Moving back to inflationary costs, in November, Dutch Bros took 2.9 percent pricing, its first hike since COVID began. The company opts for smaller, infrequent price increases to build loyal and long-lasting relationships with customers, Jemley said. In April, the brand raised prices by 3 percent, which should roll out to the entire system by the end of May.
If elevated labor and commodity costs persist, Dutch Bros will “assess further pricing actions and productivity measures through the balance of this year to protect shop profitability long-term,” Jemley said.
“We do test markets,” the CFO said. “But the good news about our business is we have such a fast purchase cycle that we get a quick read in any test market when we do something. Yes, we are concerned. That's why we're very prudent about not raising our prices fast.”
“We're going to make this next step and watch it and read it,” he continued. “But again, we'll get a pretty quick read because we have a fast purchase cycle. And then we'll judge how that's landing, and we'll assess what to do next.”
Pull-forward maintenance spending led to 150 basis points of cost pressure, but the company isn’t changing its full-year projections when it comes to this expense category. Dutch Bros expects maintenance to fall back to its original budgeted spend by the end of the fiscal year.
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Dutch Bros also experienced declines because of how fast it’s growing. The chain opened 34 units in Q1 versus nine last year—the second-most ever—and January represented the first month of operation for 20 stores that opened in December. Preopening costs were $6 million compared to $1.7 million in the year-ago period, driven by 11 shops debuting in new markets, which comes with higher spend.
The brand also felt 100 basis points of impact from new shop inefficiencies that will taper off as locations become more productive.
“Our growth objectives will remain in place despite the challenges we face in the middle P&L,” Jemley said. “Regarding new shop profitability, new shops take a few quarters to reach the margin productivity levels of our mature shops. In this regard, we remain on track.”
Same-store sales grew 6 percent in Q1 and 11.1 percent against 2019, fueled by lifts in traffic and average check. Sales were stronger in the first half of the quarter, but fell in mid-March due to rising gas prices, discontinuation of stimulus checks, and sales transfer from several new units opening in existing markets.
April comps dropped 3.7 percent as the chain lapped a 22.6 percent increase in 2021, the brand’s largest rollover of the year. Through mid-May, same-store sales are roughly flat to slightly negative.
Because of various headwinds and Dutch Bros' conservative pricing strategy, the company reduced its same-store sales guidance from mid-single digits to flat and cut adjusted EBITDA projections from $115 million to $120 million to at least $90 million.
But the chain isn’t decreasing its development schedule—the opposite actually. Dutch Bros plans to open at least 130 stores this year, up from at least 125. There’s reason for this; stores opened in 2020 and 2021 produced $2.1 million in AUV in Q1, 10 percent higher than the system average.
“I think we would have to see that new store volumes really have gone backwards, and they haven't it,” said Jemley, when asked what would cause Dutch Bros to curb development. “And we're just not seeing that, strong openings. And as long as we see that, it gives us confidence to keep going.”
Dutch Bros finished the first quarter with 572 shops, including 310 company-operated and 262 franchises. Year-over-year, that’s a net gain of 119 locations.