BRC Inc. Q1 FY2022 Earnings Call

Greetings, and welcome to the Black Rifle Coffee Company First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Tanner Doss, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone. Thank you for joining Black Rifle Coffee Company’s conference call to discuss our first quarter 2022 financial results, which we released this morning and can be found on our website at ir.blackriflecoffee.com. With me on the call today is Evan Hafer, Founder and Chief Executive Officer; Tom Davin, Co-Chief Executive Officer; Greg Iverson, Chief Financial Officer; Toby Johnson, Chief Operating Officer and Heath Nielsen, Chief Retail Officer. Before we get started, I would like to remind you of the company’s Safe Harbor language, which I’m sure you are familiar with. On today’s call, management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, please see our previous filings with the SEC. This call will also contain non-GAAP financial measures, such as adjusted EBITDA. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included on the earnings released furnished to the SEC and also available on our Investor website. Now, I’d like to turn the call over to Evan Hafer, Founder and Chief Executive Officer of Black Rifle Coffee Company.

Thanks, Tanner, and good morning, everyone. Thank you for joining us to discuss our first quarter 2022 results. Before we dive into the results of the first quarter, I briefly want to touch on our mission and vision we work towards every day. I believe that Black Rifle Coffee Company is uniquely positioned in the market because we are the only mission-driven lifestyle brand in the coffee industry. And our mission is core to everything we do. The mission is a major driver behind our success to date because it resonates with our customers, our retail partners, vendors and even our landlords. Our in-house marketing team and content creators have enabled us to build a large and growing community, who are loyal to the brand and what we stand for - vets, first responders and their families. People always ask me what has made Black Rifle Coffee so successful over the past eight years? And I'll always respond with the same answer. First and foremost, people align with and support the mission of helping Veterans, first responders and their families. We believe we're the only publicly traded company addressing this mission. And we went public as a public benefit corporation to ensure that we'll never lose sight of the overall goal. Second, it's the community that we have built around the brand. The community started organically as myself, Mat Best and Jarred Taylor started making videos on YouTube that were inside jokes for military and veterans, which has grown into a community of over 2 million customers and evangelists who support our mission. I've had thousands of people come up to me in airports and grocery stores to give me a high five and show me their Black Rifle Coffee hat or shirt and say thank you for all the Black Rifle Coffee has done for the veteran community; their shared passion for the brand and our mission allows us to be teammates and partners with our customers. Because of this partnership and the trust that we have built within our community, we're confident that as long as we're true to our mission, we will continue to win and continue to take market share. This loyal and growing community has been and always will be the reason we are successful, and how we continue to grow quarter after quarter. The first quarter of 2022 was another milestone in our journey as a newly public company. I will start by walking you through some of the business highlights in the quarter before turning the call over to Tom Davin. As we discussed on last quarter's earnings call, we detailed our key strategic investment areas that needed to be resolved as we continue to pursue sustainable growth. I'm very happy to report that we have made great progress with all of these initiatives. Our first area of strategic investment is capacity; demand for our products on all fronts has far exceeded supply. So the team has been focused on bringing new capacity in multiple areas. We've added two new suppliers for our ready-to-drink line and are expanding our roasting capacity. Our secondary strategic investment is people. People drive our business and we're focused on adding key capabilities to enable us to continue to grow. This quarter, we have added two key strategic senior leadership hires. We brought on Heath Nielsen, our new Chief Retail Officer. Heath comes to BRCC from JustFoodForDogs, where he was the CEO of a fast-growing omnichannel business with over 300 retail locations across the United States. Heath previously led operations for Nestlé Partners Starbucks division as a Senior Vice President. Prior to Nestlé, Heath led all of Starbucks’ franchise cafe and foodservice operations in North America. Heath's expertise is an incredible asset to the business and will further enhance the customer experience in all of our outposts. Today, we are also announcing the hiring of Chris Clark, our new Chief Technology Officer joining BRCC next Monday, May 16. Chris is coming to us from Levi Strauss & Co, where he served as a Senior Vice President and Chief Information Officer. Prior to being named the CIO, Chris led the Global Supply Chain & Business Intelligence Groups. Before Levi, Chris led supply chain operations at lululemon and Gap. His breadth of technology and supply chain experience will provide a competitive edge to us as we continue to scale all parts of our business, taking our digitally native routes and tying them together to create an omnichannel flywheel model. Most importantly, both Heath and Chris are military Veterans, which continues to show our commitment to our mission of hiring 10,000 vets. At BRCC, we will continue to strive to be the top employer of choice for Veterans, first responders and their families, providing training and opportunities for advancement with like-minded individuals, no matter what part of the business they're supporting. With these achievements this quarter, we continue to build a stronger foundation for sustainable growth. Our goal is now to drive brand awareness fueling market share expansion. As mentioned in our last call, BRCC’s unaided brand awareness is hovering around 20% nationally, and even lower among active duty and the veteran community. Although the demand for our products has never been stronger, we're just getting started building our brand awareness. During the quarter, we continued shifting our marketing efforts from paid media to owned media through investments in influencers, brand ambassadors, podcasts, and sports. This shift has been facilitated by fully realigning our marketing and branding departments, resulting in streamlined communication and collaboration. We made this adjustment to ensure that our marketing and ad spend are achieving the highest return on our investment. We are actively targeting our marketing and branding spend in several ways. First, as we mentioned in our previous call, we brought on some new ambassadors. One example that we're thrilled about is Travis Pastrana, one of the best-known action sports athletes in the world. Travis has several family members that served in the military and is passionate about serving veterans and their families. He has been a good friend of mine and the Black Rifle Coffee team for a long time. His transition from Red Bull to Black Rifle was a significant win for us. The Gymkhana franchise that Travis is a part of has over 1 billion views on YouTube. We are now the top sponsor for the latest video in the Gymkhana series that should be launching this summer. Travis's content appeals to both the BRCC community and a broader global audience. We are excited to bring him on the team and support him in his efforts to create fantastic content while driving our mission of supporting veterans in the process. Another example is BJ Baldwin, the seven-time Desert Racing Champion and two-time Ironman Baja 1000 Champion. BJ’s Recoil video series has over 100 million views on YouTube, and we're in the process of filming the latest version of Recoil today. Next, we're expanding our reach within our target demographics. This includes retail partnerships in our key geographical markets. We are proud to announce expanded RTD distribution with Walmart. After a successful pilot program in roughly 400 stores, with the two 11-ounce SKUs, Walmart is now expanding the distribution to all four RTD SKUs in over 3,500 stores. We believe this relationship will be effective in expanding our brand into our core communities of BRCC customers and will continue to bring greater awareness to the brand as a premium coffee. We also believe that the success we are seeing with our RTD beverages and grocery gives us the opportunity to expand into other product categories in the future. To wrap up, I want to reiterate how excited the BRCC team is to be on this journey as a public company. The mission of Black Rifle Coffee has never changed. We now have the financial resources to continue to grow our brand, but our ethos is still solely focused on our customer. Everything we do would not be possible without our loyal customers in our community. We will remain maniacally focused on serving our customers the highest quality product at the best price possible as this journey continues. With that, I'll turn it over to Tom.

