Earnings Call Transcript
Dutch Bros Inc. (BROS)
Earnings Call Transcript - BROS Q3 2023
Operator, Operator
Ladies and gentlemen, greetings and welcome to the Dutch Bros, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Paddy Warren, Director of IR at Corporate Development. Please go ahead.
Paddy Warren, Director of Investor Relations
Thank you. Good afternoon, and welcome. I'm joined by Joth Ricci, CEO; Christine Barone, President; and Charley Jemley, CFO. We issued our earnings press release for the quarter ended September 30, 2023, 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 the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and 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 substitutes 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 Joth.
Joth Ricci, CEO
Thank you, Paddy. Good afternoon, everyone. By all accounts, Q3 was a fantastic quarter, and we are extremely pleased with our unit openings, same shop sales, revenue, and profitability results. We opened 39 new shops, and system same-shop sales grew 4%. We delivered record performance since our IPO across both our top and bottom line with $265 million in revenue and $53 million in adjusted EBITDA, reflecting increases of 33% and 91%, respectively, year-over-year. It was also a strategically important quarter for the liquidity flexibility of the company. We upsized our credit facility by $150 million and executed a follow-on equity offering that we believe positions our balance sheet for a long runway of growth. Dutch Bros will continue to confidently pursue high-quality investments in new shops in the path to 4,000. I'm very proud of the team for what they accomplished, and I'm more encouraged than ever by the strength of the underlying business. This is the last time I'll be on this call as CEO. When I joined our co-founder, Travis Boersma, and the Dutch Bros team in 2018, it was clear to me that there was something special about this company and brand. In September of 2018, we laid out five key initiatives that would guide us through the next five years. With 317 shops, we set a goal to reach 800 shops by the end of 2023. We use data to inform better decision-making to execute a disciplined brand strategy, to utilize and leverage technology to improve customer experience, and to add new talent to our experienced team. At the center of it all, we set the goal of continued connection with the communities we serve. Over the subsequent five years, we have accomplished each and every one of those goals while managing through a series of events that challenged our teams and made us better in the long run. The success of those initiatives is evident, and we've reached several important milestones. I'm pleased to announce that in October, we opened our 800th shop, a testament to the team's discipline and the capacity we have created in the business. As of September 30, more than 22,000 people are employed at the shops across our system. Since 2019, we've also increased our AUVs by almost 20% and opened nine new states, demonstrating that the Dutch Bros brand resonates far beyond our home market. In Q2 of 2022, we surpassed $1 billion in trailing 12-month system-wide sales, a milestone that few beverage-focused brands have ever achieved. Notably, we've generated this exceptional top-line growth while further improving our margins. Our company-operated shop contribution margins have expanded considerably and were approximately 31% in Q3. We achieved another milestone in the quarter by opening our 500th company-operated shop, representing a 38% increase in shops at the end of Q3 compared to the year earlier. To put this in perspective, we started 2018 with just 37 company-operated shops. This is really incredible. And we've been able to develop the systems and capacity to scale this segment quickly and profitably. Through all of the changes and progress we've made over these past five years, it is important to remember that we're growing in order to share opportunities for our crews, brighten our customers' days, and bring connection to our communities. We do this while recognizing the responsibility to build long-term shareholder value. Finally, I'm pleased with the stability at the leadership level of this company. Travis's continued involvement, combined with decades of experience from internal leaders and franchisees, matched with fresh perspectives from new additions to the team, provides Dutch Bros with an amazing foundation upon which to build. The list is long, but to everyone who has been involved in this journey over the last five-plus years, I want to say thank you. Our incoming CEO, Christine Barone, recognizes the power of this brand and has immersed herself in the business since coming on board in February. She is a fabulous leader and brings Dutch Bros the experience necessary to take us on the next phase of our journey. I couldn't be more excited for her and for the company. And now for the last time, I will turn it over to Christine for some remarks.
