BROS - NYSE

Thank you for standing by, and welcome to the Dutch Bros Inc. First Quarter 2024 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, May 7, 2024 at 5:00 p.m. Eastern Time and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the lines for questions. Instructions to queue-up will be provided at that time. I would now like to turn the conference over to Paddy Warren, Dutch Bros' Senior Director, Investor Relations and Capital Markets. Please go ahead.

Good afternoon, and welcome. I'm joined by Christine Barone, CEO and President; and Charley Jemley, CFO. We issued our earnings press release for the quarter ended March 31, 2024, after the market closed today. The earnings press release, along with the supplemental information deck have been posted to our Investor Relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in response to your questions other than those of historical facts are forward-looking statements and are subject to risks, uncertainties and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q. We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP measures are neither substitute for, nor superior to, measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Christine.

Thank you, Paddy. Good afternoon, everyone. We delivered exceptional results in quarter 1 as the momentum we saw leaving 2023 continued into the new year. Headlining this performance was 10% same-shop sales growth, the strongest single quarter since Q4 2021. We delivered $275 million in revenue, an increase of 39% year-over-year. These outstanding top line results were coupled with excellent flow-through as we delivered $53 million of adjusted EBITDA, an increase of 120% year-over-year. Our innovation strategy is working. We released 2 highly successful new products in the quarter with Protein Coffee followed by Boba, driving strong results in both the morning and afternoon dayparts. Our Dutch Rewards program is working with a record 66% of all transactions coming through the program in the quarter, allowing us to efficiently and effectively provide relevant content and offers to our customers. Our investments in driving awareness in new markets are working, and we are accelerating spending to capitalize on this momentum. Quarter 1 same-shop sales growth featured a combination of ticket and traffic expansion. Our traffic trajectory improved for a second consecutive quarter. Within the quarter, we experienced some weather disruption in January, rebounding strongly in February and March. In April, traffic and ticket growth tempered as we rolled over the refresh of our rewards program, some product outages due to strong demand and the launch of Mangonada at the beginning of April 2023. Bolstered by strong same-shop sales growth, system AUVs expanded to $2 million, once again, the highest on record. In quarter 1, we opened a record-tying 45 new shops, marking the 11th consecutive quarter of 30 or more new shop openings, demonstrating remarkable consistency as we execute our growth plans. Even when taking into consideration what remains an uncertain and evolving consumer backdrop, the strong start to 2024 gives us the confidence to raise our guidance for the year. Charley will share more context and details in a few minutes. But first, I'd like to walk you through an update on our business. We began any discussion of Dutch Bros with our fundamental differentiator, our people. Recently, we were awarded a Top 10 position in Forbes' first-ever Best Customer Service list, one of just 2 quick-service brands in the Top 10. Once again, the culture we infuse into each shop and the skills and abilities of our Broistas to make drinks and create relationships are evident. In our view, these are the keys to building brand affinity and fueling growth. Our exceptional culture, exceptional people, and exceptional service speak to customers across demographics and generations. We continue to support growth with a robust people pipeline. Our pipeline has over 375 candidates with an average tenure of over 7 years' experience, ready to be tapped to lead markets as operators. As we expand across the country and enter into new regions, our people are our superpower. They help us achieve our goal of consistently delivering an exceptional customer experience focused on speed, quality and service. We continue to be pleased with our shop-level turnover, which is in-line with our expectations. The expansion of our support center in Arizona, which we announced last quarter, remains on track, and we are excited to ramp up our hiring in that market. Phoenix is a terrific market for us, where we enjoy high brand recognition and affinity. We look forward to capitalizing on this excitement as we continue to build-out capabilities in this support center. We anticipate moving into our permanent office location in early 2025. Our leadership team transition continues to go smoothly. Today, we announced Josh Guenser will be officially assuming the CFO role on May 9. And in April, we announced Sumi Ghosh, officially assumed the role of President of Operations. Both Josh and Sumi have spent significant time in our shops, passing their flow checks, becoming fully certified as Broistas and developing a strong understanding and respect for our operations. Our CMO, Tana Davila, has been in her position since June of 2023, and she and her team have been focused on delighting our customers and executing our traffic-driving initiatives. We are beginning to see the results of this focus. We have been executing on a multi-pronged plan to drive traffic, an enhanced focus on innovation, more targeted rewards program efforts, and increased paid advertising designed to build brand awareness. We saw progress in each of these areas in the quarter, as evidenced by traffic growth across our dayparts and continued momentum as these efforts began to take hold. Here is an update on our key traffic-driving initiatives. Innovation, we believe innovation plays a foundational role in the next stage of our growth at Dutch Bros. Over the past year, our innovation strategy has evolved from one primarily focused on highlighting items from our extensive secret menu to one with a greater focus on category innovation. While we continue to believe there will be a place for quick fun product drops to keep our menu fresh and exciting, we also recognize the opportunity we have to drive category innovation. The launch of Protein Coffee and Boba exemplified this new approach. Through our research, we determined there was an opportunity to address a customer need state with a high protein functional beverage. Our protein coffee beverage delivers at least 20 grams of milk protein in each medium-sized serving and quickly resonated with our customer base. It was exciting to see how our customers recognize the value of this new occasion and made it a part of their routines, evidenced by higher repeat purchase behavior than our typical LTO. Encouraged by the high sustained customer demand, Protein Coffee is now part of our regular menu. We followed up the success of Protein Coffee with the launch of Boba in March. Boba surpassed all of our expectations. We recognize the recent category growth driven by Boba, how nicely this overlaps with our large Gen-

