Participants

Kayla Barton; IR; Dutch Bros, Inc.

Christine Barone; President and CEO; Dutch Bros, Inc.

Charley Jemley; CFO; Dutch Bros, Inc.

John Ivankoe; Analyst; JPMorgan Chase & Co.

Andy Barish; Analyst; Jefferies Financial Group, Inc.

Sharon Zackfia; Analyst; William Blair & Company

Chris O'Cull; Analyst; Stifel Financial Corp.

Brian Mullan; Analyst; Piper Sandler Companies

Sierra Suntory; Analyst; Bank of America Corp.

David Tarantino; Analyst; Robert W. Baird & Co.

Jeffrey Bernstein; Analyst; Barclays PLC

Nick Setyan; Analyst; Wedbush Securities, Inc.

Andrew Charles; Analyst; TD Cowen

Jeff Farmer; Analyst; Gordon Haskett Capital Corp.

Dennis Geiger; Analyst; UBS Group AG

Presentation

Operator

Thank you for standing by, and welcome to the Dutch Cross, Inc. First Quarter 2024 Earnings Conference Call and Webcast. This conference call and webcast are being recorded today, May seventh, 2024 at 5 P.M. Eastern time and will be available for replay shortly.
After Peter has concluded following the company's presentation, we will open up the lines for questions. Instructions to queue up will be provided at that time I would now like to turn the conference over to Kayla Barton, Petroplus, Senior Director, Investor Relations and Capital. Please go ahead.

Kayla Barton

Good afternoon and welcome. I'm joined by Christine Barone, a CEO and President; and Charlie Jemley, CFO. We issued our earnings press release for the quarter ended March 31st, 2024. 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 dot group.com.
Please be aware that all statements in our prepared remarks and in response to your questions other than those of historical fact are forward-looking statements and are subject to risks, uncertainties and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and risk factors in our latest SEC filings, including our most recent annual report on Form 10 K in our quarterly report on Form 10 Q. We assume no obligation to update any forward looking statements.
We will also reference non-GAAP financial financial measures on today's call. As a reminder, non-GAAP measures are neither substitute for nor superior to measures that are prepared under GAAP. Please review the reconciliation of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Christine.