Thanks, Evan, and good morning everyone. For today's call, I will provide context on our first quarter results, which Greg Iverson will discuss in greater detail, then move to growth initiatives for the quarter and beyond, as we attack our significant coffee market opportunity. I'll frame the discussion by reiterating the competitive strengths of the Black Rifle Coffee business model. First, as Evan discussed, we are a mission-driven lifestyle brand with a passionate and loyal customer base. The support for our mission and our premium quality coffee drives exceptional customer retention and affinity for the brand, as evidenced by our category-leading net promoter score of 78. Second, we have a massive market opportunity. The U.S. coffee market is over $45 billion and we estimate that the Black Rifle Coffee's serviceable addressable market is approximately $28 billion. This includes over 100 million consumers who are aligned with our brand values. Our current guidance of $315 million in 2022 revenue equates to roughly a 1% share of the serviceable addressable market. So, we are positioned for many years of sustained growth. Third, we have a powerful and proven omnichannel strategy to drive our growth. We are a digitally native coffee and merchandise business that enables us to participate in multiple complementary channels, creating branded experiences that deliver community, premium quality, convenience, and value. We achieved all of this across three primary channels: direct-to-consumer, outpost, and wholesale channels, comprising our unique omnichannel flywheel. Our results for the first quarter reflect continued top-line growth as we made progress across our three sales channels. Our performance is further proof of the power of our mission, our market opportunity, and the omnichannel models we continue to expand our consumer touchpoints across the United States. Our net sales grew by 35% to $65.8 million, relative to the first quarter of 2021, driven by substantial growth in our wholesale and outpost businesses. Taking a look at our individual channels, starting with our direct-to-consumer business: our first quarter results were flat year-over-year at $38.3 million. This was in line with our expectations driven by a challenging comparison from a year ago, Q1 2021, where most people were still working from home. Our coffee club subscribers grew 11% to 295,900 from 265,800 in Q1 2021 and grew 3% sequentially from Q4 2021 or 287,000 at year-end last year. We are encouraged by the growth of our coffee club subscribers and continue to see a low monthly churn rate of below 4%. Our wholesale segment grew 135% from Q1 2021 and increased 28% sequentially from Q4 2021. You’ll recall this wholesale segment includes our ready-to-drink coffee business, which we are rapidly scaling across the segment with our products now available in more than 47,000 doors or locations at the end of the first quarter. We are building on the momentum in RTD by both expanding our points of distribution and increasing the average number of SKUs per door. Third, our outpost revenue increased 397% from Q1 2021 and 9.8% from Q4 2021. Our outpost momentum is driven by our continued efforts to enhance our experiential retail execution and capitalize on the significant white space we see for the brand. We ended the quarter with 9 company-owned outposts after opening one company-owned outpost in Houston, Texas. We are on track to hit our guidance of 15 to 20 new company-owned outposts in 2022. And as we mentioned last quarter, we have decided to enhance the brand experience by shifting our shop development strategy from primarily conversions to ground-up prototype shop builds wherever possible. Although this strategic shift has delayed our pipeline of new shop openings. We made significant progress in Q1 and are tracking to have 60% of all new locations designed as our redesigned prototype starting in Q2, or this quarter right now. At our outposts, we continue to see a high merchandise mix across all stores, which includes our bagged coffee, apparel, and drinkware, which is driving an industry-leading in-store check average, and average unit volumes which are among the highest in the coffee and QSR segments. Moving to growth initiatives for the second quarter and beyond, we remain focused on our multiple growth vectors to drive long-term value creation. As Evan mentioned earlier, we're making headway in multiple strategic areas. I'll address the key drivers of growth that are highlighted on our Q4 call. First, our Ready-to-Drink segment continues to perform ahead of our expectations, as we have become a top four brand in less than 24 months in this $4 billion category. While Q1 is typically not the time for convenience store and food, drug, and mass operators who have reset their stores, we expanded distribution from over 42,000 doors at the end of 2021 to over 47,000 doors at the end of Q1 2022. We see potential well beyond the 2022 year-end goal of 75,000 doors