2018, were promoted from within. Turnover is virtually nonexistent within the ranks of the regional operators that will lead our shop growth.

We believe our high retention rates are a product of the development opportunities, culture and financial incentives we provide to our employees. And this industry-leading retention in turn produces high levels of customer service and a strong financial return. As a result of our high rate of retention, we were able to keep our shops open during the pandemic and have continued to meet consumer demand across all dayparts while others in the industry maybe have struggled with some staffing.

We found one of the key factors in our success as a people-first brand is our Social Impact platform. We're dedicated to making a massive difference in the lives of our employees, our customers and communities by ensuring Dutch Bros is a powerful platform for positive action. Our Social Impact platform is built on 4 pillars: diversity, equity and inclusion, sustainability, community relations and philanthropy. We look forward to sharing the progress we are making across all of these aspects of our business in future calls.

Our growth is predicated on our people pipeline. We're confident we have a long runway for growth, having reached less than 15% of our full brand penetration. We're committed to steady disciplined growth that takes Dutch Bros coast-to-coast and serves both existing markets where there is unfulfilled consumer demand and new markets where customers are waiting to experience Dutch Bros. Across our footprint, we take pride in being able to provide an incredible drive-through experience by serving high-quality and crafted hot and cold beverages with unparalleled speed and superior service. And while espresso-based beverages, whether served hot, iced or blended are core to the brand, they are less than 32% of total beverages sold, demonstrating the breadth and the wide appeal of our menu offering.

Our ability to diversify and expand our menu into innovative and customizable beverage categories has proven to be another key differentiator within the industry. Cold Brew and our proprietary Blue Rebel energy drink are prime examples. Both are customer favorites, and are key areas of growth in terms of sales. They can both be served from a variety of flavor combinations. Cold Brew can be enjoyed hot, iced or straight from the can in standard or Nitro-infused, while Rebel is typically ordered iced or blended, with a wide selection of syrups and flavors.

Customization is core to both our menu and our people. Our Broistas are able to create more than 9,000 unique drink combinations, exactly how the customer wants it, using fewer than 12 primary ingredients, which drives broad demographic appeal, a balanced daypart mix and traction across geographies. We also utilize technology to enhance the customer experience. Most recently, this included the launch of the Dutch Bros app and our Dutch Rewards program earlier this year. The Dutch Bros app has been among the most downloaded apps in the Apple App Store within our category, and offers customers the ability to earn points based on what they spend while removing friction from the sales experience.

While it's been less than 9 months, Dutch Rewards has already attracted 2.7 million members as of September 30, and is increasing throughput by improving speed and efficiency. This increased speed for consumer, removing friction, allows us to focus on our time in creating lasting connections and refining our innovation based on consumer insights. Our growth strategy, commitment to our people, best-in-class customer service and highly efficient shop operations has resulted in a proven track record of strong unit growth and enabled us to create a highly compelling economic model, which Charlie will discuss here in a few minutes.

Our customer research points to significant demand for Dutch Bros growth. Many of the shops opened over the last few years have been infill shops to reach new customers and alleviate capacity constraints at nearby existing shops where our sales are often just too high for a single store to handle. Our new shop growth strategy balances infill and new trade zone market expansion. Given how fast we're going, we built our economic model to absorb sales transfer between an existing location and a new one. Even as our number of shops have increased over 50% since the beginning of 2019, we have maintained positive same-shop sales growth within our markets.

As we enter and scale new markets, we believe our white space extends nationwide. Our company development in the near term will focus on Texas, Oklahoma and California, although we will continue to move East. We're confident in our expansion as our recent new market shop openings in Texas and Oklahoma have performed well above both our expectations and volumes in our legacy markets. As we develop the first sites in new markets, we're also planning the next several shops and believe each opening propels our brand awareness well beyond the existing shop footprint. Word-of-mouth advocacy from our customers has been among the strongest drivers of brand awareness, largely because our commitment to our people encourages them to become enthusiastic brand ambassadors. 77% of people surveyed in our existing markets were aware of Dutch Bros, and yet marketing spend represented only 2% of total system-wide sales last year.

One of the ways we're helping word of mouth spread is by enhancing our digital and social media footprint so our customers and crews can engage with Dutch Bros across multiple channels. This will deepen our connections within the communities we serve and increase our social impact.

