Earnings Call Transcript - BROS Q4 2023

Operator, Operator

Thank you for standing by and welcome to the Dutch Brothers Inc. Fourth Quarter And Fiscal Year 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today Wednesday, February 21, 2024 at 4:30 PM Eastern Time and will be available for replay shortly after just concluded. Following the company's presentation, we will open up the lines for questions and instructions for queuing up will be provided at that time. I would now like to turn the call over to Paddy Warren, Dutch Brothers' Director, Investor Relations and Corporate Development. Please go ahead sir.

Paddy Warren, Director, Investor Relations and Corporate Development

Good afternoon and welcome. I'm joined by Christine Barone, CEO and President; Charley Jemley, CFO. We issued our earnings press release for the fourth quarter and year ended December 31, 2023 after the market closed today. The earnings press release along with supplemental information deck has been posted to our Investor Relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in responses to your questions, other than those of historical fact 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 a substitute for, nor superior to measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Christine.

Christine Barone, CEO and President

Thank you, Paddy. Good afternoon, everyone. We had an exceptional 2023 and we entered 2024 with great momentum. Revenue grew 31% year-over-year and adjusted EBITDA grew an outstanding 76% from 2022. We opened 159 shops of which 146 were company operated. In Q4, we opened 37 new shops, marking our 10th consecutive quarter of 30 or more new shop openings and demonstrating the remarkable consistency of our growth story. We ended 2023 with our highest AUVs on record, $1.97 million and we delivered 2.8% system same shop sales growth for the year. These outstanding results were underpinned by excellent flow-through, driving a substantial expansion of our margins. Dutch Bros is a time-tested, people-driven company that continues to deliver consistent high-quality growth. This growth is underpinned by excellent four-wall economics and is enabled by our shop teams who remain focused on our key tenants; speed, quality, and service. Earlier in 2023, we began laying the groundwork with key initiatives to boost traffic, which we shared with you during our Q1 call in May. In Q4, we saw the impact of these efforts culminating with 5% same shop sales growth, a 100-basis-point acceleration from Q3. These results were driven by sequential improvement in customer traffic with particular strength in the day and afternoon dayparts. Furthermore, we achieved record best rewards penetration in Q4 with over 65% of transactions attributable to rewards members. Keep in mind that 35% of our shops have been open less than two years, which makes the 65% penetration number even more impressive. With such a successful 2023 as our backdrop, we are optimistic for our next phase of growth. I will now spend a few minutes discussing our key priorities. We began any discussion of Dutch Bros with our fundamental differentiator, our people. We aim to deliver unparalleled employee engagement and by extension customer connection, recruiting, developing, and retaining outstanding people remains our primary focus and one of our greatest strengths. I am proud to say that last month we were named the top QSR brand in Nation's Restaurant News and Technomics America's Favorite Chain survey in part because of our high marks for service. Once again, the culture we infuse into each shop and the skills and abilities of our broistas to make drinks and create relationships are evident. We believe these are the keys to building brand affinity and fueling our growth. Dutch Bros was also the highest scoring consumer brand among Gen-Z and the only coffee brand in the top 10. We view this as a confirmation that exceptional culture, exceptional people, and exceptional service speak to customers across demographics and generations. This was underscored this month when we opened our first shop in Orange County, California where our reception by the community was absolutely electric. Over the three-day opening weekend, we drove over $90,000 in sales. What I find remarkable is that after 32 years and over 800 shops, a shop can open with such excitement and that the line stretched for more than a mile. It's clear to me that we have something special here and that after all these years and all the shops our brand resonates. We couldn't open shops like this without our people. And I am pleased to report that our people pipeline continues to be robust. We now have more than 350 qualified operator candidates in the pipeline. With an average tenure of seven years at scale we anticipate each operator will be capable of leading three to seven shops. Over the past two years, we've promoted over 60 people to the position of operator. This model allows many of our highest performing and most committed employees to continue to grow with us. We believe this approach enables us to strengthen our culture and values as we grow, reinforcing our