Christine Barone

Thank you, Kayla. Good afternoon, everyone. We delivered exceptional results in Q1 as the momentum we saw leaving 2023 continued into the New Year headlining, this performance was 10%, same shop sales growth, the strongest single quarter since Q4 2021, we delivered $275 million in revenue, an increase of 39% year over year. These outstanding top line results were coupled with excellent flow-through as we delivered $53 million of adjusted EBITDA, an increase of 120% year over year.
Our innovation strategy is working. We released two highly successful new products in the quarter with protein coffee followed by robust, driving strong results in both the morning and afternoon dayparts. Our Dutch rewards program is working with a record 66% of all transactions coming through the program in the quarter, allowing us to efficiently and effectively provide relevant content and offers to our customers. Our investments in driving awareness in new markets are working, and we are accelerating spending to capitalize on this momentum. Q1 same shop sales growth featured a combination of ticket and traffic expansion. Our traffic trajectory improved for a second consecutive quarter. Within the quarter, we experienced some weather disruption in January, rebounding strongly in February and March in April, traffic and ticket growth tempered as we rolled over the refresh of our rewards program, some product outages due to strong demand and the launch of mango Nada at the beginning of April 2023, bolstered by strong same-Shack sales growth. System AUVs expanded to $2 million, once again, the highest on record in Q1. We opened a record tying 45 new shops, marking the 11th consecutive quarter of 30 or more new shop openings, demonstrating remarkable consistency as we execute our growth plans even when taking into consideration what remains an uncertain and evolving consumer backdrop, the strong start to 2024 gives us the confidence to raise our guidance for the year. Charlie will share more context and details in a few minutes, but first, I'd like to walk you through an update on our business. We began any discussion of Dutch growth with our fundamental differentiator. Our people recently, we were awarded a top 10 position in Forbes first ever Best Customer Service list, one of just two quick service brands in the top 10. Once again, the culture we infuse into each shop and the skills and abilities of our broad-based us to make drinks and create relationships are evident in our view. These are the keys to building brand affinity and fueling growth. Our exceptional culture, exceptional people and exceptional service speak to customers across demographics and generations. We continue to support growth with robust people pipeline. Our pipeline has over 375 candidates with an average tenure of over seven years experience ready to be tapped to lead markets as operators as we expand across the country and enter into new regions. Our people are our superpower. They help us achieve our goal of consistently delivering an exceptional customer experience focused on speed, quality and service. We continue to be pleased with our shop level turnover, which is in line with our expectations. The expansion of our support center in Arizona, which we announced last quarter, remains on track, and we are excited to ramp up our hiring in that market. Phoenix is a terrific market for us where we enjoy high brand recognition and affinity. We look forward to capitalizing on this excitement as we continue to build out capabilities in this support center. We anticipate moving into our permanent office location in early 2025. Our leadership team transition continues to go smoothly.
Today. We announced Josh Guenser will be officially assuming the CFO role on May ninth. And in April, we announced suey goes officially assume the role of President of Operations, both Josh and CME have spent significant time in our shops, passing their flow checks becoming fully certified, as least us and developing a strong understanding and respect for our operations. Our CMO, Canada villa has been in her position since June of 2023, and she and her team have been focused on delighting our customers and executing our traffic-driving initiatives. We are beginning to see the results of this focus, we have been executing on a multi-pronged plan to drive traffic and enhance focus on innovation, more targeted rewards program efforts and increased paid advertising designed to build brand awareness. We saw progress in each of these areas in the quarter as evidenced by traffic growth across all dayparts and continued momentum as these efforts began to take hold Here's an update on our key traffic-driving initiatives. Innovation. We believe innovation plays a foundational role in the next stage of our growth and touch growth over the past year. Our innovation strategy has evolved from one primarily focused on highlighting items from our extensive secret menu to one with a greater focus on category innovation. While we continue to believe there will be a place for quick fun product drops to keep our menu fresh and exciting. We also recognize the opportunity we have to drive category innovation, the launch of protein coffee and BofA exemplified this new approach through our research, we determined there was an opportunity to address a customer need state with a high protein functional beverage, our protein coffee beverage delivers at least 20 grams of milk protein and each medium size serving and quickly resonated with our customer base. It was exciting to see how our customers recognize the value of this new occasion and made it a part of their routines, evidenced by higher repeat purchase behavior than our typical LTL encouraged by the high sustained customer demand.
Protein coffee is now part of our regular menu. We followed up the success of protein coffee with the launch of BofA in March, both surpassed all of our expectations. We recognize the recent category growth driven by BofA how nicely this overlaps with our large Gen Z customer base and how seamlessly build that can be integrated into our existing offering.
Similar to protein coffee, we saw repeat purchase trends and positive customer response Beyond driving traffic boosted average ticket and drove what we believe was an increase in group buying behavior.
Based on the strong customer inquiry response, I am pleased to announce that we will continue to offer strawberry BofA as a premium add-on to our regular menu. Going forward, we intend to continue developing category-defining products to help us build sales layers and deepen our competitive moat as we do so, we plan to remain focused on throughput and customer experience, striking a good balance between innovation and the complexity that often comes with new product launches, Dutch rewards. Last year, we took some big steps with this program moving toward more targeted offers and segmenting Dutch rewards members for the first time last summer. We began designing offers to bolster performance in the afternoon daypart. This work is off to a great start and we are beginning to see how it is resonating with customers and driving our business.
The afternoon daypart, where we have been channeling. Our focus continues to see strength. We turn those efforts toward our morning daypart in Q1. We saw great customer response there as well. We also reintroduced an offer of a free drink to new rewards customers in late 2023. This has allowed us to continue to grow the program and deepen rewards penetration, even as we continue to enter new markets. Ultimately, we aspire to become even more sophisticated with our targeting efforts aiming for more personalized marketing. This will take time and continued investment and iteration, but we believe our program will continue to strengthen our relationship with our customers paid advertising. We continue to focus on utilizing paid media to raise awareness particularly in new markets. Brand awareness has lower new markets when compared to more mature markets. In some cases, this difference is substantial with mature markets having twice the brand awareness, we began making investments in our new market awareness late last year and have been encouraged by our initial progress. We plan to accelerate these efforts in 2024, which represents an incremental investment, and we will focus these efforts in new markets including Texas, Florida and Tennessee.
Earlier this year, we announced that we would begin testing Order Ahead capabilities within our mobile Rewards app. The initial phase of the test is going well and we have expanded it to include several stores in the Arizona market. We have gathered a lot of employee and customer feedback. As we work through our stage-gate process, we are optimistic that we will have mobile order capabilities in a majority of our shops by the end of 2020. For getting this right before a broader launch is important for us. We have the opportunity to establish a new channel that increases customer convenience while maintaining the high levels of hospitality that have defined our brand for over 30 years. We do not intend to take labor out of our shops despite likely saving considerable time from the order process. Instead, we intend to reinvest this time in production and hospitality. We would hope to more often be a part of the consideration set of potential customers who may love Dutch Bros, but may be apprehensive of our sometimes long lines, we launched a strategic partnership with Olo to provide the back-end technology integration to support this initiative. We are encouraged by the fact that 66% of transactions in Q1 were attributable to Dosh rewards members as we continue to roll out mobile order functionality. Having such robust digital penetration will likely provide us a strong foundation upon which to scale new shop development continues to be a bright spot as a high-growth company, Dutch press has been able to achieve remarkable opening cadence consistency despite a challenging backdrop over the past few years. Dutch Bros is now a coast-to-coast brand. As during the quarter, we opened two shops in our 17th state, Florida in the Orlando suburbs. These early shops are exceeding our expectations. Our first Florida shops, which are 3,000 miles away from our original start and Grants Pass, Oregon have been met with enthusiastic customer demand, a testament to the strength of our brand. Texas will continue to be an important growth market for us in 2024. As we expect, approximately 30% of new shops will be in Texas compared to approximately 45% in the past two years. We expect our overall rate of infill rural will remain elevated in 2024. We believe the refinements in our real estate strategy, which we anticipate to begin taking hold in 2025, along with increased investments in brand awareness and a continued focus on our overall traffic-driving initiatives will allow us to strike a good balance as we scale the brand. As we have shared before, we are shifting our real estate strategy to less than the pace of future deep infill instead focusing on casting a wider net in new markets and allowing more time to build awareness and for shops to season, we believe the beverage occasion is reliable and habitual and that it takes time to form new habits. Our existing markets have demonstrated this time and time again, as our learnings evolve, we are placing a greater emphasis on market planning, evaluating density and other relevant variables and potential new markets and sequencing of shop openings optimally within new markets to efficiently build excitement and facilitate awareness as we grow, it will take time for these refinements to make their way through the real estate pipeline, and we will likely begin seeing an impact in 2025. Concurrently, we have been increasing our advertising investments in these newer markets in an effort to increase awareness. So far, we are pleased by the initial results.
Finally, last quarter, we mentioned the intention to begin shifting to a greater mix of build-to-suit leases and 2025 relative to 2024. We would expect this approach provides a more capital efficient development strategy. That said, we believe we are uniquely positioned given strong cash-on-cash returns that work in both ground lease and build-to-suit lease arrangements. We are pleased with the excellent start to 2024, and we continue to build a strong foundation for growth. We have terrific customer engagement through our awards program and are excited about opportunities in front of us to further accelerate this platform. We have top-tier growth. We delivered 39% year-over-year revenue growth in Q1 and yet another quarter of at least 30 plus new shop openings, demonstrating remarkable consistency. We have excellent shop margins and have demonstrated that we can drive exceptional growth profitability.
We are well capitalized. We believe we have plenty of flexibility upon which to execute our growth plan and capture a considerable whitespace. Most importantly, we have great people anchored by outstanding engaged releases and a strong pipeline of operators ready to open new markets and continue to expand in existing markets.
With that, I'll turn it over one last time to Charley to review our financials and give more details on our guidance. I wanted to take a moment to acknowledge Charlie and all you've done for Dutch Bros. Charlie has worked tirelessly to help this company make a massive difference cup1 at a time and has spent the last few months ensuring our new leadership team understands not only the financial aspects of Dutch growth, but the field focused culture as well. I have had the great pleasure of knowing Charlie for almost 15 years and having his guidance and mentorship and friendship has been a highlight of my career. I want to personally thank him for all he shared and everything he has done for this company.