Finally, we plan to expand margins through operating leverage as we've already invested in corporate infrastructure ahead of our expected growth trajectory. Therefore, we should be able to leverage our corporate cost over time to enhance our margins, and project SG&A to grow at a slower rate in our shop base and revenue.

At the end of the day, this is a long-term high-growth story, and one we're really excited to share. You're already seeing our commitment to people development, disciplined growth, increasing brand awareness and expanding margin from operating leverage is resulting in gains beyond even what we had hoped for. We have a strong new store model, and we're managing external factors as well or better than our peers.

Now briefly on our third quarter, I'd like to highlight a few financial comments, and then thank all of our Dutch team members for their work in achieving this before handing the call over to Charlie. Of note, system shop count grew 21% year-over-year to a total of 503 shops, and we are now open across 11 states. A record 33 shops opened in this quarter, of which 30 were company-operated shops. The prior opening record was 26 shops in the fourth quarter of 2020. We achieved this record despite the well-documented industry supply chain challenges. The supply chain issues impacted everything from building materials to equipment to product. Year-to-date, we've opened 63 shops, of which 52 are company operated. We anticipate opening a total of at least 92 shops this year. Approximately 80 of those will be company operated.

Our third quarter financial results demonstrate the underlying strength of this business and reinforce why we have so much conviction around Dutch Bros' long-term growth prospects.

With that, I'd like to turn the call over to Charlie to review a few more details of the results. Take it away.

Thanks, Joth. Good afternoon. As Joth mentioned, we achieved very strong third quarter results on top of what was a great start to the first half of 2021. Fundamentally, our performance is driven by our ability to continue to drive extraordinarily successful and predictable shop expansion, coupled with our ability to consistently grow sales at our existing stores, which provides us with a very high degree of confidence in our future.

In the third quarter, total revenue grew 50% to $130 million. Year-to-date, as of September 30, revenue grew 51% on top of 33% growth we achieved back in 2020 over the same 9 months. The primary growth driver was company-operated shop revenue, which grew 63% this quarter and 65% year-to-date in 2021. This 65% growth represents an additional $114 million of revenue, of which approximately 81% comes from the opening of new shops.

While new shops will always be the core of our revenue growth, we also experienced strong growth in our existing stores. In Q3, same-shop sales grew 7.3% on a system-wide basis or 8% year-to-date. We achieved these quarterly comparisons despite rolling over headwinds caused by abnormally low discount, promotion expenses in the same period of 2020. This created a drag on comparable sales in the third quarter 2021 of approximately 470 basis points. As a reminder, unlike many in the restaurant industry that experienced declines from COVID, we actually grew same-shop sales 2.4% in the third quarter of 2020, thanks to the reliability of our drive-thru focused model.

Given the COVID-19 pandemic, we are also watching our performance relative to 2019 or the 2019 comparable store base, 297 of our 503 total shops. 2021 same-shop sales rose 10.7% in quarter 3 over 2019 levels for those same shops. Same-shop sales growth for company-operated shops is also a strong 4.7% in Q3. This was on top of 2.5% growth for the same quarter in 2020.

What is so impressive about that 4.7% positive growth is that this comes despite 2 headwinds. First was the negative rollover from abnormally low discount, promotion costs in 2020 of 470 basis points. And as a result of new company shops built near existing high-volume shops, we experienced an additional 110 basis points of negative same-shop sales drag from what some in the industry call cannibalization, what we refer to as strategic sales transfer. We call it strategic sales transfer, as in most cases, we have made the conscious decisions to transfer some volume from existing high-performance older shops to newer stores nearby that enhance customer experience and create a more balanced sales base across our stores that can then grow further. In aggregate, these represent 580 basis points of headwinds in quarter 3, making us even more proud of the same-shop positive sales growth we achieved. Isolating these factors gives a more accurate representation of the underlying strength and strong momentum of our business.

I want to take a moment to discuss discounts, which drives many of the margin comparisons in company-operated shop profitability. While this is a meaningful metric now, as our discount rate stabilizes, it will limit the impact of rollovers in the future. When the pandemic began, we instituted a number of protocols to make employees and customers feel comfortable. We stopped exchanging cash, and we suspended the stamping of our paper-based loyalty card. We then digitized our loyalty program through the Dutch Rewards program, launched in early 2021. These changes have significantly altered our discount and promotional expenses.