competitive moat. As we expand into new markets, we take great pride in energizing Dutch Bros that it’s best. Homegrown motivated friendly operators, steeped in our unique culture and experts in an operating system, we have been building and refining for over 30 years. In January we announced three additions to our leadership team: Sumi Ghosh, incoming President of Operations; Joshua Guenser, incoming CFO; and Jess Elmquist, Chief People Officer. The entire team is looking forward to adding the wealth of experience they bring to what already makes Dutch Bros great. We embarked on a project last year as a leadership team to outline how our corporate team can best support our shops as we scale and grow, with expansion at our support center operations into Arizona as a key pillar of this work. We recognize the importance of continuing to attract top-notch talent and we believe adding a significant presence in the Phoenix market positions us to better compete for this talent. We also believe this expansion will enable easier access to our operations as we grow across the United States. As part of this move, we anticipate that approximately 40% of support operations staff will be in Arizona by January of 2025. Many of these positions will focus on driving the strategic direction of the company and assisting in day-to-day operations in the field. We expect to maintain a significant presence in Southern Oregon, where our roasting, accounting, and select other functions will continue to be based. Southern Oregon has been a key part of Dutch Bros' success and we will continue to be connected to the community in a meaningful way. Dutch Bros is a growth company, and 2023 was a record year for us. We opened 159 new shops across 13 states, the most new shop openings in our history. This exceeded the expectations we communicated with you last year of 150 shops. Over the past five years, we have now opened over 500 system shops and we have grown our company-operated shop count from 90 to 542, an average annual growth rate of 43% over those years. In 2023, our development represented a 24% growth in total system shop count and 37% growth in our company-operated shops. In 2024 we expect to open 150 to 165 new shops, which would represent another big development year for us. Another year of growing at this pace demonstrates our confidence, confidence in our brand, confidence in our people pipeline, confidence in our four-wall model, and confidence in our team. As we grow toward our goal of 4,000 plus shops, we continue to make refinements to our development strategy and market planning approach. In 2023 we outlined the steps we were beginning to take to shift our strategy, primarily emphasizing balancing speed and market penetration. We also discussed our renewed emphasis on capital efficiency with a longer-term shift toward more build-to-suit leases and flexibility with the exploration of a wider array of prototype units such as endcaps. We would expect to begin seeing the impact of these changes in 2025. Our exceptional four-wall model provides fuel to our growth engine. We continue to work diligently to maintain what we believe is one of the most compelling four-wall models in the industry. Last year we shared with you our intention to achieve at least 100 basis points of adjusted SG&A leverage this year. In 2023, we greatly exceeded this objective, delivering 190 basis points of leverage. We accomplished this while continuing to invest in building organizational capacity. Since 2021, the year of our IPO, we have delivered 280 basis points of adjusted SG&A leverage. In total, we delivered 430 basis points of adjusted EBITDA margin expansion in 2023. This underscores our team's commitment not only to growth but profitable growth. Since I joined a little over a year ago, the team has been focused on delighting our customers and driving traffic. In Q4, total system same shop sales were 5%, a sequential improvement of 100 basis points from Q3. We believe this improvement is largely a result of the increasing momentum of our traffic-driving initiatives, as our traffic trajectory improved from Q3 to Q4. Consistent with the larger industry, we saw some softness around weather events in January, as weather events, but our sales trends have strengthened and we were pleased with the results. Here’s an update on these initiatives. Innovation, we believe innovation plays a large role in the next stage of growth. Specifically, one of our priorities is category innovation, where we can build sales layers to support visit frequency and introduce new customers and occasions. We believe our operations are uniquely suited for these efforts and that as a brand, we have an opportunity to play a more active role in curating, developing, and bringing forward innovative products. Earlier this year, we launched protein coffee, a new beverage that delivers at least 20 grams of milk protein in each medium-sized serving and could provide a roadmap for future category expansion. Products like this really excite us, as they have the potential to drive routine with our customers. We will continue to add exciting