Earnings Call
Dutch Bros Inc. (BROS)
Earnings Call Transcript - BROS Q2 2022
Operator, Operator
Greetings and welcome to the Dutch Bros Second Quarter 2022 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paddy Warren, Director of Investor Relations and Corporate Development. Please go ahead.
Paddy Warren, Director of Investor Relations and Corporate Development
Good afternoon and welcome. I'm joined by Joth Ricci, President and CEO; and Charley Jemley, CFO. We issued our earnings press release for the quarter ended June 30, 2022, after the market closed today, and we'll file our 10-Q in the upcoming days. The earnings press release, along with the supplemental information deck, have also now been posted to our Investor Relations website at investors.dutchbros.com, and we will post our 10-Q there as well when it is available. Please be aware that all statements in our prepared remarks and in response to your questions other than those of historical facts, including statements regarding our future results of operations or financial condition, strategies, plans and objectives of management, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are inherently subject to risks, uncertainties and assumptions. They are not guarantees of performance and are expressly qualified in their entirety by cautionary statements. These forward-looking statements are made as of today's date. Except as otherwise required by law, we are under no obligation to update these forward-looking statements to reflect subsequent events, circumstances, new information, actual results, revised expectations or the occurrence of unanticipated events. We may not actually achieve any plans, intentions or expectations disclosed in our forward-looking statements, and therefore, no one should place undue reliance upon them. For more details, please refer to our earnings press release and to the risk factors in our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022, and in our upcoming quarterly report on Form 10-Q for the period ending June 30, 2022, to be filed with the SEC. Finally, we will also reference non-GAAP financial measures on today's call to enhance investors' overall understanding of our financial performance. These non-GAAP financial measures may be different than similarly titled measures used by other companies. As a reminder, non-GAAP financial measures are neither substitutes for, nor superior to, measures that are prepared under GAAP. When evaluating our business, please do not rely on any single measure. You can review the reconciliation of non-GAAP measures to comparable GAAP measures in our earnings press release. With that, I would like to call – turn the call over to Joth.
Joth Ricci, President and CEO
Thank you, Paddy. Good afternoon, everyone, and we appreciate your continued interest and support of Dutch Bros. Our second quarter results reflect the ongoing strength of our brand as we expand geographically. We delivered revenue of $186.4 million, which is a 44.2% increase from the second quarter of 2021. During the quarter, we opened 31 shops, raising our total shop count by 28% compared to the same period last year. Our real estate pipeline is robust, along with our team's capability to open and staff new shops, driving our growth. The performance of our new shops has exceeded expectations, and we are confident we can achieve our target of at least 130 new shops in 2022, which will provide us with continued strength and momentum as we move into 2023. Same shop sales were down 3.3% in Q2, benefitting from approximately 5.3% in pricing but facing challenges from sales transfer of about 140 basis points. While there was a slowdown in traffic starting in March, we saw stabilization in June and July, with same-store sales down 2.3% in June and 0.9% in July. We are encouraged that despite taking additional pricing actions during the quarter, our traffic improved in July. The decline in Q2 was primarily impacted by challenges in California, especially during the afternoon, though the overall system remained slightly negative. Elevated gas prices in California, which rose over 30%, contributed to this situation. We continue to execute a market-entry strategy to quickly build operational scale, solidifying our footprint and balancing market demand. Sales transfer helps mitigate demand-related challenges at individual shops, which can lead to longer lines and impact customer experience. Our strategy allows us to enhance our position and brand awareness, as evidenced by our success in Texas with 61 new shops in the last 18 months. In Q2, reported system comparable sales experienced 140 basis points of intentional sales transfer. This was a 260 basis point impact in our company-operated shops, remaining in line with our expectations. During the quarter, we implemented a second pricing round of about 3%, contributing to the overall 5.3% pricing running through our system. We typically use pricing to manage expected elevated costs while temporarily absorbing transitory increases. However, some traditionally transitory costs have remained high, prompting us to consider further pricing actions in Q3. Notably, we have also announced a price increase for Rebel and Coffee sold to our franchisees, effective September 1. In Q2, our contribution from company-operated shops increased 20% year-over-year to $39.5 million. We observed a sequential improvement of 630 basis points in company-operated shop margins from Q1 2022 as the benefits of pricing and operational enhancements began to take effect. Our adjusted EBITDA of $23.9 million met our expectations and aligns with our full-year guidance. As we initiated our public journey, we set five key objectives: attract and develop our people through growth capital, open new shops, increase brand awareness and customer engagement, invest in technology to enhance customer experiences, and expand margins through operating leverage. Nearly a year after our IPO, our investment thesis remains solid, and we continue to stay focused on these goals. Despite the challenging macroeconomic environment, we are encouraged by our team's agility. Their efforts in Q2 helped reinforce our mission to make a significant difference, one cup at a time. Regarding people development, we maintained strong staffing, retention, and applicant flow in Q2, with shop-level turnover holding at 66%, well below the industry average. Shop-level manager turnover remained in the low double digits, and operator turnover was nearly nonexistent. We attribute our low turnover rates to our people-first culture, career development opportunities, and employee benefits. We have promoted 50 new operators in the past 12 months, enabling us to fully staff our shops while remaining a selective employer. In terms of new shop development, we