Christine Barone, President
Thank you, Joth. On behalf of all of us at Dutch Bros, I want to extend my heartfelt congratulations and thanks to you on a personal level for all you have done for me and for Dutch Bros. You prepared this company to compete on a national stage and have set us up for the growth that lies ahead. Thank you. I share Joth's excitement for the exceptional performance we delivered in Q3 across our key metrics. We once again delivered on our new unit growth target as we have quarter after quarter. In Q3, we opened 39 new shops across 11 states, including Kentucky and Alabama. We now have Dutch Bros shops operating in 16 states. We also demonstrated continuing momentum, delivering 4% system same-shop sales growth, a 20 basis point improvement quarter-over-quarter. Combined with sales contributions from new shops, we saw a 33% increase in revenue year-over-year. We are extremely pleased with the profitability we delivered in Q3, headlined by $53 million in adjusted EBITDA for the quarter. This is almost double the $28 million in adjusted EBITDA we reported in Q3 of 2022 and reflects our commitment to growth with profitability. I will now spend a few minutes discussing our key priorities and how they ladder up to these outcomes. We began any discussion of Dutch Bros with our fundamental differentiator, our people. The shop teams who greet and care for our customers and each other every day are the lifeblood of this organization. Recruiting, developing, and retaining outstanding people is our primary focus and our greatest strength. Our people pipeline is robust. We have more than 325 qualified operator candidates in the pipeline with an average tenure of seven years. At scale, we anticipate that each operator will be capable of leading three to seven shops on average. Over the past two years, we've yielded nearly 50 people to the position of operator. These new operators started out as baristas for Dutch Bros, working their way up through the ranks and embodying our brand values of speed, quality, and service. We love this model because it allows us to reward our highest performing and most committed employees with an opportunity to continue to advance within the organization while cementing our culture and values as we grow. Our shop expansion strategy is motivated by our commitment to create opportunities for our people. We intend to continue to look for opportunities to open profitable shops led by strong homegrown leaders with what we believe are top-tier return outcomes. Furthermore, our expanding margins allow the flexibility to continue to make proactive investments in crew wages and benefits. As discussed last quarter, we are committed to making further investments in our people. On November 1, we made changes to our shop manager pay structure in recognition of the critical role these leaders play in growing our business. We also reimagined our incentive structure to be more closely aligned with both sales growth and great customer service. We believe these changes will more closely align manager pay with our internal sales growth and customer service objectives. Like many of our peers in the industry, we have managed through a difficult development environment, characterized by elevated build costs, supply chain shocks, permitting delays, and rising interest rates. We continue to work diligently to manage these headwinds, and we remain confident in our 2023 development target. We have also engaged in a purposeful strategy to rapidly gain share in new markets and achieve efficiencies. As we have discussed in the past, we believe this approach to market entry and its associated higher levels of infill have been a key driver in the moderation of new shop AUV. Last quarter, we outlined a shift in our real estate strategy, which we believe will position us for long-term success. This new approach is underpinned by three key elements: first, widening our initial reach as we enter new markets and allowing our brand awareness to build. We expect to achieve the same ultimate density though our TAM remains unchanged at 4,000 shops. Second, shifting back towards more build-to-suit leases, which require a lower upfront cash commitment. Third, developing new prototypes to efficiently and effectively penetrate markets and generate strong unit economics. We anticipate beginning to feel the effects of the changes in 2025 as the impacts work through our robust pipeline. As we grow, we believe maintaining financial discipline on strict underwriting standards allows us to balance creating opportunities for our people while supporting long-term unit development goals. In Q3, we continued to see margins expand, driven primarily by a combination of pricing, shop-level operational improvements, and moderating SG&A growth. Not only did total company-operated shop contribution almost double from Q3 2022 to approximately $72 million this quarter, our shops delivered 540 basis points of margin expansion year-over-year to 31% of company-operated shop revenue. Strong margins propel our new shop growth, delivering quick payback periods and enabling us to reinvest into further development opportunities. We believe our four-wall model also provides us a certain level of flexibility to adjust and adapt as we expand. Moderating growth in SG&A spending is an opportunity for leverage. While we intend to make smart investments that support critical capabilities as we scale, we expect to see leverage as revenue growth outpaces SG&A spending growth. We also remain committed to introducing more customers to the Dutch Bros brand. In Q3, we saw system-wide same-shop sales growth expand to 4%, an improvement of 20 basis points from Q2. We successfully executed through a variety of tactics. First, innovation keeps the brand fresh and fun. We launched three seasonal LTOs in the quarter beginning with the Chocolate Crunch Cold Brew Freeze and Frost, topped with soft top and Oreo crumbles, and rounding out the quarter with the Caramel Pumpkin Brulee and Sweater Weather Chai. We intend to use innovation to drive excitement and trial and leverage our customization advantages. Second, we are continuing to enhance our rewards program and find new ways to delight our customers, rewarding and recognizing customers as part of our legacy at Dutch Bros. In Phase I, we digitized our existing program and rapidly scaled it by converting to a spend-based approach. Introduced in early 2021, the rewards members accounted for 60% of transactions in less than 12 months. Impressively, this metric has continued to grow even as we are entering into new