limited-time offerings to our lineup and highlight our unique secret menu items as we did in Q4 with our highly successful winter campaign; the buzz around our truckload local platform drove our limited-time offering mix to the highest levels on record during the competitive holiday season. We believe our innovation strategy will bring in new customers to Dutch Bros and drive awareness, interest, and loyalty. We are also focused on driving traffic through paid media, utilizing advertising to raise awareness. We believe advertising has a role in educating guests on what Dutch Bros is about and we're confident that once people visit us they will have a great experience and want to come back. Our brand insights work supports our strategy. As we move into new markets with lower initial brand awareness, we recognize the need to adapt our approach. In these new markets, we lean into top-of-the-funnel activities, particularly through digital channels and local community activations. We look forward to continuing to scale these efforts over time and are optimistic about the long-term impact of the sustained efforts. On Black Friday, we once again recorded our highest sales day on record, and we then provided shoe charms with the purchase of any two drinks. This was exciting for many reasons, specifically, demonstrating what we believe to be our ability to participate in authentically and culturally relevant moments and create strong connections with our Gen Z guests. Third, we are continuing to increase the sophistication of offers, messaging, and capabilities on our app and Dutch Rewards platform. Last quarter, we discussed entering the second phase of our Dutch Rewards program, a more tailored approach to promotions. In Q4, we achieved our highest rewards penetration on record, with more than 65% of our transactions attributable to rewards members. Moving forward, our focus will be on refining our personalization capabilities. Still early, we are encouraged by the customer response, particularly with efforts like gamification and segmentation. Perhaps most excitingly, today we are announcing a pilot test of mobile order functionality in our app. We have begun operational testing and intend to begin beta testing our new app with mobile ordering in Arizona. Pending the results, we would expect to conduct a multi-shop test as part of our innovation stage-gate process. We recognize this could be a big opportunity for us and also understand the importance of getting this right, delivering on our core values of speed, quality, and service. As such, it is our goal to roll out this capability to the majority of shops by the end of the year. In 2024, we are taking the steps to build a rock-solid foundation upon which to embark on the next phase of our growth story. I am proud of what the team has accomplished to get us to this point, and I am confident we have the building blocks of long-term success. We have terrific customer engagement with rewards members, driving a record 65% of our transactions in Q4, and we are excited about the opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered 31% year-over-year revenue growth in 2023. This growth has been consistent, demonstrated by 10 consecutive quarters of opening 30 or more shops on our way to 4,000 plus. We have excellent shop margins. We have demonstrated that we can drive this exceptional growth with profitability. We are well-capitalized, and 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 capture our considerable whitespace. And most importantly, we have great people. We have outstanding and engaged broistas 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. As Christine's comments shared, 2023 finished on a particularly high note. Key operating metrics were excellent all around including unit openings, revenue and adjusted EBITDA growth, and same shop sales, all of which exceeded our expectations. For the financial year 2023, revenue grew 31% to $966 million. We achieved over $1.4 billion in system-wide sales or 24% growth. System AUVs reached $1.97 million, the highest on record. System same shop sales were 2.8%, in line with our guidance of low single digits. Company-operated shop contribution reached $242 million, growing an impressive 54%. Company-operated shop contribution margin was 28.2%, expanding 360 basis points year-over-year. Adjusted EBITDA margin was 16.6%, expanding 430 basis points year-over-year. In the fourth quarter, the company-operated shops segment delivered outstanding performance, generating $227 million in Company-operated shop sales and $60 million in shop contribution. Year-over-year net sales increased 30%, and company-operated shop contribution grew approximately 21%. As a percentage of company-operated sales, company-operated shop contribution was 26.5%. When making a comparison of these results to the prior year, recall that in Q4 of 2022 our sales and margins were positively impacted by approximately $7.4 million or more in the revenue line related primarily to the 2021 launch of our Dutch Rewards program. Please make reference to our supplemental investor materials where we demonstrate the