Genesis Healthcare Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 16 speakers on the call.

Operator

You for standing by, and welcome to the Dutch Bros, Inc. 2nd Quarter 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, Tuesday, August 8, 2023, at 5 pm Eastern Time and will be available for replay shortly after it has concluded. Following the company's presentation, we will open up the lines for questions and instructions to queue up will be provided at that time. I would now like to turn the call over to Patti.

Speaker 1

Good afternoon, and welcome. I'm joined by Joss Rickey, CEO Christine Verone, President and Charlie Gimli, CFO. We issued our earnings press release for the quarter ended June 30, 2023, after the market closed today. The earnings press release, along with the supplemental information deck, and have also now been posted to our Investor Relations website at investors. Dutchbros.com.

Speaker 1

Please be aware that all statements in our prepared remarks In response to your questions, other than those of historical fact, are forward looking statements and are subject to risks, uncertainty 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 ks 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 financial measures are neither substitutes for nor superior to measures that are prepared under GAAP.

Speaker 1

Please review the reconciliation of non GAAP measures to comparable GAAP results in our earnings press release. With that, I'd like to now turn the call over to Joss.

Speaker 2

Thank you, Patty. Good afternoon, everyone. Q2 results demonstrate continued momentum in the business. This is the result of the team's collective ability to take The vision of a long term growth plan and adapt to a changing environment. Our ability to deliver on new unit growth targets quarter after quarter remains a consistent bright In Q2, we opened 38 new shops across 8 states with 83 new shop openings through June 30.

Speaker 2

We are more than halfway through our objective of 150 new shops in 2023. This helped propel a 34% increase in revenue year over year, including a 580 basis points quarter over quarter improvement as same store sales shifted positive to 3.8%, reflecting better traffic trends. In Q2, approximately 90% of our beverages were served cold. We delivered increased profitability alongside this revenue growth, underscored by a 5 70 basis points expansion in company operated shop contribution margin. The Q2 saw SHOP margins return to seasonally normalized levels as we emerge from the COVID related inflationary period characterized by 2022 results.

Speaker 2

Revenue growth, company shop productivity and disciplined SG and A investments drove almost $49,000,000 in adjusted EBITDA, more than double what we reported in Q2 2022. We are very proud of the team and what it's accomplishing and are encouraged by our underlying strength. As we look ahead, our long term vision is clear and we remain focused as ever. After 5 years in working with Trav and team and nearly 2 years after the IPO, I believe Dutch Bros is a strong healthy business with a very long runway. As we set the stage for scaling the company, I am pleased to share that Christine Verone will step into the role of President and CEO effective January 1, 2024.

Speaker 2

I believe Christine is the right person to lead Dutch Bros in its next phase of growth. She is a rare leader with demonstrated abilities in marketing, operations and finance. Since joining us in February, her impact has been immediate and action has been decisive as she is focused on our real estate strategy, driving traffic, improved data analytics and overall marketing efforts. We are feeling the impact of our leadership as she executes against the current business and leads the team into 2024 planning and beyond. Over the coming months, I will work side by side with Christine to best position the business for long term success.

Speaker 2

We will execute against our plan, Driving traffic, optimizing operations, selecting strong sites and building great shops efficiently. Most important, I'm excited for what this means for the future of Dutch Bros. And I look forward to seeing how Christine's vision and leadership drives our brand towards our goal of 4,000 shops in the next 10 to 15 years. With that, I will turn it over to Christine.

Speaker 3

Thank you. Since joining the Dutch Bros team, I have been so impressed with our Brewistas, managers, operators and franchisees. I am now beginning to execute on quick wins and laying the groundwork for our 2024 priorities. As I discussed in detail last quarter, Driving traffic has been a key focus over the last 6 months, and we are gaining traction. As Josh mentioned, we saw an improvement of 580 basis points of system wide same shop sales quarter over quarter.

Speaker 3

And substantially, all of this was a result of improved traffic trends. Beyond driving sustainable traffic growth, these last 6 months have also provided an opportunity to assess our strategy and the strength of the business' foundational building blocks. I will provide a brief assessment of these building blocks and discuss how we will focus organizational attention over the near term to position Dutch Bros for long term success. The great news is that a strong foundation is already in place. We have incredible people systems and a rock solid brand, 2 of the hardest foundational elements to replicate, which gives me confidence in our competitive positioning.

Speaker 3

The team has worked diligently over the course of more than 30 years to build a one of a kind culture that radiates through our frontline and is the key enabler of our success. Supporting our people and culture is a critical lens in which we evaluate decisions, and we plan to keep it that way as we execute our growth plan. As the market landscape has shifted over the last 3 years with elevated build cost, I see further opportunity to refine our real estate strategy. I also see opportunity to build on our values of speed, quality and service and enhance our marketing capabilities with a continued focus on our rewards program. We began any discussion of Dutch Bros with our fundamental differentiator, are people.

Speaker 3

The shop teams who greet and care for our customers and each other every day are the lifeblood of this organization. Recruiting, developing and retaining people remains our key focus. And in this regard, the organization is doing great. In Q2, we saw continued improvements in turnover, falling to the mid-60s from about 70% last quarter. We saw even larger improvements in the markets in which we made proactive wage investments.

Speaker 3

Our people pipeline is robust and continues to grow. We have more than 325 qualified operator candidates in the pipeline, with an average tenure of 7 years. Creating opportunity to grow with the company is a cornerstone of our people strategy and is the driving force behind shop expansion. In many organizations, people availability is a limiting factor to growth. At Dutch Bros, this is one of our competitive strengths.

