Earnings Call Transcript - BROS Q1 2024

Operator, Operator

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.

Daniel Warren, Senior Director, Investor Relations and Capital Markets

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 a 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.

Christine Barone, CEO and President

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 a 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 two 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 two 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-Z customer base, and how seamlessly Boba can be integrated into our existing offering. Similar to Protein Coffee, we saw repeat purchase trends and positive customer response. Beyond driving traffic, Boba boosted average ticket and drove what we believe was an increase in group-buying behavior. Based on the strong customer and crew response, I am pleased to announce that we will continue to offer Strawberry Boba as a premium add-on to our regular menu going forward. We intend to continue developing category-defining products to help us build sales layers and deepen our competitive moat. As we do so, we plan to remain focused on throughput and customer experience, striking a good balance between innovation and the complexity that often comes with new product launches. Dutch Rewards; last year, we took some big steps with this program, moving toward more targeted offers and segmenting Dutch Rewards members for the first time. Last summer, we began designing offers to bolster performance in the afternoon daypart. This work is off to a great start, and we are beginning to see how it is resonating with customers and driving our business. The afternoon daypart, where we have been channeling our focus, continues to see strength. When we turn those efforts toward our morning daypart in Q1, we saw a great customer response there as well. We also reintroduced an offer of a free drink to new rewards customers in late 2023. This has allowed us to continue to grow the program and deepen rewards penetration, even as we continue to enter new markets. Ultimately, we aspire to become even more sophisticated with our targeting efforts, aiming for more personalized marketing. This will take time and continued investment and iteration, but we believe our program will continue to strengthen our relationship with our customers. Paid advertising; we continue to focus on utilizing paid media to raise awareness, particularly in new markets. Brand awareness is lower in new markets when compared to more mature markets. In some cases, this difference is substantial, with mature markets having twice the brand awareness. We began making investments in our new market awareness late last year and have been encouraged by our initial progress. We plan to accelerate these efforts in 2024, which represents an incremental investment, and we will focus these efforts in new markets, including Texas, Florida, and Tennessee. Earlier this year, we announced that we would begin testing order ahead capabilities within our mobile rewards app. The initial phase of the test is going well, and we have expanded it to include several stores in the Arizona market. We have gathered a lot of employee and customer feedback as we work through our stage gate process. We are optimistic that we will have mobile order capabilities in a majority of our shops by the end of 2024. Getting this right before a broader launch is important for us. We have the opportunity to establish a new channel that increases customer convenience while maintaining the high levels of hospitality that have defined our brand for over 30 years. We do not intend to take labor out of our shops, despite likely saving considerable time from the order process. Instead, we intend to reinvest this time in production and hospitality. We would hope to become a more frequent consideration for potential customers who may love Dutch Bros, but may be apprehensive about our sometimes long lines. We launched a strategic partnership with Olo to provide the back-end technology integration to support this initiative. We are encouraged by the fact that 66% of transactions in Q1 were attributable to Dutch Rewards members. As we continue to roll out mobile order functionality, having such robust digital penetration will likely provide us a strong foundation upon which to scale. New shop development continues to be a bright spot. As a high-growth company, Dutch Bros has been able to achieve remarkable opening cadence consistency, despite a challenging backdrop over the past few years. Dutch Bros is now a coast-to-coast brand as during the quarter, we opened 2 shops in our 17th state, Florida. In the Orlando suburbs, these early shops are exceeding our expectations. Our first Florida shops, which are 3,000 miles away from our original start in Grants Pass, Oregon, have been met with enthusiastic customer demand, a testament to the strength of our brand. Texas will continue to be an important growth market for us in 2024 as we expect approximately 30% of new shops will be in Texas compared to approximately 45% in the past 2 years. We expect our overall rate of infill will remain elevated in 2024. We believe the refinements in our real-estate strategy, which we anticipate to begin taking hold in 2025, along with increased investments in brand awareness and a continued focus on our overall traffic-driving initiatives will allow us to strike a good balance as we scale the brand. As we have shared before, we are shifting our real-estate strategy to lessen the pace of future deep infill, instead focusing on casting a wider net in new markets and allowing more time to build awareness and for shops to season. We believe the beverage occasion is reliable and habitual and that it takes time to form new habits. Our existing markets have demonstrated this time and time again. As our learnings evolve, we are placing a greater emphasis on market planning, evaluating density and other relevant variables in potential new markets and sequencing shop openings optimally within new markets to efficiently build excitement and facilitate awareness as we grow. It will take time for these refinements to make their way through the real estate pipeline, and we will likely begin seeing an impact in 2025. Concurrently, we have been increasing our advertising investments in these newer markets in an effort to increase awareness. So far, we are pleased with the initial results. Finally, last quarter, we mentioned the intention to begin shifting to a greater mix of build-to-suit leases in 2025 relative to 2024. We would expect this approach provides a more capital-efficient development strategy. That said, we believe we are uniquely positioned given strong cash-on-cash returns that work in both ground lease and build-to-suit lease arrangements. We are pleased with the excellent start to 2024 and we continue to build a strong foundation for growth. We have terrific customer engagement through our rewards program and are excited about opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered 39% year-over-year revenue growth in Q1 and yet another quarter of at least 30-plus new shop openings, demonstrating remarkable consistency. We have excellent shop margins and have demonstrated that we can drive exceptional growth profitably. We are well-capitalized. We believe we have plenty of flexibility upon which to execute our growth plan and capture a considerable white space. Most importantly, we have great people, anchored by outstanding engaged Broistas and a strong pipeline of operators ready to open new markets and continue to expand in existing markets. With that, I'll turn it over one last time to Charley to review our financials and give more details on our guidance. I want to take a moment to acknowledge Charley and all he's done for Dutch Bros. Charley has worked tirelessly to help this company make a massive difference, one cup at a time, and has spent the last few months ensuring our new leadership team understands not only the financial aspects of Dutch Bros but the field-focused culture as well. I have had the great pleasure of knowing Charley for almost 15 years and having his guidance, mentorship, and friendship has been a highlight of my career. I want to personally thank him for all he's shared and everything he has done for this company.