changes in Company Shop margins. Outside the negative impact on a comparable basis of 2022 breakage income, company shop margins increased as a result of pricing, sales leverage, and beneficial pre-opening costs, partly offset by slightly elevated ingredient costs and other operating expenses. As I mentioned, we achieved 360 basis points in margin expansion in 2023. Shifting to SG&A, for the quarter, SG&A was approximately $57 million, which includes about $10 million in stock-based compensation. We anticipate in 2024 ongoing stock-based compensation will be approximately 30% to 40% of 2023 levels, as equity compensation awards associated with the IPO fully vested in January 2024. With the exclusion of stock-based compensation and other nonrecurring expenses, adjusted SG&A was approximately $44 million 17.4% of revenue compared to 18.9% in Q4 last year. While we're adding organizational capacity to support scaling the business, we're also making a concerted effort to stage those investments over time. For the year, adjusted SG&A was 16.6%, an improvement of 190 basis points compared to 2022. Regarding our balance sheet and liquidity, as of December 31, we had approximately $683 million in total liquidity compared to approximately $700 million at the end of Q3. We believe our liquidity position is sufficiently robust to support our currently contemplated growth plans as we scale towards 4,000 plus shops. As of December 31, that liquidity was comprised of the following: $134 million in cash and equivalents, $349 million undrawn revolver, $200 million in undrawn delayed draw term loans. Yesterday, prior to the expiration of the end of February, we drew a portion of our delayed draw term loans totaling $150 million. We intend to utilize these funds for general corporate purposes. This includes, but is not limited to, building new shops. Meanwhile, this cash will be invested in short-term interest-bearing securities until we can fully deploy it. Moving on to 2024 guidance. In early January, we shared our expectation to open 150 to 165 new shops. We expect low single digits system same shop sales growth in 2024. Revenue is expected to be within the range of $1.19 billion to $1.205 billion. The midpoint in this range would reflect 24% growth over 2023 and 62% growth on a two-year basis. Adjusted SG&A is expected to be between 15.3% and 15.8% of total revenue at the midpoint of the revenue range. This would represent continued leverage of approximately 75 to 125 basis points as compared to 2023. Stock-based compensation, which is excluded from adjusted SG&A, is expected to be $12 million to $17 million for the year, down from $39 million in 2023. Adjusted EBITDA is expected to be in the range of $185 million to $195 million or approximately 15.9% of total revenue at the midpoint of these ranges. For context, the midpoint of the adjusted EBITDA range represents approximately 19% year-over-year growth and notably, 108% growth on a two-year basis. I'd like to highlight a few key assumptions underlying this guidance. First, we continue to make investments in our people. In Q3 2023, we announced an investment in higher pay nationwide for our shop managers. Further, on April 1, California wages will rise to $20 per hour minimum, representing an increase of approximately 25% year-over-year. Collectively, we would expect a 50 to 100-basis point headwind on adjusted EBITDA margins from these pay changes. Second, we are planning to make P&L investments in increased technology at the shop level to support scheduling throughput and mobile order initiatives. Collectively, we would expect 75 to 125 basis points headwind on adjusted EBITDA margins from these investments. Combined with the expected adjusted SG&A leverage I just mentioned, we would expect these actions to collectively represent 50 to 100 basis points overall margin pressure year-over-year. Furthermore, we intend to embark on a large-scale organizational change in 2024. To support this move, we would anticipate incurring between $24 million and $31 million in costs, which we deem nonrecurring. I would anticipate will be almost entirely excluded from adjusted EBITDA. Capital expenditures are expected to be in the range of $280 million to $320 million, up from $227 million in 2023. This year-over-year increase will be driven primarily by a higher percentage of ground leases in 2024 compared to 2023. Last year, we began pursuing more future sites using build-to-suit leases to shift our capital back to more normative levels. We would expect any capital expenditure benefit to take hold more firmly beginning with the class of 2025. In 2023, we spent approximately $18 million on our roasting facility. We expect to spend approximately $10 million in 2024 and we anticipate that this facility will open in the middle of this year. We also expect to spend between $6 million and $10 million in capital expenditures related to the Arizona office expansion. Thank you and now we will take your questions. Operator, please open the lines.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Andrew Charles with TD Cowen. Please proceed with your question.

