Q2 2023 Dutch Bros Inc Earnings Call

Participants

Charley L. Jemley; CFO; Dutch Bros Inc.

Christine Barone; President; Dutch Bros Inc.

Daniel P. Warren; Director of IR & Corporate Development; Dutch Bros Inc.

Jonathan J. Ricci; CEO & Director; Dutch Bros Inc.

Andrew Marc Barish; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division

Andrew Michael Charles; MD & Senior Research Analyst; TD Cowen, Research Division

Brian Hugh Mullan; Director & Senior Research Analyst; Piper Sandler & Co., Research Division

Christopher Thomas O'Cull; MD & Senior Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

David E. Tarantino; Director of Research & Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Gregory Ryan Francfort; Director; Guggenheim Securities, LLC, Research Division

Jeffrey Andrew Bernstein; Director & Senior Equity Research Analyst; Barclays Bank PLC, Research Division

Jeffrey Daniel Farmer; MD & Senior Analyst of Restaurants; Gordon Haskett Research Advisors

Nerses Setyan; Senior VP of Equity Research & Senior Equity Analyst; Wedbush Securities Inc., Research Division

Rahul Krotthapalli; Analyst; JPMorgan Chase & Co, Research Division

Sara Harkavy Senatore; MD in Global Equity Research & Senior Analyst; BofA Securities, Research Division

Sharon Zackfia; Partner & Group Head of Consumer; William Blair & Company L.L.C., Research Division

Presentation

Operator

Thank you for standing by, and welcome to the Dutch Bros, Inc., Second Quarter 2023 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, Tuesday, August 8, 2023, at 5 p.m. 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 Paddy.

Daniel P. Warren

Good afternoon, and welcome. I'm joined by Joth Ricci, CEO; Christine Barone, President; and Charley Jemley, 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 have also now been posted to our Investor Relations website at investor.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, 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-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 financial measures are neither a substitute for nor superior to measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release.
With that, I'd like to now turn the call over to Joth.

Jonathan J. Ricci

Thank you, Paddy. Good afternoon, everyone. Q2 results demonstrate continued momentum in the business. This is a result of a 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 spot. In Q2, we opened 38 new shops across 8 states, with 83 new shop openings through June 30. 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 570-basis point expansion in company-operated shop contribution margin. The second quarter saw shop margins return to seasonally normalized levels as we emerge from the COVID-related inflationary period characterized by 2022 results. Revenue growth, company shop productivity and disciplined SG&A investments drove almost $49 million 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 in 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 Barone will step into the role of President and CEO effective January 1, 2024. 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 her 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. 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.

Christine Barone

Thank you. Since joining the Dutch Bros team, I have been so impressed with our broistas, 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 Joth mentioned, we saw an improvement of 580 basis points of system-wide same-shop sales quarter-over-quarter, 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. 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 front line 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 costs, 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 growth with our fundamental differentiator, our people. 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. 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. 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. 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 support our growth aspirations, and we believe these investments will enable us to compete effectively as we scale.
In Q2, we opened 38 new shops, 35 of which were company operated. Shops opened in 2022 and 2023 are annualizing to approximately $1.7 million 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 expand 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. Elevated infill is a result of a purposeful decision to push the development piece 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, 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 second 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. 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 on our path to 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. Second, 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 process. 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 pursue a more diverse range of lease and shop types while continuing to focus on the drive-thru channel. Third, we will continue to look for opportunities 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 giveback days. We are continuing a 30-year history of investing in our communities, driving trial with promotions and relevant events to build our brand and new shop revenue.
These actions represent a curation of our approach to growth. 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&A growth. Company-operated shop profitability powers our growth aspirations. Not only did total company-operated shop contribution grew almost 70% from Q2 2022 to approximately $67 million, these shops delivered 570 basis points of margin expansion year-over-year to 30.3% 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&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&A growth to remain below the rate of revenue growth, which will create leverage.
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 multipronged 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.
First, innovation. 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. Mangonada, 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 million drinks sold in the quarter. 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 posted a few product drops to deliver quick burst of innovation and buzz, which included our cookie crumble topping and Popping 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. Second, rewards. We have seen continued momentum in our rewards program following the end of March refresh. 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.
Third, paid media. 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. Fourth, promotion.
In our last call, I noted the success of the Fill-a-Tray program we ran in late March. 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 Fill-a-Tray, we continue to pulse and experiment with other multiple-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. My first 6 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, Joth 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.
With that, I'll turn it over to Charley to review our financials.