When expressed as a percent of gross sales, discount and promotional expenses declined from the upper teens in 2019 falling to as low as the mid-single digits in 2020, and are now normalizing. After absorbing the costs associated with signing up over 2 million members in the first half of 2021, discount and promotional expenses are now settling in close to our targeted go-forward rate. We expect that rate to be in the low double digits, creating a permanent margin lift. Importantly, unlike a simple paper punch card, we are now able to create more value from this promotional expense by learning more about customer patterns and preferences.

The Dutch Rewards program is a powerful tool, giving us many opportunities to engage with customers and satisfy them in creative ways. We believe the yield will build over time and allow us to develop operational and speed of service efficiencies. If the percentage of sales generated by Rewards customers continues to accelerate, we may see our discounts and promotional expenses rise. But the payback on that is very clear by having customers join the Rewards program where we can directly and efficiently engage with them.

As I mentioned earlier, outstanding new shop performance is the primary driver of strong revenue and adjusted EBITDA growth. Our new shops continue to exceed expectations, and we've seen this consistently in recent quarters and uniformly across new and existing markets. Average weekly sales for new shops also continued to outperform the overall system, increasing AUVs to an all-time high of 1.8 million on a trailing 12-month basis.

As we continue to infill existing markets, our new shops provide balance to our existing high-volume shops. This is accomplished by transferring customers in locations that are more convenient for them with both shops maintaining very strong unit volumes and economics. The result is a more even distribution of volume across locations, taking pressure off existing units as well as our Broistas, by enabling them to deliver superior customer service. We will, therefore, continue to strategically infill markets.

As Joth explained earlier, it is our culture that sets Dutch Bros apart. We prefer not to understaff our stores nor drive up productivity to a level that compromises the employee experience because that is what creates the customer experience. The Dutch Bros brand is built around our ability to deliver on the promises of speed, quality and service without compromise. Challenging times are often when a strong culture has the opportunity to demonstrate its greatest value. Our approach to managing operations is even more critical today with the backdrop of an environment where many businesses struggle to source and retain employees, or to even operate regular hours customers rely upon. In Q3, we had less than 0.1% downtime on shops from staffing constraints, a metric that we believe positions us favorably in our industry.

Shifting now to company-operated shop profitability. As I mentioned, in the third quarter, company-operated shop revenue grew 63% to $109 million. Company-operated shop profit grew 18% to $22.8 million. That delta between revenue growth and shop profit growth is the result of the abnormally low discount and promotional costs in 2020 that I noted earlier. If we apply a consistent discount and promotional cost rate to quarter 3 '21 and quarter 3 '20, company-operated shop profit grew 50%. Any remaining delta in profitability is a result of the expected start-up inefficiencies of our new shop -- newest shop openings, the shops we opened in Q3 as their start-up results impact the overall portfolio. That said, we are pleased with the ramp profile of our 2021 unit class. For example, the shops opened in the first quarter of '21 are performing higher than the system average on both a sales and margin perspective.

Total selling, general and administrative costs were $154 million in the third quarter compared to $26 million in the third quarter of 2020. This increase is primarily from the recognition of $125 million in noncash stock-based compensation and $3.3 million in direct IPO-related transaction cost and a $1.4 million onetime charitable donation in connection with our IPO. Removing these expenses, core G&A was 18.7% of total revenue.

We will continue to invest in the people and systems necessary to enable and drive growth. Given the high returns we are delivering in company-operated shops, we believe these investments are necessary and position us well to support growth on a profitable and a sustainable level.

We generated $20.6 million of adjusted EBITDA in the third quarter, and $68.8 million year-to-date. This quarter reflects a 2.6% decrease as compared to Q3 of 2020, and reflects the lapping of those abnormally low discount, promotion costs in 2020.

On a year-to-date basis, growth is 21%. Note that our adjusted EBITDA adds back stock-based equity compensation, nonrecurring expenses related to our initial public offering on September 15, 2021, and costs related to the COVID-19 pandemic, which have not yet ended. In order to walk you from reported net income to adjusted EBITDA, we've included those details within a short presentation we posted on our investor website. We reported a third quarter net loss of $117 million or $0.15 EPS, down from net income of $6.7 million in the prior year. Adjusted for onetime charges, net income was $11 million or 23% EPS.