Thank you, Christine, and the Dutch Bros team for those kind words. I would like to add my welcome to Josh as our new CFO. One word for Q1's financial results, outstanding. Here's a brief recap of the financial results Christine just shared with you. Revenue growth accelerated to 39%. System AUVs reached $2 million, a record. Same-shop sales were 10%, which did include roughly a 1% benefit from February 29 Company net sales grew 43% with very good leverage driving 77% growth in company-operated shop contribution. Four-wall productivity remained strong, with company-operated shop contribution margin reaching 29.8%, expanding 560 basis points year-over-year. Adjusted SG&A fell below 15% for the first time since our IPO to 14.7%, 370 basis points lower than Q1 of 2023. Adjusted EBITDA increased to $53 million, growing 120% year-over-year. Adjusted EBITDA margin of 19.1% is up 700 basis points over quarter 1 last year. Company-operated shops saw strong leverage up and down the P&L, driven primarily by strong comparable sales results and continued strong margins from newer shops. Cost of goods sold improved 260 basis points year-over-year, driven by strong ticket growth as well as year-over-year moderation in underlying costs. We continue to keep a close watch on key commodity costs as we did see some increases in ingredient costs as the quarter progressed. In particular, we are watching sugar and cocoa prices in the near to medium term. We make note of the elevated coffee seed price, which could become a factor down the road given the lag time from bean to cup. Labor costs improved 160 basis points year-over-year, where the impact of strong comparable sales outweighed the considerable wage investments we have made in the past 12 months. Moving forward, the California minimum wage action that took place April 1 may weigh on our ability to deliver similar leverage in the future. Occupancy and other costs improved 90 basis points year-over-year, driven by sales leverage as well. Pre-opening costs remain moderate as we take advantage of the efficiency in these costs that come from infill. For the quarter, SG&A was approximately $46 million, which includes about $2 million in stock-based compensation. With the exclusion of stock-based compensation and other non-recurring expenses, adjusted SG&A was approximately $40 million or just 14.7% of revenue compared to 18.4% in Q1 last year. We continue to support a high-growth business with the proper level of investment and resources while achieving leverage and support costs as we scale. Regarding our balance sheet and liquidity. As of March 31, we had approximately $662 million in total liquidity compared to approximately $683 million at the end of 2023. And we believe that we have sufficient liquidity at our disposal to support our currently contemplated growth plans. As of March 31, that liquidity was comprised of the following elements: $263 million in cash and equivalents, $349 million in undrawn revolver, $50 million in undrawn delayed-draw term loans. In the quarter, interest expense net, declined $1.5 million from 1 year ago to $6.4 million. This decline is driven by a $3.5 million reduction in interest paid for outstanding balances in our credit facility, less the interest income we received on our investments in marketable securities. That decline is driven by an improved net cash position and is a product of the September 2023 follow-on offering. Partially offsetting the decline in interest expense net, is an increase in interest expense-related to finance leases of $2 million, which rose from $3.5 million in Q1 2023 to $5.5 million in Q1 2024. That increase is a product of new company-operated shop openings and the portion of those openings where leases have been classified as finance leases for accounting purposes. Not discounting the continuing potential of uncertainty in the consumer landscape going forward, we are updating guidance for the balance of the year on the strength of our Q1 performance. As we look forward, it will always be our desire to remain nimble. In that respect, we are seeing attractive returns on both our people and marketing investments and we believe the strength of our 4-wall model enables us to make and accelerate investments that bolster our brand. With this backdrop, we are issuing the following update to our original 2024 guidance. Total revenues are now projected to be between $1.2 billion and $1.215 billion or an increase of $10 million from our original guidance. Adjusted EBITDA is now estimated to be between $195 million and $205 million or an increase of $10 million from our original guidance. When we look at the remainder of the year, we expect to see quarterly adjusted EBITDA results more close to one another than we have seen in prior years. We would expect Q2 and Q3 will remain slightly stronger quarters seasonally than Q4, however, less pronounced. There are no changes to our original guidance as it relates to the following aspects. Total system shop openings remain in the range of 150 to 165, same shop sales growth remains in low-single digits, capital expenditures are estimated to remain in the range of $280 million to $320 million. In summary, it was an outstanding first quarter and start to 2024. These results demonstrate that improvements made last year are beginning to take hold and help position us to navigate the dynamic consumer environment. We look forward to a review of our quarter 2 results in early August. Thank you, and now we will take your questions. Operator, please open the lines.