Speaker 3

We will continue investing in our people, specifically in our shop managers, many of whom will become the next generation of regional operators. Through these investments, we aim to even more closely align incentives with great customer service and driving traffic. We're also investing in our leadership team. In June, we hired Tana Davila as our Chief Marketing Officer. Tana brings more than 2 decades of marketing experience in the multiunit restaurant space.

Speaker 3

Her skill set is exactly what we need now to continue our expansion, deepen our customer relationships with our rewards program and execute our traffic driving initiatives. We plan to continue investing in key capabilities to In Q2, we opened 38 new shops, 35 of which were company operated. Shops opened in 20222023 are annualizing to approximately $1,700,000 in AUV. It is important to note that despite moderating AUVs, Newer shops are following a similar profitability curve to what we have seen in prior cohorts, demonstrating what we believe are more favorable operating conditions as we continue to at Sand Eastward. Consistent with what we shared last quarter, we believe moderation in new SHOP AUVs for recent age classes is in part a function of an elevated infill rate, which in 2023 is about twice the level it was in 2022.

Speaker 3

Elevated infill is a result of a purposeful decision to push the development pace in Texas. Since entering Texas in January of 2021, We have invested heavily in the market. And as of June 30, we had 131 shops open in the state. Texas is a high potential market and a critical component of our eastbound expansion. Building depth and scale there has moved our operations closer to newer markets in the Southeast.

Speaker 3

And we believe securing this foothold quickly enables us to better compete as we move eastward. Being profitable quickly is important, and we are encouraged that company operated shop margins in Texas are following a similar profitability curve to the rest of the system. As previously announced, we chose to position our 2nd roasting facility just outside of Dallas to support this long term expansion. With build costs remaining elevated and moderating new shop AUVs, we are completing a body of work to adapt and refine our development plan to the conditions we anticipate over the next few years. We purposely built a robust pipeline, providing us the flexibility to be selective.

Speaker 3

A refined real estate strategy allows us to continue to live up to our commitment of building the right shops at the right time and expanding our footprint at the right pace at 4,000 shops. To that end, we're taking the following actions. First, we plan to widen our initial reach as we enter new markets and adjust our pace of new market penetration. We believe this will provide markets time to curate demand while balancing the benefits of overhead leverage and distribution efficiency that comes with market density. 2nd, over the past several years, We pursued a strategy that favored ground leases, partly in response to supply chain and construction pressures, enabling us to exert greater control over our development Processed.

Speaker 3

This enabled us to sidestep some of the well documented industry development delays. As we believe these pressures will begin abating, we have greater opportunity to to value engineer our existing prototypes. We expect to see this work impact site builds beginning in late 2024. Finally, we are doubling down on community by partnering with local organizations for targeted give back days. We are continuing a 30 year These actions represent a curation of our approach to growth.

Speaker 3

We don't believe the full impact of these changes will be immediately felt. In the short term, we anticipate elevated build costs and believe moderated new shop revenue productivity will persist as these changes work through the system. The first half of the year demonstrates we can navigate change and deliver excellent profitability. We saw margin expansion in Q2, driven by a combination of shop level operational improvements and moderating adjusted SG and A growth. Company operated SHOP Profitability Powers Our Growth Aspiration.

Speaker 3

Not only did total company operated SHOP contribution grow almost 70% from Q222 to approximately $67,000,000 These shops delivered 5 70 basis points of margin expansion year over year to 30.3 percent of company operated shop revenue. Strong margins propel our new shop growth, facilitating quick payback periods and enabling us to reinvest into further development opportunities. A strong four wall model allows us a certain level of flexibility to adjust and adapt as we expand. Adjusted SG and A as a percentage of revenue improved 140 basis points when compared to Q2 of last year, falling to 15.7%. We are committed to smart investments that support critical capabilities as we expand, but anticipate SG and A growth to remain below the rate of revenue growth, which will create leverage.

Speaker 3

Last quarter, I mentioned a key focus for the remainder of the year would be driving traffic. In Q2, we executed against our traffic driving initiatives with improvements in traffic substantially driving all quarter over quarter same shop sales growth. The team acted quickly to activate a multi pronged approach, leaning into innovation, leveraging the rewards program, scaling up paid media and utilizing promotions to drive trial. Here is a brief update on each key pillar. 1st, innovation.

Speaker 3

We have been leaning into innovation in a big way in 2023. Last quarter, I discussed the introduction of our flavored soft tops for St. Patrick's Day. In Q2, we took innovation to the next level with a nationwide release of our limited time only Mangonada platform. Mango Nada, which we tested last year, outperformed our own expectations in Q2, making up more than 10% of our menu mix at launch and resulting in nearly 3,000,000 drinks sold in the quarter.

Speaker 3

Later in the quarter, we built on this momentum with our strawberry horchata chai, which demonstrated the success of wider deployment of secret menu offerings. Also in the quarter, we pulsed a few product drops to deliver quick burst of innovation and buzz, which included our cookie crumble topping and Poppin' Candy Firecracker Rebel. Encouraged by customer response, we plan to continue to keep our menu fresh, fun and relevant, while balancing operational focus in a simple pantry of ingredients. 2nd, rewards. We have seen continued momentum in our rewards program following the end of March refresh.