geographies. We began laying the groundwork of the second phase of our rewards journey. In March, we moved from a broad-based giveback program to a more targeted approach where we are using consumer insights to drive behaviors that we expect will create more lasting value. We are beginning to activate specific campaigns and target dayparts. For example, in Q3, we ran double-point Tuesdays and a visit frequency challenge. We believe that customers are responding to our efforts and that we are beginning to see positive results. As we look forward, we plan to continue to use our increasing capabilities to personalize offers. We are still at the beginning of our journey, and we believe we have significant runway to continue refining personalized offers. Third, selective promotions help open new experiences. We're enjoying success with our Fill-A-Tray program, which we have now run quarterly since March. We continue to experiment with offer design and timing and remain pleased with both the execution and results. In our most recent iteration, we once again drove substantial sales. Outside of Fill-A-Tray, we will continue to execute on multiple base promotional activities to encourage trial and growth. Then fourth, paid media brings awareness. While approximately 63% of our transactions were attributable to our rewards members this quarter, we recognize an opportunity to connect with a wider range of customers in various stages of their journey at Dutch Bros. We have increased paid media spend in an effort to bring new customers to Dutch Bros, create more brand awareness in new markets, and keep the brand top-of-mind for our existing customers. We look forward to continuing to scale this spend over time and are optimistic about the long-term impact of these sustained efforts. We have high expectations for ourselves and our business. We are proud of both our third quarter results and the steps we're taking to build on our strong foundation for the long term. We have terrific customer engagement with rewards members driving 63% of our transactions. We are excited about the opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered record revenue in Q3 with a 33% year-over-year increase. This growth has been consistent, demonstrated by nine consecutive quarters of opening shops at our target of over 4,000. We have excellent shop margins. We have demonstrated that we can drive this exceptional growth with profitability, culminating in this quarter with record adjusted EBITDA since our IPO. We are well capitalized. We believe our recent primary offering and credit upsizing provides a long runway and plenty of flexibility upon which to execute our growth plan and capitalize on our considerable opportunity. Most importantly, we have great people. We have outstanding and engaged baristas in our shops and a strong pipeline of operators ready to open our new markets. These factors give us great confidence in our future. With that, I'll turn it over to Charley to review our financials.
Charley Jemley, CFO
Thanks, Christine. Both Joth and Christine noted what a strong quarter we had and how pleased we were with our unit openings, same-shop sales revenue, and adjusted EBITDA results. The company-operated shop segment delivered outstanding performance, generating $236 million in net sales and $73 million in shop contributions in the quarter. This represents a year-over-year net sales increase of 36% and company-operated shop contribution growth of more than 65%. As a percentage of net sales, company-operated shop contribution was 31%, an expansion of 540 basis points year-over-year. These strong four-wall economics give us flexibility and position us to invest in areas that support and sustain growth. Margin expansion is taking place up and down the P&L, including 120 basis points in cost of goods, 230 basis points in labor, and 110 basis points in occupancy and other. We believe this margin expansion is primarily a function of pricing and efficiency improvements we have made in key areas throughout shop operations and the portfolio effect of moving into lower operating cost markets. Labor was 26% of net sales, down from 28.3% in 2022. The benefit from the changes we began implementing in Q4 2022 continue as well as leverage from year-over-year pricing actions. These gains were partially offset by our decision at the beginning of 2023 to increase starting wages in federal minimum wage markets and an ongoing initiative to ensure our retail teams are the best in the business. We continue to make meaningful system-wide investments in those teams. Specifically, this will take the form of investments in shop manager wages and incentives that began November 1. We estimate these investments will cost between $1.5 million and $2 million in the two months that they are in place in the fourth quarter alone and continue to be part of our cost structure going forward. Shifting now to SG&A. For the quarter, SG&A was approximately $50 million, which includes about $10 million in stock-based compensation. Therefore, with the exclusion of stock-based compensation and other nonrecurring expenses, adjusted SG&A was approximately $41 million, falling to 15.3% of revenue compared to 17.5% in Q3 last year. While we are still scaling and adding resources, we are making a concerted effort to stage them over time. Now on to a few comments on the health of our balance sheet and liquidity. Last quarter, I commented that having a well-capitalized balance sheet is a priority to position the company to take full advantage of the long growth runway ahead in a responsible and thoughtful manner. During the quarter, we not only upgraded our credit facility by adding an additional $150 million in capacity but also raised approximately $330 million in primary equity proceeds net of discounts, fees, and expenses. We proceeded to pay down our revolving credit facility, which at the time was approximately $203 million, and retained approximately $130 million of cash on our balance sheet. We will use this cash infusion for general corporate purposes, including funding our growth over the coming quarters. The primary equity capital raise achieved three outcomes: First, we believe the transaction will be accretive given the projected reduction in interest expense under our credit facility. Second, it provides the flexibility we believe will be required to manage through the total project cost escalation we have experienced since the time of our IPO. And third, it enabled us to reset our capital structure, positioning the company to have both ample liquidity and optionality