Charley Jemley

Thank you, Christine, and the Dutch gross team. For those kind words, I would like to add my welcome to Josh as our new CFO, one word for Q1's financial results outstanding. Here's a brief recap of the financial results, Christine, just shared with you. Revenue growth accelerated to 39%. System AUVs reached $2 million, a record. Same shop sales were 10%, which did include roughly a 1% benefit from February 29th. Company net sales grew 43% with very good leverage, driving 77% growth in Company-operated shop contribution. Four-wall productivity remained strong with Company-operated shop contribution margin reaching 29.8%, expanding 560 basis points year over year. Adjusted SG&A fell below 15% for the first time since our IPO to 14.7%, 370 basis points lower than Q1 of 2023. Adjusted EBITDA increased to $53 million, growing 120% year over year. Adjusted EBITDA margin of 19.1% is up 700 basis points over Q1 last year. Company operated shops saw strong leverage up and down the P&L, driven primarily by strong comparable sales results and continued strong margins from newer shops. Cost of goods sold improved 260 basis points year over year driven by strong ticket growth as well as year-over-year moderation in underlying costs. We continue to keep a close watch on key commodity costs as we did see some increases in ingredient costs as the quarter progressed. In particular, we are watching sugar and cocoa prices in the near to medium term. We made note of the elevated coffee C price, which could become a factor down the road, given the lag time from being to cut labor costs improved 160 basis points year over year, where the impact of strong comparable sales outweighed the considerable wage investments we have made in the past 12 months.
Moving forward, the California minimum wage action that took place April 1 may weigh on our ability to deliver similar leverage in the future. Occupancy and other costs improved 90 basis points year over year, driven by sales leverage as well. Preopening costs remain moderate as we take advantage of the efficiency in these costs that come from infill for the quarter, SG&A was approximately $46 million, which includes about $2 million in stock-based compensation with the exclusion of stock-based compensation and other nonrecurring expenses. Adjusted SG&A was approximately $40 million or just 14.7% of revenue compared to 18.4% in Q1 last year. We continue to support a high-growth business with the proper level of investment and resources while achieving leverage and support costs as we scale regarding our balance sheet and liquidity. As of March 31st, we had approximately $662 million in total liquidity compared to approximately $683 million at the end of 2023. And we believe that we have sufficient liquidity at our disposal to support our currently contemplated growth plans. As of March 31st, that liquidity was comprised of the following elements $263 million in cash and equivalents, $349 million in undrawn revolver, $50 million in undrawn delayed draw term loans in the quarter. Interest expense net declined $1.5 million from one year ago to $6.4 million. This decline is driven by a $3.5 million reduction in interest paid for outstanding balances in our credit facility, less the interest income we received on our investments in marketable securities. That decline is driven by an improved net cash position and is a product of the September 2023 follow-on offering partially offsetting the decline in interest expense. Net is an increase in interest expense related to finance leases of $2 million, which rose from $3.5 million in Q1 2023 to $5.5 million in Q1 2024. That increase is a product of new Company operated shop openings, and the portion of those openings were leases have been classified as finance leases for accounting purposes, not discounting the continuing potential of uncertainty in the consumer landscape going forward, we are updating guidance for the balance of the year on the strength of our Q1 performance. As we look forward, that will always be our desire to remain nimble in that respect. We are seeing attractive returns on both our people and marketing investments, and we believe the strength of our four-wall model enables us to make and accelerate investments that bolster our brands.
With this backdrop, we are issuing the following update to our original 2024 guidance. Total revenues are now projected to be between $1.2 billion and $1.215 billion or an increase of $10 million from our original guidance. Adjusted EBITDA is now estimated to be between $195,000,205 million dollars or an increase of $10 million from our original guidance. When we look at the remainder of the year, we expect to see quarterly adjusted EBITDA results more close to one another than we have seen in prior years, we would expect Q2 and Q3 will remain slightly stronger quarter seasonally than Q4, however, less pronounced, there are no changes to our original guidance as it relates to the following aspects. Total system shop openings remain in the range of 150 to 165. Same shop sales growth remains in the low single digits. Capital expenditures are estimated to remain in the range of $280 million to $320 million.
In summary, it was an outstanding first quarter and start to 2024. These results demonstrate that improvements made last year are beginning to take hold and helped position us to navigate the dynamic consumer environment. And we look forward to a review of our Q2 results in early August.
Thank you, and now we will take your questions. Operator, please open the lines.