[Operator Instructions] Our first question comes from John Ivankoe of JP Morgan

Yes, the question is on Mobile Order & Pay. And as you see it, you mentioned it would significantly speed-up the ordering process, but you don't expect to actually reduce the amount of hours that you have for store-level employees. So, are you expecting to reallocate some of the outside employees to perhaps inside? And as you speed-up the ordering process, do you also have similar plans to speed-up the production process? In other words, are we just shifting the bottleneck from one thing to another or can both aspects of the Dutch Bros production system speed-up at the same time? Obviously, I'm asking in a long-winded way, how much this actually could, at least in theory, help throughput at peak hours, given many of your stores currently being at capacity?

Thanks, John. As we -- we're just getting started on testing mobile order. So we're in several shops now in Arizona. And as we look at kind of where we can speed up both production and the lines, a couple of things to note is; one, we do have variability across our system and our AUVs. And so we do have a number of shops that are operating at very, very high AUVs, where we have different deployment standards in those shops because of those very high AUVs. So, as we take that as a learning as we go into something like mobile order, we have a very thoughtful way of, at different volumes, how we can best deploy our teams and best get through our lines. And so you're exactly right that as we look at Mobile Order & Pay, we think it's incredibly important that we really keep our brand differentiator, and that brand differentiator is our service. And so, yes, we will deploy more folks to making sure that we have great conversations with our customers, including both at the window and in the line. So if you drive through the line, you're going to have an awesome conversation as you come through, have someone greet you and say, "Oh, you've got a mobile order, let me help you with that." If you come up to the window, you're going to come and have that same conversation. And so, it's very intentional that we want to reinvest this labor back into both production and into ensuring that we can have great conversations with our customers.

And if I can, some of the new stores that you will be building that will be launched with Mobile Order & Pay, do you expect those stores to actually have some different design or functionality than maybe some of your legacy system that was originally opened without the system?