Charles Jemley, CFO

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 for 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, Operator

Our first question comes from John Ivankoe of JP Morgan.

John Ivankoe, Analyst

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?

Christine Barone, CEO and President

Thanks, John. As 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.

John Ivankoe, Analyst

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?

Christine Barone, CEO and President

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.

John Ivankoe, Analyst

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

Operator, Operator

Our next question comes from Andy Barish of Jefferies.

Andrew Barish, Analyst

Yes, it's great to work with you, Charley. I wanted to hear your thoughts on April and the consumer environment. After such an impressive start, your forecast for the rest of the year suggests relatively modest same-store sales growth. I'm curious about what factors are contributing to that, apart from what I assume is a degree of conservatism.

Christine Barone, CEO and President

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 two 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 one promo in 2023, and we lapped that this year with two 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 two years of the timing of those promos that we wanted to make sure that we noted.

Charles Jemley, CFO

And Andy, as we mentioned in the last quarter, we expect some additional costs to start impacting the P&L from the second quarter onward. This continues to hold true, including the California wage increase and the technology investments we're making in preparation for Mobile Order & Pay. Therefore, not only will the rollover challenge become more significant as we move from Q2 onwards, but our cost changes will also slow things down a bit.

Andrew Barish, Analyst

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

Christine Barone, CEO and President

I wanted to mention the final aspect regarding the rewards program. As you may remember, we updated the rewards program at the end of March 2023. Therefore, for the remainder of the year, we will be phasing out a portion of that discount. That being said, we are very pleased with our performance in Q1 and are looking forward to the rest of the year.

Andrew Barish, Analyst

If I can touch on your comments about product innovation, the straightforward question is, why is it working so well for you and not for others?

Christine Barone, CEO and President

Yes. I think we're currently in a unique phase of our growth where we're large enough to innovate effectively with our partners and introduce distinctive products quickly, thanks to our size and the agility of our team. When we approach product innovation, we focus on external trends and what our customers are discussing and considering. For instance, the rise of Protein Coffee reflects growth in the protein market as a functional beverage, serving as a meal replacement or complementing fitness routines. Additionally, Boba appeals to our younger customer base as a fun option. Both products resonate well with our target audience, and we're excited to continue offering them throughout the year to engage our customers further.