Andrew Charles, Analyst

Great. Thank you. Christine, as you implement the new enhancements in development in 2025 like more build-to-suit and focusing more on whitespace than on billing disputes. Can you increase the number of store openings above the roughly 150 per year in 2023 and guide of the 2024, or should we expect a perhaps truncated 2025 opening class to better observe the enhancements we're making?

Paddy Warren, Director, Investor Relations and Corporate Development

Thanks for your question, Andrew. I think if we look forward we're really not talking about guidance today for 2025. We feel good about where our pipeline is and about the guidance that we provided for shops for 2024 and feel like we have a robust pipeline to support our future.

Andrew Charles, Analyst

Great. And then as soon as the digital ordering op tests, you know what are you looking to observe during that time? And how you kind of maybe this is finishing off way how you're kind of mapping this out to not cause congestion distress. You are very productive at the restaurant?

Paddy Warren, Director, Investor Relations and Corporate Development

Absolutely. What really drives our brand is our service, and maintaining the connection between our baristas and customers is essential. As we transition to mobile and digital ordering, we want to ensure that the experience remains consistent. We're evaluating how this impacts operations, including line speed and drink preparation. We also have drive-through shops with walk-up windows, so we're considering how customers will pick up their drinks at these locations. In some of our newer shops, we have escape lanes that allow us to explore options like delivering drinks directly to a car that pulls out of the escape lane after placing a mobile order.

Andrew Charles, Analyst

Thank you.

Operator, Operator

Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein, Analyst

Great. Thank you very much. Question just on loan growth outlook on 10-Q with the remainder of 2024, we did see strong momentum at some point. If you could just talk about the components you're assuming for the 2024 comp guidance, I think it's a low single-digit how much pricing we should assume for the traffic assumption and any color you can provide on the first quarter? I know it's been choppy as you mentioned the weather to start. Just trying to get a sense for the first quarter is tracking relative to obviously the fourth quarter and what your guidance for full year 2024?

Paddy Warren, Director, Investor Relations and Corporate Development

Hi Jeff, we will have pricing rollover from 2023 in the low single digits. We have not yet refined how we'll price in 2024. And we mentioned the California wage impact. In those comments, we would expect our sales transfer from new units in dollar terms to be similar but as a percentage of our comp base to begin to decline, versus this year's levels of 203 basis points and then we're looking at a low single digit comp number. So the balance of that is pretty nominal on the traffic side from a growth perspective book.

Christine Barone, CEO and President

And I would share and add to that. That is we ended Q4 with that 5% same-store sales. We were rolling off 300 basis points of I guess between Q3 and Q4. So that sequential lift in same shop sales between the two quarters, we would really encourage customer reaction standpoint.

Jeffrey Bernstein, Analyst

Got it. And just to clarify Christine, I know you mentioned obviously speed of service within your operations is important. Then you also talked about category innovation which is obviously important to help encourage more trial and increase frequency, and the balance for two of those were already three new expenses. They were kind of run counter to one another. How do you think about them more broadly?

Christine Barone, CEO and President

I believe that when we consider category and innovation, it must be something truly impactful that either creates a new time for customers or introduces occasions that attract new customers. We also need to examine what elements of our products are already part of our customers' routines and enhance them without adding unnecessary complexity. It's crucial to balance these different factors as we pursue innovation. However, maintaining speed of service is extremely important for us when introducing anything new to our shops. We always evaluate how such innovations will affect speed, quality, or service for our customers.

Jeffrey Bernstein, Analyst

Understood. Thank you.

Christine Barone, CEO and President

Thank you.

Operator, Operator

Our next question comes from Chris O'Cull with Stifel. Please proceed with your question.

Chris O'Cull, Analyst

Thanks. I had a follow-up question regarding mobile ordering in terms of the question, but I'm curious if you guys can just offer any touchstones around that what the size of the mobile ordering opportunity might be or how you're thinking about the contribution? And then secondly, Christine, I wanted to ask a question about paid advertising. It just seems like paid advertising could be an important tool in the company's Arsenal when it comes to transaction growth. It looked like advertising expense last year at least through the third quarter was relatively flat year-over-year despite, obviously, a lot of sales growth. Just wondering if you expect paid advertising to increase meaningfully year-over-year? And then the company considered budgeting this line as maybe a percentage of sales going forward?

Christine Barone, CEO and President

Certainly. I'll address the first question regarding mobile ordering and the opportunity it presents. Our customers have shown a strong desire for an app enhancement specifically focused on mobile ordering, highlighting its significance for them. Additionally, when we look at the broader market, it becomes evident how crucial this technology is for customers industry-wide. We don’t anticipate a significant impact on our 2024 financials, but we recognize it as a substantial opportunity. We believe it can attract new customers and create additional usage occasions. For instance, if a customer is pressed for time and recalls waiting in a long line previously, mobile ordering would allow them to manage their time better and arrive punctually. Regarding advertising, we share your view that it represents an opportunity for us, especially as we expand into new markets where our brand is less recognized. In Q4, we initiated testing and focused on advertising at the top of the funnel in areas like Texas, where we see a significant chance to enhance our brand awareness.

Chris O'Cull, Analyst

Thank you.

Operator, Operator

Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.

Sara Senatore, Analyst

Thank you. I have two questions. First, could you break down the sequential improvement in traffic that you experienced? In past quarters, you had some easier comparisons for traffic. I'm interested in how much of that improvement was due to advertising, digital efforts, and any limited-time offerings, as this relates to the underlying drivers.