given the much larger universe of 375,000 doors across convenience stores, food, drug and mass accounts. In March, I outlined that Ready-to-Drink capacity commitments coming into 2022 gave us the confidence we would achieve our committed revenue targets. But it did not allow us to fully meet the accelerating demand for our products. Throughout Q1, we often had to slow the onboarding of new RTD accounts because we simply couldn't meet the demand from new customers, as well as the increased demand from our existing customers. We now have completed agreements with two additional co-manufacturers for RTD that enable us to more fully address product demand that is currently unmet, giving us increased optionality to further expand distribution and increase our average SKU per door. We'll see the benefits of this additional co-manufacturing capacity in the second half of the year. According to National Rankings by the Nielsen organization, all four of our SKUs, the 211 ounce and 215 SKUs rank in the top 25 across all channels. Double clicking on our primary channel convenience stores, the story is even more remarkable; one excludes private label, all four of our SKUs ranked number 18 or higher, making Black Rifle Coffee Company RTD one of only three brands with four or more SKUs in the top 18. In the food, drug, and mass channel, we continue to have success in gaining new Ready-to-Drink doors and exceeding our volume per outlet or sell-through targets. This success led a number of these FDM accounts to inquire about a broader relationship that would include the sale of bagged coffee in K-Cups or what we call rounds. While this possibility has not been part of our model to date, we are now beginning to devote planning resources to this possible growth area. Regarding coffee roasting capacity, we came into the year with enough owned coffee roasting capacity to achieve our committed revenue targets. But we lacked the ability to ramp up quickly if demand were to materialize. We're addressing this constraint by continuing to invest in our coffee roasting facility in Manchester, Tennessee, just south of Nashville, where we are finalizing plans for a multi-year $30 million CapEx program that will increase capacity and further automate roasting and packaging operations. Once complete, our Manchester facility will have the ability to roast over $1 billion in value of bagged coffee, measured in terms of revenue, all while enhancing the work environment for our team. In addition to the Manchester facility, we are evaluating additional capacity options, both via new investments, as well as possible outsourced roasting capacity so that we are positioned to respond to new opportunities as they develop. Second, with the hiring of Heath Nielsen, we've added additional leadership firepower to enhance our experiential retail strategy. While our initial outpost rollout has been a success, we've identified several areas for improvement. As we continue to scale this business, we see a major opportunity to innovate around our beverage and food menu. We are highly aware of the fact that most major coffee brands have 70% to 80% of their beverage mix coming from cold beverages. Today, ours is roughly 40% cold beverages relative to the total mix. We will roll out a new cold beverage menu this quarter, Q2, and we have an exciting innovation pipeline in the works. Further, we're in the process of revamping our food menu with twin objectives of providing better quality for our guests while enhancing product margins. In Q1 2022, we opened one new company-owned outpost in Houston, Texas, and one franchise store in Woodstock, Georgia. This brings our total outpost count to 18, 9 of which are company-owned and 9 of which are franchised. Finally, I'd like to address inflation. We continue to experience inflationary pressures throughout the business, including the price of green coffee and parcel shipping costs. We anticipate additional cost pressures throughout the year given the current macroeconomic environment. We are addressing this challenge in two ways. First, we've been working with a leading international operational consulting firm on a range of productivity projects in order to become more efficient and enhance our margins. Second, we've already taken pricing in several areas, including core coffee products, direct-to-consumer shipping charges, and drink pricing at our outposts. Ready-to-drink coffee pricing will go into effect in June. We're evaluating additional pricing actions across our portfolio. Thus far, our productivity initiatives and pricing actions have lagged our inflation in costs. We believe additional pricing actions are appropriate given our premium brand positioning. In conclusion, you can see we've made tremendous progress on a number of fronts that will help us continue on our multi-decade growth strategy powered by our omnichannel flywheel model. Let me now hand it over to Greg Iverson to discuss our Q1 financial performance in greater detail.