Speaker 3

That refresh enables us to invest more surgically, bringing even more exciting promotions to Dutch Rewards members, who make up almost 65% of our transactions. We began deploying this new approach in April with a Double Point Tuesday promotion, providing an extra incentive for Dutch Rewards members to join us on Tuesdays. We saw a favorable customer reaction for each of the 4 weeks that we activated this promotion, which was encouraging. Later in the quarter, we experimented with a variety of Time, geographic and frequency based offers, helping us to further refine our strategy and expand our toolkit. 3rd, paid media.

Speaker 3

In Q2, we leaned into enhancing our paid digital media capabilities, which was a meaningful driver of our traffic improvement quarter over quarter. Used in conjunction with innovation and our targeted app based promotional efforts, Paid social enables us to reach a wider audience at an attractive ROI. We anticipate continuing to iterate and refine these efforts to create a holistic full funnel marketing plan, grounded in our robust Dutch Rewards loyalty program. 4th, promotion. In our last call, I noted the success of the Fill a Tray program we ran in late March.

Speaker 3

Encouraged by customer response, we reran this promotion in June, experimenting with the promotional offer and timing, and we're just as pleased with the outcome. Bringing friends and family together to experience Dutch Bros is what we are all about, and we think this is a great way to reinforce these brand values, especially in new markets. Outside of Filatrade, we continue to pulse and experiment with other multiples based promotional activities that encourage trial and group visitation. Taken together, we made real progress against our traffic driving initiatives, which built in momentum throughout the quarter. We plan to keep our foot on the gas, adding capabilities and executing through the back half of the year.

Speaker 3

My first six months have been exciting and productive. I'm impressed by the team's culture, willingness to adapt and the progress we've made. We have many of the key building blocks in place to create our sustained competitive advantage, anchored on our cornerstone people systems. I appreciate the investments that Trav, Joss and the full team have made to immerse me in our culture and help me quickly learn our business. Over the next few quarters, we look forward to sharing in greater detail how these blocks are coming together to shape this strategy.

Speaker 3

With that, I'll turn it over to Charlie to review our financials.

Speaker 4

Thanks, Christine. Total revenue of approximately $250,000,000 an increase of almost 35% year over year. Same shop sales growth for the system turned positive in the quarter at 3.8% with traffic driving the improvement. Adjusted EBITDA was approximately $49,000,000 double what we reported in Q2 2022 and 19.4 percent of revenue. Shop growth remains on track.

Speaker 4

We opened 38 new shops system wide, of which 8 opened in April, 13 in May and 17 in June. Of the 17 shops we opened in June, 11 were in the final week of the quarter and that limited their sales contribution in Q2. Strong profitability is driven by surging performance in company operated shops. Net sales grew 38% at company operated shops. Shop contribution margin reached 30.3 percent, expanding 5 70 basis and will be recorded at the end of the call.

Speaker 4

Note, this contribution includes 1.5% of preopening expenses. We continue to see strong labor productivity. Labor costs improved 2 80 basis points from the same period last year. This is primarily a result of improved scheduling and deployment. Better labor productivity more than offsets the significant investments we made in wages.

Speaker 4

As Christine noted, people metrics remain strong, speaking volumes for the company culture and hiring and retention practices in the retail shops. Cost of goods sold were 6.8 percent of company operated shop sales for the quarter, down slightly year over year as menu pricing helped and some moderation took place in ingredient input cost. In the last week of the quarter, we began to update our customization pricing, creating a streamlined system for a wider array of modifications. We also moved a number of shops into higher priced tiers to better align in market pricing. Going into 2023, It was not our intention to take price.

Speaker 4

However, we made these moves to set our pricing architecture for the future. In the Franchising and Other segment, gross profit improved to $19,200,000 compared to $13,800,000 in the same period last year. This segment of our business is more than stable now than it was a year ago as inflation impacted our coffee and rebel manufacturing businesses adversely. Shifting now to SG and A. For the quarter, SG and A was approximately $52,000,000 which includes about $10,000,000 in stock based compensation.

Speaker 4

Please make reference to the supplemental slides for a reconciliation between SG and A and adjusted SG and A. Therefore, with the exclusion of stock based compensation and other non recurring expenses, adjusted SG and A was approximately $39,000,000 This declined to 15.7 percent of revenue for Q2 2023 compared to 17.1% in Q2 last year. As Christine mentioned, we continue making investments in people as we build organizational capabilities and better support our operators in the field. But we also expect continued leverage going forward as revenue growth outpaces investment. Now on to a few comments on the health of our balance sheet and liquidity.

Speaker 4

Last week, we successfully upsized our $500,000,000 credit facility, adding $150,000,000 in capacity, expanding our syndicate and a transaction that generated a healthy amount of interest from lenders. Given the tightening credit markets, We view this outcome as a strong vote of confidence in the company's long term financial outlook and growth prospects. Our overall credit facility now totals $650,000,000 which is made up of approximately $100,000,000 of drawn term loans, A $350,000,000 revolver of which approximately $183,000,000 was drawn as of June 30, 2023 and $200,000,000 of undrawn delayed draw term loans. As of June 30, we had approximately $256,000,000 of net debt, Inclusive of this upsizing, we would have had approximately $370,000,000 in liquidity against our $650,000,000 facility, up from approximately $220,000,000 in liquidity before our refinancing. In Q2, our operations generated approximately 43,000,000 in pretax cash flow prior to capital spending and financing, reflecting expanding company shop productivity and SG and A leverage.