Yes. So, a couple of things on that. I think, one, for the last several years, we have opened shops with a number of escape lanes in them, which will allow us to run drinks out to our customers and then have them leave that line before they reach the window. As we're drawing shops today, we're certainly highly cognizant that we will have mobile order capabilities in those shops in the future. And so as we think about that, we're thinking about all different types of things like parking, we're thinking about the lines, we're thinking about the escape lanes. But as you know, it does take a while for drawings to work their way through the pipeline and system. That being said, I do think we have an ideal setup in many of our locations for mobile order by having both a walk-up window and a drive-through lane. And having that walk-up window, I think, is going to be a very natural behavior for our customers who can come in, park in our lots and then just walk up and have a great conversation with our Broista and grab their drink.

Look forward to it. And Charley, have a great time, congratulations.

Our next question comes from Andy Barish of Jefferies.

Yes, it's great working with you, Charley. Just wondering kind of on your comments on April and the consumer environment, I mean you're -- after an incredible start, your guide for the rest of the year implies pretty modest same-store sales growth. So just kind of wondering what's in there besides a fair amount of conservatism, I would imagine?

Thanks for your question, Andy. So, as we look at the rest of the year, one thing we're being very thoughtful about is what the rollover looks like from last year. So we did see an acceleration between Q1 and Q2 last year in our same-shop sales and in our traffic between those 2 quarters and really throughout the rest of the year. As we look at our guidance, we're also taking into consideration numerous price moves. And as I shared, when we look at April, one of the unique things about Q1 is that we had 1 promo in 2023, and we lapped that this year with 2 promos. So having Protein Coffee and Boba, lapping over our White Chocolate Lavender launch from last year. So that's just something that's a little bit different between the 2 years of the timing of those promos that we wanted to make sure that we note it.

And Andy, some -- as we mentioned in the last quarter, we expect some additional costs to start flowing into the P&L from quarter 2 onward. Those still hold, that would be the California wage, that would be the tech investments that we're making to get ready for Mobile Order & Pay. So, not only the rollover challenge gets more significant as you go from Q2 forward, but our cost change shift is also going to slow things down a little bit.

Got it. And I think a follow up...

Yes. Andy, I was just going to note the final piece was around the rewards program. So, if you recall, we made the change to the rewards program at the end of March of 2023. And so, for the rest of the year, we will be lapping over, taking that -- little bit of that discount out of the system for the rest of the year. All that said, we're super happy with how Q1 went and excited for the rest of the year.

Yea, if I can [Indiscernible] your product innovation commentary I mean it's -- I guess the simple question is, why is it working so well for you and not so well for others?

Yes. So, I think if we look at our product innovation, I think one of the things is that we're in a really unique time, I think, in our growth cycle, where we're big enough to really innovate with our partners and bring unique products to market, but we can also do that really quickly because of our size and scale and our team's ability to adjust and bring new products in. I think if you look at how we did product innovation and how we looked at it, is we were looking kind of externally at what are other things that are happening outside of us, what are things that our customers, in particular, are talking about and thinking about. And I think that Protein Coffee occasion, you're really seeing kind of that growth in that protein market as a functional beverage and how people are using it sometimes as a meal replacement, sometimes like in combination with their fitness routine. And then, Boba is just something really fun, I think, straight down the middle for us in our young customer base. And both of these things just felt like they really, really work with our target customer and who we're going after. And I think that -- when we look at this, we're super excited that we're going to have both of these for the rest of the year as we continue to drive that excitement with our customers.

Our next question comes from Sharon

I guess, just a really basic numbers question. Charley, could you break down the comp for us in terms of traffic versus ticket?

Yes. Hi, Sharon. So, out of that 10% comp, February 29 contributed approximately 1 point of that, menu pricing contributed approximately 6 points of that, discount mix shifts generated about 3 points of that the balance is then traffic, and note that sales transfer is in there, and that was at the lower end of our expected range of 200 basis points to 300 basis points, and that's how you get the math.

And then, I'm just trying to think through kind of the really significant profit upside that we saw in the first quarter, at least relative to the Street. I know you don't give quarterly guidance. And then the raise for the year, which was kind of more modest than the upside. And thinking through your conversation or comments that you made about the rest of the year, okay, more similar than normal, obviously implies some unit level margin degradation the rest of the year on a year-over-year basis. Can you help us think about kind of what you're going to see from a labor perspective in California, like what you're eating there? Because I think you did not take price and correct me if I'm wrong. And then secondarily, are you baking in more inflationary commodities than what you saw in the first quarter?