Thanks, Tom, and good morning everyone. Today I will discuss our 2022 first quarter results and walk quickly through our balance sheet following our SPAC merger. Give some additional details on our share count and comment on the current outlook for 2022. Turning first to our financial results, we are pleased to have continued our impressive growth trajectory and delivered solid results in the first quarter. For the first quarter, total revenue increased 35% to $65.8 million compared to $48.7 million in Q1 of last year. The meaningful increase in revenue was driven by our wholesale and outpost channels, which continued their impressive growth from 2021 by 135% and 397% respectively. Now I will give some additional details on our three sales channels. First, our direct-to-consumer revenue was $38.3 million in both Q1 of 2022 and 2021. As a reminder, in Q1 2022, we are comparing against a prior year period with unprecedented consumer demand. For reference, the year-over-year growth from Q1 2020 to Q1 2021 was over 66%. Importantly, while D2C revenue was flat for the quarter, our subscriber base grew 11% in the first quarter to 295,900 versus the prior year period. Turning to our wholesale channel, revenue increased 135% to $22 million in Q1, compared to $9.4 million during Q1 of last year. The increase was primarily driven by growth in our RTD product and expanding wholesale partnerships. Our RTD product can now be found in over 47,000 doors and all four of our SKUs continue to be ranked in the top 25 in both C-store and grocery drug and mass. As we continue to penetrate the overall RTD market, our supply chain team has worked tirelessly throughout the quarter to continue to find co-manufacturing capacity. We locked down two new co-manufacturers for our RTD product, more than doubling our capacity. We are working to get the new capacity online as quickly as possible, given the demand and we look forward to providing you updates on our progress on future calls. We expect some of this capacity to come online later this year. Moving to our outpost channel, revenue increased 397% to $5.5 million in Q1, compared to $1.1 million last year. The main driver was an increase in our company-owned store count, which increased to 9 outposts as of Q1 2022, compared to 1 in Q1 2021. While we have started to see inflationary pressures on our outpost building costs, we are still confident in our earlier assumptions on average unit volumes and have seen our newly built stores continue at the same $2.5 million run rate we have discussed previously. We are also mitigating some of these cost pressures from a market planning perspective as we look to build multiple outposts in our target markets. We also expect this outpost market focus will allow us to drive marketing efficiencies in the future. Overall, we have continued to see our omnichannel flywheel approach working throughout each revenue channel. We have continued to see upticks in D2C subscribers within a short radius of our newly opened outposts, and our increased distribution of RTD products has continued to bring new customers into the BRCC ecosystem. As we continue our explosive growth, we have heavily invested in our senior leadership across all functions of the business. By solving for other major constraints of capital and capacity, we are extremely confident in our ability to execute and continue to drive growth. Turning to profitability, our Q1 gross margin was 35.2%, decreasing 488 basis points from 40.1% in Q1 of last year. The decrease was driven by increases in the cost of coffee and RTD, as well as a continued shift in our product mix as our RTD has a higher product cost and a lower gross margin compared to coffee. Our wholesale business now accounts for 33% of total revenues versus 19% in Q1 of 2021. In addition, elevated shipping rates on small parcel shipments have continued to drive a lower gross margin. However, the increased shipping rates were partially offset by our productivity initiative to migrate our shipping to multiple carriers. As I mentioned on the last update, we have been taking action across all areas of the business to combat the rising costs that we and all food and beverage companies are seeing. We have taken pricing across our non-subscriber D2C channel, as well as our outposts and wholesale channels. There is an obvious lag in seeing the benefits of these initiatives, which we have recently begun implementing. We should begin seeing the impact of the productivity initiatives and price increases rolling through the P&L with a modest impact in Q2, and improving sequentially throughout the year. Our operating expenses during Q1 increased by approximately 103% to $38.9 million as compared to $19.2 million last year. I will quickly walk through the drivers of these increases, beginning with marketing and advertising. For the first quarter of '22, marketing expenses increased 24% to $8.2 million from $6.6 million in the first quarter of 2021. As a percentage of sales, marketing decreased by approximately 107 basis points to 12.4% compared to the same quarter last year. The increase in expense was driven by focused investment in our brand partnerships to strengthen our brand awareness and was partially offset by more targeted ad spend. Salaries, wages and benefits increased 106% to $16 million from $7.8 million in the first quarter of 2021. As a percentage of revenue, they increased by approximately 840 basis points to 24%, compared to 16% last year. The increase was primarily driven by increased employee headcount to support our significant sales growth, as well as $1.9 million of increased equity-based compensation, which mostly resulted from the completion of our SPAC merger. We have added 708 employees since Q1 of 2021 with 438 of these employees working at our outposts. As part of this growth, we've invested heavily in building out our leadership team as Tom mentioned earlier. We've also invested in key positions to support the growth of our wholesale and outpost channels. Additionally, as I mentioned last quarter, a large portion of our outpost cost structure is included in the salary, wages and benefits line, as we typically bring on 35 to 40 new employees for each outpost opening. As we continue to build our outpost business, you will continue to see growth in salaries, wages and benefits. Moving on to G&A, G&A expenses increased $10 million or 208% to $14.9 million, compared to $4.8 million in the first quarter of 2021. As a percentage of revenue, G&A increased by approximately 1,240 basis points to 22.3% of revenue, compared to 9.9% last year. This increase was primarily driven by increased consulting and other professional services needed to support the explosive growth of our business across multiple sales channels, and the transition to operating as a public company. Approximately $3.6 million of this increase in Q1 were fees paid to an internationally recognized consulting firm to support the planning and execution of our growth and productivity strategic initiatives. We also had nine company-owned outposts in 2022 versus one in 2021. The incremental lease and other occupancy costs for these outposts also contributed to the increase. In addition to the GAAP measures I've discussed, adjusted EBITDA is an important profitability measure that we use internally to manage our business. For the first quarter of 2022, adjusted EBITDA was a loss of $6.8 million versus a loss of $2.3 million a year ago. This decrease was primarily due to the increased operating expenses I've discussed. Now I will briefly walk through our balance sheet for the first quarter of 2022. Our balance sheet remains strong with over $110 million of cash and cash equivalents. As of Q1 2022, following our SPAC merger, we were required to recognize liabilities on our balance sheet related to the fair value of earnouts, warrants, and derivative liabilities. We also recognize significant noncash losses in our P&L from the change in fair value of these items. With the large movement in our stock in Q1, the change in fair value was material. Because each of these liability items has been settled in shares as of today, these items will be classified as equity rather than liabilities on our balance sheet beginning in Q2, and will not be affecting the P&L after Q2 or causing variability in our outstanding share count. We've included a supplemental table in our earnings release to help clarify our share count related to these items. Turning now to our 2022 financial outlook, we are reaffirming our revenue outlook of $315 million. Moving to profitability, we mentioned earlier that our productivity and pricing initiatives are lagging the effects of rapid inflation. With this, we expect our Q2 gross margin and adjusted EBITDA to be similar to that of Q1, with sequential improvements in the back half of the year. While we continue to experience significant inflationary pressures through our productivity and pricing initiatives, we're still targeting being adjusted EBITDA positive in 2022. Lastly, we previously guided to opening 15 to 20 new company-owned outposts in 2022. We are still in that range, although we expect to be closer to 15 than 20 as our retail team ensures we're opening outposts in great locations with excellent return metrics. With that, I will turn the call over to the operator for questions.