Question and Answer Session

Operator

(Operator Instructions) John Ivankoe, JPMorgan.

John Ivankoe

Hi, thank you very much. Are the question is on Mobile Order & Pay. And as you see it you mentioned it would significantly speed up the ordering process, but you don't expect to actually reduce the amount of hours that you have for store-level employees. So are you expecting into reallocate some of the outside employees to perhaps inside and as you speed up the ordering process, do you also have similar plans to speed up the production process? In other words, are we just shifting the bottleneck from one thing to another or can both aspects of the Dutch Bros?
Production System speed up at the same time? Obviously asking in a long-winded way how much this actually could, at least in theory, help throughput at peak hours given many of your stores currently being at capacity? Thank you.

Christine Barone

I think, John, as we were just getting started on testing mobile order. So we're in several shops now in Arizona and U.S. As we look at kind of where we are, we can speed up both production and the lines. A couple of things to note is one. We do have variability across our system in our AUVs. And so we do have a number of shops that are operating at very, very high AUVs where we have different deployment standards in those shops because of those very high AUVs. So as we take that as a learning as we go into something like mobile order. We have a very thoughtful way of at different volumes, how we can best deploy our teams and best get through our lines. And so you're exactly right that as we look at mobile order and pay, we think it's incredibly important that we really keep our brand differentiator and that brand differentiator is our service. And so that we will deploy more folks to making sure that we have great conversations with our customers, including both at the window and in the line. So if you drive through the line you're going to have an awesome conversation as you come through, have similarly reach you and say I've got a mobile order. Let me help you with that. If you come up to the window you're going to come and have that same conversation. And so it's very intentional that we want to reinvest this labor back into both production and into ensuring that we can have great conversations with our customers.

John Ivankoe

And if I can sort of view the new stores that you will be building that will be launched with mobile order and pay you expect those stores to actually have some different design or functionality than maybe some of your legacy system that was originally opened without the system?

Charley Jemley

Yes. So a couple of things on that. I think one for the last several years, we have opened shops with a number of escape lanes and then which will allow us to run drinks out to our customers and then have them lean lead that line before they before they reach the window. And as we're drawing shops today, we're certainly highly cognizant that we will have mobile order capabilities in those shops in the future. And so as we think about that, we're thinking about all different types of things like parking. We're thinking about the lines we're thinking about the Escape lanes. But as you as you know, it does take a while for drawings to work their way through the pipeline and system. That being said, I do think we have an ideal setup and many of our locations for mobile order by having both the walk-up window and a drive-through lanes and having that walk-up window, I think is going to be a very natural behavior for our customers who can come in parking lots and then just walk up and have a great conversation with our brokers to grab their drinks.

John Ivankoe

Look forward to it. And Charlie have a great time. Congratulations.

Operator

Andy Barish, Jefferies.

Andy Barish

Great work going through Charlie just wondering kind of on your comments on April on the consumer environment. I mean, you're after an incredible start, your, you know, your guide for the rest of the year implies a pretty modest same-store sales growth. So just just kind of wondering what what's in there b the B side, so a fair amount of conservatism I would imagine.