We used our primary proceeds from the IPO to pay down the entire balance of our $198 million term loan and to maintain a strong balance sheet geared for new shop growth. As of September 30, we had $26 million in cash and equivalents and $35 million drawn on our revolving credit facility, reflecting just $9 million in net debt. We also had $115 million in committed undrawn capacity in our revolving credit facility, allowing us to be nimble and flexible as we grow.

Before turning it back over to Joth, we wanted to share guidance for quarter 4 and a select metric for 2022. Total shop openings are expected to be at least 30 in quarter 4. Revenue is projected to be in the range of $125 million to $128 million. Same-shop sales are estimated in the mid-single digits. Adjusted EBITDA is projected to be in the range of $12.5 million to $13.5 million.

With that, I'll turn it back over to Joth for closing remarks.

Thanks, Charlie. Again, I hope what you take away from today's call is a better understanding not only the financials of the company, but what has and will continue to make Dutch Bros successful. These results reinforce our disciplined plan to make Dutch Bros a national brand. Our success is driven by a phenomenal culture and the people who embody it. As we move forward, we will continue to focus on people development and strengthening our systems to steadily move towards a 4,000 shop goal. We will introduce our brand to new markets, increase brand awareness in existing markets and invest in digital technology to ensure we're reaching the right audience, and living up to the extremely high customer service standards we set for ourselves.

Finally, we'll expand margins through operating leverage. Our strategy and business plan is about discipline, it's about executing and it's about having confidence in the fact that we can build on short-term wins for long-term success. We thank you again for your interest in Dutch Bros, and now we'd be happy to take your questions. Operator, please open the lines.

(Operator Instructions) Our first question is from Andrew Charles with Cowen.

Great first quarter update. Given the continued success with the shift to the digital loyalty program in 2021, what are your thoughts on digital ordering through the app? I know you've been open-minded about this in the past, and I was curious if it's something you're more focused on now than perhaps 2 months ago when you were doing the road show.

Well, I think -- Andrew, it's good to hear from you. I think that that is certainly on our radar and something that we're actually working on, and we'll hope to be looking towards a test of that here pretty soon, and something I think we'll be able to talk about maybe in the next 90 to 180 days with more specifics around it. But I think our Rewards platform is something that we're going to continue to build off of. And really, the basis of what we built was a foundation that we can really grow from. And I think our team is really looking at a variety of great options that will fit the best growth experience.

Very helpful. And then apologies if I missed it, but did you guys disclose what the mix of loyalty sales were? I think it was running around 50% when you guys were pursuing the IPO. And I'm curious within that, just what have the early learnings been on the loyalty offers aimed to increase frequency and ticket that you're working ultimately towards personalized marketing with?

Yes. Andrew, it's Charlie. So about 60% of tender is our -- is it -- through the Rewards program, Rewards members. And then can you -- so that's your first question. Can you follow up with your second one?

Yes. I'm sorry, Charlie, you said 60%, 6-0 percent?

6-0. Yes.6-0.

Got it. And then yes, just I'd love to know the early learnings, just I know that you guys have the loyalty program, you've been starting to do more, not quite personalized, but certainly more offers intended to increase frequency and ticket. And I was just curious about the early learnings there.

Yes. I think the early learnings on that have been wildly receptive. I think through September, our Rewards members, our average TAC is around, gosh, 5% to 7% higher than a non-Rewards member. And we've been after kind of very targeted promotional opportunities at local levels, and then also thinking through category promotions, whether it's Cold Brew or increasing even around some of our holiday drinks, currently. I think all of those have shown some -- really some great early results. And with that, we've enrolled now almost 2.8 million members in our Rewards program with the launch of February 1. So definitely getting some activity.

Our next question is from David Tarantino with Baird.

I was hoping, first, to ask about performance in your newest markets in Texas and Oklahoma. I think you've been adding more units in those markets since the last time we talked. And I was curious to know what you're seeing as you further penetrate those markets in terms of AUVs. And I guess, directionally, I think you mentioned that they're still above the system average. Just wondering if you could maybe elaborate on what you're seeing as you penetrate those markets.