Charley L. Jemley

Thanks, Christine. In our decision-making, we emphasize profitable growth while keeping an eye toward the future. As many of you know, the 4-blade windmill is one of Dutch Bros iconic images. In Q2, the windmill turned with a stiff summer breeze and generated outstanding growth and performance across 4 key aspects. Total revenue of approximately $250 million, 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 million, double what we reported in Q2 2022 and 19.4% of revenue.
Shop growth remains on track. We opened 38 new shops system-wide, of which 8 opened in April 13 and 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 and company-operated shops. Net sales grew 38% at company-operated shops. Shop contribution margin reached 30.3%, expanding 570 basis points year-over-year. Note, this contribution includes 1.5% of preopening expenses. We continue to see strong labor productivity. Labor costs improved 280 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.
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 26.8% 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 costs. 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. However, we made these moves to set our pricing architecture for the future. In the franchising and Other segment, gross profit improved to $19.2 million compared to $13.8 million 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&A. For the quarter, SG&A was approximately $52 million, which includes about $10 million in stock-based compensation. Please make reference to the supplemental slides for a reconciliation between SG&A and adjusted SG&A. Therefore, with the exclusion of stock-based compensation and other nonrecurring expenses, adjusted SG&A was approximately $39 million. This declined to 15.7% 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. Last week, we successfully upsized our $500 million credit facility adding $150 million in capacity, expanding our syndicate in 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 million, which is made up of approximately $100 million of drawn term loans, a $350 million revolver, of which approximately $183 million was drawn as of June 30, 2023, and $200 million of undrawn delayed draw term loans. As of June 30, we had approximately $256 million of net debt, inclusive of this upsizing we would have had approximately $370 million in liquidity against our $650 million facility, up from approximately $220 million in liquidity before our refinancing.
In Q2, our operations generated approximately $43 million in pretax cash flow prior to capital spending and financing, reflecting expanding company shop productivity and SG&A leverage. In the quarter, we consumed approximately $59 million 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. 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 million to $250 million, which includes approximately $15 million to $20 million 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 the low single digits. We believe improved traffic trends and pricing actions will offset the negative same-shop sales growth we reported last quarter.
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 million to $1 billion. This expectation considers the revenue moderation in the 2022 and 2023 age 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 half when modeling our revenue. Adjusted EBITDA is now estimated to be between $135 million and $140 million, up from at least $125 million. 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 increased levels of investment to support key priorities outside what has been previously communicated. Thank you.
And now we will take your questions. Operator, please open the lines.

Question and Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Chris O'Cull with Stifel.

Christopher Thomas O'Cull

Christine, congrats on the promotion. And Joth, congrats on the successful career at Bros. 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?

Christine Barone

Yes, absolutely. So as we look to refine our real estate strategy, a couple of things we are working through. So one, 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, in looking through shop types and lease types. So we today have a variety of shopping lease types.
And when you 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 in, there's an opportunity to pull back a teensy bit on the ground leases as we move forward. We also have a variety of different shop types within our portfolio, and we'll continue to experiment. Recently, we've had a couple of openings with some end caps. And so we will continue to look at that as a part of our portfolio going forward.

Christopher Thomas O'Cull

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?

Charley L. Jemley

Chris, it's Charley. 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 shop model.
At the time of the IPO, we targeted a 35% return on ground leases and 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% and 40% on a project cost basis and those moderating new shop volumes as we are infilling so heavily. So we'll see what was highly likely excessive returns relative to the IPO coming more -- coming down and moderating in the near term.

Operator

And the next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia

I guess just 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 fortressed 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&L as you go in maybe a little bit slower into new markets. Is it fair to think that's an AUV enhancement that may be a bottom line drag, Charley, if you could give us any thoughts on that?

Christine Barone

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. 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.

Charley L. Jemley

I think in terms of the P&L, the profitability, 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. 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 preopening costs. So all those refinements as we go forward should help us move through this shifting of how we're going about this.

Operator

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

Andrew Michael Charles

Great. Christine and Joth, congrats to both of you. Charley, you just touched on this, but I just want to make sure it's confirmed that with [refined] into 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?

Charley L. Jemley

Absolutely. Yes.

