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Dutch Bros Earnings Call

Dutch Bros inc.

Earnings Call Transcript 2023-Q4 

Operator

Thank you for standing by, and welcome to the Dutch Bros, 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 p.m. Eastern Time and will be available for replay shortly after it is 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 Paddy Warren, Dutch Bros Director, Investor Relations and Corporate Development. Please go ahead, sir.

Daniel Warren (executive)

Good afternoon, and welcome. I’m joined by Christine Barone, CEO and President; and Charley Jemley, CFO. We issued our earnings press release for the fourth quarter and year ended December 31, 2023, after the market closed today. The earnings press release, along with the supplemental information deck have been posted to our Investor Relations website at investors.dutchbros.com.

Please be aware that all statements in our prepared remarks and in response to your questions other than those of historical facts are forward-looking statements and are subject to risks, uncertainties and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today’s call. As a reminder, non-GAAP measures are neither substitutes 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’d now like to turn the call over to Christine.

Christine Barone (executive)

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 4-wall economics and is enabled by our shop teams who remain focused on our key tenets, speed, quality and service.

Earlier in 2023, we began laying the groundwork with key initiatives to lift traffic, which we shared with you during our Q1 call in May. In Q4, we saw the impact of these efforts culminate with 5% same-shop sales growth, 100 basis point acceleration from Q3. These results were driven by sequential improvement in customer traffic with particular strength in the midday and afternoon dayparts.

Furthermore, we achieved record Dutch rewards penetration in Q4 with over 65% of transactions attributable to rewards members. Keep in mind that 35% of our shops have been opened less than 2 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 begin 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 3-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 lines stretched for more than a mile. It is clear to me we have something special here and that after all these years and all these 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 7 years. At scale, we anticipate each operator will be capable of leading 3 to 7 shops. Over the past 2 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 introducing Dutch Bros at its 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 3 additions to our leadership team: Sumi Ghosh, Incoming President of Operations, Josh Gunter, incoming CFO and Jeff 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. An expansion of our support center operations into Arizona is 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 operation 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 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 5 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 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 4-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 the greater emphasis on balancing speed and market penetration. We also discussed a 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 4-wall model provides fuel to our growth engine. We continue to work diligently to maintain what we believe is one of the most compelling 4-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, a 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 systems same-shop sales was 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 eased, our sales trends have strengthened, and we were pleased with the results. Here is 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 road map 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 LTOs 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 Truffle Mocha platform drove our LTO 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 are leaning 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 these sustained efforts.

On Black Friday, we once again recorded our highest sales day on record where we provided shoe charms with the purchase of any 2 drinks. This was exciting for many reasons, specifically demonstrating what we believe is our ability to participate authentically in 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 in refining our personalization capabilities. Though 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 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. 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 white space. 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.

Charles Jemley (executive)

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. Systems 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 shop 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 of breakage 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 preopening 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 that 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 or 17.4% of revenue compared to 18.9% in Q4 last year. While we are adding organizational capacity to support scaling the business, we are also making a concerted effort to stage those investments in 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 at 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, including, but 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-digit systems same-shop sales growth in 2024. Revenue is expected to be within the range of $1.19 billion to $1.205 billion. The midpoint of 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 the 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 more 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 points headwind on adjusted EBITDA margins from these pay changes.

Second, we are planning to make P&L investments and 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 of 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 cost, which we deem as nonrecurring and 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 as compared to 2023.

Last year, we began approving 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

Our first question comes from Andrew Charles with TD Cowen.

Andrew Charles (analyst)

Christine, as you implement the new enhancements in development in 2025, like more build-to-suit and focusing more on white space than in billing. Do you expect that you can increase the number of store openings above the roughly $160 per year in 2023 and guided for 2024, or should we expect a perhaps truncated 2025 opening class to better observe the enhancements you’re making?