opened 31 shops across nine states in Q2, exceeding our guidance of at least 30 new openings. In the first half of the year, we opened 65 new shops. The new shops opened in Q2 ended with an annualized average unit volume of $2.1 million, exceeding expectations and supporting further expansion as we move from West to East. So far, we have opened seven shops in Southern California and 29 in Texas. Our new shops in Southern California have shown a significant unmet demand, opening with annualized AUVs well above our company average. Nationwide, our 2020 and 2021 classes produced average unit volumes of $2.1 million over the past 12 months, demonstrating brand strength. Our new shops have shown predictable volume progression, reaching margin maturity within the first three to four quarters. Meanwhile, our Dutch Rewards program is growing alongside our shop count, contributing to our goal of increasing brand awareness. The Dutch Bros app surpassed 4 million users in Q2, with 2.6 million being active members. We added nearly 450,000 new active members in Q2, and about 63% of our transactions were from Dutch Rewards members. Cold beverages dominate our menu, accounting for 80% of sales. In Q2, we saw strong growth in our Freeze and Rebel categories, despite regional challenges. Our relationship between Broistas and customers remains crucial, and we are implementing systems like the Dutch Pass, which allows customers to preload funds and speeds up transaction times. On the cost side, we have faced challenges from higher input costs, particularly in dairy and freight. We had previously moderated our profitability outlook due to these factors and are maintaining that perspective. We completed a second round of price increases in June and implemented additional productivity initiatives to navigate this environment. In Q2, our company-operated shop margins improved significantly. We at Dutch Bros are committed to making a long-term impact and contributing to our communities. Our annual Drink One for Dane fundraiser was a success, raising over $2.3 million to support ALS research. Additionally, we made donations to various charitable organizations in honor of specific heritage months. Engaging with our communities strengthens customer connections and brand loyalty, enabling us to fulfill our mission. In the quarter, we surpassed two significant milestones: we opened our 600th shop and achieved $1 billion in trailing 12-month system-wide sales. It took us 27 years to reach 328 shops and just 3.5 years to grow to 603, indicating strong demand for Dutch Bros. I am incredibly proud of our team's achievements and optimistic for our growth as we aim for 4,000 shops in the next decade to 15 years. Now I'd like to hand it over to Charley to review our financials.
Charley Jemley, CFO
Thanks, Joth. Before I begin, two reminders. First, as we have done in the past, a presentation containing supplemental information is posted on our Investor Relations website. That may prove helpful as you digest today's discussion or reflect upon it later. Second, we are a fast-growing brand, particularly our company-operated shops. We intend to continue executing a company-operated shop growth algorithm guided by operational readiness and people pipeline discipline. Over the last few years, we have accelerated our unit growth and are very pleased with the continued outperformance of our new units relative to our system average. The pace of new shop development has been increasing. As you've seen, our accelerated unit growth has driven some uneven flow of earnings, and we are very willing to accept that and continue to work diligently to manage our margins. This has clearly been made even more difficult by dynamic exogenous factors. But fundamentally, we are highly confident in our ability to drive high growth with best-in-class margins over the medium to long term. With that preamble for context, let's go over the results. Company-operated shop revenue grew 56% in Q2 to $161 million, and overall consolidated revenue increased 44% to $186 million. Year-to-date consolidated revenue grew 48%. In Q2, we opened 31 new shops, of which 26 were company-operated. That brings us to 65 for the first half of the year and 133 in the last 12 months. As of the end of Q2, system shop count grew 28% when compared to 1 year ago. This is well ahead of our stated objective of mid-teens system shop growth. As of the end of Q2, 336 company-operated shops were open, 62% more than 1 year ago. Growth has been unlocked by our capacity to open at least 30 company-operated shops in a given quarter, which we have now demonstrated in 3 of the last 4 quarters. Looking ahead, we have a robust shop pipeline despite facing many of the same obstacles the rest of the industry is experiencing. Comparable shop sales decreased 3.3% in Q2. Throughout the quarter, we continued to experience the trend shift we flagged on our Q1 earnings call, which began in mid-March. A couple of additional points for context. We are lapping positive 9% same-store sales from Q2 of 2021. Q2 same-store sales are 7% higher than 2019's preparation levels. Trends stabilized in June, and that stabilization held through July, both in terms of total same-store sales and traffic. And as Joth mentioned, our same-store sales headwinds were driven primarily by our shops in California. The fast pace of new shop growth was driven by entry into new markets and meticulous infill around existing shops, even in relatively new markets. Aggressive infill results in purposeful sales transfer from existing shops to new ones as we execute speed, quality, and service objectives consistently at each shop. Reported comparable sales growth in Q2 was lower by 140 basis points for the system and 260 basis points for company-operated shops as a result of that sales transfer. This remains very much in line with our expectations. In Q2, company-operated shop contribution was $39.5 million or 24.6% of company-operated shop revenue. After removing the 240 basis points benefit from lower preopening expenses in Q2, underlying margins advanced 390 basis points from Q1 to Q2. This improvement was a function of the following factors: a staged menu price increase that we completed June 1, which helped margins in Q2 but importantly has not yet delivered its full impact; improved labor deployment, refined to more closely match current traffic trends; and better leverage of fixed costs as per shop volumes build in late spring and early summer. It is notable that after 7 straight quarters of escalation in company shop beverage food and packaging percentage, we experienced a decline from Q1 to Q2. We saw modest tempering in input cost inflation in Q2. On a weighted basis, our beverage food and packaging basket increased 12% year-over-year in Q1, declining