Charley Jemley

Thanks for your question, Andy. And so as we look at the rest of the year, one thing we're being very thoughtful about is what the rollover looks like from last year. So we did see an acceleration between Q1 and Q2, Q2 last year in our same-Shack sales and in our traffic between those two quarters and really throughout the rest, the rest of the year as we look at our guidance, we're also taking into consideration numerous price moves. And you know, as I shared when we look at April, one of the unique things about Q1 is that we had one promo in 2023, and we lap that this year with two promos. So having protein coffee and BofA lapping over our white chocolate lavender launch from last year.
So that's just something that's a little bit different between the two years of the timing of those promos that we wanted to make sure that we noted and Andy, some as we mentioned last quarter, we expect some additional cost to start flowing into the P&L from Q2 onward. Those still hold that would be the California wage that would be the tech investments that we're making to get ready for Mobile Order & Pay. So not only the rollover challenge gets more significant as you go from Q2 forward. But our cost change shift is also going to slow things down a little bit.

Andy Barish

Got it. And mean, I think it, Bob. Yes, that's yes, Ernie, I was just going to note the final piece was around the rewards program.

Christine Barone

So if you recall, we made the change to the rewards program at the end of March of 2023. And so for the rest of the year, we will be lapping over taking that down a little bit of that discount out of the system for the rest of the year. Now all that said, we're super happy with how Q1 went and are excited for the rest of the year due to.

Andy Barish

Yes, if I could go inside of your product innovation commentary, I mean, it's I guess the simple question is this, why is it working so well for you and not so well for others?

Christine Barone

Yes. So I think as we look at our product innovation, I think one of the things is we're in a really unique time, I think in our growth cycle where we're big enough to really innovate with our partners and bring unique products to market. But we can also also do that really quickly because of our size and scale and our team's ability to adjust and bring new products. And no, I think if you look at how we did product innovation and how we looked at it as we were looking kind of externally at what are other things that are happening outside of what are things that our customers in particular are talking about and thinking about it. I think that protein coffee occasion, you're really seeing kind of that growth in that protein market as a functional beverage and how people are using it sometimes of the meal replacement, sometimes like in combination with there, fitness, routine and then BofA, just something really fun. I think straight down the middle for us in our in our young customer base. And in both of these things just felt like they really, really work with our target customer and who we're going after. And I think that when we look at this, we're super excited that we're going to have both of these for the rest of the year. And as we continue to drive that excitement with our customers.

Andy Barish

Thank you very much.

Operator

Sharon Zackfia, William Blair.

Sharon Zackfia

I guess then just a really basic numbers question. Charlie, could you break down the comp for us in terms of traffic versus ticket?

Christine Barone

Yes, Sharon. So out of that 10% comp, February 29th contributed a part, approximately a point of that menu pricing contributed approximately six points of that discount and mix shifts generated about three points about the balances and traffic and note that sales transfers in there, and that was at the lower end of our expected range of 200 to 300 basis points, and that's how you get them.
Okay. And then I'm just trying to think through kind of the really significant profit upside that we saw in the first quarter, at least relative to the street. I know you don't give quarterly guidance and then the range for the year, which was kind of more modest than the upside. And thinking through your conversation that or comments that you made about the rest of the year.

Sharon Zackfia

Okay, more similar than normal yet obviously implies some unit-level margin degradation the rest of the year on a year-over-year basis. Can you help us think about kind of what you're going to see from a labor perspective in California like what you're eating there because I think you did not take price and correct me if I'm wrong. And then secondarily, are you baking in more inflationary commodities than what you saw in the first quarter?

Christine Barone

Yes. So let me start with we're obviously super pleased with our performance in Q1 with 120% year over year EBITDA growth. When we look at that, a couple of things to note, one is that we did have a pretty rapid acceleration in February and March of our same shop sales. And oftentimes, when you have that type of acceleration in your sales, it's actually hard to staff against that type of growth. And so that is something that as we move into the year, we really want our store our shops to be staffed in the best way possible. And so we're just going to be very thoughtful about that and know that we had a unique acceleration throughout the quarter.
And the second piece is exactly what you noted is that the April California wage increase happened on April first. And so it's not in those Q1 numbers. I'll turn it over to Charlie to give a few more specifics on that.

Charley Jemley

But those are two of the big themes there John, I think you asked about commodities and there's really no big movements there. We noted in the first quarter, it was a pretty neutral, a little bit of help. We don't expect a lot of change their balance a year. The other thing is just to remind that we have these costs and investments coming into our P&L as we go through the balance of the year, we mentioned the California wage, and we also have the tech investments related to Mobile Order & Pay. And as they start moving into our P&L, more fully and then I talked about the shape of earnings and how we went into the year, very confident in the first quarter, we delivered a great number. And so as we move through the year, we would expect that a more normal sequence from quarter one to two and three than you've seen in the past. So we expect to see tighter absolute range of profitability as you start looking at two and three and then less fall off in four than we normally than we would have experienced in the past.

Sharon Zackfia

So I think looking at your trajectory of the absolute profit dollars in the quarter, just being mindful of it. And Charlie, best of luck.

Operator

Chris O'Cull, Stifel.