Christine Barone (executive)

Thanks for your question, Andrew. I think as 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 I just want to ask about the digital ordering ops test. What are you looking to observe during that time? And how are you kind of maybe in a shortened way, how are you kind of mapping this out to not cause congestion and stress in your very productive restaurants?

Christine Barone (executive)

Absolutely. So, as you know, what really drives our brand is our service. And so having that connection between the Broista and the customer. So, as we test mobile and digital ordering, we’re really looking to continue to have that same experience between our broistas and our customers. So that’s really what we’re looking for as we test this. We’re thinking through operations. So, what does this do to line speed, how are we slotting in the drinks as they’re ordered all of those different things as we operationally test this. As you know, we also have drive-thru shops that are set up with a walk-up window, so looking at how people will come up and pick up their drinks from a walk-up window, also how they’ll go through our drive-thru lane and a number of our newer shops, we have escape lanes. And so, we can even begin testing things like delivering a drink to a car that can then pull out the escape line as they pick up their mobile order.

Operator

Our next question comes from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein (analyst)

Great. Question just on the growth outlook. It seems like you’ve entered 2024 with some strong momentum. So, I’m wondering if you could just talk about the components you’re assuming for the 2024 comp guidance, I think you said low single digit, how much pricing we should assume and therefore, the traffic assumption and any color you can provide on the first quarter. I know it’s been choppy, as you mentioned, with the weather to start, I’m just trying to get a sense of where the first quarter is tracking relative to obviously the fourth quarter and what your guidance is for full year 2024.

Charles Jemley (executive)

Jeff, we’ll have pricing roll over 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 issuers levels of 200 to 300 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.

Christine Barone (executive)

And I would share and add to that, that as we ended Q4 with that 5% same shop sales, we were rolling off 300 basis points of price between Q3 and Q4. So that sequential lift in same-shop sales between the 2 quarters, we were really encouraged with what we saw from a customer reaction standpoint.

Jeffrey Bernstein (analyst)

Got it. And just to clarify, Christine, I know you mentioned, obviously, speed of service within your operation is important, but then you also talked about category innovation, which is obviously important to encourage more trial and increased frequency. I think to balance the 2 of those when obviously, you would think that they would kind of run counter to one another. How do you think about that more broadly?

Christine Barone (executive)

Yes. I think as we think about category innovation, it really has to be something that’s impactful. So, something that’s either driving a new daypart or a new occasion for a customer or bringing in new customers. And then thinking through what types of things are really within the routines that we already have. So, putting sprinkles on top of some things really is within our existing routines and doesn’t drive really a layer of extra complexity whereas other things might. So really balancing all of those different things as we think about innovation and adding. But speed of service is really — is incredibly important to us. So, as we think through any new innovation, any new thing that we introduce to the shops, we’re always thinking through how will this impact speed, quality or service for our customers.

Operator

Our next question comes from Chris O’Cull with Stifel.

Christopher O’Cull (analyst)

I had a follow-up question related to mobile ordering and then another question, but I’m curious if you guys can just offer any touchstones around what the size of the mobile ordering opportunity might be or how you’re thinking about the contribution or the return on that type of investment? 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. And 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 has the company considered budgeting this line as maybe a percentage of sales going forward?

Christine Barone (executive)

Yes. So, I’ll take the first question on mobile order and size of the opportunity. So, as we look at this, the number one thing that our customers ask for as an app enhancement is mobile ordering. So that would point to us that our customers really, really want this enhancement in our app. We also look across the industry and understand how important this type of technology is for customers across the industry. We don’t believe that it will be material to our 2024 numbers. However, we do think it’s really a big opportunity. We do believe also that it’s something that has the potential to bring in new customers and has the potential to introduce new occasions. So, if you’re in a hurry and you’ve remembered that we had a really long line one day, you can — you know that if you mobile order, you can adjust your timing and help you get to wherever you’re going on time.