Yes. So, let me start with, we're obviously super pleased with our performance in Q1 with a 120% year-over-year EBITDA growth. When we look at that, a couple of things to note. One is that we did have a pretty rapid acceleration in February and March of our same-shop sales. And oftentimes, when you have that type of acceleration in your sales, it's actually hard to staff against that type of growth. And so that is something that as we move into the year, we really want our shops to be staffed in the best way possible. And so we're just going to be very thoughtful about that and know that we had a unique acceleration throughout the quarter. The second piece is exactly what you noted, is that the April -- California wage increase happened on April 1, and so it's not in those Q1 numbers. I'll turn it over to Charley to give a few more specifics on that, but those are 2 of the big themes there.

Yes. And I think you asked about commodities, and there's really no big movement there. We noted in the first quarter, it was pretty neutral, a little bit of help. We don't expect a lot of change there for balance of the year. The other thing is just to remind that we have these costs and investments coming into our P&L as we go through the balance of the year. We mentioned the California wage. We also have the tech investments related to Mobile Order & Pay and those will start moving into our P&L more fully. And then, I talked about the shape of earnings and how -- we went into the year very confident in the first quarter. We delivered a great number. And so as we move through the year, we would expect that a more normal sequence from quarter 1 to 2 and 3 than you've seen in the past. So we expect a tighter absolute range of profitability as you start looking at 2 and 3 and then less fall off in 4 than we normally -- than we would have experienced in the past. So I think looking at the trajectory of the absolute profit dollars in the quarter, just be mindful of that.

Thank you, and Charley, best of luck.

The next question comes from Chris O'Cull of Stifel.

This is Patrick on for Chris. Charley, obviously, been a pleasure. So, Christine, I did want to start with the paid advertising. And I'm curious if you feel like you found an effective marketing mix that you believe will increase brand awareness, specifically in markets like Texas that maybe can not only help comps but also start to address some of that new unit volume pressure you've been seeing?

Thanks, Patrick. Yes, that is an area that we absolutely saw success within Q1. And -- so we really started kind of experimenting in earnest in Q4 of last year with different channels, different messaging and how best to reach new customers, particularly in new markets. And we're incredibly encouraged by the results that we're seeing of that work. And I think that with the very strong rewards penetration that we have at that 66% of transactions, we have an awesome channel to talk to existing customers, especially in our mature markets where that penetration rate is even higher, and we really are using our paid spend and our paid advertising to go after, introducing new customers to our brand.

Great. That's helpful. And then, I did want to follow-up on your comments around category-defining innovation. And I realize you're not going to share identified opportunities or upcoming products by any means. But can you help us understand the strength of the pipeline of ideas that you currently have that you feel could be category-defining or innovative? And then, how should we be thinking about the pace of product launches in the similar vein of what you did in the first quarter as we think about the rest of the year or even into 2025 and whether or not there's a certain cadence that we should be sort of thinking about?

Yes. So I'll start with, I think, the Protein Coffee is just a really great example of this, where it really is a new use occasion for our customers in a way that they likely hadn't used us in the past. So, it can create repeat purchase. It sometimes, I think, can even hit customers that maybe are new customers to us. And so the reason we would call something like that category defining is, it's really a whole new group of products for us that's different than the other things that we have. And I think as we go through the rest of the year, one thing to note, I think, with the launch of both the -- keeping the Strawberry Boba on the menu and having the Protein Coffee on the menu, I think you could expect us to continue to innovate around these 2 pieces as we go through the year in addition to having a pipeline of other great products as we go through the year. We were very pleased with what we're starting to see with this like 2-month promo cadence, and so, having something around that. But again, it's an area that we continue to look at to understand what's working best with our customers and our Broistas.

Our next question comes from Brian Mullan of Piper Sandler.