Chris O'Cull

Great. Thanks. Hi, guys. This is Patrick on for Chris and Charlie obviously been a pleasure. So Christine, I did want to start with the paid advertising, and I'm curious if you feel like you've found an effective marketing mix that you believe will increase brand awareness, specifically in markets like Texas that maybe can only help comp but also start to address some of that new unit volume pressure you've been seeing?

Christine Barone

And thanks, Patrick, you that is an area that we absolutely saw success with in Q1. And so we really started kind of experimenting in earnest in Q4 of last year with different channels, different messaging and how best to reach new customers, particularly in new markets. And we're incredibly encouraged by the results that we're seeing of that work. And I think that with the very strong rewards penetration that we have at that 66% of transactions, we have an awesome channel to talk to existing customers, especially in our mature markets where that penetration rate is even higher. And we really are using our paid spend and our paid advertising to go after and introducing new customers to our brand.

Chris O'Cull

Great. That's helpful. And then I did want to follow up on the your comments around category-defining innovation. And I realize you're not going to share identified opportunities or upcoming products by any means. But can you help us understand strength of the pipeline of ideas that you currently have that you feel could be category-defining or innovative? And then how should we be thinking about the pace of product launches in the similar vein of what you did in the first quarter? As we think about the rest of the year or even into 2025? Whether or not there's a certain cadence that we should be.

Christine Barone

Thank you. Yes. So I'll start with I think the protein coffee is just a really great example of this where it really is a new use occasion for our customers in a way that they likely had used us in the past so it can create repeat purchase it sometimes I think can even hit customers that may be our new customers to us. And so the reason we would call something like that category-defining is it's really a whole new group of products for us that different than the other things that we have. And I think, you know, as we go through the rest of the year.
One thing to note, I think with the launch of both the keeping the strawberry build on the menu and having the protein coffee on the menu, I think you could expect us to continue to innovate around these two pieces as we go through the year. In addition to having a pipeline of other great products as we go through the year. We were very pleased with what we're starting to see with this like two month promo cadence. And so having something around that. But again, it's an area that we continue to look at to understand what's working best in with our customers and our belief.

Chris O'Cull

That's very helpful. Thanks, guys.

Operator

Brian Mullan, Piper Sandler.

Brian Mullan

Thank you. I just question on the entrance into Florida. Christine, you spoke to a good start in the prepared remarks. Maybe you just elaborate talk about what you're doing on the brand awareness front and seeing with the consumer reception? And then just related, just to confirm, is it fair to say the stores are hitting your underwriting expectations thus far from from an AUV and a margin perspective? If you could just comment on that, too, that would be great.

Christine Barone

Yes, I would share it. It's definitely still early on I think what we were very pleased by us to go and open into a new market. We just saw lots of buzz around our openings. We were able to see that we have customers coming from from lots of different places away to come and visit us in our new shops. And we only have two shops open. But as I shared, the shops are exceeding what we what we had expected them to do. So very excited to be in this new market and to be meeting lots of new customers in Florida. Okay. Thank you and Charlie, Ben, congrats and best of luck.

Charley Jemley

Thanks, Brian.

Operator

[Sierra Suntory], Bank of America.

Sierra Suntory

Thank you. And I wanted to ask a couple of questions. One is if you could just talk a bit about and they are mobile order. And I think it sounded like the expectation is that if you will be a part of the consideration set of customers. So that does that mean bringing in new customers and or is it or greater frequency with existing customers? I think we've seen from other restaurants that sometimes the mobile app is a good customer acquisition tool. I wanted to get your thoughts on that.
And then and I have a follow-up yes, I think that it actually could could be both of how we've considered. I do think as you know, our expectation would be as we roll this out in early days. That we have such strong penetration already of our Rewards app that this would likely start with our existing customers and potentially introduce a new occasion where they were had a time crunch or a little bit worried about potentially waiting into when it went in a long line.
And the other thing I think we've seen in some of the industry comments is that the for the AM daypart that that mobile order might be particularly important just given I think people have a little bit more time crunch sometimes in the morning. And so our ability to potentially capture new occasions in the morning as we roll out mobile order and pay is something that we're definitely excited about.

Christine Barone

Understood. Okay. And then the second thing the second question was just on advertising. And I think a lot of times it appears that advertising spend actually kind of compounds over time. And so as I think about that as a driver. I understand that your comparisons maybe get a little bit more difficult, but you I think you also have certainly this am, I guess, a virtuous cycle, perhaps maybe a way to characterize it. So as you think about advertising, is it just you and each quarter advertising drive traffic and trial and then you kind of start from zero again or is that something that you would expect to see where it is build on it up over time?
Yes, I do think that it it could be reasonable to think through that it would build over time. And I think we are also getting smarter and learning more with what the most effective channels are for us, what the most effective the pacing and sequencing of that paid advertising is, and it really encourages us to make additional investments in paid advertising, given the very strong results we believe we're seeing right now.

Sierra Suntory

Got it. Okay. Thank you. And congrats, Charlie, you'll be missed.

Operator

David Tarantino, Baird.