with the belief that our four-wall economics are some of the best in the industry. The ability to execute without undue capital constraints is vital to reaching our growth potential. As a collective result of all these actions and under current assumptions and market conditions, we do not currently foresee a need to raise additional primary equity capital. Total liquidity is now around $700 million, consisting of $150 million in cash and equivalents, $350 million undrawn revolving credit facility, plus $200 million in undrawn delayed draw term loans. At the end of the quarter, the net cash position was approximately $54 million, made up of $150 million in cash and cash equivalents and $96 million in term loans. Moving on to 2023 guidance. Our expectation for total system shop openings in 2023 remains unchanged. We expect to open at least 150 new shops, of which at least 130 will be company-operated. Our expectation for capital expenditures remains unchanged, which we expect to be in the range of $225 million to $250 million. This includes approximately $15 million to $20 million in spending in 2023 for a new roasting facility, which is projected to open in 2024. Our estimate of system same-shop sales growth remains in the low single digits. Our expectation that revenue would be at the lower end of the range of $950 million to $1 billion remains unchanged. Given the strong growth in company-operated shop revenue and its contribution to our bottom line, along with the continuance of SG&A leverage, we now estimate adjusted EBITDA will be between $150 million to $155 million, up $15 million from last quarter's guidance. The increase in adjusted EBITDA reflects stronger-than-expected year-to-date profitability, partially offset by the increased shop labor investments. And as we noted earlier, we intend to execute a series of business building initiatives throughout the fourth quarter. These initiatives include aggressively using our rewards program to attract new customers and retain existing ones, with a particular focus on building engagement in newer markets. In addition to using rewards as a key lever, we also intend to bring even more focused investments to building capability in our consumer-facing technologies and investing in the talent required to grow the business. To summarize, it is important we balance profit delivery with wise investments in our future. Growing at this pace and through a company-led model requires the ability to flex and adjust as needed, always taking a long-term view. Thank you, and now we will take your questions. Operator, please open the lines.
Operator, Operator
Our first question is from Chris O'Cull with Stifel.
Unidentified Analyst, Analyst
Hello. This is Ella on for Chris. I was hoping we could dig into traffic trends during the quarter and whether you saw some meaningful change in cadence over the course of Q3? And then as you step back, what do you believe has really been most effective in driving incremental business in recent periods?
Christine Barone, President
Yes, absolutely. So, we're very pleased with our 4% same-shop sales growth in the quarter. And as we look at traffic specifically, we saw a little bit of deceleration between Q2 and Q3 but are really pleased with the overall direction in which traffic is headed. When we look at Q2 versus Q3, we saw a couple of things. One, we had a little bit of a harder lap than we had last year. The second thing is as we took pricing in Q3. As we take pricing, we typically see a little bit of dip in traffic as we first take that pricing. But we're very pleased with the results of the pricing that we took and saw what we would have expected to see from a traffic perspective with that pricing. We also had a really strong LTO in Q2 with the Mangonada. And as we look forward, we want to continue that unique type of momentum that we have in that type of LTO. Going forward, as we look at ways to drive traffic and think through the things that are most effective in doing that. One, it's really innovation. And we've done a number of things to enhance our innovation over the last couple of quarters, dropping in some short-term LTOs like the Poppin' Candy Firecracker Rebel. And then as we look forward into next year, we're going to continue doing that. But we're also going to be looking tightly at consumer trends to consider longer-term offerings that are truly innovative and new to the market. Secondly, as I shared in my prepared remarks, we believe there's a lot of momentum with the rewards program. We're really on a journey within rewards, thinking about starting with a high-spend-based program where, in March of this year, we took some of that rich base reward out and moved it to really incentivize customer behavior. As we continue to progress in the rewards program, we're learning a lot about the types of offers that our customers respond to. And what you'll see going forward is really more and more personalization in that rewards program. So, segmenting our customer base further for offers, looking at different point levels and different rewards levels that will really drive our customers in that program. Third, in paid media, so we have increased spend a little bit in our paid media. We've really been focused on driving sales at the bottom of the funnel, getting an immediate return of showing someone an ad and getting them into the shop as we continue to expand our paid media. What we'll be looking at is really driving brand awareness as well. When we look at the number of shops that we have in new markets, we think there's a significant opportunity to continue to drive brand awareness in those markets. And finally, we've been doing a number of things with promotions really to drive trial. So, we think the best introduction to Dutch Bros is through a friend who already loves Dutch Bros. And so, we're going to continue doing promotions that allow friends to share with friends. We're also learning that as we learn more from the rewards program, we can shift some of those promotions into our rewards program. And so, we'll continue to do that as we move forward with traffic. We also believe that we have a significant opportunity as we move forward to build different sales layers into our business, specifically looking at different channels through which we could drive business.
Unidentified Analyst, Analyst
That's really helpful. And I have another question about the performance in Texas. So maybe if you can provide an update on store performance impact as in whether you've continued to see the deterioration you expect in AUV performance?