Operator, Operator

Our next question comes from Sharon Zackfia of William Blair.

Sharon Zackfia, Analyst

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

Charles Jemley, CFO

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.

Sharon Zackfia, Analyst

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 secondly, are you baking in more inflationary commodities than what you saw in the first quarter?

Christine Barone, CEO and President

Yes, I'm very pleased with our performance in Q1, showing a 120% year-over-year EBITDA growth. Notably, we experienced rapid acceleration in same-shop sales during February and March. Typically, such growth can make it challenging to find adequate staffing. As we progress through the year, ensuring our shops are properly staffed is a priority, and we'll approach this thoughtfully since we saw unique acceleration throughout the quarter. Additionally, the wage increase in California took effect on April 1, which is not reflected in our Q1 numbers. I'll pass it over to Charley for more specifics, but those are two significant points to highlight.

Charles Jemley, CFO

Yes. Regarding commodities, there hasn’t been significant movement. In the first quarter, it was relatively neutral with some slight positive impact, and we don't anticipate much change for the remainder of the year. I also want to remind you that we'll see costs and investments reflected in our P&L as we progress through the year, including the California wage increase and technology investments related to Mobile Order & Pay, which will begin to impact our P&L more significantly. I previously discussed the shape of earnings; we entered the year confidently in the first quarter and achieved strong results. Moving through the year, we expect a more standard progression from quarters one to two and three compared to what we've seen historically. This suggests we will see a tighter range of profitability in the second and third quarters and less decline in the fourth quarter than typically experienced. So, please keep the trajectory of absolute profit dollars in mind as we evaluate performance for the quarter.

Sharon Zackfia, Analyst

Thank you, and Charley, best of luck.

Operator, Operator

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

Christopher O'Cull, Analyst

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?

Christine Barone, CEO and President

Thanks, Patrick. Yes, we definitely saw success in Q1. We really began experimenting earnestly in Q4 of last year with various channels and messaging to effectively reach new customers, especially in new markets. We're very encouraged by the results from that work. With a strong rewards penetration at 66% of transactions, we have a great way to engage with existing customers, particularly in our mature markets where the penetration rate is even higher. We're using our paid advertising to introduce new customers to our brand.

Christopher O'Cull, Analyst

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?

Christine Barone, CEO and President

I believe the Protein Coffee is a great example of a new opportunity for our customers that they may not have considered before. This product can lead to repeat purchases and even attract new customers. We consider it category-defining because it represents a new range of products for us that differs from our existing offerings. As we progress through the year, I want to highlight that with the introduction of both the Strawberry Boba and the Protein Coffee, we plan to continue innovating around these two items while also maintaining a pipeline of other exciting products. We are pleased with the outcomes from our recent two-month promotional strategy and are focused on understanding what resonates best with our customers and our Broistas.

Operator, Operator

Our next question comes from Brian Mullan of Piper Sandler.

Brian Mullan, Analyst

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.

Christine Barone, CEO and President

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 to come and visit us in our new shops. We only have two 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.

Brian Mullan, Analyst

Okay. And Charley, congrats and best of luck.

Operator, Operator

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

Sara Senatore, Analyst

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.

Christine Barone, CEO and President

Yes, I believe it could be both in how we view it. Our expectation is that as we begin to roll this out, we already have strong adoption of our rewards app, which suggests that it will primarily benefit our current customers. This could create a new scenario for them when they are short on time or concerned about waiting in long lines. Additionally, we’ve noticed in industry discussions that mobile ordering might be especially relevant during the morning hours when people often face time constraints. Thus, we are excited about the opportunity to attract new situations in the morning as we implement Mobile Order & Pay.

Sara Senatore, Analyst

Understood. Okay. The second question is about advertising. It seems that advertising spending tends to build up over time. While I recognize that comparisons may become more challenging, there appears to be a positive cycle at play. So when you consider advertising, does it drive traffic and trials each quarter, essentially starting from scratch every time? Or do you anticipate that it will build progressively over time?

Christine Barone, CEO and President

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.

Operator, Operator

Our next question comes from David Tarantino of Baird.

David Tarantino, Analyst

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?

Christine Barone, CEO and President

The primary success metric we are currently focusing on is our same-shop sales trends. We also track detailed metrics on views, click-throughs, and similar data. However, we get particularly excited when we see positive indications in our traffic and same-shop sales trends.