Yes. So David, it's Charlie. So those markets are still holding in excess of 20% ahead of the system average. So -- and we've been fast filling in, in those stores, right, quickly infilling, and been able to maintain very high volumes. And when we look at our margins, we're very pleased with those outcomes as well. So we're speeding through Texas as fast as we can get there.

Great. And then Charlie, another one on margins. So I think in the presentation, you show a bridge that gets you to 31% shop margins after, I guess, backing out the preopening costs. And if I do the same bridge for the quarter you just reported, it's lower than that. So I wonder if you could talk about the factors on why the most recent quarter would be lower than the last 12 months, and whether you think that's a new run rate for the business.

A couple of things there. Number one, the third quarter from a volume seasonality perspective is slightly below the average for the year, so you get a little bit of deleverage. And then we're starting to feel a couple of things we changed operationally. We changed our Freeze product to be a premix product rather than individually mixed in stores, and that creates a little bit more cost of goods. But then eventually, we have a far superior product itself, and we'll eventually get that back in labor savings.

And you may have noted that we did pulse prices in early November. We have not taken any prices in our system of any significance since pre COVID. And so we've absorbed a little bit of general inflation, normal inflation, whether it's wage changes in markets that had legislated minimum wage, and they're getting to their last tiers or other general wage inflation, and we've been very thoughtful and careful about price escalation. And again, we've instituted a price increase to defend our margins going forward. So you've got both a seasonality aspect and then the lag of the current price increase versus what's happened inflationally over the last few quarters.

Got it. And then I guess as you think about your fourth quarter EBITDA guidance or is that -- does that imply that you expect the margins to be better in the fourth quarter than the third quarter given that price increase?

No. Not significantly. No. I mean, the guidance is a little higher. The absolute number is lower than quarter 3. That's seasonality driven. So no, we're not expecting any real change in the shape of margin other than seasonality impacts.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. Welcome to the public markets. Two questions. The first question, just on the, well, the pricing you just mentioned. I'm just wondering maybe you can share your historical average in terms of pricing. And how do you think about the right level in periods of outsized inflation? It would seem like you have a couple of options. You can either price to whatever level is necessary to hold the margins if you think you have pricing power, or the alternative, I guess, you price more modestly, maybe you let the industry-leading margins take a little bit of a hit, but you protect your traffic. So I'm just wondering how you think about pricing in this current environment, and maybe what you just took in November as a proxy? And then I have one follow-up.

Okay. So historically, over the years, 1% to 2% pricing. And as I mentioned, very low pricing since pre COVID. The great thing, and Joth mentioned it in his script, that we have 12 ingredients. We have a -- I don't want to simplify the supply chain and dismiss the great effort our teams make to get things to stores. But we don't have a complexity that others do, and therefore, we're not nearly as subject, at least to date, to the types of inflationary pressures that others are having. We believe that that price increase we just took will defend our margins again going into next year. And we want to just stay really focused on genuinely giving value to our customers, and we'll just monitor it, right? We don't have any hard and fast philosophy. It's an environment today where you've got to be able to pivot quickly, and that's the approach we'd like to take.

I think we expect our margins to generally hold up. They are industry-leading, and we're very grateful to have that, and we'll watch this over time.

And the fact that we've gone through an entire set of prepared remarks, and there was no mention of your basket of commodity or labor inflation in the third quarter or your expectations going forward. Is it really to the degree that it's fairly minimal? Or can you share maybe what your basket of inflation was for commodity and labor in the third quarter, and what your outlook is?

The basket is low single digits. And inflation, overall, it's very mild and tempered. And we don't say that thinking we're immune to the struggles that could happen going forward. But we've been very fortunate. Dairy is not really up, that's a big component of our cost structure. We're forward out on coffee, very long. And we have about a 3-bean blend that we can pivot around and manage our costs. And so we feel -- we don't see the kind of pressure others are seeing.

And then on the labor side, aside from wage changes related to minimum wage laws that are out here West, for example, we've just not felt the kind of wage inflation. We already were paying our people very well, and we have not had to intervene at this stage.