Christine Barone, CEO and President

Yes. I'll start with the underlying comp driver question and turn it over to Charley for the specific. So we looked at customer behavior in the fourth quarter. We really saw strength in both the midday and afternoon dayparts. We saw growth, especially in our proprietary menu items. So things like Dutch freeze and Rebel. We also saw continued strength in the cold beverage platforms and an increase in mix in cold beverages. We felt like our limited-time offerings really resonated with our customers over the quarter as well. So I think it's a lot of different drivers that really helped to drive an excellent Q4.

Charley Jemley, CFO

Yes. Qualitatively the decomposition of our same-store sales as you know, we reported five, plus five. Our pricing rollover is approximately 5%. Our sales transfer estimate is right in our range of 200 to 300 basis points. And then the balance of that really is the traffic, underlying traffic, which is growing and we note sequentially grew. And so back to Christine's comments we really think some of the activities that we activated in Q4 really did help us move from the traffic position in Q3 sequentially to a better performance in Q4.

Christine Barone, CEO and President

I think as we noted we also saw really strong performance in the rewards program. So that 65% penetration in transactions. And again, just noting we have so many new shops in the base to have that continue to stay at that nice steady rate is really encouraging to us.

Sara Senatore, Analyst

Got it. Thank you. Very helpful. And then just to follow up to that is, how are you thinking or feeling about your ability to use the data you are accruing about your customers and your transactions through loyalty or through digital ordering? Presumably, they're helping to inform what you do across the board, but where are you or whether you want to put it in innings or some kind of other measurement, like just sort of how much progress you're making in sort of the analytics piece of this?

Christine Barone, CEO and President

Yeah. I think we're kind of in the second inning moving into the third is what I would say, and feeling really good. So, one, we continue to test different types of offers through the rewards program, so understanding what level of points, what types of promotions work. We also added in a number of giveaway items like Bestie bracelets and the shoe charms that I mentioned, so looking at that. And then all of that is giving us data on how do our customers react to the types of things we're doing. Then we combine this with looking at, how are new customers coming in the brand, so bringing in some external research as well, and looking at that all together to really map out a calendar for the year. That drives the new customers, drives new occasions. And so we feel we're feeling good about the path that we're on in the way that we're able to use data.

Sara Senatore, Analyst

Terrific. Thank you so much.

Operator, Operator

Our next question comes from David Tarantino with Robert W. Baird. Please proceed with your question.

David Tarantino, Analyst

Hi. Hi. Good afternoon. My question, Charley, is on the new unit productivity. And I was just wondering if you could maybe give us an update on what you're seeing on that front for the most recent class of openings as you completed the most recent fiscal year? And then I wanted to understand a bit more about what you're assuming in the guidance for this year on new stores specifically, because I guess by our math, it looks a little lower than what it was in 2023, but I might have that math wrong. So could you help us out on that front? Thanks.

Charley Jemley, CFO

Okay. Hi, David. So we did have a great year, 31% revenue growth, even levered up 76% same shop sales plus 5%. And our system AUVs notably reached a record high in 2023 of $1.97 million. So we do believe we have opportunities in new markets to both refine that strategy and to build customer awareness. As we mentioned, we've refined the real estate strategy and we're reflecting those learnings on impact and sequence and how we go into new markets. Customers, we know, they love us in new markets once they've tried us, and we see the differential really is an awareness between our new and existing markets. But not a difference in the satisfaction of visit. We have an opportunity to build those AUVs in new markets with a combination of top of the funnel, which Christine just mentioned, how we're testing that and how we do community building. We're very focused on that. We're very pleased with the early results. But we recognize brand building does take place and building sales over time with new sales later, like mobile order that we just announced. So we do share those system-wide AUVs, those company operated AUVs every quarter reflect how the system is evolving. And we realize that pretty much all ships are going to rise with that tide of how we drive traffic, focus on awareness, focus on brand building. And really, we're going to continue that into next year and try to achieve similar or better results in 2024 in terms of these new market openings.

David Tarantino, Analyst

Understood. I guess maybe I'll ask it a different way. Does the guidance for 2024 include, and when you think about the average weekly sales or average volumes for the 2024 class, are you assuming something similar to what you realized in 2023, at least directionally? Could you comment on that?