Just a question on the entrance into Florida. Christine, you spoke to a good start in the prepared remarks. Maybe you could just elaborate, talk about what you're doing on the brand awareness front and seeing with the consumer reception? And then just related, just to confirm, is it fair to say the stores are hitting your underwriting expectations thus far from an AUV and a margin perspective? If you could just comment on that too, that would be great.

Yes. I would share, it's definitely still early. I think what we were very pleased by is to go and open into a new market. We just saw lots of buzz around our openings. We were able to see that we had customers coming from lots of different places away to come and visit us in our new shops. We only have 2 shops open, but as I shared, these shops are exceeding what we had expected them to do. So, very excited to be in this new market and to be meeting lots of new customers in Florida.

Okay. And Charley, congrats and best of luck.

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

I wanted to ask, I guess, a couple of questions. One is, if you could just talk a bit about the mobile order, and I think it sounded like the expectation is that you will be a part of the consideration set of customers. So does that mean bringing in new customers? Or is it greater frequency with existing customers? I think we've seen from other restaurants that sometimes the mobile app is a good customer acquisition tool. But I wanted to get your thoughts on that. And then, I do have a follow-up.

Yes. I think that it actually could be both of how we consider it. I do think as our expectation would be as we roll this out in early days that we have such strong penetration already of our rewards app that this would likely start with our existing customers and potentially introduce a new occasion where they were -- had a time crunch or were a little bit worried about potentially waiting into -- in a long line. The other thing I think we've seen in some of the industry comments is that the -- for the AM daypart that that mobile order might be particularly important, just given, I think people have a little bit more time crunch sometimes in the morning. And so our ability to potentially capture new occasions in the morning as we roll out Mobile Order & Pay is something that we're definitely excited about.

Understood. Okay. And then the second -- the second question was just on advertising. I think a lot of times, it appears that advertising spend actually kind of compounds over time. So as I think about that as a driver, I understand that your compares maybe get a little bit more difficult. But I think you also have sort of this, I guess, virtuous cycle perhaps maybe is the way to characterize it. So, as you think about advertising, is it just in each quarter advertising drive traffic and trial and then you kind of start from 0 again? Or is that something that you would expect to see where it builds on itself over time?

Yes. I do think that it could be reasonable to think through that, it would build over time. I think we are also getting smarter and learning more with what the most effective channels are for us, what's the most effective pacing and sequencing of that paid advertising is. And it really encourages us to make additional investments in paid advertising, given the very strong results we believe we're seeing right now.

Got it. Okay, and congrats, Charley. You will be missed.

The next question comes from David Tarantino of Baird.

My question is on the advertising. Christine, I think you mentioned being pleased with the results you're seeing in some of the newer markets. And I was wondering if you could just elaborate on what you're measuring or what results you're looking at when you make that statement? Is it the sales response or is it some sort of awareness metric or how are you measuring success at this point?

The primary success metric that we're looking at right now is our same-shop sales trends. We do also have detailed metrics on views and click-throughs and all of those types of things. But we would -- this is something that we're excited when it shows up in our traffic and same-shop sales trends.

Got it. Okay. And then, on the rewards program, it seems like that has been a pretty big driver from a year-over-year perspective. It doesn't seem like you're doing much last year, and now you're doing a lot in that rewards program in terms of communications. So I wanted to get your thoughts, you're going to be cycling some of that initial surge coming up. I just wanted to get your thoughts on kind of what year 2 looks like and how you refine that program in a way to keep this as sales driver as you think about year 2 and year 3?

Yes. So I'd say as we did the reset at the end of March of 2023, and as we moved into April and had that extra discount that we really deployed against traffic driving, we started with testing more mass offers to really almost our entire audience. As we moved through the balance of 2023, we started to be able to segment a little bit and we were obviously learning from what was successful, what drives results. And we continue to use that over time. So, I think when you think about a program like this, we are still in the relatively early innings of it where we still have more segmentation to go, we still are building our database of what works and doesn't work. Obviously, we're always in an evolving consumer landscape and so understanding what others are doing and how that impacts the offers that we're doing, and we're also building what I would say is our operational capabilities to deploy offers even more quickly. So, we can almost slate a whole bunch of offers in a row and then decide which ones to pull as we go through a quarter. And so a lot of that is actually still new as we comp through that over the first half of this year.