Christine Barone, President
Yes. So, we actually don't provide regular updates on state-level performance. We did provide some updates when we did our follow-on offering in early September. And as we shared at that point, we're very pleased with how the Texas market is developing. We entered the Texas market in January of 2021, so less than three years ago. We have 148 shops now in Texas at the end of Q3. As we've gone into that market, we've rapidly been able to build scale, and we believe that our brand awareness is catching up with us a little bit in that market. So again, given the rapid growth that we've had in the state, we're quite pleased with where the AUVs are.
Operator, Operator
Our next question is from Jeffrey Bernstein with Barclays.
Jeffrey Bernstein, Analyst
Great. Two questions as well. First one, just a follow-on in terms of the traffic trends. I think you noted a little bit of easing from the second quarter to the third quarter, often in conjunction with that price increase. So, I'm just wondering if you can share maybe how much pricing you're running in the third and fourth quarter? And maybe how you think about that? I don't know how you measure affordability or how you think about pricing into a slowing macro. Just trying to size up maybe you have data on trends by income cohort. Just trying to get a sense for your confidence in your ability to take that incremental price without degradation of traffic over time? And then I had one follow-up.
Charley Jemley, CFO
Jeff, it's Charley. I'll talk about the pricing facts, and then I'll kick it over to Christine to give a qualitative answer. So, pricing impact on same-shop sales in the third quarter is approximately 8% to 9%. That is then going to drop to between 4% and 5% for the fourth quarter.
Christine Barone, President
Yes. And then as we think about pricing and look at where we have opportunity, we're actually building in a new layer to the work that we do from a pricing perspective. So, we're looking at willingness to pay by size, by product, by geography. And we believe that we're in a really good place from a pricing perspective and feel comfortable with what we've taken. Although we don't have plans right now to take additional price, I do believe that we have room for that.
Jeffrey Bernstein, Analyst
Okay. Are you able to look at your customer base by income level to size up maybe traffic trends across different income levels? Like how do you test that just to get confidence that you have that pricing power?
Christine Barone, President
Yes. So, we don't look at our base by income level right now, but a couple of cuts that we do is we're looking at things by geography. This last pricing move we took, we actually took in tranches. We were able to look surgically at what we did with the pricing move and look specifically at how different geographies responded as we did each of those pricing moves over different times. The other thing that we look at is we look a lot at our rewards data just to understand what's happening with frequency over those customers. We look at different frequency that they come in with and what happens when we take different pricing moves and do different promotions, things like that. So, we're looking at price from a number of different angles.
Jeffrey Bernstein, Analyst
Got it. And just my follow-up. You mentioned some new markets, I'm sure it's too new, but Alabama and Kentucky being the most recent. Whether it's those states or whether new markets over the past 12 months, the receptivity into new markets, can you talk qualitatively about what you've seen versus perhaps your expectations? Obviously, it's a brand going into new markets, so you probably get some mixed results depending on where you're headed. So, I'm just curious, over the past year, in the newest markets you've entered into, whether it's cities or states, if you can share any best or worst, how those performances have gone thus far?
Christine Barone, President
Yes, we're absolutely still super excited about what we're seeing with response as we go into new markets, new cities, and new states. We have just an incredible responsiveness to the brand. We send pictures around of the awesome long lines that we get to see. It's really like a party when we open a new Dutch Bros, and we love to see how excited both the baristas are and the customers are when they get to visit us for the first time. It's pretty amazing to be 800 shops in and still have this awesome reception as we go and enter new markets.
Operator, Operator
Our next question is from Sara Senatore with Bank of America.
Sara Senatore, Analyst
I have a question on the units and then just a follow-up on the pricing and the margin construct. So, the unit growth, I guess, you mentioned that the TAM is unchanged. Does the rate of growth change? I know last year, around this time, you gave forward guidance on unit growth. I was just wondering if this sort of rule you have of increasing the number of new units by 15% every year still holds? Or if having to widen out the development radius, if you will, kind of changes the rate of growth? So that's the first. And then like I said, just a second question. So, a couple of things. Just on changing the overall TAM. When we look at what we're doing from a development strategy, it really is just taking a little bit more time, in many cases, maybe just a matter of months as we go into a new market. That's really just to allow the brand awareness to build a little bit. I think the lines are a double-edged sword, right? So, we have that our customers learn about us sometimes from seeing those awesome long lines as we go into a market, and then they also become the thing that they want us to change, and they want us to shorten our lines so that they can come more often. But we do think that that's an important element of brand building as people kind of seeing that brand, seeing others love the brand and coming into the market that way. On the specifics of the unit questions, I'll hand it over to Charley for some of that.
Charley Jemley, CFO
You have follow-ups, Sara?
