Dutch Bros has been building more locations in existing markets, which can hurt volumes. / Photograph: Shutterstock.
Dutch Bros said on Wednesday that its same-store sales in the third quarter rose 1.7%, improving sequentially during the period. Executives also said that same-store sales rose in 38 of its 39 markets.
But that one market is a big one. Sacramento is one of Dutch Bros’ more established markets and one with generally strong average unit volumes. “If you remove that DMA from our entire system, our same-store sales would be up 4.1%,” CFO Charles Jemley told investors on Wednesday. “That’s how much of an impact that market has on our same-store sales.”
The issue has been infill development. Dutch Bros has been “fortressing” local markets with new stores. The idea is to improve overall service and capacity by providing more locations, believing that lines that are too long ultimately drive away customers.
Dutch Bros has been adding stores in Sacramento. Executives said in August, for instance, that they are OK with lower overall volumes if it improves customer service. “When we start to do infill in that market, we’re going to naturally see some impacts that will improve overall customer service, but it will knock down volumes,” CEO Joth Ricci said then, according to a transcript on the financial services site Sentieo/AlphaSense. “And we’re OK with that. That’s an important piece of the business.”
There are signs that the market is improving. Same-store sales in Sacramento in the second quarter declined 9.7%, Jemley said. They were down 4.8% in the third period. “We’ve seen an improvement there,” he said, “but we still have work to do.”
Infill development is a key element of Dutch Bros’ expansion plans. The company expects to reach 800 new shops by the end of next year. That would be nearly double the number of locations the chain operated at the end of 2020. Dutch Bros expects to open 150 locations next year.
The company has been expanding into Southern California and into markets out East, such as Tennessee earlier this year. Stores opened in 2020 and 2021 average $2.1 million in revenues per year, 10% higher than the system average, Ricci said, which gives the company confidence to keep building more units.
This is fueling strong revenues, which rose 53% last quarter to $198.6 million. Annual system sales reached $1 billion in the second quarter.
Net income adjusted for one-time events was $14.3 million, up 25%. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, rose 32.8% to $27.8 million.
Dutch Bros said its margins are improving after inflation-related challenges earlier in the year. Margins at company-operated shops have improved by 730 basis points since the first quarter of this year, which executives said have come from higher prices, up about 10%, and operational improvements such as labor scheduling. Margins were 25.6% of sales in the period.
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.