Our first question is from Sharon Zackfia with William Blair.

I guess a question on the reiteration of the positive EBITDA for the year. I mean, clearly, you guys have a lot of demand for the brand, and you're putting a lot of effort towards being able to satisfy that demand. I guess I'm just wondering, why the push towards positive EBITDA when there's a lot of investments here to be made? And it is a little bit tough to get to the positive EBITDA kind of in the back half of the year. You need to have a pretty big stair step, so can you help us think through kind of what changes dramatically in the second half versus the first half?

Hey, Sharon, Tom Davin here. Thank you for your question. I appreciate you joining the call. We've got a whole team here. So as Greg mentioned, Q2 is going to look a lot like Q1 in terms of gross margin and adjusted EBITDA. So obviously that means we have to model out positive adjusted EBITDA in the second half of the year. We are banking on: number one, continued strength in the outpost and wholesale business, particularly wholesale driven by RTD, as well as continued strength there. We see the pricing activity kicking in in the second half of the year. On top of that, we have a number of productivity initiatives that we are just launching right now. So, it's going to be tight, but we are still targeting that breakeven on a full-year basis. Greg, anything to add?

No, Tom, you covered it. It's the three things: upside based on additional capacity, particularly within RTD, the productivity initiatives that we have been planning and are in the early stages of execution, and then it's continued pricing actions.

Thanks for that. I guess a follow-up on the pricing actions. I know you haven't done RTD yet, but are you seeing any price resistance out there to the price you have taken so far? Can you update us on what your outpost pipeline looks like for a new company on development in '23?