Speaker 4

In the quarter, we consumed approximately $59,000,000 in CapEx, the vast majority to fund new SHOP Growth. We believe we have a well capitalized balance sheet and our priority is to position the company to take full advantage of the long growth runway ahead in a responsible and thoughtful manner. Moving on to 2023 guidance. First, I will quickly take you through the specifics, highlighting the changes and some context. Our expectation for total system shop openings in 2023 remains unchanged.

Speaker 4

We expect to open at least 150 new shops, of which at least 130 will be company operated. Given the shop opening outlook is unchanged, Guidance regarding capital expenditures also remains unchanged. Capital expenditures are estimated to be in the range of $225,000,000 to $250,000,000 which includes approximately $15,000,000 to $20,000,000 in spending in 2023 for a new roasting facility, which is projected to open in 2024. Our estimate of system same shop sales growth remains in low single digits. We believe improved traffic trends and pricing actions will offset the negative same shop sales growth we reported last quarter.

Speaker 4

Having seen 6 months of performance, we have greater clarity in our full year revenue expectations, which we now believe will be at the lower end of the previously communicated range of $950,000,000 to 1,000,000,000 This expectation considers the revenue moderation in the 20222023H classes, partially offset by recent traffic trends and pricing actions. As a reminder, seasonality in our back half of the year is typically lower than the first When modeling our revenue. Adjusted EBITDA is now estimated to be between $135,000,000 $140,000,000 up from at least $125,000,000 This reflects stronger than expected year to date profitability trends, partially offset by our revised expectation of revenue at the lower end of our range. Our expectations for full year adjusted EBITDA also reflect Thank you. And now we will take your questions.

Speaker 4

Operator, please open the lines.

Operator

Thank you. We will now be conducting the question and answer session. And the first question comes from the line of Chris O'Cull with Stifel. Please proceed with your question.

Speaker 5

Thanks for taking the question. Christine, congrats on the promotion and Joss, congrats on the successful career at Burrows.

Speaker 4

Thank you.

Speaker 3

Thank you.

Speaker 5

So, Christine, I was hoping you could elaborate on your comments about changes to the development Strategy and specifically as it relates to the widening the reach and maybe pursuing a different type of shop and or lease structure?

Speaker 3

Yes, absolutely. So as we look to refine our real estate strategy, a couple of things we are working through. So 1, as we move into new markets, we think that as we widen our penetration, it will allow the brand really some time to build as we go into these new markets. That is the piece on widening the reach. And then your second question, and looking through shop types and lease types.

Speaker 3

So we today have a variety of shop and lease types. And when we look at those, we have increased our ground leases over time really to react to the market conditions that we've been seeing. And so we believe over time as those market conditions and kind of all of the COVID supply chain pieces work their way There's an opportunity to pull back a teensy bit on the ground leases as we move forward. We also have at a variety of different shop types within our portfolio and we'll continue to experiment. Recently, we've had a couple of openings with endcaps, and so we will continue to look at that as a part of our portfolio going forward.

Speaker 5

Okay. That's helpful. And then it's encouraging to hear the profitability curve for new stores is similar to the rest of the system. But can you provide an update on the average investment cost and maybe how new unit returns, how the target may have changed from The IPO

Speaker 4

Yes. Hey, Chris, it's Charlie. So as it relates to returns and investment, We haven't specifically shared the return results since the IPO, but if you look at the shape of what's happening, historically, we had outsized returns. If you take our AUV relative to the investment costs and the profitability of SHOP model, at the time of the IPO, we targeted a 35% return on ground leases 75% on build to suit, and we're pleased with that result. But as noted, going forward, In the short term, we've got elevated build costs, which are up between 30% 40% on a project cost basis and those moderating new shop volumes as we are infilling so heavily.

Speaker 4

So we'll see what was Highly likely excessive returns relative to the IPO coming more coming down and moderating in the near term.

Speaker 6

Okay. Okay, great. Thanks guys.

Operator

And the next question comes from the line Sharon Zackfia with William Blair. Please proceed with your question.

Speaker 7

Hi, good afternoon. I guess following up on the real estate strategy refinement, It sounds as if perhaps there's some ramifications from Texas in the refinement strategy. I just want to Clarify if that's the case, is there anything you've seen in Texas as you've kind of infilled and fortress there so quickly That if you had a do over, you might not want to replicate. And I'm trying to also think through The ramifications for the P and L as you go in maybe a little bit slower into new markets, is it fair to think That's an AUV enhancement, but maybe a bottom line drag, Charlie, if you could give us any thoughts on that.

Speaker 3

Great. I can start with, learnings from Texas. So I think one of the things as we grow, we're growing very quickly. So we are Constantly, taking in the learnings, from each of the new shop openings and understanding how to get a little bit better each time, right? So That's a constant improvement.

Speaker 3

For us, Texas is a really important landmark and part of the country to really have gone into in a big way. It really provides that launching pad for the rest of the country for us. And we've been incredibly pleased with the customer response from our growth in Texas.

Speaker 4

I think in terms of the P and L, the profitability, you Call it a drag. We noted that our Texas SHOPS margins are very productive, as productive as our existing portfolio. So as we look to widen our reach and go out a little further, it doesn't mean we're going to slow our development pace. It means we're going to change the shape of it. But we shouldn't see a drag on profitability.

Speaker 4

The other thing that's very notable this year beyond the margin productivity we're seeing is We've refined our opening approach and we are saving dollars on a like for like basis on pre opening costs. So all those refinements as we go forward It should help us move through this shifting of how we're going about this.

Speaker 7

Okay. Thank you for that.