Andrew Michael Charles

Okay. And then Charley, just a quick for keeping one. Can you provide the price traffic and mix components of 2Q performance?

Charley L. Jemley

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

Andrew Michael Charles

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 locations in 2Q? What do you attribute that to? And what are the opportunities to help make that a bit more consistent?

Christine Barone

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 promotions. We also did a lot of what we would call throwback promotions. 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 more familiar with some of these promotions.

Charley L. Jemley

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 costs. Sales transfer is higher, a higher rate on 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. We don't see an operational difference. We have no data that would say there's an operational difference between the company and franchise portfolios.

Operator

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

Sara Harkavy Senatore

Just a clarification and then a question, please. So in terms of the margins, 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 that tends to have higher margins or from opening in lower-cost stake? Just sort of like on 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.

Charley L. Jemley

Yes. So the lease type of ground lease or build-to-suit has no effect on the company's 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 and savings in preopening and savings in operating expenses. We do have lower wage costs as we move eastbound. So that's also a factor as the portfolio weights in.

Sara Harkavy Senatore

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&I. Is that not the case?

Charley L. Jemley

They do have lower cash rent, but from GAAP -- for GAAP accounting purposes, that -- part of that gets inferred, that difference gets inferred as interest and gets reclassed down to interest expense.

Sara Harkavy Senatore

Right. Okay. All right. I'll take that offline. And then in terms of kind of the -- some of the marketing changes to like the sort of paid media, some of the initiatives seem like kind of more traditional traffic driving initiatives. What does that mean in terms of how much your -- 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?

Christine Barone

Yes. 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. And so rather than in 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.

Operator

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

Jeffrey Andrew Bernstein

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.

Charley L. Jemley

I'll -- this is Charley. I'll speak to the new unit AUV. So Jeff, if you remember at the IPO, we projected $1.7 million -- we are seeing that moderate from well over $2 million in the lease of class to $1.7 million. And we also want to reinforce that that's 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 costs, there are things we can do that we talked about earlier, prototypes, doing an end cap, which is lower project cost versus a ground-up freestanding building, maybe using some different lease types to consume less cash up front. 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 -- you'll want to tag into this as well.

Christine Barone

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 unit growth. And I think the robustness of that pipeline, how many sites we have wind up to still go will allow us to keep our shop growth [in place].

Jeffrey Andrew Bernstein

Understood. And then my follow-up is just on the restaurant margin, north of a 30% margin this quarter, up 500 some-odd basis points. That's really incredible. Just wondering, Christine, as you look at this business with the fresh set of eyes having come from others within retail and whatnot. Is there any thoughts to maybe the business being over earning, 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.

Christine Barone

Absolutely. So a couple of things. I think one, as Charley 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. And again, this brand was really built on investing in local communities, bringing new people in, investing and driving trial. And so we are really going to continue doing that work to allow new guests to fall in love with us.

Operator

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

David E. Tarantino

I had a question about the traffic trends and certainly a lot of improvement from the first quarter. 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 of the traffic improvement was related to each of those factors?

Christine Barone

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 more traffic. Got it.

David E. Tarantino

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?

Charley L. Jemley

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.

Christine Barone

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 promotion 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.

David E. Tarantino

Great. And if I could squeeze one more in. Charley, 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 you're going to be running in the second half of the year?

Charley L. Jemley

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

Operator

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

Jeffrey Daniel Farmer

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 in the comp base as a same-store sales headwind or a tailwind at this point?

Charley L. Jemley

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 -- it's de minimis at this point. Now as we hit the first day of the 16th month going forward, that will start to ratchet up as we go forward. I think in the second quarter, 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.

Jeffrey Daniel Farmer

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.

Charley L. Jemley

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

Jeffrey Daniel Farmer

Okay. And then last one, I apologize, I'll sneak just one more in. And just sort of I think early on in the year, you guys had broadly guided to the shop level EBITDA margin for 2023. I think you basically said your expectation was that it would be flat. Any update there in terms of your expectation for the full year 2023 shop level EBITDA margin?

Charley L. Jemley

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 commodities helping us.

Operator

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

Andrew Marc Barish

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 $1.7 million new store productivity number kind of stabilizing at these levels?

Christine Barone

No, I mean, as we look forward, so we've done a lot of work, as I shared on the real estate pipeline. 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 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 infilling. 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 opened so many shops in Texas, I'm very confident as we go forward and what this pipeline will look like, what our growth will look like.