about 50 basis points to approximately 11.5% in Q2. Turning now to a year-over-year comparison. Company-operated shop contribution decreased 740 basis points to 24.6%. Last quarter, we noted sharp increases in beverage, food, and packaging costs. While I noted that slight moderation from quarter-to-quarter, costs do remain elevated compared to the prior year and have outpaced productivity gains and pricing actions. Slide 11 of the supplemental investor deck contains additional details of margin progression year-over-year. The takeaways are as follows: beverage food and packaging costs increased 230 basis points to 27.1%, and that increase was measurably slower than Q1, which increased 400 basis points. We are starting to lap the inflation that began to show in Q2 of 2021. Labor increased 120 basis points to 29.4% year-over-year but was below 30% in Q2 after rising above that in the 3 previous quarters. Occupancy and other costs increased 340 basis points to 16.6%, in part from the aforementioned R&M spending. New shop inefficiency and preopening caused a timing drag in margins of 160 basis points. Our beverage, food, and packaging costs increased primarily from input cost inflation and the reformulation of our Freeze product, which we first mentioned in Q3 2021's release. Dairy, which now represents approximately 20% of our COGS basket, reached historic highs in the spring. And while it has moderated somewhat, our costs were about 30% higher than 12 months ago. Our year-over-year labor cost increase was primarily driven by changes we implemented in 2021 to minimum staffing levels at open and close as well as legislated minimum wage increases. As of Q2, we have not yet been materially burdened by wage rate escalation outside of those state-mandated minimum wage increases. As a partial offset in Q2, we began to realize some of the gains that will come from improved labor execution moving forward. The increase in occupancy and other costs was in part driven by front-loaded maintenance spending. Beginning January 1, we executed with some urgency catch-up spending around shop condition and preventative maintenance. The pandemic limited our ability to fully execute that in 2021. This resulted in higher-than-anticipated R&M spending in Q1 and part of the second quarter of this year. We have two action items to address input cost inflation. First, menu pricing. Joth clearly outlined our view in his comments. Second, it is our responsibility to use our many years of experience, the deep supplier relationships, and our emerging scale to reduce costs without harming the customer experience and without having to rely too heavily on menu pricing. In the short term, we sharpened our pencils and delivered margin improvement in Q2 relative to Q1. We expect to identify and achieve productivity through renewed focus on best-in-class operations, specifically understanding and targeting shops underperforming our sales and margin expectations. A couple of quick comments on our new shops. In Q2, we experienced 120 basis points of new shop inefficiency in COGS and labor and 40 basis points of increased preopening expenses. In Q2, we opened 26 new company shops, twice as many as the 13 new company shops opened in the second quarter of last year, resulting in preopening expenses of 2.2% of company-operated shop revenue compared to 1.8% last year or a 40 basis point increase. We invested $138,000 per shop in preopening expenses, slightly higher than our norm. This is a function of the 9 shops that were the first shops in their respective markets, which typically have a higher per unit investment. Preopening expense is both an investment in getting a shop ready for customers but also sets the tone for the rest of the market. We have a well-orchestrated process for entering new markets. Our new shops are ramping toward margin efficiency in line with our expectations. As a reminder, we are targeting a 30% plus contribution margin in year 2 for new shops. This margin excludes depreciation and would not include preopening expenses, which are typically borne in the first year. As an example, I direct you to Slide 10 in the supplemental investor deck. Our class of 2020 achieved a gross margin of 24% in the trailing 12 months, which includes depreciation expense. Depreciation for all company shops was about 5% during the same period. This gives us confidence as we effectively hit our second year contribution margin targets in this class in spite of the headwinds we've discussed. Refining our look at menu pricing, driving operating efficiencies, and the value creation from supply chain initiatives like the tap systems will drive our margins toward our objective. In our franchising and other segment, revenue decreased 1.4% to $26 million, and gross profit decreased 24.6% to $13.8 million. As a business, we sell our franchisees certain products in addition to collecting royalties. Typically, we have held these costs more or less flat over time, reducing variability and helping franchisees control their margins. However, over the past 12 months, underlying input costs rose considerably, impacting segment profitability. As mentioned, we have communicated a price increase to our franchisees for their purchases of Rebel and Coffee beans related to the products we sell to them. Shifting now to G&A. We are beginning to realize G&A leverage. In the second quarter, our total G&A grew 26% relative to total revenue growth of 44%. As a percentage of total revenue, G&A was 22.7% versus 25.9% in the second quarter last year. We expect that our G&A will continue to leverage as we gain scale. Please note that our G&A was burdened by 120 basis points of public company costs and 110 basis points of stock-based compensation. Now for a few comments on liquidity. Our balance sheet is strong and well capitalized. As of June 30, we had $21 million in cash and equivalents and $148 million drawn on our revolving credit facility and in term debt or a $126 million net debt position. $352 million in committed undrawn debt capacity remains with an option to further increase our liquidity if needed. Shifting now to guidance. For the full year 2022, we are affirming our guidance from last quarter. Total system shop openings are expected to remain at least 130, of which at least 110 shops will be company-operated. Total revenues are projected to now be at least $715 million. Same-shop sales growth is estimated to remain flat. Adjusted EBITDA is estimated to remain at least $90 million. Capital expenditures are estimated to remain in the range of $175 million to $200 million, which includes approximately $15 million to $20 million for our new roasting facility that we project will open in late 2023 or early 2024. With that, I'll now turn it back over to Joth for closing comments.