Operator

And the next question comes from the line of Andrew Charles with Cowen and Company. Please proceed with your question.

Speaker 8

Great. Christine and Josh, congrats to both of you. Charlie, you just touched on this, but I just want to make sure it's confirmed that With the refinement to the real estate strategy, do you guys still anticipate you'll be able to support your prior targets for mid teens annual growth in 2024 and beyond?

Speaker 4

Absolutely. Yes.

Speaker 8

Okay. Thank you for that. Okay. And then, Charles, just a quick bookkeeping one. Can you provide the price Traffic and mix components of 2Q performance?

Speaker 4

Yes. So when you break down our system comps, you've got a +6 approximately on price. And net of sales transfer, you have a flat traffic number. Sales transfer is estimated to be approximately 300 basis at

Speaker 8

this point. Very good. And then, Christine, one question for you. Can you talk a little bit about the gap in same store sales between company operated and franchise What you attribute that to and what are the opportunities to help make that a bit more consistent?

Speaker 3

Yes. So as we look at that gap, I think one of the things is we are still growing our rewards program. And so over time, our newer shops, They are ramping up really nicely and adding rewards programs. And so as I noted, in Q2, we really increased, the rewards promotion. We also did a lot of what we would call throwback promotions.

Speaker 3

So things that we've done in the past that our customers get really excited about. We have seen great success in new markets with these that are franchise markets, which are some of our older markets are We're familiar with some of these promotions.

Speaker 4

Yes. And so Christine, sort of dovetailing off of that, higher promo costs in the company shops, particularly in the markets as we see it in the brand, so therefore, a higher rewards cost. Sales transfer is higher a higher rate in the company portfolio versus the franchise because we're going faster there. And then there's some geographical differences between where the franchisees are and where the company shops are and the relative growth rate of that. It all kind of lays out to allow for the difference that we're seeing.

Speaker 4

We don't see an operational difference. We have no data that would say there's an operational difference in the company and franchise portfolios.

Speaker 8

Very helpful. Thanks for the color.

Operator

And the next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.

Speaker 9

Great. Thank you. Just a clarification and then a question, please. So in terms of the margin, Trying to understand from a restaurant level perspective, I know you did a really nice contribution bridge, but to what extent Are there any influences from like the shift from build to suit to ground lease to your early point, The 10% higher margins or from opening in lower cost states, Just sort of like an apples to apples basis, is as we think about as I think about the margins, I want to make sure I understand kind of What any kind of mix impact might be? And then I'll have a question on some of the marketing initiatives.

Speaker 4

Yes. So the lease type, a ground lease or a build to suit has no effect on the company SHOP reported margin. So it's not a factor. And the rest of so that margin walk upward, again, nothing to do with the lease type, It's about half of that walk ahead is the menu price impact of things we've done. And then the rest of it is operational efficiencies and labor in savings and preopening and savings and operating expenses.

Speaker 4

We do have lower Wage costs as we move eastbound, so that's also a factor as the portfolio weighs in.

Speaker 9

Okay. Just to clarify, my understanding was that ground leases had lower part of the sort of philosophy behind doing ground leases Was that perhaps lower rent expense because you weren't kind of reimbursing the landlord for T and I? Is that not the case?

Speaker 4

They do have lower cash rent, but from GAAP for GAAP accounting purposes that part of that gets inferred that difference gets inferred

Speaker 9

And then And then in terms of kind of the some of the marketing changes, so like the sort of paid media, Some of the initiatives seem like

Speaker 3

kind of more

Speaker 9

traditional traffic driving initiatives. What does that mean in terms of how much you're how you're thinking about media as a percentage of revenues or how you're thinking about the marketing mix Going forward versus what we what maybe you had done previously.

Speaker 3

So, as we look forward, I think, one, we've just brought in a new CMO, Tana, and so she's Really beginning to ramp up in her job and looking at the mix of things that we're doing. But I would share that I think from a percent spend, what we're looking at right now is we're specifically looking at the return on all of our initiatives. And I think with the data that we have from our rewards program, the way that we can see the performance of our different Ad types and what we put in them and all of those things that we're not actually targeting a percentage. What we're looking for is really looking to expose our brand to new customers. We're in so many new markets and bring them in.

Speaker 3

And so rather than And targeting an actual percent, we're really looking at, what can drive growth, what can drive trial and what is an effective ROI in our marketing spend.

Speaker 9

Got it. Thank you.

Operator

And the next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Speaker 10

Great. Thank you very much. Two questions. First one, just Christine, with the AUVs being perhaps down a little bit from what you were initially expecting for new units and as you mentioned the cost to build up, I know you're working diligently on both fronts to mitigate that, but I'm just wondering if there was even the consideration of slowing down the near term unit growth from What's already industry leading levels to give you more time to kind of absorb or maybe work through the headwinds you're dealing with on both fronts or whether that was not even a consideration?

Speaker 4

Hey, this is Charlie. I'll speak to the new unit AUV. So Jeff, if you remember, At the IPO, we projected $1,700,000 We need AUVs. We are seeing that moderate from well over $2,000,000 in the lease of class to 1,700,000 And we also want to reinforce that a lot of heavy infill going into Texas, which we talked earlier about, we wouldn't necessarily repeat that as we go out a little wider. In terms of the build cost, well, that's pretty sticky, the elevated build cost.

Speaker 4

There are things we can do that we talked about earlier. Prototypes, Doing an end cap, which is lower project costs versus a ground up freestanding building, maybe using some different lease types to I'm assuming less cash upfront. And so at this stage, we don't feel like that should really change the shape of our growth trajectory going through the next few years. And Dana, you want to tag into this as well.