From an advertising perspective, we would agree with you that we really do believe that advertising is an opportunity for us, especially as we’re reaching scale in some of our new markets where we have lower brand awareness. As we went into Q4, we did some testing in top of the funnel advertising, especially in markets like Texas, where we know we have a really awesome brand awareness opportunity in front of us.

Operator

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

Sara Senatore (analyst)

I was wondering — 2 questions actually. The first is just if you could maybe decompose that traffic improvement, the sequential improvement you saw, as I think you’ve done in the — in previous quarters. Obviously, you had somewhat easier comparisons on traffic, but then kind of understanding how much of that you saw was advertising versus digital versus any kind of LTOs just as a sort of underlying comp driver question.

Charles Jemley (executive)

Yes. And qualitatively, the decomposition of our same-store sales, as you know, we reported 5, plus 5. 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 know 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 (executive)

And 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. Very helpful. And then just the follow-up to that is, how are you thinking or feeling about the — your ability to use the data you are accruing about your customers and your transactions through [ e-loyalty ] or through digital ordering; presumably, they’re helping to inform what you do across the board. But I guess where are you or whether you want to put it in innings or some kind of other measurement, like sort of how much progress you’re making in sort of the analytics piece of this.

Christine Barone (executive)

Yes. 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 things 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. When 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.

Operator

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

David Tarantino (analyst)

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?

Charles Jemley (executive)

Okay, David. So, we did have a great year, 31% revenue growth, EBITDA 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 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 tried us, and we see the differential really is an awareness between our new and existing markets, but not a difference in 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 layers like mobile order that we just announced. So, we do share those system-wide AUVs, those company operated AUVs every quarter reflects how the system is evolving. And we realized that pretty much all ships are going to rise with that tie to 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 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, is that — are you assuming something similar to what you realized in 2023, at least directionally? Could you comment on that?

Charles Jemley (executive)

Approximately similar, understand that we will do more sites in existing markets like California. We will do less 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 and partly how new markets like Florida do, and we’re very optimistic about that.

Christine Barone (executive)

Yes, David. I think as we look at how we’re — we are continuing to update our real estate models as we grow, adding in the new data from each of the new shops that opens and looking at their performance and again, continuing to refine that real estate strategy. So, assuming similar levels of volume, but we’re continuing to look at ways to enhance those new unit AUVs.

Operator

Our next question comes from John Ivankoe with JPMorgan.

John Ivankoe (analyst)

The question or the topic, I guess, is on category innovation and building sales layers. And certainly, that leads me to think about your morning business, particularly a habitual morning business and how Bros under indexes 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 is any closer to considering piloting some food in some markets, especially as we have mobile order and pay finally discussed as an incremental initiative.

Christine Barone (executive)

Thanks for the question, John. So, we are excited about protein milk that we launched in Q1 and think that, that actually does serve a unique need set for folks who are trying to get that all-in-one protein as they start their morning or continue their afternoon. As we look at innovation going forward and building those sales layers, for now, we’re really, really focused on mobile order. We think that this can be something that is really strong for us. And as we test this getting this just right and doing it in a way that works for Dutch Bros is going to be incredibly important to us.

And I do — I think we do recognize, as we look at where we might have opportunities that the morning daypart is one of those areas. So, continuing to think through like what works for others and what would be uniquely Dutch Bros and what can work for us.

Operator

Our next question comes from Jeff Farmer with Gordon Haskett.

Jeffrey Farmer (analyst)

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.

Christine Barone (executive)

Yes. So, a couple of things. So, one, I think starting with how do we answer the market. We’ve actually had our mobile Dutch Bros unit in Florida for the last little bit. So, building kind of that excitement and awareness as we go into the market. We’ve gotten some really nice take-up from the activities that we’ve done with that. We are planning on opening our first shop in Orlando at the end of the week. We’re also, as we look at approving sites through our pipeline, we have just every single year, given the amount of shops we’re opening, we’re including that in our new models as we go. And so, each time that we open new shops that gets updated as we look at approving these sites and going into a new market. So, we also are not feeling I think — we’re really looking at that infill strategy, and refining that a little bit. So, we believe that the ultimate outcome is exactly the same as we would have ended up on our way to 4,000-plus shops. But we do believe that we can tweak that a little bit as we go into these new markets like Florida.