Joth Ricci, President and CEO
Thank you, Charley. For 30 years, Dutch Bros has been in the business of building and nurturing relationships. And we have all the building blocks to remain a successful and enduring company, including a powerful authentic brand; strong people systems that drive company culture and fuel our shop growth; a highly engaged customer following; customizable and uniquely curated beverages; highly consistent and highly attractive unit-level economics; a portable model that is successful across geographies; a strong and well-capitalized balance sheet that provides ample liquidity; and an engaged cofounder and a very experienced leadership team. We've been there, and we will continue to be there for our people and our customers as we navigate through near-term headwinds while keeping our eyes keenly focused on our long-term opportunity to expand our footprint and create real value for our shareholders. Thank you again for your interest in Dutch Bros. And now we'd be happy to take your questions. Operator, please open the lines.
Operator, Operator
Your first question comes from Sharon Zackfia with William Blair.
Sharon Zackfia, Analyst
I guess, Joth, I recall and you mentioned that you were going to do that promotion with Rewards in June around Blue Rebel. It sounds like you had a good response to that and maybe even did something with Freezes as well. Can you talk about the learnings from that and how you might use that kind of more targeted offer dynamic in the third quarter? And then, Charley, I just wanted to quantify what you're expecting for commodity inflation in the back half of the year versus the 11.5 you saw in the second quarter. And are you including an additional price increase in the guidance?
Joth Ricci, President and CEO
Why don't you go first?
Charley Jemley, CFO
I'm not including an additional price increase in the guidance. I expect that as we compare to last year's inflation, the current rate of 10% to 12% will begin to decrease and settle into the high single digits. Now, Joth, it's your turn.
Joth Ricci, President and CEO
Yes. I believe we successfully implemented the Rebel plan and concentrated on it during May and June. By June, we began to see a significant improvement from that initiative. We also made progress with the Freeze category, achieving double-digit growth as we concluded the quarter. We are applying many of the insights gained from this approach moving forward. As I mentioned earlier, whether it's focused on specific categories or customer promotions, our team is exploring deeper opportunities and those plans are in place for Q3. The positive results we observed in July are largely due to our team's enhanced ability to execute these promotions. We have some exciting plans for our customers lined up for the third and fourth quarters, and we are eager to see more of this.
Operator, Operator
Next question, Jeffrey Bernstein with Barclays.
Jeffrey Bernstein, Analyst
Two questions on the top line drivers. The first one, just specific to the comps you disclosed. I know you said the system was down 3.3 for the quarter. June was only down 2.3, so it seems better, and only down 0.9 in July. I'm just wondering if you had to prioritize the drivers that led to that improvement, whether it's deceiving with easy compares or do you really believe it's improving underlying trends, maybe easing gas prices, which I know you talked about last quarter as a potentially major headwind for you. So I'm just trying to gauge whether you believe that what appears to be the improvement in July is improving underlying fundamentals or something else. Any way you could prioritize that would be great. And then I had one follow-up.
Joth Ricci, President and CEO
I think it's a great question and one we're currently examining. The overall 3.3% decline was heavily influenced by California's performance in Q2. We've discussed gas prices extensively in previous earnings calls, and it's noteworthy that California's prices remain over 30% higher than the national average, which we believe has definitely impacted our business. Specifically in California, from Bakersfield to Chico, same-store sales were down about 9.7%, and we also experienced a significant level of sales transfer. The overall 3.3% decline includes a 1.4% impact from sales transfer. There were discounts to consider, and that specific market is down nearly 9.7%. If we exclude that market, the rest of the company is actually down only 1%. We're focused on isolating these issues to improve our promotional strategies and better understand those comparisons.
Jeffrey Bernstein, Analyst
Understood. And then the follow-up. You mentioned the California weakness. Fully appreciate that. I'm just wondering in your research otherwise, are there any learnings in terms of maybe varying by age brackets or lower versus higher household income? It seems like we talk more and more about a slowdown in consumer more broadly. I'm just wondering what your research showed in terms of where you're most and least vulnerable regarding your core customer.