Charley Jemley, CFO

Approximately similar. Understand that we will do more sites in existing markets like California. We will do fewer relative sites in Texas. And as we go through this year and we note that we're opening Florida this week and that's going to be a new market for us. So we would assume a similar result. It will come out in partly how new markets like Florida do. And we're very optimistic about that.

Christine Barone, CEO and President

As we continue to refine our real estate models with the data from each new location we've opened, we are focused on enhancing our strategy. We are assuming a similar volume going forward, but we are also exploring new ways to improve both unit performance and brand visibility.

David Tarantino, Analyst

Great. Thank you very much.

Operator, Operator

Our next question comes from John Ivankoe with JPMorgan. Please proceed with your question.

John Ivankoe, Analyst

Hi. Thank you. The question for the topic I guess is on category innovation and building sales layers. And certainly, that leads me to think about your morning business particularly habitual morning business and how Bros. underindexes relative to some peers. So I wanted to talk about the opportunity that you may have to increase in frequency, particularly in the morning, and Christine, especially given some of your background at a previous employer around executing food programs that in fact could drive beverage sales if Bros. has any closer to kind of considering piloting some food in some markets especially as we have Mobile Order & Pay finally discussed as an incremental initiative. Thank you.

Paddy Warren, Director, Investor Relations and Corporate Development

Thank you for the question, John. We are excited about the Protein Milk we launched in Q1, which meets the needs of people looking for an all-in-one protein option to start their morning or sustain them through the afternoon. As we focus on innovation to build sales, we are particularly concentrated on mobile ordering. We believe this will be a significant opportunity for us, and getting it right in a way that suits Dutch Bros is crucial. We acknowledge that the morning segment presents opportunities for growth, and we are thinking about what has worked for others while also considering what would be uniquely suited to Dutch Bros.

John Ivankoe, Analyst

Thank you.

Operator, Operator

Our next question comes from Jeff Farmer with Gordon Haskett. Please proceed with your question.

Jeff Farmer, Analyst

Thank you. I'm just curious how your Florida development strategy in 2024 and moving into 2025 has been impacted or influenced by everything you've learned with what happened with your Texas development strategy over the last couple of years? So basically lessons from Texas that you're applying to Florida?

Paddy Warren, Director, Investor Relations and Corporate Development

We have been operating our mobile data growth unit in Florida for a while, generating excitement and awareness as we enter the market. Our initial shop in Orlando will open at the end of this week, and we have seen positive responses from our activities so far. As we consider potential sites, we are taking into account the number of shop openings each year, which we are incorporating into our new models. Whenever we open new shops, we update our plans accordingly. We are also focusing on an infill strategy, which seems promising. We still aim for our ultimate goal of over 4,000 shops, and we believe we can adjust our approach as we move into new markets like Florida.

Jeff Farmer, Analyst

That's helpful. Thank you for that. And unrelated, a little bit of a pivot here. Just moving back to the potential California price increase that would come in spring of 2024, are you guys looking to protect dollar profit? Are you looking to protect margin on where you take sort of a wait-and-see attitude to at some of the peers do? How are you guys thinking about that bigger picture?

Paddy Warren, Director, Investor Relations and Corporate Development

I think in general we'll look at profitability not percentage margin and we are aware of what others are doing. We also want to time anything we do with the, you know, with the media event in the market not lag too much into that. So we'll take some price. We know that and we're evaluating that right now. We're ready when that happens.

Jeff Farmer, Analyst

Thank you.

Operator, Operator

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Andy Barish, Analyst

Thank you. Good evening. I wanted to discuss some of the factors affecting margin at the restaurant level. Charley, Chris mentioned the situation in California as well as the manager and pay increases expected in the fourth quarter. Is it anticipated that these factors will lead to an impact of about 50 to 100 basis points on the labor line for 2024? Is this the main driver of shop level margins, or should we expect any other factors to consider?

Charley Jemley, CFO

So in terms of the forward guide you're correct. It's the combination of those two wage events that are the largest driver of any margin contractions. We are making some other P&L investments. We will support what we need and Mobile Order & Pay towards the end of the year and other technology things that we're going to be ready to go and make sure our point-of-sale system in our operations are ready for some investment there. And then we get to offset that by continuing to get SG&A leverage service. So the net margin contraction we're expecting at an adjusted EBITDA level is what we mentioned there which is about 50 basis points to 100 basis points in aggregate.