Jeffrey Farmer (analyst)

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

Charles Jemley (executive)

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 media and 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 so that we’re ready when this happens.

Operator

Our next question comes from Andy Barish with Jefferies.

Andrew Barish (analyst)

Just wanted to kind of work up some of the margin puts and takes you gave us to the sort of the restaurant level, shop level profitability, Charley? And I just wanted to make sure what was just mentioned on California as well as the manager and pay increases starting in 4Q. Is that combined expected to be about 50 to 100 basis point impact on the labor line for 2024? And is that kind of the primary mover in shop level margins? Or do you anticipate kind of any other lines that we should be paying attention to there?

Charles Jemley (executive)

So, in terms of the forward guide, you’re correct. It’s the combination of those 2 wage events that are the largest driver of any margin contraction. We are making some other P&L investments. We will support what we need in mobile order and pay towards the end of the year and other technology things that we’re doing to be ready to go and make sure our point-of-sale system and our operations are ready. There’s some investment there. And then we get to offset that by continuing to get G&A leverage so that the net margin contraction, we’re expecting an adjusted EBITDA level is what we mentioned there, which is about 50 to 100 basis points in aggregate.

Andrew Barish (analyst)

Got you. Helpful. And then, Christine, there was some early back in the previous regime, discussion on operational efficiency opportunities through TAP systems, and I know a lot of other things have moved to the forefront. But where do you kind of envision that at this point in terms of revisiting that potential initiative down the road?

Christine Barone (executive)

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 customers visiting us more frequently. Specifically, as we look at TAPS, we have rolled out to over 100 shops now, 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 of our new shops as we roll out new shops as well.

Operator

Our next question comes from Nick Setyan with Wedbush Securities.

Nick Setyan (analyst)

Congrats on a great Q4. My question is you mentioned sort of the margin impact from the labor investments. Is that before any pricing actions? Or does that actually contemplate the pricing actions within that guidance?

Charles Jemley (executive)

Yes, it does contemplate some pricing within the guidance. We did take price, a little bit of price, in January related to some of the minimum wage moves and the [ 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 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?

Charles Jemley (executive)

Roughly low single-digit rollover is the end of 2024, coming from 2023, if you look at our price move. And I think it’s also very important to note that we had been bolstering our margins throughout 2023 to help us to prepare to take on what’s coming at us in 2024.

Nick Setyan (analyst)

Okay. So low single-digit pricing in Q1 and Q2?

Charles Jemley (executive)

Well, 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 (executive)

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 mentioned entering 2024 with a lot of comp momentum. Any sort of incremental clarity around what core to-date trends look like relative to Q4?

Christine Barone (executive)

No. I mean 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. Charley, how are we thinking about sort of COGS in 2024? Can we actually see some leverage there?

Charles Jemley (executive)

The direct ingredient costs have moderated, but we also know that sugar is continuing to rise, and that’s part of our basket. And that our distribution costs are still pretty sticky given energy costs and wages involved in that, given we’re a small drop business. So, we think COGS is a pretty benign impact in 2024. We’re not expecting a lot of benefit there.

Operator

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

Christine Barone (executive)

Thank you for your questions. As we conclude, I wanted to highlight our recently completed Dutch Luv giveback. 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 giveback and pivoted from one day of giving to a campaign that allowed us to make a dollar donation for each Dutch Luv feature drink sold from February 1 through the 18th. This campaign not only drove traffic, it 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 that create this exceptional performance by connecting with our customers and communities every single day. Thank you.

Operator

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

ODPOVĚDNOST:

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