Joth Ricci, President and CEO
Yes. Thank you. Definitely, our lower-income, younger customer base is where we're seeing the impact. We've seen if you have a customer base with a household income of $40,000 or lower, we've seen up to 45% declines in the visiting rate of those people and actually really in Oregon and California. And customers that are between the $40,000 and $60,000 earning are about 27% less in those markets as well. So it's definitely indexing higher in lower-income consumers.
Jeffrey Bernstein, Analyst
Just to clarify, you said a 40% decline in the traffic if the household income was sub $40,000?
Joth Ricci, President and CEO
In visits. Correct.
Jeffrey Bernstein, Analyst
Got you. So where does it stand on the other side? Are you observing any significant changes? It seems like there's a substantial drop, and I'm curious about the level of income at which you're not experiencing any decline among higher-income households.
Joth Ricci, President and CEO
It's minor to, I'd say, a little, if any on the mid- to high-end income. It's really all being affected on the lower income.
Charley Jemley, CFO
We are not significantly impacted by the low-end consumer. Therefore, even with that substantial drop, it doesn't create much of a drag on our overall performance.
Jeffrey Bernstein, Analyst
Understood. Do you share what percentage of your customer mix is in each of those buckets?
Joth Ricci, President and CEO
We don't. No.
Operator, Operator
Your next question comes from David Tarantino with Baird.
David Tarantino, Analyst
My question is on the margins, and I'm specifically interested in some of the productivity gains that you achieved in the second quarter. And Charley, if you could maybe kind of unpack those for us a bit and give us a sense of how much that might have helped the margin in the quarter. And if I heard you correctly, I think you referenced that there was only a partial quarter benefit in the second quarter. So if you could talk about kind of what you think the run rate savings or improvement might be as we think about the second half of the year and into next year.
Charley Jemley, CFO
The pricing we talked about was not fully implemented until June 1. While it doesn't directly impact productivity, it does assist in improving margins. Therefore, we anticipate that this will fully realize in Q3 as we benefit from a complete quarter of pricing. Regarding productivity, as I indicated earlier, we excluded the preopening expenses from our quarter-over-quarter analysis. This led to about 400 basis points of genuine margin enhancement. Almost half of that is attributed to seasonal factors and leverage. The rest comes from a slight reduction in our cost of goods and labor deployment, which aligns closely with traffic levels. This adjustment happened late in the quarter since we needed more time to modify our schedules. We expect this to be fully reflected in the third quarter, along with a decrease in our repairs and maintenance spending. Those are the two main factors driving these changes.
David Tarantino, Analyst
Considering that some of those developments occurred late in the quarter, how should we analyze the margins for the second half of the year in light of those savings? Additionally, since you haven't factored in a price increase in your model, what should we anticipate regarding the margin progression in the second half of the year excluding that potential price increase?
Charley Jemley, CFO
They will float upward in the second half of the year relative to, say, the second quarter because of the full brunt of pricing because of the moderation of our labor scheduling to match the traffic levels we're at. And we are going to bring the R&M spending closer to a normal run rate. So you should expect us to report to you company shop margins that are starting to elevate again.
David Tarantino, Analyst
Great. And then I guess longer term, you mentioned a goal on the shop-level EBITDA margins of getting to 30%. I guess what is a reasonable time frame? Or how are you thinking about that internally in terms of time frame to deliver that type of performance?
Charley Jemley, CFO
Yes, we discussed achieving 24.6 in the quarter. When factoring in preopening and new store effects, we’re already in the upper 20s. If you analyze our store group by age over the last three years, the margins in year two are above 30%. This indicates that our more established new stores are already reaching that benchmark. However, our overall portfolio is being held back by older, lower-volume stores. That’s why we are confident in reaching 30%, as we are already delivering those results in our latest stores.
Operator, Operator
Next question, Nicole Miller with Piper Sandler.
Nicole Miller, Analyst
I just want to make sure I got the monthly comps right. I know April was down 3.7. I missed May. Can you just cover May, June, and July again? Because I have a question that relates to that.
Charley Jemley, CFO
Yes. So April was down 3.7. May was down 3.8 for the system. June was down 2.3 for the system. And we mentioned July for the system was down negative 0.9%.
Nicole Miller, Analyst
Noting that this is the system. The reason I'm curious about the change from June to July, where it went from down 2.3 to down 0.9, is a significant improvement. If gas prices are indeed the cause of this comp fluctuation, typically when there's a benefit like low gas prices, consumers tend to spend that extra cash quickly. However, when those prices increase again, there can be a lag in the response. Normally, even as gas prices decline, the industry’s comp improvement doesn’t occur within 30 days. Do you think it’s solely related to gas prices, or is there something else at play?
Charley Jemley, CFO
Well, this is Charley. In July, we began implementing our pricing changes fully. The good news is that we haven't seen a drop in traffic as a result. Stability is the key point regarding fuel gas prices. It's a reflection of the pressure consumers are facing. Similarly, we are observing that elevated fuel prices are a challenge for some consumers. We believe this is also why California is lagging, as it has the highest gas prices in the country.