Speaker 3

Yes. Jeff, what I would add to that is that We have a really robust real estate pipeline. And so what that allows for is that allows for us to take our learnings over time and adjust in places where we think it makes sense, but continue that same year growth. And I think the robustness of that pipeline, How many sites we have lined up to still go will allow us to keep our shop growth on place.

Speaker 10

Understood. And then my follow-up is just on the restaurant margin, north of a 30% margin this quarter, Up 500 and some odd basis points. That's really incredible. Just wondering, Christine, as you look at this business With the first set of eyes having come from others within retail and whatnot, is there any thought to maybe the business being over earning And maybe willing to reinvest some of those benefits in store. I mean, it just seems like those are well above industry level Margins, and maybe there's an opportunity to reinvest some of that to further strengthen the platform.

Speaker 10

Thank you.

Speaker 3

Yes, absolutely. So a couple of things. I think one, as Charlie mentioned, this is seasonally our highest revenue quarter. So that also helps with profitability in the quarter. And then as we think about reinvesting, absolutely.

Speaker 3

And Again, this brand was really built on investing in local communities, bringing new people in, investing in driving trials. And so we are really going to continue doing that work, to allow new guests to fall in love with us.

Speaker 10

Thank you.

Operator

And the next question comes from the line of David Tarantino with Baird. Please proceed with your question.

Speaker 11

Hi, good afternoon. I had a question about the traffic trends and certainly a lot of improvement from the Q1. But I was wondering if you could maybe talk about how much of that improvement might have been related to just lapping over A lower comparison versus kind of real underlying improvement based on the initiatives that you called out. I guess how much I guess of the traffic improvement was related to each of those factors.

Speaker 3

Yes. As we look at the traffic improvements quarter over quarter, we believe about a third of that traffic improvement is due to the easier lap from Q2 of 2022. And then evenly split really over the rest of the pieces, so innovation, Dutch Rewards and an increase in the advertising spend, really all split the rest of that improvement in our traffic.

Speaker 11

Got it. Okay. And then I guess, how did that inform the outlook for the second half of the year? I guess, what's your expectations for the traffic picture as the rest of the year evolves.

Speaker 4

Well, from a we don't break it Down in the full year from a guidance perspective, but we mentioned low single digit total comp. There's an element of pricing in there as well that we've noted, and then you've got sales transfer, right? So, we're just going to keep pushing the gas on the traffic lift And try to get that as high as we can. And we talked about the investments. So that's

Speaker 3

Yes. I think one of the things I would add to that is that we've learned a lot with what we've done in Q2. And so we've experimented again from a rewards Perspective with different types of offers, different day parts, different geographies, we've done the same on the promotions front. And so I would say we are as we move forward, we'll continue doing similar activities, but with the learnings that we've had from Q2 To really enhance the profitability and understand, where those, actions have made the biggest differences.

Speaker 11

Great. And if I could squeeze one more in. Charlie, I might have missed it, but the pricing increases that you implemented at the end of Q2, I guess, what amount of pricing, I guess, effectively did that lead to? And What type of pricing are you going to be running in the second half of the year?

Speaker 4

Well, on a full year basis, We're now going to range from about a 4% up to approximately a 6% full year price lap with that price move that we just took.

Speaker 11

Got it. Okay. Thank you very much.

Operator

And the next question comes from the line of Jeff Farmer with Gordon Haskett.

Speaker 6

Greg, thank you. Just looking to better understand the sales volume curve of some of these infill development shops. I guess, more specifically, to the extent that you're willing to share, are these units or shops entering the comp base As a same store sales headwind or a tailwind at this point?

Speaker 4

Right now, there's so few of these shops, For example, in the Texas market that's in the comp set, it's really very low. It's de minimis at this point. Now as we hit the 1st day of 16th month going forward, that will start to ratchet up as we go forward. I think in the Q2, we had maybe approximately 40 shops or 50 shops that's in the comp base from Texas. So going forward, you'll see that more.

Speaker 6

Okay. So I'll back off from the comparable store units for a second. But just in terms of thinking about, I think we all understand that the infill shop Volumes are lower, but in terms of the growth rate, anything you can share there in terms of year 1, year 2, year 3 In terms of the AUV growth trajectory of those infill locations?

Speaker 4

So too early, right? We're talking about 22 late 2022 and 2023's class being the high rate of infill. So they haven't annualized over themselves. And remember, we don't We report a comp number till the 1st day of 16th month to allow shops to climb over their launch curve, settle. So it's just too it's premature to even know.

Speaker 6

Okay. And then last one, I apologize. I'll sneak one more in. Just sort of I think early on in the year, you guys Ted, broadly guided to the shop level EBITDA margin for 2023. I think you basically said Your expectation was that it would be flat.

Speaker 6

Any update there in terms of your expectation for the full year 2023 shop level EBITDA margin?

Speaker 4

We're very confident in the flat, and we feel like we'll probably outperform that going forward. It's our belief, given The strong results we've demonstrated in the quarter, the fact that we've taken some pricing and we are beginning to see the green shoots of Commodity is helping us. Okay. Thank you.

Operator

And the next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.

Speaker 12

Hey, guys. And I guess first, Christine, specifically, just as you've gotten involved and looked at the pipeline, is there anything That makes you uncomfortable with that $1,700,000 new store productivity number kind of stabilizing at these levels?