Understood. And my only other question, Joth, I'm just wondering as you think about the projected unit growth, which is obviously the fundamental driver of your top line and clearly industry leading. Just wondering if you could talk about what you perceive to maybe the greatest challenge and the risk to that growth? It doesn't sound like it's really staffing and doesn't sound like it's necessarily a real estate, and it's not really new market pushback, which are usually the areas that high-growth stories talk about. So I'm just wondering what leads to the guardrails of the mid-teens annual unit growth that you've put out there relative to something higher or lower? How do you arrive at that number when there doesn't seem to be much in the way of limitation?

Thank you, Jeff. I think the answer to that is really is that our growth is predicated based on our people readiness. So what we're trying not to do is -- we're not a real estate company that we're plugging people into. We're a people company, plugging real estate into it. So what I am -- what I'm super careful of is stretching our culture to a degree where we wouldn't be able to handle that. And we've gone from 42 locations to 71 locations -- to this year, we'll open 92. We've been on a really good run here for the next 3 years, and I would say, building the muscle of growth. But also, we will not compromise our culture or our people systems related to what really might be the less challenging side of actually finding real estate. Our pipeline is full. We're well out on our leases, and we're very confident in our growth plan. But we also need to manage it with our people development. And we'll make sure that's our #1 filter to open new shops.

Our next question is from John Ivankoe with JPMorgan.

I understand that there weren't closed store days or maybe even closed shifts or perhaps even closed hours at the store. But what about periodic staffing challenges that must have occurred in some stores somewhere in the quarter. I mean, obviously, you guys run a drive-thru format and not having staffing in that drive-through format very logically would affect throughput. So can you -- I mean, I guess, I'm really kind of pressing you for an answer here, say, hey, were there any operational challenges that did periodically occur in the quarter in terms of number of cars getting through in specific hours? And I guess, is that an opportunity going forward to get even better?

Well, I think 2 answers, John. This is Joth. I think there's 2 answers to that. One, yes, there is an opportunity to get better. Two is that we absolutely weren't completely immune from a staffing problem here and there, but we certainly did not have anything that affected the overall performance of the business that even really hit to our radar that might have damaged our ability to perform. So does that mean we didn't have a challenge? No. Does it mean that we had a challenge that was enough to create problems? I'm not aware of anything that did that. So again, I mean, we're kind of boring in that sense and also very fortunate that our leadership in the field and our people in the team have been -- and people in the field have been amazing at the way they continue to onboard people, recruit people and make sure that we're fully staffed to serve the customer. So nothing really there for us to report.

No. Listen, that's great. And boring in most cases, is good. I wrote down, 60% of tender, I think, was through your reward program. Converting that digital customer to mobile order and pay, whether it's through curbside or perhaps it's just through the walk-up window where maybe during different slower dayparts where you're not necessarily at your throughput peak, I mean I think it would be an interesting opportunity for you as you kind of further yourselves down the digital landscape. I mean what's your current thinking on that? And how would you kind of put that in your -- in the Dutch Bros priorities, I guess, over the next couple of years?

Well, I think the expansion and development of our Rewards program and the app itself is -- it's right there, top 1, 2, 3 in priorities related to the development of this business. And to think that we don't really have anything other than just a frictionless payment system right now, I think for all of us says that there's opportunity operationally to improve order ahead, walk-up windows. The order ahead in a Dutch Bros way because we will always maintain the service aspect of what we do, and we think that's an important element to who we are. We don't ever want to remove that. So maybe there's a way to even improve the service aspect of what we do through a last order system or the last drink you had, and there's so many great enhancements to technology now through kind of fencing your stores and when people go through that digital fence like what information they can learn. I think there's some incredible opportunities. And I think our team is really just getting on the early stage of building that.

Our next question comes from Chris O'Cull with Stifel.

This is Patrick on for Chris. You're obviously building a lot of sites at a really rapid pace. And I'm just curious if you're seeing any upward pressure in terms of site prep or construction costs due to labor shortages or raw material inflation on that side -- on the construction side of things. Or if you're seeing any need to order equipment out farther ahead or any issues just procuring equipment as you develop? And then I have one follow-up.