Nicole Miller, Analyst
I'm interested in understanding where those sales may have shifted. Do you have any insights? For instance, did the lack of afternoon treats mean no treats in California or no coffee at all? Or did someone perhaps substitute items from home, another channel, or a convenience store? I'm just curious about where you anticipate recovering those sales in the future.
Joth Ricci, President and CEO
Yes, great question. When we analyze the loss, it’s primarily occurring in the afternoon and evening. California significantly contributes to this loss, particularly in iced classics, smoothies, cold brew, frost, and iced tea, which suggests this is linked to lower-income customers. Where do we think it’s headed? Our hypothesis is that it might be going to convenience stores. I've mentioned the interaction between convenience stores and Dutch Bros and how they can complement each other. Do we know exactly where those sales are going? Not exactly. However, our current focus is on enhancing Dutch Rewards in our promotional programming and customer interactions to better reach the afternoon and evening customers, as we still see growth in morning sales. We've managed to narrow it down to specific categories, times of day, and target customers.
Nicole Miller, Analyst
Do you know the typical distance or time that guests who are having trouble reaching you usually travel? Are they driving less? We've heard that this might be happening as well.
Joth Ricci, President and CEO
I only have anecdotal evidence, Nicole. We don't know exactly how far they drive. We try to map our stores within a 3- to 5-mile radius, if we have the right volume in those stores. So you can think of it as a 5-mile radius. However, in some cases, people stop to buy on their way to work, or if it's the back-to-school market, then that trip is shorter. But we don't know directly.
Operator, Operator
Next question, Andrew Charles with Cowen.
Andrew Charles, Analyst
Charley, I wanted to dig into the impact of sales transfer. If I recall correctly, it was running around 230 basis points in 1Q to 140 basis points in 2Q. Can you talk through what drove the easing of that impact, and within guidance for flat comps, how we should think about sales trends for the back half of the year?
Charley Jemley, CFO
Yes. The 230 basis points referred to company shops, while the 140 basis points referred to the overall system. We are noticing a slight increase in sales transfer within the company network compared to last quarter. Our approach is to determine what portion of sales generated by a new shop is incremental. We are seeing that incrementality in our new shop network aligns well with our expectations, which is how we measure this aspect. We do report the impact on comparable sales, but our primary focus is on the incremental sales generated each time we open a new shop in the network.
Andrew Charles, Analyst
Okay. Is it fair to assume kind of this slight growth in sales transfer continues in the back half of the year? Is that something it's embedded in expectations?
Charley Jemley, CFO
I think similar levels are what we're expecting for the balance of the year because our shop development program is not dramatically different. We're going to open about 30 a quarter. The ratio of company shops will be very similar. So we would expect this to persist.
Andrew Charles, Analyst
Yes. And Joth, a question for you. Notwithstanding the improved sales trajectory exiting the quarter in July, but if your guidance for flat same-store sales in 2022 proves true, are you hoping to slow development in 2023 to eliminate the distraction and help intensify the focus on growing same-store sales and rebounding those back to that targeted low single-digit range?
Joth Ricci, President and CEO
No. Our growth plan for 2023 will remain in the mid-teens range for year-over-year new shop expectations. We have discussed the growth strategy of Dutch, which includes new unit growth that impacts sales transfer in those markets. Top line sales are also crucial for us as we work on increasing our market share. For instance, in Q2, 26 out of 31 markets we monitor experienced an increase in top line sales, and we're enhancing total market share. With new stores opening at a $2.1 million average unit volume trend, our sales transfer aligns with our guidance and expectations, and we are witnessing total market share growth in nearly all our markets. This combination will help us meet our long-term targets.
Andrew Charles, Analyst
That's very helpful. And then just one last clarification on that. When you say mid-teens, you're referring to the number of actual store openings. So if you're saying basically 130 for this year, mid-teens being 15%, that was just 150 plus for next year? Just to make sure we're talking apples-to-apples.
Joth Ricci, President and CEO
That would be 130 with 15% on top of it. So whatever number that gets you to, that would be the number, yes.
Operator, Operator
Next question, Sara Senatore with Bank of America.
Sara Senatore, Analyst
I have a couple of questions about unit growth, actually, related. First of all, you made the point that you're well ahead of that mid-teens guidance. Can you just talk about whether we should think about as sort of a gating factor or a limiting factor, is it growth rate? Or is it the absolute number of new units you can open? Because obviously, the rate is kind of twice as high as what the long-term guide implies. And so as we think through the sort of converging on that long-term rate, how do we think about that? And then I'll have a follow-up, please.
Joth Ricci, President and CEO
Yes, Sara, that's a great question. We've ramped up quickly, moving from the high 90s last year to 130 this year. We adjusted our guidance to that 130 figure in the first quarter, but we aim to stabilize at a mid-teens growth rate. We will explore opportunities and assess where we can enter new markets, which might affect that growth rate. This year, it will likely be in the high 20s to low 30% range, but I would prefer us to settle down. We need to manage the pressure this growth places on our system, culture, and development of our people. As we nurture our talent, it must align with our pipeline development and overall strategy. The key to our success lies equally in our people and construction efforts, and we will ensure we manage both to meet our long-term expectations.