Andrew Marc Barish

Great. I appreciate that. And then maybe, Charley, just on the updated guidance for the full year adjusted EBITDA, it seems like at least from analyst expectations, you beat by about $10 million 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?

Charley L. Jemley

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 and being very mindful that we have the firepower to reinvest and we're going to do that.

Operator

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

Brian Hugh Mullan

Last call, you shared that the frequency in that top cohort of customers had held in really nicely where it was -- while it was maybe the lower quartile where you had seen a little bit of softness. So as it pertains to the second quarter, can you speak to what you saw with both of those cohorts in terms of frequency? And then maybe what are your expectations on that for the balance of the year?

Christine Barone

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

Operator

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

Nerses Setyan

I really want to home 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?

Charley L. Jemley

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

Nerses Setyan

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

Charley L. Jemley

Sorry, 6% for the full year. Last quarter, we reported that pricing would be 4%, 6% for the full year rollover, if 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. And then please go ahead with your question.

Nerses Setyan

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

Charley L. Jemley

In Q2 only, all-in versus last year is about 6% year-over-year.

Nerses Setyan

Okay. And then going forward in Q3, what does that translate to, inclusive of the recent price increases year-over-year?

Charley L. Jemley

So it's now estimated at approximately 7%, effect for Q3 year-over-year.

Nerses Setyan

Got it. So with 7% pricing in Q3 really big year-over-year [full year] margin increases in the first half. It sounds like Q3, which have 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. I mean, is Q4 going to be that much of a drag?

Charley L. Jemley

So you've got about 6% price or -- so we show you guys a guide of low single digits, 6% is coming from price and we're running around 300 basis points from sales transfer okay? So you're plus 6%, minus 3% from sales transfer kind of puts you in that low single-digit range that we're talking about.

Nerses Setyan

Sure. And then for the [four-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 margin?

Charley L. Jemley

Over in the fourth quarter, we took a large entry for breakage income in the fourth quarter, we got to climb over that. We reported that last year, the breakage for 2022 and 2021 was $7 million that we had to climb over in profit from breakage last year in the fourth quarter. That's a big climb.

Operator

And the next question comes from the line of Rahul Krotthapalli with JPMorgan.

Rahul Krotthapalli

I just wanted to check on the TAC system rollout. Can you guys elaborate on where or 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 got on labor came from the efficiency of this capital [allotment] within the system you have exiting 2Q?

Christine Barone

Yes, absolutely. I can take that. So our TAC 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. 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 in 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.

Rahul Krotthapalli

And I have a follow-up on the pricing side. I think you guys talked about 2 different components here. One is higher pricing for the customization and are there being more number of shops moving to higher-priced peers, 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 2 categories of customization pricing and moving shops to higher tiers?

Christine Barone

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. And so when you look at that, there's a couple of reasons why.
One, when we looked at sort of 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. 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.

Rahul Krotthapalli

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 6.0 million numbers you have now, is there any notable change in the frequency of the [situation]?

Christine Barone

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.

Operator

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

Gregory Ryan Francfort

I had 2 quick follow-ups. The first is maybe just as we think about the changes on the leases, how you're going to finance new stores, within the $225 million to $250 million of CapEx from this year, what would that have looked like under maybe the new mix you're considering?

Charley L. Jemley

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.

Christine Barone

No, 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 I just want to make sure we're very clear that this is really a refinement. And you are continued focused on learning from every new shop that we're opening.

Gregory Ryan Francfort

Got it. Understood. And maybe just going back to the labor. I think you guys put in place these changes to how you guys kind of schedule labor and some of them in the middle of the fourth quarter. So I guess it's now been, I don't know, around 9 months, how has that gone? 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 settles out versus where you might want to go.

Christine Barone

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 patching 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.
And we believe that the investments that we make in labor, ensuring that our broistas 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.

Gregory Ryan Francfort

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

Charley L. Jemley

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

Operator

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

Nerses Setyan

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

Charley L. Jemley

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.

Nerses Setyan

And what about the cost inflation for Q2?

Charley L. Jemley

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.

Operator

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

Jonathan J. Ricci

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, driving traffic, optimizing operations, selecting strong sites and building great shops efficiently. 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%. 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 of Dutch Bros.

Operator

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