Sara Senatore, Analyst
Yes, it was about margins. I can address the question regarding the margins, and I would be happy to hear both perspectives. Margins are currently among the highest I've seen in the industry, exceeding 30%. Could you discuss your perspective on this? You mentioned having the capacity to reinvest. What would a stable margin look like at the four-wall level?
Charley Jemley, CFO
They are improving, and we have started making some investments as of November 1, which will continue through the end of the quarter and into next year. As a result, you can expect our margins to moderate. This quarter tends to have the highest seasonality, so keep that in mind when assessing our margins. Overall, we believe we are in a good position. We also mentioned the flexibility and strength of our four-wall model, which enables us to adapt to shifting market conditions. This summarizes our current perspective on margins.
Christine Barone, President
Yes. And then I wanted to go back and just answer your question on guidance. So, we're planning on doing holistic guidance at the end of our fiscal year. But we do feel good about our long-term growth targets.
Sara Senatore, Analyst
And you'll sort of address the rate of growth then? Just understood the TAM is unchanged, but just the pace of growth.
Christine Barone, President
Absolutely. Yes, we'll do that holistically at the end of the year.
Operator, Operator
Our next question is from Jeff Farmer with Gordon Haskett.
Jeffrey Farmer, Analyst
I might have missed it, but regarding the Q3 same-store sales number, did you share the sales transfer impact that was observed in Q3?
Charley Jemley, CFO
We didn't in our script or comments, the comp, I did share the pricing piece as an earlier follow-up question. So, from a comparable sales buildup, we're pleased with the 4%. We had high single-digit positive pricing, about 100 bps of positive from discount mix net. The estimated sales transfer drag is right inside our range of 200 to 300 basis points. And then the balance of that is going to be our traffic results, building up to the full.
Jeffrey Farmer, Analyst
That's helpful. Following up on the broader margin question, which relates to level margin or shop level margin, I want to focus on the labor line. You've mentioned this, and it's been impressive to see at least five quarters of over 200 basis points of year-over-year improvement. How should we consider labor costs as we approach 2024?
Charley Jemley, CFO
Well, I think a couple of things on that. First of all, what we noted was our investment in shop manager labor that we're going to make as of November 1. And then certainly, we have the California wage increase coming at us as of April 1 of next year, and we'll continue to thoughtfully examine our wage and incentive structure at the shop level and make appropriate investments there. Again, that's why the 31% margin that we're showing today is so powerful because it does allow us the flexibility to deal with navigating those things.
Christine Barone, President
I would also share, we're really proud of our teams and how they've navigated labor. Our baristas are also our sales force. We are really thoughtfully navigating through labor, being careful where we spend, but also making sure we're making the right investments in labor to grow our sales to ensure that we keep our lines at a length that our customers enjoy. It's a good partnership with thoughtful tracking, and I'm super proud of just our operations teams for all of the work they're doing in this area.
Operator, Operator
Our next question is from Brian Mullan with Piper Sandler.
Brian Mullan, Analyst
Just a follow-up question on the stores in Texas. On the last call, I think you indicated those stores were still following the same profitability curve as the rest of the system despite the AUVs being a little lower than the system average. I'm just wondering if that still holds true today, and whether you think that would continue to hold true as you look out over the next, I don't know, 12 months? And then just related to that, can you just talk about how you plan to approach development there next year? Will you still be opening more stores in Texas next year?
Charley Jemley, CFO
I'll go reverse first. We will open more shops, obviously, in Texas next year. The pace at which we open in Texas won't change dramatically. The question about productivity of new shops. So, on a like-for-like AUV adjusted basis, our newer shops are more productive than existing shops. As we've moved east, we've benefited from lower operating costs on average than our existing West Coast markets.
Jeff Farmer, Analyst
Okay. And just to follow-up, last call, I think, again today in the prepared remarks, you mentioned potentially value engineering the cost of the prototypes, which is exciting or interesting to hear. But I'm just wondering if you could discuss any progress that has been made on that front. How far along are you on that work? And why do you expect to see some benefits to the system from that development?
Charley Jemley, CFO
There's really three ways to get our investment down. One is the mix of molded suits and ground leases; more build-to-suit leases take down your upfront investment. Then there are prototype changes, going into freestanding units or looking at in-line end caps to bring your total capital cost down. There's just the natural prototype itself, taking costs out. We have made some progress taking part of that cost escalation out, but we're realistic to know that we won't get any significant measure of that cost back. Thirty percent to 40% escalation would be hard to get back. However, we are working diligently to cut corners where we can to take a portion of that out. We have some good ideation on that, with things in motion in our prototypes. Those won't show up until our pipeline exhausts itself over the next 18 to 24 months. So, I want to be practical and realistic with the listener: even if we took all those costs out today, we wouldn't get those into our pipeline.