Sara Senatore, Analyst
Great. And then just a related question. I know you mentioned California is a key growth market for you. I understand the impact of these high gas prices are transitory. But sales transfer is also relatively high there. Is there, I guess, some kind of argument to be made that perhaps the volumes that you can support there are different or the density is somehow different? I know you always talk about not wanting such long lines if the service degrades. But just as I think about that as both a long growth runway but also one where you're seeing probably some of the greatest sales transfer, how do I reconcile those two things?
Joth Ricci, President and CEO
Yes. When I think about California, I see it in two ways. There's the developed part of California, which is essentially Chico to Fresno, where our long-term history is quite different from Southern California and the Central Coast, where we've launched several new businesses in recent years. Sacramento stands out as one of our largest average unit volume markets. As we begin to fill in that market, we will likely see improvements in overall customer experience, though it may reduce volume. We're fine with that; it's an important aspect of our business. Over the past two years, we've opened approximately 2.7 million units in California, and the response to new outlets has been very positive. However, a key long-term goal will be to stabilize and balance out volume in markets that are highly developed, which is evident in California, Las Vegas, and Tucson. In those areas, we are intentionally reducing volume to expand and grow market share. We will keep doing this and aim to improve how we analyze and communicate this information to you all.
Operator, Operator
Next question, John Ivankoe with JPMorgan.
John Ivankoe, Analyst
So returning to the point you made in response to Sara's question, when discussing mid-teens growth, I want to clarify that there could be some confusion. I've made that mistake myself. Are you referring to achieving mid-teens growth at a certain point in the unit count for a given year? Or do you envision continuously opening 15% more units each year until reaching an extremely high number?
Charley Jemley, CFO
John, in the offering, we talked about getting 15% plus system shop growth, right? The system growing year-over-year 15%. As we mentioned in our comments, we actually, over the last 12 months, have grown 28%. That's very high growth. So ultimately, we're going to slope down from 28% towards 15%. We're not going to slam on the brakes. We're going to slow down. Now if we were at 15% now, and we were going to 15%, to remain at 15%, we would, as Joth mentioned, add 15% more openings every year. So right now, we're going to target 15% more openings year-over-year, which will allow us to slope down from the 28% growth rate down towards the 15% over time.
John Ivankoe, Analyst
I understand. It may just be a coincidence that those figures are the same but represent different aspects. I appreciate your clarification regarding the increase in wages due to mandated minimum wage hikes and reaching minimum staffing levels rather than market pressure. This is particularly noteworthy since you’re unique in not attributing wage increases to market dynamics. I’d like to know if you are observing any signs of wage pressure among various employee groups, like new Baristas, experienced Baristas, general managers, or assistant managers. Are there any areas where you feel it's important to proactively retain your strong employees? Additionally, could you comment on whether you are seeing any changes in turnover or employee tenure at the store level currently?
Joth Ricci, President and CEO
Yes. There are a couple of points I'd like to make, John. We are closely monitoring the federal minimum wage states since their wage market differs significantly from the West Coast states where we have higher minimum wages. We've made minor wage increases in certain situations while adjusting our staffing needs. It’s worth noting that we received 64,000 applications in the second quarter and hired 3,500 people. We’re successfully attracting applicants and hiring quality staff across the system, and our turnover has decreased. We haven't had the need to engage in competitive wage strategies or offer hiring bonuses, as we prefer to highlight the benefits of working at Dutch Bros, including good wages and tips. We will stay flexible and responsive to market conditions and will keep evaluating the situation. So far, the strategy we implemented about 18 months ago has proven effective.
John Ivankoe, Analyst
And several others notice your significant employee retention and the ability to attract talent by encouraging customers to appreciate good service. Have you observed any changes in the amount of tipping for hourly employees in your marketplace? Should that be a concern for you? Or is the Bros culture of recognition between customers and employees something unique that will be challenging for others to imitate?
Joth Ricci, President and CEO
I think the culture of recognition is a great way to put it. I think the changes that we've seen in tipping have really kind of flowed through what was the COVID a couple of years and not taking any cash. There was a really high appreciation for being open and being there for the customer. We've seen tipping kind of stabilize here, I would say, over the last 6 to 9 months as kind of markets have opened back up and we've kind of, let's call it, normalized for whatever that is. But I think back to the culture and kind of what we do, and again, I think great service and taking care of the customer is what we're about. And we believe that the customer appreciates that versus feeling like they have to do something.
John Ivankoe, Analyst
And finally, if I may, can you comment on the general manager side? I mean just you were at record low turnover before. I mean what's just the overall commentary of that employee base?
Joth Ricci, President and CEO
At that stage, on our operator side, we've had basically 0 turnover on that end. On the manager side, it's still in the low double digits on the system. So I'm really happy with the way that we've stabilized across the entire system on how we've taken it. I think that there's been a lot of pressure on kind of mid-management as managing COVID, managing some of the challenges of coming back to work. I think there's a lot of challenges for a mid-level manager right now. And I think that our teams have done a good job of keeping those people around, making sure we take care of those people, and we'll continue to do that. So again, our numbers stay low and really have proven that even in many of the new markets that we've opened up.