Yes. It's Charlie. We are seeing a little bit of upward pressure in build-out costs. We've had some disruption, but we've been able to pivot pretty quickly to be able to get equipment on site, materials on site. We're fortunate that we are not doing elaborate build-outs in terms of lobbies and things like that. Again, not dismissive of what it takes to get all these sites built, but we're not seeing great upward pressure, and we're not experiencing great difficulty in terms of getting things logistically on to sites.

Great. That's helpful. And then just one question. I mean I appreciate everything you guys have said on staffing already, and certainly that your operator turnover is really low. But I'm curious, just underneath the hood of not having as many issues as maybe some of your peers, is there less turnover in the hourly ranks because you have that upward mobility and you're seeing that really pay off for you from a retention standpoint? Or is it that you've seen hourly turnover increase, but maybe you're just more effective as an employer of choice in your markets to be able to bring people in to replace as that churn maybe has gotten a little bit higher? Just any additional color you have there would be helpful.

We actually have seen our hourly turnover go down here over the last few pay periods, and have not had that issue in market. So again, I've got to give credit to our hiring teams in markets. We have a lot of our employees attracting other people and communities to come forward. They're actually our best recruiters, is our current employees, they say come work at Dutch, it's a great place to work. And so I think that the system that we have and the people that are out there just talking about how great it is to be a Dutch Bros has really been a difference maker for us in market. So again, the staffing issue just isn't there for us. And one, if anything, as the labor market continues to improve, we think it's only going to get better.

Our next question comes from Sara Senatore with Bank of America.

One question, and a couple of follow-ups, please. The first is on, you mentioned the (inaudible). Is that the right number to think about going forward...

Sara, we actually can't hear you. We can barely hear you.

All right. How about this?

There you're back. Okay. Yes, yes.

Okay. I was just asking about the sales transfer. You mentioned 110 basis points strategic sales transfer headwinds. Is that the right number to think about going forward? Or are we going to see a little bit less information as you shift maybe some of the market openings. I know over time you sort of strike a balance between...

Sara, it's Charlie. On the sales transfer, I think that's the right way to think about it sequencing forward about that level. It may ebb and flow a little bit in a particular quarter, just depending on how much backfill or infill we do versus new trade zones, but that's the way we're thinking about it, given what's happened over the last few months.

And are you -- do you have a sense now as you open more about sort of how long it takes for a store that maybe -- an existing store that did have some of that sales transfer working against it to get back to previous levels as we think about just the kind of volume cadence over time.

Not enough data that we could really anchor ourselves on given how fast we've gone recently. But we see that stores that are receiving impact are receiving impact of less than (inaudible) right now. So there's -- we definitely think there's some build back opportunity, but we couldn't quantify that just yet.

Yes. So we're still new into all of that sort of strategy. So I think in the coming quarters, I think we'll have much better information to share on that.

Okay. And then just -- and you make it the same answer to this next question, my last one, which is you mentioned the payback of acquiring consumers and offering some of this discount is clear. Do you have any information on frequency or spend or how it changes when people join the Rewards program?

So we have data on frequency, but I think the thing that we want to do is let this evolve over time. So in other words, now we can follow a customer, and we have identified them through the Rewards program. And just in February, this began. So you really need to follow them through a number of cycles. Our frequency is good, but it's not such a high frequency business that we could point to our people's behaviors changing as part of becoming a reward member and how are those Rewards members' behaviors changing over time as we engage with them. So you're exactly right. It's -- we're going to give you the same answer. It's a bit too early to tell. But everything we see gives us a ton of optimism around where this is going.

Our next question comes from Nicole Miller with Piper Sandler.

Just 2 questions. The first, you're clearly seeing same-store sales momentum, albeit year-over-year compares become more challenging. Can you just rank the impact of price? And I'm thinking it might be the 5% to 7% higher check on 60% of the tender of loyalty, more than anything. But I also don't want to overlook any menu or marketing influences on comp as well.

Yes. Well, over time, price is just such a small piece of what our comp momentum is. I mean it's almost not measurable. In terms of what loyalty is doing just yet, again -- yes, we get a higher average check from loyal customers, but you would expect that because they're loyal customers. So a lot of what we're seeing is just plain good solid traffic growth.

All right. So execution, excellent. And then it was very helpful to understand the concept and the employee for sure because they touch the customer. But I want to ask you a little bit more on the customer. Where is that customer going to or coming from? Is Dutch the first cup of AM coffee? Essentially, what is the behavior of the customer? And has anything changed?