Andy Barish, Analyst

Got you. That's helpful. Christine, there was some earlier discussion about operational efficiency opportunities through TAP systems during the previous regime. I know many other priorities have come to the forefront, but where do you see this initiative at this point in terms of revisiting it down the road?

Christine Barone, CEO and President

Yes. What I would share on that is throughput is still really important to us. We know that our long lines can be an inhibitor sometimes to our customers visiting us more frequently. Specifically, as we look at TAPs we have rolled out to over 100 shops now on the TAP system. And so we are encouraged by the results that we're continuing to see with the Tap system. We are also planning on investing in the TAP system to put it into a majority. We have our new shops as we roll out new shops as well.

Andy Barish, Analyst

Great. Thank you very much.

Christine Barone, CEO and President

Thank you.

Operator, Operator

Our next question comes from Nick Setyan with Wedbush Securities. Please proceed with your question.

Nick Setyan, Analyst

Thank you, and congrats on a great Q4. My question is, you mentioned sort of a margin impact from the labor investments. Does that before any pricing actions or does that actually contemplate the pricing actions within that guidance?

Paddy Warren, Director, Investor Relations and Corporate Development

Yes, it does contemplate some pricing within the guidance. We did take a little bit of price in January related to some of the minimum wage movers in legislated markets already. And then it does contemplate a level that will take through the year, the California situation and others as well. So that's and that's really the net impact.

Nick Setyan, Analyst

Got it. And so, going into the call I had about 4% in Q1 and Q2 in terms of pricing. Is that correct, 4% in Q1 and Q2 in terms of menu pricing?

Paddy Warren, Director, Investor Relations and Corporate Development

We expect low single-digit rollover from '23 to '24. Our price changes are significant, and it's important to highlight that we have been strengthening our margins throughout '23 to prepare for the upcoming challenges in '24.

Nick Setyan, Analyst

Okay, so low single-digit percentage in Q1 and Q4.

Paddy Warren, Director, Investor Relations and Corporate Development

That's the rollover. So that's the rollover that's in place already from 2023 pricing. And then there's additional pricing that we're clearly signaling that we're going to take in 2024.

Christine Barone, CEO and President

And then we did take some pricing in Q1 in January in line with some wage increases in some of the western states including Arizona, California, Colorado, and Washington.

Nick Setyan, Analyst

Okay. Fair enough. And then you know you mentioned entering 2024 with a lot of comp momentum, any sort of incremental clarity around what quarter-to-date trends look like relative to Q4?

Christine Barone, CEO and President

No. I mean what we what we shared in our prepared remarks is kind of where we are is, I think like everyone else, we saw some impacts of weather, but outside of the weather we're really pleased with what we saw in January.

Nick Setyan, Analyst

Got it. And then just on the COGS line sequentially a little bit of an uptick on the COGS line. Charlie, how are we thinking about sort of COGS in 2024? Could we actually see some leverage there?

Charley Jemley, CFO

So direct ingredient costs have moderated, but we also know that sugar is continuing to rise and that's a part of our basket, and that our distribution costs are still pretty sticky given energy costs and wages involved in that given our small drop business. So we think COGS is a pretty benign impact in '24, we're not expecting a lot of benefit there.

Nick Setyan, Analyst

Fair enough. Thank you very much.

Operator, Operator

There are no further questions at this time. I'd now like to turn the floor back over to Christine Barone for closing comments.

Christine Barone, CEO and President

Thank you for your questions. As we conclude, I wanted to highlight our recently completed Dutch Bros gift pack. Each year, our shops, customers, franchisees, and foundation work together to donate to local organizations working to end hunger in our communities. This year, we adjusted the gift pack back and pivoted from one day of giving to a campaign that allowed us to make a $1 donation for every Dutch-loved featured drink sold from February 1st through the 18th. This campaign not only drove traffic, but also gave our customers an opportunity to give each time they came to our window and it was a huge success. I look forward to announcing our results soon and I'm grateful for the opportunity to truly live up to our mission of making a massive difference one cup at a time. In closing, we are pleased with our strong results in Q4 and believe we are in a position of strength entering into 2024. I want to thank all of our teams to create this exceptional performance by connecting with our customers and communities every single day. Thank you.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.