Christine Barone, President
I think the place where we've seen a little bit of shorter-term progress is really being thoughtful about the equipment that goes into each of our shops. As we have more shops in an area, we don't need extra equipment in a shop, so we're really thinking that through. I think we've shared our pre-opening numbers, and as you look at pre-opening, as we have an existing shop in the market, we're really taking advantage of that to train our employees up. So, we've seen a drop in those numbers as well.
Operator, Operator
Thank you. Our next question is from Sharon Zackfia with William Blair.
Unidentified Analyst, Analyst
I wanted to follow up on the wage increase in California. What is your average wage, and how do you plan to offset it? If you plan to raise prices, how much do you think would be necessary? Would you prioritize protecting penny profit or percentage margins?
Charley Jemley, CFO
So, as you know, the wage is going to $20; we're currently at $16 an hour. We have not yet determined what moves we will make from a pricing perspective, but we are actively looking at productivity and other options such that pricing becomes the default that we have to make. We're also really looking wisely at whether it is a margin percentage protection strategy or a penny profit protection strategy. As we get to our guidance for 2024 and we articulate the full context of that, we'll share what our thinking is on that.
Unidentified Analyst, Analyst
Okay. Is there anything driving the greater strength in the franchise compared to the company?
Charley Jemley, CFO
Nothing, I would say, executionally or operationally, that's different, which would be really the spirit of wanting to understand that question. It's really just the mix of geographies, etc., where they are versus where we are. But nothing really we can point to operationally between the two groups.
Christine Barone, President
Yes. I think the other piece, the sales transfer piece that Charley spoke about earlier is, obviously, with the infill we have in Texas, those are all company-owned shops. So, we do have a greater impact of sales transfer in the company-owned shops.
Operator, Operator
Our next question is from Gregory Francfort with Guggenheim Securities.
Gregory Francfort, Analyst
I have two quick ones. The first is just the investment in the shop manager wages. I'm curious what drove that. Was that just maybe compression versus crew wages over the last 12 to 24 months, or is there any other reason for that investment today?
Christine Barone, President
Yes. I think a number of things. For us, it's really important to stay ahead of the market and where we think investments are needed. One of the big things we're doing is in order to continue to get great folks ready for the next level, we've looked at responsibilities in that role, and we thought it was important to reflect that in the added pay. We also saw an opportunity to align incentives with the revenue growth and the profitability of the shops. So, we made those changes for those reasons. As we look at the strength of our performance and where our shop managers were, this felt like a great time to make those investments.
Gregory Francfort, Analyst
Got it. And then maybe just a follow-up there. What were the changes in metrics in terms of the incentive? Is it you're incentivizing more on the bottom line or the top line than you were before?
Christine Barone, President
Yes. When we look at our overall priorities, it's to align our shop managers to those overall priorities. We're certainly very focused right now on driving traffic and driving revenue. So, that's the biggest piece. We also look at some of the shop-level profitability things, like looking at labor. Again, it's a delicate balance. We also don't want our shops to under-schedule in labor. So, we're careful to make sure that they hit just the right balance on that line.
Operator, Operator
Our next question is from Andrew Charles with TD Cowen.
Unidentified Analyst, Analyst
Could you provide an update on the performance of the new shop volumes in relation to the $1.7 million you mentioned previously? Also, is there anything you can do to boost those volumes beyond the broader sales strategies you've discussed?
Christine Barone, President
Yes. Thanks so much. We don't actually share that. We did that for the offering that we just did, but we don't share those figures on an ongoing basis. What I would say is we think we have a number of different levers that we can use to drive AUVs. A number of the things that I talked about just in general of what we're doing to drive traffic. We are also focused on building volume in new markets. Thinking through ways to build brand awareness, we're tracking sentiment in these new markets. We feel good about how the customers in new markets are behaving as compared to customers in existing markets. We really believe it's a brand awareness opportunity that we can leverage. So, we're doing all kinds of things to further invest in the communities, making sure that people know that we're there. Thinking through how we can partner with the local high schools and make sure that we have some visibility in their sports stadiums and things like that. We're excited about what we can do in these new markets.
Unidentified Analyst, Analyst
Okay. And then as you look towards 2024, are you going to run Fill-A-Tray around once a quarter again, or are you going to mix that or replace it with separate promotions? Anything on the promotional cadence for next year would be helpful.
Christine Barone, President
Yes. Look, we haven't planned our promotional cadence for next year yet. We are really looking at our sales kind of on a daily and weekly basis as we decide which things to do and what will most benefit from. The reason why we like Fill-A-Tray so much is it really is a deal on four separate drinks. We think, especially in new markets where we're building customer love, it's a great way to share with your friends when you come into Dutch Bros, and it also feels a lot like us. The baristas continue to comment that this is what it really feels like to be at Dutch Bros when I'm at a Fill-A-Tray day. We like to have those parties in our shops. But that's not the only thing we do. We have a number of other things that are working really well as well.