Speaker 3

So no, I mean, as we look forward, so we've done a lot of work, as I shared on the real estate It's obviously an important part of what we're working on here every day. And as we look at that, I think There's things that are ups and downs. So we know that in infill rate, it's going to take the AUVs down a little bit. But going into a new market, where we are Fresh in that market, we are going to see higher AUVs. And so when you look at kind of The way that we can shape our pipeline and really build demand in these new markets while we're then going in and in filling.

Speaker 3

And by the way, I don't think it's a very long time between building that demand and then coming back and infilling that it's going to take. So as I look at the pipeline and all of the richness of the data that we have now, after having We opened so many shops in Texas. I'm very confident as we go forward in what this pipeline will look like, what our growth

Speaker 12

Great. Appreciate that. And then maybe, Charlie, just On the updated guidance for the full year adjusted EBITDA, it seems like at least from Analyst expectations, you beat by about $10,000,000 here in the 2Q and flowed that through. I know there's a lot of puts and takes, but What are some of the key investment areas that you called out if you're willing to share?

Speaker 4

Yes. So Christine sort of outlined a lot of those areas that we've been investing in. But going forward, those will be things around the capability to Support growth going forward, making sure we have a solid team in place, using our rewards program and targeted promotional activity to keep driving traffic in the future and making sure we see new markets even more productively as we go forward. So Good observation that we're flowing through the 10% plus a little more. And I'll go back to the commentary about our 30% margin I'm being very mindful that we have the firepower to reinvest and we're going to do that.

Speaker 12

Thanks very much guys. Nice results.

Operator

And the next question comes from the line of Brian Mullen with Piper Sandler.

Speaker 2

Okay, thanks. Last call you shared that the frequency in that top cohort of customers had held in really nicely where it was Maybe the lower quartile where you had seen a little bit of softness. So as it pertains to the Q2, can

Operator

you just speak to what you saw with both

Speaker 2

of those cohorts in terms of frequency? And then maybe what are your expectations on that for the balance of the year?

Speaker 3

Yes. So we saw in Q2, we saw some improvements across cohorts. As we look forward, Again, we're going to continue to increase our rewards activity. So we are seeing really great customer from that rewards activity. And with that, we would hope to continue to see improvement in the frequency.

Speaker 8

Thank you.

Operator

And the next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.

Speaker 13

Thanks. I really want to hone in on the margins. But first, you guys kind of said 6% system pricing. Is that In line for the company owned stores in Q2.

Speaker 4

It's not dissimilar, The system pricing move versus the company pricing move.

Speaker 13

Okay. And then Q3 pricing sounds like it's going to be close to 3%. Is that fair?

Speaker 4

Sorry, it's 6% for the full year. Last quarter, we reported that pricing would be 4%, 6% for the full year rollover. It's not a 6% pricing move. I just wanted to make sure you understood that. It was approximately a 4% Price move on an annualized basis that we just took.

Speaker 4

And then please go ahead with your question.

Speaker 13

So in Q2, the all in menu price was what, just to be clear? Year over year, the all in menu price?

Speaker 4

In Q2 only, all in versus last year It's about 6% year over year.

Speaker 13

Okay. And then going forward in Q3, what does that translate to

Speaker 4

So it's now estimated at approximately 7%

Speaker 13

Got it. So with 7% pricing in Q3, Really big year over year forward margin increases in the first half. It sounds like Q3, which has some decent leverage. Why shouldn't we see meaningfully above flat for the full year. And by that, I mean, 150, 200 bps above last year.

Speaker 13

I mean, is Q4 going to be that much of a drag?

Speaker 4

So you've got about 6% price for the so we shot you guys a guide of low single digits. 6% is coming from price and we're running around

Speaker 13

Sure. And then for the 4 wall EBITDA margin, You said it should be at least flat for the year, but it just seems like given the performance in the first half, We should be meaningfully above flat year over year. Is that fair for the full year quarter?

Speaker 4

Remember the rollover in 4th quarter, we took a large entry for breakage income in the 4th quarter. We got to climb over that. We reported that last year that the breakage for 2022 2021 was $7,000,000 that we have to climb over in Profit from breakage last year in Q4. That's a big client.

Speaker 13

Fair enough. Thank you very much.

Operator

And the next question comes from the line of Rahul Crow with JPMorgan. Please proceed with your question.

Speaker 14

Good afternoon, guys. Thanks for taking my question. I just wanted to check on the TAP system rollout. Can you guys elaborate on where or how How much of the system has this rolled out now? And then I'm also curious on how much of the 180 bps leverage you've got in labor came from the efficiency of this TAP rollout within the system you have exiting 2Q.

Speaker 3

Yes, absolutely. I can take that. So, our TAP system is still in a testing phase. We are currently in 16 shops that are operational right now. So as far as labor efficiencies, it's really not driving any of that labor efficiency in our markets.

Speaker 3

When I look across at what's driving the labor piece, it's really investments we've made in our labor scheduling systems, investments we've made and educating our teams on how to best schedule labor, looking at scheduling against peaks and things like that. So that's really the result That's what we're seeing from a labor perspective.

Speaker 14

And I have a follow-up on the pricing side. I think you guys talked about 2 different components here. 1 is higher pricing for the customization and the other being more number of shops moving to higher priced So I'm just curious like how much of the pricing taken was on the base menu versus what is the component mix, which is contributing to this price step up between the two categories of customization pricing and moving shops to higher tiers.