David Tarantino

Hi, good afternoon. My question is on the advertising at Christina, as I think you mentioned being pleased with the results you're seeing in some of the newer markets. And I was wondering if you could just elaborate on what you're measuring or what what results you're looking at when when you make that statement? Is that is it the sales response or is and some sort of awareness metric or how are you measuring success.

Christine Barone

Yes. And the primary success metrics that we're looking at right now is our same shop sales trends. We do also have detailed metrics on views and click-throughs and all of those types of things. But this is something that we're excited when it shows up in our traffic and same shop sales trends.

David Tarantino

Got it. Okay. Thank you for that. And then on the on the rewards program, it seems like that has been a a pretty big driver from a year over year perspective. It didn't seem like you're doing much last year. Now you're doing a lot in that and that rewards program in terms of communication. So I wanted to get your thoughts. You're going to be cycling some of that initial surge coming up. I just wanted to get your thoughts on kind of what year two looks like and and how how you refine the program in a way to keep this as a sales driver as you think about your year three?

Christine Barone

Yes, I would say, as we did the reset at the end of March of 2023, and as we moved into April and had that extra discount that we really deployed against traffic driving. We started with testing more en masse offers to really almost our entire audience as we moved through the balance of 2023, we started to be able to segment a little bit, and we were obviously learning from what was successful, what drives results. And we continue to want to use that over time. So I think when you think about a program like this, and we are still in the relatively early innings of it where we still have more segmentation to go. We still are building our database of what works and doesn't work. Obviously, we're always in an evolving consumer landscape. And so understanding what others are doing and how that impacts the offers that we're doing. And we're also building up what I would say is our operational capabilities to deploy offers and even more quickly. So we can almost slate a whole bunch of offers in a row and then decide which ones to pull as we go through a quarter. And so a lot of that is actually still new as we as we come through that over the first half of this year.

David Tarantino

Great. Thank you very much and best of luck, Charlie.

Charley Jemley

Thank you, David.

Operator

(Operator Instructions) Jeffrey Bernstein, Barclays.

Jeffrey Bernstein

Great. Thank you very much, and congrats, Charlie, clearly leaving on a high note and best of luck because I had a question and then a follow-up. So my question is just well, it's actually a follow-up as well. The magnitude of the traffic and ticket, I know you mentioned it was tempered in April versus what would likely have been. I'm guessing a teen exit rate in the first quarter, especially with January being pressured, I would assume, therefore February and March were above that 10% for the full quarter. As you think about that tempering in April or any sign of macro slowdown or pressure from a lower consumer? Or do you see it all as really just compares and the outages and the lap of the rewards, trying to get a sense for the second quarter comp, obviously the quarter is almost halfway done and just because it was such a strong first quarter comp, just want to make sure we're on the same page as to what we're thinking for that second quarter comp with that low single digit full year guidance. And then I had one follow-up?

Christine Barone

Yes. I think at this point from what we see, we believe a lot of it is internal factors that we were outlining. And so one looking at kind of that core underlying traffic change between Q1 and Q2 of 2023. So what we're lapping over and the other piece is the piece where we had the extra promo in Q1 and then have a heavy implications of that in Q2. We also had such incredibly strong demand for BofA as we launched in March and that despite ordering more product very quickly we did have some fairly significant outages in our shops at the end of April of Toba, which we're starting to replenish now into our shops. And so all of those different factors are really internal factors that we that we believe that we're seeing in that it start to Q2.

Jeffrey Bernstein

Understood. And then my follow-up is just on the California performance. I know you mentioned that well, there was reference to price increases that you did or did not take in California. Just looking to clarify what exactly you guys did in California and have you seen any change in trajectory of your performance or anything you'd note about the industry over the past five or six weeks, just because you have such a significant presence and it is such an unusual event. Any thoughts would be great.

Christine Barone

Thank you. So a couple of facts there in January when the legislated minimum wage for all workers went up in California, we took a slight price advance. And then on April one, when the FAST Act kicked in, we also took a price advance that price advance was designed to keep us as close to penny profit hole as possible, not margin accretive. And then I think we are watching this very closely. If it would be far too early to declare any knowledge of whether this is going to have any lasting effect on traffic at this point.

Operator

Nick Setyan, Wedbush Securities.

Nick Setyan

Thanks and I just want to echo my congratulations for Q1, and it's been great working with you, Charlie. I do think this Q2 kind of guidance commentary and the full year guidance is it's really important to touch back upon it just given the strength of Q1, I mean, we could potentially have a negative comp for the rest of the year and still have low single-digit comps. So and connect them possibly would just be really helpful if you could kind of maybe incrementally clarify what you're seeing in April and what you expect the comp to be in Q2, if possible?

Christine Barone

Well, we we won't give you a Q2 comp, but I think it's important to get some context. So last year we had a negative two comp in the first quarter last year, we had a positive four comp in the second quarter, so a four point swing this year, we had a six we mentioned a six points price help in the quarter that will moderate, particularly as we move the balance of the year.

Nick Setyan

So you both have you just have this pricing rollover is going away?