Great. Best of luck, Charley

[Operator Instructions] Our next question comes from Jeffrey Bernstein of Barclays.

Great. Congrats, Charley. Clearly leaving on a high note. Best of luck. I had a question and then a follow- up. So my question is just -- well, it's actually a follow-up as well. The magnitude of the traffic and ticket, I know you mentioned it was tempered in April versus what would likely have been, I'm guessing a teen exit-rate in the first quarter, especially with January being pressured, I would assume, therefore, February and March were above that 10% for the full quarter. As you think about that tempering in April, any sign of macro slowdown or pressure from the lower income consumer, or do you see it all as really just compares and the outages and the lap of the rewards. Just trying to get a sense for the second quarter comp. Obviously, the quarter is almost halfway done, and just because it was such a strong first quarter comp, I just want to make sure we're all on the same page as to what we should be thinking for that second quarter comp with that low-single-digit full-year guide intact? And then I had one follow-up.

Yes. I think at this point, from what we see, we believe a lot of it is these internal factors that we were outlining. So one, looking at kind of that core underlying traffic change between Q1 and Q2 of 2023, so what we're lapping over. The other piece is this piece where we had the extra promo in Q1 and then having the implications of that in Q2. We also had such incredibly strong demand for Boba as we launched in March that despite ordering more products very quickly, we did have a fairly significant outages in our shops at the end of April of Boba, which we're starting to replenish now into our shops. And so all of those different factors are really internal factors that we believe that we're seeing in that start to Q2.

Understood. And then my follow-up is just on the California performance. I know you mentioned that -- well, there was reference to price increases that you did or did not take in California. Just looking to clarify what exactly you guys did in California, and have you seen any change in trajectory of your performance or anything you'd note about the industry over the past 5 or 6 weeks, just because you have such a significant presence there, and it is such an unusual event? Any thoughts would be great.

So, a couple of facts there. In January, when the legislated minimum wage for all workers went up in California, we took a slight price advance. And then on April 1, when the FAST Act kicked in, we also took a price advance. That price advance was designed to keep us as close to [ penny profit ] whole as possible, not margin accretive. And then I think we are watching this very closely. It would be far too early to declare any knowledge of whether this is going to have any lasting effect on traffic at this point.

Our next question comes from Nick Setyan of Wedbush Securities.

I just want to echo my congratulations for Q1 and it's been great working with you, Charley. I do think this Q2 kind of guidance commentary and the full year guidance is really important to touch back upon. Just given the strength of Q1, I mean, we could potentially have a negative comp for the rest of the year and still have low-single-digit comps. So, to the extent possible, it would just be really helpful if you could kind of maybe incrementally clarify what you're seeing in April and what you expect the comp to be in Q2, if possible.

Well, we won't give you a Q2 comp, but I think it's important to get some context. So last year, we had a negative 2% comp in the first quarter. Last year, we had a positive 4% comp in the second quarter. So that's a 4 point swing. This year, we had a 6 -- we mentioned a 6 point price help in the quarter. That will moderate, particularly as we move through the balance of the year. So you both have -- you just have this pricing rollover, it's going down. And so we're just -- we're moving through an average of about a 4% comp we have to lap in the back 3 quarters of this year versus lapping a negative 2%. So, it isn't that we have a negative or not an optimistic view of the balance of the year, it is just -- it is a product of the math when you look at it.

Fair enough. And just as a follow-up, maybe just on the pricing piece, that it was 6 points in Q1. What do we expect pricing to be in Q2?

So, approximately 6% to 7% of rollover help in Q2, and then that will moderate significantly as you go to 3 and 4.

Our next question comes from Andrew Charles of TD Cowen.

Great. Just want to start by -- [ actually ] congratulations to both Charley and Josh. Christine, very exciting commentary about the new store performance you're seeing in Florida. Can you speak to what you're seeing relative to the overall base of new store productivity? Curious how this has been trending, recognizing that you had been guiding to a flat year for new store volumes for 2024 relative to 2023. Wonder if that's still on track and that's still the way to think about this economics for this year?