Sure. I'll touch on the pricing. So as we look across the portfolio, we see the leading indicator being the outpost pricing where we have already taken 8% on drinks and over 10% on bagged and boxed coffee. We are not seeing pushback, either qualitatively or quantitatively there. The price increase on the ready-to-drink side will kick in in June. We'll see that benefit in the second half of the year. We have also taken pricing on Amazon and on our website, we've taken bag coffee, box coffee pricing, and outbound shipping, or shipping to the consumer's home. Overall, we are not seeing pushback or any demand elasticity at this point.

Yes. I think that you can also look at some indicators from the trailing six months as to the DTC conversion rates on organic and paid traffic. Those have been relatively consistent, so there has never been, in the last 180 days, as far as seasonality is concerned, a decrease or an unpredicted decrease in conversion. So we took price on DTC, non-sub for coffee in both coffee and apparel. We didn't see a decrease in price. We have also reduced the amount of promos, so that could be considered taking price as well.

Heath, do you want to talk about the pipeline for outposts and what you've brought to the fight?

Yes, absolutely. And Sharon, it's great to talk to you for the first time on the call here. We are still on target for our 2023 guidance of 30 stores. What we have done is we have focused our market planning in some strong key markets, Texas, Arizona, specifically, where we have been focusing on bringing in some top-quality locations. Back on the pricing, at the outpost we have seen zero change in habit. It was nice to be able to launch three new beverages this week. And with that, the demand continues to be incredibly strong.

Great. I want to ask about ice beverages, but I know I've surpassed my two questions already. Thanks.

Our next questions come from the line of Joe Altobello with Raymond James.

First question, is Walmart in the 47,000 RTD doors reported as of March 31?

Yes. Toby, you want to handle that one?

Yes, we started our RTD distribution in Walmart last fall with about 400 stores. We are in the process of expanding that distribution to over 4,000 stores. So, there is a Walmart number that's in that 47,000.

And what's the seasonality that extent? You mentioned, obviously, there's shelf resets that go on throughout the year. So is that more fourth quarter weighted in terms of expansion?

We do see some retailers who are very disciplined about their reset schedules. But for our brand in particular, we've had an incredible partnership from our retail partners. They've actually cut us into the shelf off of that schedule in many cases. So we try to be ready, and it's one of the big drivers behind building our capacity. When we have the ability to partner and expand that distribution, we want to take advantage of it. We've seen steady growth, even outside of those windows. Although typically what you see from retailers is a change in who they're carrying during those specific resets. We're very grateful for the partnerships that we've been building.

Joe, the other quick point on that is Walmart tested with 211-ounce SKUs, they're rolling out with all four of our SKUs, which rarely ever happens.

One last one for me. On CapEx, you mentioned that the cost of building the outpost has gone up. And I think the old number was about 1.4 million per outpost. So what does that number look like today? And what's the total CapEx you're thinking for '22 and '23?

We know the numbers are going to be higher, Joe; we don't have a firm estimate on that yet. We expect to give you an update on the next earnings call in August. But we are definitely seeing some inflationary pressures and construction costs right now.

Joe, adding to that, the inflationary pressures we'll see really with our 2023 openings, less of an impact on the openings in 2022, where some of the work is underway.

Yes, we’re pretty locked in for this fiscal year.

Our next question comes from the line of Steve Powers with Deutsche Bank.

Maybe first, could you just talk a little bit further about the flat DTC sales in the quarter? I definitely understand and appreciate the comparison dynamics. But because I'm just looking for a little bit more perspective on the lack of growth alongside the 11% subscriber growth you called out, just it implies a blunt metric 10% decrease in the revenue per subscriber overall. I just love a little color about how you think about that, how you think about that metric and how you think about that metric trending over time?

This is Evan here. I think what you're seeing is you're seeing a natural progression or evolution of the marketing spend directly related to the most, I would say, advantageous or opportunity-based channels in Black Rifle. So as we start to look at this as an omnichannel business, we have to really start allocating our marketing dollars to the things that are hyper-growth and effective. The DTC softness, I think a lot of people have felt that over the last, I'd say, 12 months. So right now, we're in the process of doing is pulling in, reorganizing what I would say is an owned media strategy around how do we activate influencers from the DTC side, but also gives us direct benefits to general branding. When we look at the billions of impressions that we're doing across the internet, which I think we're one of, if not the only coffee company that emphasizes something like this. Our dollars are being emphasized on the hypergrowth opportunities based on areas of the business. So it's not necessarily something that we do understand why, it's not something that we're concerned with.

We’ve also added, if you do the rough metric, where I think you've got the number of subscribers in the denominator and the numerator as total DTC revenue. That math actually doesn't work because you've got subscription revenue, non-sub DTC revenue, and Amazon in there. So where we're off year to year is going to be in that non-sub DTC. We are seeing an increase in not just subscribers but overall subscriber revenue. The softness is the non-sub DTC year-on-year.