Speaker 3

Yes. So one of the reasons why we took price was really to set up this long term pricing architecture in the right way. And so a little more than half of the pricing increase was to make moves in pricing tiers and customizations or modifiers. And so about 2.5% of that price is actually for those moves. And then the rest, Is drink pricing moves really related to drinks that have those modifiers included in them?

Speaker 3

And so when you look at that, there's a couple of reasons why. 1, When we looked at our pricing regions and where we were priced versus competitors, we felt like there's obviously been some movement during COVID of Where people have moved and kind of where how prices have changed. So that was really just catching up with that as we looked at moving into these new pricing tiers. And then from a customization standpoint, this really allows, our customers to kind of pick and choose what they do and sets up our long term pricing architecture in a nice way.

Speaker 14

Understood. That's really helpful, Christine. One last follow-up, if I may. On your rewards members cohort, did you see any change in frequency of store visitation over the past few quarters? So if you take up like one specific cohort within the 6,200,000 numbers you have now, is there any change, notable change in the frequency of visitation?

Speaker 3

Yes. So as we track our rewards data, that's not exactly how we track it right now. And when we're looking overall at traffic improvements, I think with the number of new shops we have, we're both looking for those frequency changes, but we're also looking to add new customers in. And so those cohorts do have changing members within them. And so what we're really looking for is we want to bring new customers in, that are quickly increasing their frequency over time And then also increasing the frequency of our existing customers.

Speaker 14

Perfect. Thanks a lot for answering my questions and congratulations on the

Speaker 5

role. Thank you.

Operator

And the next question comes from the line of Gregory Francfort with Guggenheim Securities. Please proceed with your question.

Speaker 15

Hey, thanks for the question. I had 2 quick follow ups. The first is, maybe just as we think about the changes on the leases, how you're going

Speaker 8

to finance new stores, Within the $225,000,000

Speaker 15

to $250,000,000 of CapEx from this year, what would that have looked like under maybe the new mix you're considering?

Speaker 4

I couldn't speculate going forward like that. I mean, I understand the question, but on the fly, I couldn't tell you what that would be.

Speaker 5

Yes. One thing I

Operator

would add,

Speaker 3

I think it's important to note too is our pipeline is planned 18 to 24 months out. And so We are currently now for the majority of our time looking for sites in 2025. As we look at continuing the growth here, this will be a gradual Change versus something more abrupt. And so just want to make sure we're very clear that this is really a refinement. And our continued focus on learning from every new shop that we're opening.

Speaker 15

Got it. Understood. Understood. Then maybe just going back to the labor, I think you guys put in place these changes to how you guys Kind of schedule labor in sometime in the middle of Q4.

Speaker 6

So I guess

Speaker 15

it's now been, I don't know, around 9 months. How is that done? I mean, do you feel like you've gotten it to the right level? Do you think you maybe have an opportunity to take more labor out or maybe reinvest? Just it was a big change, and I'm curious kind of where you think that settled out versus where you might want to go?

Speaker 3

Yes. Well, when we look at the change we made, it was really our labor scheduling system last year catching up with the pricing moves that we made. So if you think about it at the shop level, we weren't actually changing the amount of labor that was in our stores. We were just catching it up with the pricing move. And as we look over time, I think one of the great parts of our brand is really our people and our systems, the really strong turnover number that we have within our stores.

Speaker 3

And we believe that the investments that we make in labor, Ensuring that our breweries have an awesome working environment and have the right number of people within the shop to please our customers is Super important. So we are not looking to make changes in labor other than things that will make our shops more efficient from a line speed perspective, but we're not looking to cut labor in our shops.

Speaker 15

Understood. Maybe one last one. Just Charlie, I know it's been really topical about the fundraising with with either debt financing versus equity financing. I'm just curious, any updates or thoughts on that front would be helpful. Thank you.

Speaker 4

We wouldn't comment on any future action, but we're very pleased that we upsized through the accordion. And as we noted, very pleased that we had a Rod, syndicate join us in that effort. It was it turned out great.

Speaker 15

Thanks, guys.

Operator

And the next question is a follow-up from Nick Setyan with Wedbush Securities. Please proceed with your question.

Speaker 13

Thanks for the question. Just what was inflation, labor inflation and food cost inflation in the quarter? What do we expect it to be in Q3 and Q4 now?

Speaker 4

We don't guide that forward, Nick. So wage inflation outside of the moves we made for the quarter was low single digits. And remember as we move east, our wage rate is waiting down, so it helps to abate any wage inflation. We don't give those figures out by quarter going forward.

Speaker 13

And what about the cost inflation for Q2?

Speaker 4

So ingredient input costs went down about 1%. They were actually elevated in Q1. They've now shifted from 1% higher to about 1% lower of input costs.

Speaker 13

Thank you very much.

Operator

Ladies and gentlemen, at this time, there are no further questions. Now I'd like to turn the floor back over to Joth Rickey for any closing comments.

Speaker 2

Thank you for your questions. As we look ahead, our goals are clear and we are focused. We plan to continue executing against our plan, We plan to be smart, learn, adapt and run our playbook. We're playing offense and our efforts to deliver profitable growth have begun to bear fruit. Throughout the quarter, we saw sequential progress in our traffic and our top line grew 34%.

Speaker 2

We delivered approximately 100% adjusted EBITDA growth year over year. We continue to build quarter after quarter, creating a strong foundation of growth. Most importantly, I'd like to thank you for your time and your continued support That's for us.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Genesis Healthcare Q2 2023
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