David Tarantino, Analyst

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 a sales driver as you think about year 2 and year 3?

Christine Barone, CEO and President

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.

David Tarantino, Analyst

Great. Best of luck, Charley.

Operator, Operator

Our next question comes from Jeffrey Bernstein of Barclays.

Jeffrey Bernstein, Analyst

Congratulations, Charley. It seems you're leaving on a positive note. Best wishes moving forward. I have a question followed by a follow-up. My initial question relates to the traffic and ticket volume; you mentioned it was moderated in April compared to what might have been expected, possibly reflecting a teen exit rate in the first quarter, especially with pressures in January. Therefore, February and March likely exceeded that 10% for the entire quarter. As you consider the moderation in April, are there any indications of a macroeconomic slowdown or issues with lower-income consumers, or do you view it primarily as a matter of comparisons, outages, and the timing of the rewards? I'm trying to get a clearer picture for the second quarter comparison. The quarter is nearing its midpoint, and given the strong comparison from the first quarter, I want to ensure we all have a mutual understanding of what to expect for that second quarter comparison while maintaining the low single-digit full-year guidance. I have one additional follow-up as well.

Christine Barone, CEO and President

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.

Jeffrey Bernstein, Analyst

Understood. My follow-up question is regarding the performance in California. I recall you mentioning price increases that were either implemented or not in California. I would like to clarify what actions were taken there and whether you've noticed any changes in your performance or any observations about the industry in the past 5 to 6 weeks, considering your strong presence in the region and the unusual circumstances. Any insights would be appreciated.

Charles Jemley, CFO

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.

Operator, Operator

Our next question comes from Nick Setyan of Wedbush Securities.

Nick Setyan, Analyst

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.

Charles Jemley, CFO

We won't provide a comparison for Q2, but it's important to offer some context. Last year, we experienced a negative 2% comparison in the first quarter and a positive 4% comparison in the second quarter, resulting in a 4 point swing. This year, we noted a 6 point benefit from pricing in the quarter, which will decrease as we progress through the year. We are experiencing a drop in pricing, and we expect to average about a 4% comparison for the last three quarters of this year compared to last year's negative 2%. It's not that we have a negative or pessimistic outlook for the remainder of the year; it's simply a reflection of the numbers when you analyze them.

Nick Setyan, Analyst

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?

Charles Jemley, CFO

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

Operator, Operator

Our next question comes from Andrew Charles of TD Cowen.

Andrew Charles, Analyst

Great. I want to begin by congratulating Charley and Josh. Christine, your comments about the new store performance in Florida are very exciting. Can you share what you're observing regarding the overall base of new store productivity? I'm curious about the trends, especially since you had been indicating a flat year for new store volumes in 2024 compared to 2023. Is that still the case and is that the right way to view the economics for this year?

Christine Barone, CEO and President

Yes. So, as we look at new shop productivity, again, we're just getting started in Florida, and with those two 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.

Andrew Charles, Analyst

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.

Christine Barone, CEO and President

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 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.

Operator, Operator

The next question comes from Jeff Farmer of Gordon Haskett.

Jeffrey Farmer, Analyst

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?

Charles Jemley, CFO

Yes. We don't disclose individual state comparisons, but there were 77 shops in the comparable base for Texas in the first quarter. Am I correct here, Paddy? Out of roughly 175 shops there now.

Jeffrey Farmer, Analyst

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 a little bit better than you thought it was going to be. How should we be thinking about sales transfer moving forward?

Charles Jemley, CFO

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.

Operator, Operator

Our final question comes from Dennis Geiger of UBS.

Dennis Geiger, Analyst

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?

Christine Barone, CEO and President

Yes, I believe we are in a highly competitive market and will continue to face competition. As I observe others attempting to replicate our strategies, I think that significant advertising investments can potentially benefit us by highlighting what matters to us. Most importantly, it’s crucial for us to remain true to our identity. It's essential to understand why our customers return and enjoy our beverages and service. In times when customers are carefully considering their spending, staying true to what drives our success is vital. For us, it’s undoubtedly our Baristas and the exceptional service they provide to our customers. 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.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.