Christine Barone

It's going down. And so so we're just we're moving through an average of about a four comp we have to lap in the back three quarters of this year versus lapping a negative two. So it's it isn't that we have a negative or not an optimistic view of the balance of the year. It it's just a product of the math when you look at it.

Nick Setyan

Fair enough. And just as a follow-up, maybe just on the pricing piece, there was six points in in Q1. What do we expect pricing to be in Q2 so approximately 6% to 7% rollover help in Q2. And then that will moderate significantly as you go to three and four.

Christine Barone

Okay. Thank you very much.

Operator

Andrew Charles, TD Cowen.

Andrew Charles

Great. Thank you. I just want to start dosing. Congratulations, both Charlie and Josh proceed. Very exciting commentary about the new store performance you're seeing in Florida, can you speak to what you're seeing relative to the overall base with new store productivity? Get Curious how this has been trending, recognizing that you had been guiding to a flat year for the new store volumes for 2020 on 24, likely 2023. Wondering if that's still on track and that's still the way to think about the economics for this year?

Christine Barone

Yes. So as we look at our new shop productivity, again, we're just getting started in Florida. And with those two shops, although we're incredibly pleased with their performance. We do still plan to open 150 to 165 shops this year. So the Florida was not going to be the lion's share of the openings for this year. We did see our new shop productivity improve in Q1 of 2024 on the back of our strong new unit openings and sales growth. We're continuing to see some really big openings in some of our mature markets. And then we are pleased with the results that we're seeing from kind of the building awareness efforts and that paid advertising.

Andrew Charles

Great. And just moving into the advertising, can you help us quantify how much more investment you're putting into that relative to the expectations you had I know it's been an area of focus where you're stepping up and touch report.

Christine Barone

Yes. Yes. So we haven't shared that number in particular. We do expect a small step-up in our in our advertising spend. And we're continuing to evaluate that though, as we go throughout the year. And one of the things that we can measure that and it's we're looking more closely at what is happening to our traffic trends and our same shop sales trends from that, we are allowing ourselves kind of the ability to grow just spend up in those areas as we see results from it.

Andrew Charles

Well, thank you so much and best wishes, Charlie.

Operator

Jeff Farmer, Gordon Haskett.

Jeff Farmer

Thank you, and I truly enjoy everything that you pursue in the future. I have a quick question and a follow-up on the question roughly, ballpark. How many Texas shops have actually made it into the comparable store base.

Christine Barone

I think it's roughly 15 months. And of those shops, Texor shops that are in the comp base, are they acting as a same-store sales tailwind?

Jeff Farmer

How are they showing up in the comp base?

Christine Barone

Yes, we don't disclose individual state comps, but there were 77 shops. My correct. Your pet is in the comp base in the first quarter for Texas 77 out of roughly over 100, 75 there now.

Jeff Farmer

Okay. And then just on a follow up, how are you thinking about sales transfer in coming quarters. You mentioned that it was, I think, 200 basis points of headwind, a little bit better than you thought it was going to be. How should we be thinking about sales transfer moving forward?

Christine Barone

So we have a range an expected range of 200, 300 basis points. You are correct there that we said this quarter it was in the lower end of that range. And as we go through the year, as the comp base gets bigger, the impact of sales transfer starts to moderate. So we would expect to move towards the lower end of that range as we go through that throughout the year. But thank you. Best of luck, Charlie.

Operator

Dennis Geiger, UBS.

Dennis Geiger

Thanks, guys. Just wondering if you could speak to competition as at all as others trying to replicate your success and get into energy or other categories. Have you gone into any updated or latest thoughts on that dynamic? Is it something where it may be a benefit as marketing advertising draws attention to the category and any latest thoughts on that?

Christine Barone

I think that as we look across ad unit there, we've always been in a very competitive market and on and so we will continue to be in a competitive market. So as I look at, like others, trying to do some of the things that we're doing, I do think if big advertising budgets come in and share. Some of the things that are important to us, it very likely could be a benefit to us. I think most importantly, for us, it's really staying very, very true to who we are understanding why our customers are coming back to us and continuing to have beverages with us and enjoy our service is what's super important. And I think that you know, at a time like this where you do have customers who are really thinking through how to spend spend their wallets, that it's really important to stay true to what makes you incredibly successful. And for us, it absolutely is our belief in the service they offer to our customers.

Dennis Geiger

Makes sense. Thank you and congrats.

Christine Barone

Thank you. Thanks for your questions. And in closing, I'd also like to invite everyone to join us for our 18th annual direct one for Dan Day on May 17th. Our customers and crews will honor our co-founder Dan Burkland passed away in 29 following a battle with ALS three. Once again, it's one of the most meaningful days of the year for Dutch growth last year, our customers franchisees and vendors joined together to support our foundation and donating $2.5 million to the Muscular Dystrophy Association to help find a cause and cure for ALS. We look forward to continuing to make an impact in 2024 and beyond. The impact touch versus making in our communities and the lives of our releases continues to grow. We are pleased with our results in Q1 and believe our business is in a position of strength. 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

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.