Well, I wish I knew the answer to that. I think that we're learning about that every day. I mean I think some of our data points to -- obviously, we're a West Coast brand for 30 years, and we're very close to a Starbucks in probably every market that we're in. And so I'm sure we trade back and forth with customers there. I do think -- and some other people in the industry have thanked us for introducing customers to a coffee-type concept because we tend to be a younger audience where people are coming into the industry. And so I think we get a -- we get some degree of credit for introducing that to people.

But as our menu is shifting with energy and Cold Brew and things of that nature, I think that's also changing a bit, too. So for us, it's convenience stores. It's probably the local large chain coffee location, and really anybody else who serves beverages. I think that's what we love about the business that we're in is that beverage business, whether it's the lunch counter pick up business or whether it's a convenience store or whether it's the Starbucks that's been there, I think everybody who's in the beverage business, I think we're all competing for that occasion. So we'll learn more, especially over the next couple of years as we dig more into that type of information and research.

I appreciate that. I asked that question just terribly. So I'm going to try again, although that was very helpful. I mean they're coming in the middle of the day or late morning. So no one's getting up at 5:00 a.m. -- and well, I shouldn't say no one, a nice chunk are getting up super early and hustling over to the drive-through. But my goodness, they're coming all day long. So thinking about the customers themselves, like where are they driving to? Where are they driving from? Is it work? Is it -- it's something else besides that. I was asking more in that framework. Sorry, I didn't ask that well.

That's okay. Thanks, Nicole. I think that you have -- the short answer is, yes. So we do have that early morning, I'm going to work. We do have the, I have dropped off kids at school, I'm now getting started with my day. We do have the I'm going to school crowd. I think we have -- 27.5% of our business is done in the afternoon -- in the afternoon daypart. So that tells me it's an after-school crowd. It's a second drink of the day pick me up crowd. 37% of our business is done midday, so like 11:00 to 1:00, which is definitely a lunch crowd. So we're very spread across dayparts. I mean 25.7% in the morning, 36.6% midday and 27.5% in the afternoon. So the answer is, yes. I mean, they're coming from whatever they're kind of doing in their lives and making Dutch a part of their day. And I think that's what's pretty important about our concept and the menu that we offer.

Our next question comes from Sharon Zackfia with William Blair.

I was hoping you could talk about turnover at the hourly and managerial levels. And if you have any metrics you could compare relative to 2019 for those metrics? And then sorry if I missed this, but it looks like the franchise comps, although it's a smaller part of the business, were stronger than company-owned. Is there something going on where the franchisees are taking more price? Or can you talk about what might be going on there?

So I'll take the franchise piece. Slight difference in pricing that they'll take. They're a little more aggressive, but it's really geography. It's just where they're placed, some of the markets they're in just have a bit more growth than some of the markets the company is anchored in. They're great operators, but they're not better operators than our company folks. It's really just a dispersion by geography.

And then I think in terms of turnover and staffing and Joth will weigh in here, we almost have no turnover at the manager -- store manager level. And as we talked about, that core position, the regional operator. Our on-shift employees, I'll call it, it's way below 100% turnover. And it's just -- and I know from my other experiences in other businesses, it's simply lower than -- it's one of the lowest around. And we're just not feeling much churn.

Yes. I mean really, I think it's -- to Charlie's point, it's kind of, call it, mid-50% range for staffing. And really we're 100% staffed. And no turnover at the management level. So we've been fortunate. I mean we have people who love to come to work at Dutch Bros every day, who love to be a part of the chemistry that we have in stands. And like I said, our -- if anything, the people who are working in our stands are our best recruiters for new employees. So they love being there. And I think our team on the ground creates a great environment for people to work.

There are no further questions at this time. I would like to turn the floor back over to Joth Ricci for any closing comments.

Thank you. And thank you to everyone who joined the call today. Thank you for being part of this journey with us as we have now become a public company, we have been just very thankful for the response that we've gotten, for the excitement that people have. And for the many people who are just learning about Dutch Bros for the first time, we welcome you to the family, and look forward to having you along this journey with us. So thank you, again. We look forward to future calls and sharing results. And most importantly, have a great rest of your day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.