Operator, Operator
Thank you. Our next question is from Nick Setyan with Wedbush Securities.
Nick Setyan, Analyst
Just to clarify, the 8% to 9% pricing in Q3, that's the system price, right? Can you just tell us what the company's own pricing was in Q3 and what that should be in Q4?
Charley Jemley, CFO
We don't disclose that company price, but there's not a lot of difference between the company price action and the franchise action.
Nick Setyan, Analyst
Got it. And then just about the EBITDA guidance, obviously, with the breakage last year, it would imply a pretty big deceleration in the amount of leverage, not just in the labor line, but in occupancy and other, even with the investments in labor. I guess, what's the driver behind occupancy and other in terms of the deceleration to leverage?
Charley Jemley, CFO
I don't know how you would get to an occupancy or other number moving in the fourth quarter since we didn't guide the fourth quarter. I would just characterize the investment in labor we talked about. We'll have some additional SG&A investments around capability building that we'll use to drive traffic and grow while navigating through the coming quarters. So, that's really what tempers our EBITDA guide to $150 to $155 million given the over-delivery in the third quarter, we'll have some spend backs in both the shop level and at the SG&A level.
Operator, Operator
Our next question is from Rahul Krotthapalli with JP Morgan.
Rahul Krotthapalli, Analyst
On the personalization journey with the rewards program and loyalty, can you elaborate on where you are here with transactions coming in? How large is the average check size from the members versus non-members? And also, if you can comment on the frequency of the rewards members changing? And I have a follow-up.
Christine Barone, President
Yes. So, we don't share that detailed level of data about the rewards program. What I would say is that it's a program that's in its infancy, if I can say it that way, that the significant change we made in how we allocate kind of the spend against it at the end of March has allowed us to start sending out things like frequency challenges, daypart targeting, and attracting folks to different dayparts. As we do all these things, we're also experimenting with different points levels to encourage customers to come into the shops. I think we will just continue to learn from this program and get more sophisticated with the level of offers we provide.
Rahul Krotthapalli, Analyst
Got it. And on the builder shift back in the development pipeline, did you guys discuss the mix going forward as you increase build-to-suit and ground leases to reduce capital intensity? Can you also discuss how it can impact the rents to an extent possible?
Charley Jemley, CFO
Yes. So, we haven't discussed the mix. As we look at 2024 objectives and targets, we'll give you some context. Just to temper your expectations, you don't make dramatic shifts in lease types. We make refinements, and that's what we're doing. In terms of what it does to rent, a build-to-suit rent is higher than a ground lease rent. But what you're really doing is the trade-off of less upfront cash intensity to build a build-to-suit versus a ground lease. We're trading that for having more rent on a go-forward basis. We thoughtfully make those trade-offs.
Christine Barone, President
Yes. I would just add that we really expect any of the changes in the pipeline to be in the 2025 pipeline; the 2024 pipeline has been built out for some time. So, we would expect to see minimal changes to the 2024 pipeline.
Operator, Operator
Our next question is from Drew with Robert W. Baird.
Unidentified Analyst, Analyst
It's on the topic of cash flows. I'm wondering if you could provide some additional perspective on how you're thinking about free cash flow over the next couple of years? When do you think you may return to free cash flow positive when considering all the changes you have underway with your development strategy?
Charley Jemley, CFO
The best way to think about that is, A, we have ample liquidity to get through this investment phase. Secondly, the store base, the company shop base is continuing to scale up its cash flow generation. That cash flow generation is growing faster than the CapEx required to make the store investments. So, over time, as the business scales in size and scope, it will become more and more self-funding. We have not shared when we think we will be free cash flow positive, largely depending on the rate of shop growth and how many shops we build. When we get to guiding 2024 and we can give some CapEx guide and some adjusted EBITDA guide, you'll see how those factors are playing out.
Operator, Operator
Thank you. As there are no further questions, I would now hand the conference over to Joth Ricci for closing comments.
Joth Ricci, CEO
Thank you, everyone, for your questions. In file, it's been the honor of my career to lead Dutch Bros through this transformative period. From a regional drive-through beverage brand to an emerging national competitor with locations from Oregon to Kentucky. It's been a great ride. To our customers, employees, franchisees, suppliers, communities, and investors, thank you all for your continued support. Dutch Bros' success wouldn't be possible without each of you, and it's been an absolute pleasure to be by your side. Thank you.
Operator, Operator
Thank you. The conference of Dutch Bros, Inc., has now concluded. Thank you for your participation. You may now disconnect your lines.