And that really, just to highlight that, Steve, before we get off is, remember this business for the majority of its life is a direct-to-consumer and subscription-based company. So now as we start to grow into more of an omnichannel emphasis, those dollars have to be allocated, and the emphasis of the branding has to be allocated to other channels. It's a natural evolution that I think that we're actually happy with. I think that we've seen an instrumental amount of growth in those other channels, which I'm very happy with.

Yes, and adding just one more point before we move off, this is an important topic. The results in DTC are entirely in line with our internal projections. So what you see there, both from a subscriber perspective and a non-subscriber is exactly what we expected or very close to what we expected for the quarter.

Separate, different topic. You mentioned just hired the higher salary, wages, and benefits costs, mostly headcount driven. I guess, I'm just curious how you're thinking about wage inflation, especially at the outposts. In your outposts model growing going forward, how big a concern or just factor is that in the sort of total cost of operation of those outposts as you ramp them up and build them out?

Heath, you want to take that one?

Yes, we've been incredibly fortunate to see incredibly low turnover within our outposts. It's absolutely dedicated to the lifestyle and the community that we've built. We have a very loyal customer base as well. We're building a company that's high on culture. People want to work for us. Recruiting efforts are strong, everywhere we've opened, and we've been able to open that full capacity and feel very strongly that that will maintain.

I believe that over the past eight years of leading this company and interacting with numerous potential employees, we have seen a strong interest in joining Black Rifle Coffee. This interest has grown into the thousands, if not tens of thousands. People are drawn to work with us because we are a mission-driven company with a unique and refined culture. Individuals seek workplaces that have an authentic community aspect, and we foster connections not only with our employees but also with our subscribers and customers. This uniqueness creates a protective barrier against some of the inflationary challenges facing other businesses. We have a special bond with people. Additionally, our pipeline is benefiting from the SkillBridge program, which allows us to bring individuals transitioning from active military duty into our workforce at a rate that surpasses other employers. We're competing successfully against companies with distinct cultures, like General Electric, which speaks volumes about the positive environment and uniqueness of our company at Black Rifle.

It's not for everybody, but for those who want to volunteer, it's quite unique.

Our next question comes from the line of George Kelly with ROTH Capital.

So, just a couple for you on the RTD business. I think you said in your prepared remarks that you couldn't supply all the demand that you saw. So could you quantify how much sort of how much revenue that could have represented?

You bet. George. I'm going to let Toby handle that. We haven't quantified it exactly, but we can give you some directional guidance.

Hi, George. So with the explosive demand that we have seen for our product, we knew last fall that, even though we came into 2022 more than doubling our capacity, it wouldn't be enough. So, we started partnering with additional suppliers and we have signed two new contracts, and what we've seen is that demand is not slowing down. So the great news is, this additional capacity and the partnerships that we have been building will enable us to meet even more of the demand that we see for our products, beginning in the second half of 2022. We're very confident that we can continue to meet demand and we are building even more capacity for the future. I think we've said before, what we had coming into the year was enough to meet what was in our projections. So, this is really all about capturing the upside and the growth and the momentum for the brand.

And just to make sure that I heard you right. Can you, I mean, was it a material amount of revenue that you lost in the quarter just because you were unable to supply it?

Yes, George. Like Tom said, we are not going to quantify it, but I guess what I'd say is the demand is materially higher than our existing capacity. When we bring this additional capacity online here in the not-too-distant future, that is going to drive some significant growth within that RTD product line in the wholesale channel.

And then the second question for you, still on RTD. But I've been amazed that you have been able to grow that business so quickly without more incremental advertising dollars. I know Evan, you were talking about how your ad budget is kind of shifting into the channels that are getting the best returns. But is it sustainable? If I just look year over year, it's not that much incremental spending. Would you suspect later this year and next year to see that really inflect higher as you support these businesses?

No. And when I look at the outlook in marketing dollars, as far as how we are allocating those resources, not to go into the specifics as far as how we are marketing. The way that we are generating media in-house and offsetting the cost and being able to authentically reach our customers through multiple social media channels is something very unique to Black Rifle. We can generate better media that resonates more authentically with our audience and communicate with them effectively than the majority of all the other companies out there. So, when we pivot the type of branding and messaging around a specific product, it's done in-house. You won't necessarily see those parsed out indirectly allocated to RTD or an increase to that over the next. I would say 12 to 18 months. You'll see it, the messaging, the branding the intent or the channels specific allocation, but it's still bucketed as branding specific. Does that make sense?

Our next question comes from the line of Bill Chappell with Truist Securities.

First, Evan, in your prepared remarks, you spoke about cold beverages moving into other categories? Just trying to understand when and also kind of what your thoughts are of how far the brand can go. Where customers will admit it? Will it go as far as non-coffee drinks? Will it go to alcohol? Just anything you can expand on those comments?