Operator, Operator
Next question, Andy Barish with Jefferies.
Andy Barish, Analyst
Nice progress here in the quarter. As we think about the back half and the same-store sales progression, can you help kind of how you're thinking about it? Is the negative 1 that you saw in July kind of what you expect for the rest of the year? I mean 3Q compares get a little bit easier, but then you had some halo from the IPO and a good holiday season in the 4Q last year. Any help on that, I guess, would be appreciated.
Charley Jemley, CFO
I would say that the pricing we implemented has led to some slight negative traffic. Currently, we don’t have enough evidence to view the situation differently. Therefore, we're maintaining our previous guidance and monitoring it very closely. We were encouraged by the stability we observed in July and hope to see that continue in August and September, which would provide us a clearer outlook. I wish I could provide more details, but we find ourselves in uncharted territory.
Andy Barish, Analyst
Yes, that's completely understandable. Do you have a timeline in mind for when you might consider adjusting pricing again? Or are you open to being flexible, and can changes be implemented quickly if you decide to pursue that option?
Joth Ricci, President and CEO
We announced a price increase for our franchisee side of the business, and we are currently considering another increase for the third quarter. This is something we need to decide on soon because it takes about three to four weeks to implement pricing changes, and we haven't done that yet.
Andy Barish, Analyst
Okay. Finally, regarding the new shop inefficiencies at about 120 basis points, as you stabilize at this 30 per quarter and begin to compare this in the third quarter, should we expect that number related to company-owned site openings to emerge prominently at this level, particularly when considering that margin challenge?
Charley Jemley, CFO
Yes, Andy, I believe you can expect that trend to continue. Keep in mind that this is an absolute figure. For instance, if our margin is at a certain level, we are indicating that it is being impacted by 120 basis points. This is not a year-over-year comparison; it's purely an absolute measure. What is crucial is that we consider our absolute margins, account for the inefficiency, take preopening into account, and assess that as the trajectory for the year two margin in our shops. I would suggest that this aligns with what we've communicated in the current quarter, and it's quite manageable. Notably, if you examine our presentation, you will see that stores we opened this year, which are now six months old, have already shown an improvement in margin. We made this clarification this quarter by separating it into two six-month periods to highlight the significant margin growth in our new stores, rather than any decline.
Operator, Operator
Next question, Chris O'Cull with Stifel.
Chris O'Cull, Analyst
The company expects to be at the high end of its total revenue target now but kept the number of shop openings and same-store sales outlook unchanged. So, I may have missed this, but are you anticipating more operating weeks this year or just higher average unit volumes at the new shops?
Charley Jemley, CFO
I think there's just more evidence that the AUVs have held, and therefore, we'll go to the top end of that guidance now. And now we're six months in. So it becomes math. It becomes algebra going forward.
Chris O'Cull, Analyst
Fair enough. And Charley, are you assuming that they average what they've averaged in the first half, like the new stores, that type of higher AUV? Or are you still being a little conservative with that outlook?
Charley Jemley, CFO
I think we should be conservative because we're aggressively infilling. I mean you look at Texas. We've already got 60 stores open there in just shy of 18 months, and we aggressively infilled there. So we're meticulously knocking those volumes down. That's why we're being reticent to overdeclare on new shop AUVs right now.
Chris O'Cull, Analyst
Could you provide an update on your entry into Tennessee, given that it's the farthest East you've established a meaningful market presence? I'm curious about the sales transfer in this market and whether you're still experiencing strong customer adoption and loyalty.
Charley Jemley, CFO
Yes. The Tennessee shops are well spaced apart, so we do not anticipate any significant sales transfer. We have recently approved several new stores there, and we’re starting to reduce volumes. Overall, we are very pleased with how things are progressing in Tennessee, which is why we moved quickly to secure even more locations.
Chris O'Cull, Analyst
The lines have been long, indicating that things are going well. Lastly, regarding traffic, you mentioned that transactions stabilized in June and July. Can you clarify the level of traffic performance you're observing in July?
Charley Jemley, CFO
When I examine the overall traffic per store in our comparable group, it closely resembles June. I'm referring to customer counts, specifically the actual transactions. Typically, we would expect a seasonal decline from June to July during the summer months, but the trend has remained fairly stable. The year-over-year figure that you report is negative, but in this current environment, it's important to focus on the near term, considering week-to-week and month-to-month changes. I also want to highlight that when we compare to the previous year, there have been numerous disruptions, changes in habits, and the impact of COVID, along with shifts in openings and closures. Right now, our focus is on the daily foot traffic in the stores.
Operator, Operator
Thank you. I would like to turn the floor over to Joth Ricci for closing remarks.
Joth Ricci, President and CEO
Thank you, operator. And again, thank you to everyone for your support, your interest and your commitment to Dutch Bros. We and our team are very committed to what we set out in our plan a year ago. As I said earlier, we are excited about the progress that we've made. We're excited about the amount of things that we're learning every day and really excited to take Dutch Bros to many, many more markets in the years ahead. So thank you again for the time. Have a great afternoon, and thank you for your interest.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.