Yes. So, as we look at new shop productivity, again, we're just getting started in Florida, and with those 2 shops, although we're incredibly pleased with their performance, we do still plan to open 150 to 165 shops this year. So, the Florida, it's not going to be the lion's share of the openings for this year. We did see new shop productivity improve in Q1 of 2024. On the back of our strong new unit openings and sales growth, we're continuing to see some really big openings in some of our mature markets and then are pleased with the results that we're seeing from kind of the building awareness efforts in that paid advertising.

Great. And just maybe move into the advertising. Can you help us quantify how much more investment you're putting into that relative to the expectations you previously had? I know it's been an area of focus and now you're stepping up in 2024.

Yes. So, we haven't shared that number in particular. We do expect a small step-up in our advertising spend, and we're continuing to evaluate that, though, as we go throughout the year. And one of the things is we can measure that, and as we're looking more closely as to what is happening to our traffic trends and our same-shop sales trends from that, we are allowing ourselves kind of the ability to spend up in those areas as we see results from it.

Great. Thank you so much and best wishes, Charley.

The next question comes from Jeff Farmer of Gordon Haskett.

Thank you. And Charley, enjoy everything that you pursue in the future. I had a quick question and a follow-up. On the question, roughly ballpark, how many Texas shops have actually made it into the comparable store base? I think it's roughly 15 months. And of those shops, Texas shops that are in the comp base, are they acting as a same-store sales tailwind? How are they showing up in the comp base?

Yes. We don't disclose individual state comps, but there were 77 shops, Am I correct here, Paddy? In the comp base in the first quarter for Texas, 77 out of -- roughly you have 175 there now.

Okay. And then just on the follow-up, how are you thinking about sales transfer in coming quarters? You mentioned that it was, I think, 200 basis points of a headwind, so little bit better than you thought it was going to be. How should we be thinking about sales transfer moving forward?

Yes. So, we have a range, an expected range of 200 basis points to 300 basis points. You're correct there that we said this quarter it was in the lower end of that range. And as we go through the year, as the comp base gets bigger, the impact of sales transfer starts to moderate. So we would expect to move towards the lower end of that range as we go throughout the year.

All right. Thank you. Best of luck, Charley.

Our final question comes from Dennis Geiger of UBS.

Just wondering if you could speak to competition at all as others try to replicate your success and get into energy or other categories that you've gotten into. Any updated or latest thoughts on that dynamic? Is it something where it's maybe a benefit as marketing, advertising draws attention to the category? Any latest thoughts on that?

Yes. I think that as we look across -- we've always been in a very competitive market, and so we will continue to be in a competitive market. So as I look at like others trying to do some of the things that we're doing, I do think if big advertising budgets come in and share some of the things that are important to us, it very likely could be a benefit to us. I think most importantly, for us, it's really staying very, very true to who we are. Understanding why our customers are coming back to us and continuing to have beverages with us and enjoy our service is what's super important. And I think that at a time like this where you do have customers who are really thinking through how to spend their wallets that it's really important to stay true to what makes you incredibly successful. And for us, it absolutely is our Broistas and the service they offer to our customers.

Makes sense. Thank you and congrats.

Thanks for your questions. In closing, I'd also like to invite everyone to join us for our 18th annual Drink One for Dane Day. On May 17, our customers and crews will honor our Co-founder, Dane Boersma, who passed away in 2009 following a battle with ALS. Drink One for Dane is one of the most meaningful days of the year for Dutch Bros. Last year, our customers, franchisees and vendors joined together to support our foundation in donating $2.5 million to the Muscular Dystrophy Association to help find a cause and cure for ALS. We look forward to continuing to make an impact in 2024 and beyond. The impact Dutch Bros is making in our communities and the lives of our Broistas continues to grow. We are pleased with our results in Q1 and believe our business is in a position of strength. I want to thank all of our teams that create this exceptional performance by connecting with our customers and communities every single day. Thank you.