Sure. I think from my perspective, I'm looking at what do my customers want? Not what do I want to give my customers. I think this is more of a listen than it is me forcing the communication and the development around that. So what we've heard over the last several months specifically in our outpost is that people want more cold beverages. Our job is to dive deeper into cold beverages and then look at how we can continue to not only develop inside for the customers and the outposts but also what will resonate in different channels with them. I think that's also one of the things that's made us successful in the RTD and why there's been such hypergrowth specifically related to that category is we're listening to our customers, developing in-house, then releasing those into the channels that ultimately yield the highest return. So from this perspective, I can pitch it over to Heath to talk about the cold beverage cycle. I think that's where our head is at as far as future development. That leads us into additional products that are cold, you're going to see one of the dev cycles come in earlier, and then you'll look at a wide variety of options. We’ve had multiple people approach us about doing co-branded alcohol-based cold beverages, and we haven't had the bandwidth. Eventually, some things like that will come online in more of a dev cycle to see how they go. But right now, we're just trying to capture the natural growth of all the other cold beverages.

No, you're right on there, Evan. I would be primarily based in the Sunbelt, Texas, Arizona, Florida, Georgia; they trend higher on the cold beverage side to begin with. We're half or less of some competitors as it comes to our cold beverage platform. Right now, we're focused primarily around the tea-based fruit fusion level, which is a good quality beverage. I do see us adding beverages in the next month or two heavier in that side. We've got a very strong, incredibly loyal coffee-based beverage and we love that. We are not seeing the pull as much on some of the higher milk and dairy levels. So, we like the idea of adding more tea-based fruit fusions for us.

And then secondly, just back on DTC growth. You alluded that part of it is also a year ago, the comps everyone was working from home and obviously, they moved to the omnichannel, just kind of as I look forward, does that kind of imply at least through this year that business will be flattish excluding price increases? And in terms of growth, it's kind of flattish as people get their products at different retails. I'm just trying to understand from a model standpoint, how to look at that business?

Yeah, DTC always has a bit of seasonality to it. So when you look toward the back half of the year in any DTC company, you're going to look at Q4 as your big opportunity to put wins on the board. So, flattish, I guess this is what you would kind of represent as the general narrative for DTC. I don't expect us to be flattish. I expect the back half of the year to do really well for us in the DTC. The reason I say that is the internal components of what we're building for the marketing structure to reach the DTC customer more effectively now are going to pay off toward the end of the year. When it pays off from the DTC perspective, it will also win general brands. When I say general branding, it's also going to pay off from a general branding perspective. So we're going to yield some really great results towards the end of the year.

Our final question for this morning comes from Guggenheim.

I do have two follow-up questions actually. First on the CapEx. I appreciate you said you will give more details in the next earnings. But you mentioned $30 million CapEx for additional roasted capacity. Should we think about this year fully, or could I spread this around this year and next year?

Good morning, Tom here. I'm going to have Greg cover that one in terms of the timing of the Manchester CapEx project.

Yes, absolutely. What we've talked about in the past is we're in the early stages of adding significant capacity and automation to our primary roasting facility in central Tennessee. You're right that the total investment there is about $30 million. About $13 million to $14 million of that investment is going to occur in fiscal 2022 with the balance in 2023.

I would like to return to your guidance. Do you still expect to achieve EBITDA positivity by the end of the year? Given that the second quarter will closely mirror the first, you will need to rely on either an increase in gross margin, which seems challenging especially with more ready-to-drink products, or the addition of more outposts between 15 and 20. If the gross margin remains unchanged due to these factors, could you provide additional guidance regarding marketing, sales, and general and administrative expenses? The potential upside may come from those areas.

Yes, I'm glad to repeat what Tom mentioned earlier. There are three main factors that will help us achieve breakeven or a slightly positive adjusted EBITDA for the year. The first is ongoing pricing initiatives. We've mentioned examples like ready-to-drink products, which we announced will take effect in June, and we expect significant impact from this pricing in the second half of the year. We are also looking into pricing strategies in other areas that could provide additional benefits. The second factor is productivity, and we are starting to see some of the advantages of these productivity efforts, with more to follow. Previously, we focused heavily on growth and establishing new businesses, such as ready-to-drink offerings and partnering with new wholesalers, while not emphasizing productivity as much. This year, we are maintaining a better balance between growth—which we are seeing in the outpost and wholesale channels—and productivity initiatives, and we've engaged outside resources for support. The takeaway is that there are substantial opportunities for productivity improvements, and we aim to see those benefits in the latter half of the year. Lastly, the third factor relates to volume, where we see potential for growth from ready-to-drink products. Regarding our expectations for the upcoming quarters, we can discuss that in more detail later.

Thank you. That is all the time we have for questions today. I would now like to turn the call back over to Tom Davin for closing comments.

Thank you everyone for joining our Q1 earnings call. As you have seen, we are making progress on a number of key strategic initiatives. We are addressing capital, capacity, and leadership constraints. We are investing most importantly to drive growth and we are gaining more and more proof points that the power of the omnichannel model is working well for Black Rifle Coffee. Thank you, everyone.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.