BROS: Steady Growth But Economic Headwinds Loom
A Look at 3Q23 and 4Q23 Performance
BROS is set to report EPS AMC today. Estimates are for The company reported a modest increase in franchise comps of 1.5% in 3Q23 (down from 6.4% QoQ), with company-operated shops showing a slightly lower growth rate of 0.9% (down from 1.6% QoQ). Total revenue for the quarter stood at $258.3 million, up 30%, with company sales contributing $231.8 million and franchising adding another $26.9 million. The overstated estimates for its company-operated shops' contribution margin, excluding pre-opening expenses, was 29.9% (vs 25.6%) under normalized numbers of 23.1%. Franchise operations boasted tobe 63.9%, reflecting a strong model. The adjusted EBITDA estimate for the quarter is $40.4 million, translating to a margin of 15.6%, and earnings per share (EPS) are estimated to be $0.06. The quarter should have closed with 790 stores, split between 504 company-operated and 285 franchised locations.
Regarding 4Q23, growth will be slightly reduced, with same-shop sales rising by 1.4% and company-operated shops by 1.0%. Revenue for 4Q213 is estimated at $251.4 million, with company sales at $225.3 million and franchising at $26.1 million. The company-operated shops' contribution margin experienced a slight dip to 27.5% and a normalized 22.5%. The franchise margin will also see a decrease to 60.2%. Adjusted EBITDA for 4Q23 is estimated to $27.9 million, with a margin of 11.1%, and the EPS leveled at $0.00. The company will end the year at 822 stores, comprising 532 company-operated and 290 franchised stores.
Key Points:
- 3Q23 and 4Q23 showed consistent growth in same-shop sales, with Q3 at +1.5% and Q4 at +1.4% (4Q could see more challenges dependingon the level of discounting.)
- Total revenue for 3Q23 is $258.3 million, and total revenue for 4Q23 is $251.4 million.
- Company-operated shops' contribution margin will decrease from 3Q23 to 4Q23.
- Franchise margin remained high but will also decline from 63.9% in Q3 to 60.2% in Q4.
- Adjusted EBITDA margins will decline from 15.6% (looks aggressive) in 3Q23 to 11.1% in 4Q23.
- The company is profitable in 3Q23 at $0.06 (2Q23) but will lose money in 4Q23 at ($0.01) and it also lost money in 1Q23.
- The company expanded its store count from 790 at the end of Q3 to 822 at the end of Q4.
BROS was not as promotional in 3Q23 as in 2Q23, with a National Coffee Day Celebration: Dutch Bros celebrated National Coffee Day on September 29, 2023, with special promotions, including offering an exclusive “Drink More Coffee” hat. Also, Dutch Bros launched a holiday menu, a typical time for companies to offer special drinks and promotions. The Chief Marketing Officer, Tana Davila, mentioned celebrating the season with various innovative drinks, suggesting that promotional activities might have accompanied these. Dutch Bros Coffee has a seasonal promotion approach, aligning its marketing efforts with holidays and seasonal changes. They seem to use these occasions to introduce new products and offer special promotions to their customers.
Navigating the High Tide of Inflation: The Restaurant Industry's Crucial Turn in 2024
My take on a recent Restaurant Business article on restaurant industry pricing and the outlook for 2024
The consumer sector has demonstrated remarkable resilience despite the historic levels of inflation over the past two years, helped along by strong employment and wage growth. This economic backbone has kept restaurant sales buoyant, defying our pessimistic forecasts that assumed a more significant downturn. However, the industry stands at a crossroads, as continuous price increases are no longer considered sustainable. CMG and MCD are two companies that are front and center on this argument.
Carlos Herrera, Coca-Cola North America's chief economist, emphasized at the Global Restaurant Leadership Conference that while consumers have been willing to pay more for dining out, there is a noticeable shift in their behavior—they are beginning to cut back on the quantity of food purchased. This trend signals a critical juncture for restaurant operators, who may need to pivot from price hikes to cost management to sustain profitability in 2024, which Herrera dubs "The Year of Management."
Herrera pointed out that the proportion of income spent on dining out has increased from a historical average of 5% to 5.7%, a change consumers are acutely aware of. This heightened expenditure is not limited to restaurants but extends to grocery stores, contributing to an additional $220 billion in food spending. The restaurant industry, in particular, has seen menu prices outpacing general inflation for two consecutive years, with a notable 5.1% increase at Full Service in September alone, compared to a 3.7% rise in the CPI.
The consumer's frustration with escalating prices is palpable on social media, with reports of exorbitantly priced meals becoming commonplace (and anchor pricing becoming an issue for CMG). While restaurant operators assert that there has been little pushback against price increases, consumer discontent and the decline in industry traffic suggest otherwise. Although the labor shortage of 2021 and 2022 has passed, consumers still don't want to work in the industry, and wage growth is still 5-6%, giving an excuse to raise prices.
As the industry looks towards 2024, consumer fatigue is a real possibility. While there is no immediate sign of a significant pullback in dining out, the frequency of restaurant visits is declining, and price hikes are likely a culprit. If this trend persists, it's a double-edged sword for the industry; rising prices faster than overall inflation will likely lead to a more pronounced reduction in customer visits, and if they don't, the industry will see a significant decline in margins.
Key Points:
- Consumer resilience has kept restaurant sales stable despite high inflation.
- Continuous price increases in the restaurant industry are unsustainable.
- Consumers are reducing the quantity of food purchased due to higher costs.
- The percentage of income spent on dining out has risen from 5% to 5.7% due to inflation.
- Excess food spending has reached $220 billion above normal levels.
- Restaurant prices have increased by 5-6% year-over-year, outstripping the consumer price index.
- Social media reflects consumer frustration with rising meal costs.
- Labor costs remain high, contributing to the pressure on price increases.
- While consumers are not drastically cutting back on dining out, the frequency of visits is decreasing.
