Rein v. Dutch Bros.

OPINION & ORDER

PAUL A. ENGELMAYER, DISTRICT JUDGE

Lead plaintiff Douglas Rein brings this putative federal securities class action against Dutch Bros, Inc. (“Dutch Bros”) and its chief executive officer Jonathan Ricci and chief financial officer Charles L. Jemley (collectively, “Defendants”) alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and the implementing rule of the Securities and Exchange Commission, 17 C.F.R. § 240b-5 (“Rule 10b-5”). On behalf of himself and others who purchased Dutch Bros securities between November 10, 2021, and May 11, 2022 (the “class period”), Rein claims that Defendants made a series of false and misleading statements during the class period touting Dutch Bros' performance and prospects, which allegedly understated the threat to the company's sales and profitability presented by rising inflation affecting the cost of commodities key to its success.

Pending now is Defendants' motion to dismiss the Amended Complaint (“AC”) for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, the Court grants the motion and dismisses the AC in its entirety.

I. Background

A. Factual Background^[1]

1. The Parties

Dutch Bros is a publicly traded company incorporated under Delaware law that operates and franchises drive-through coffee shops, which sell coffee and related products. AC ¶¶ 14, 22. On September 17, 2021, Dutch Bros went public, with an initial public offering (“IPO”) in which it issued approximately 24.2 million shares of Class A common stock at a public offering price of $23 per share. Id., ¶¶ 28, 3. As of its IPO, Dutch Bros had 471 shops in 11 states. Its IPO was intended to facilitate the company's “expansion to at least 4,000 Dutch Bros locations in the United States.” Id. ¶ 23.

At all relevant times, Ricci was Dutch Bros' president and chief executive officer, and Jemley was its chief financial officer. Id. ¶¶ 15-16.

Lead plaintiff Rein is an investor who, during the class period, purchased Dutch Bros securities at what he alleges were “artificially inflated prices,” which declined after Dutch Bros, on the last day of the class period, announced a decline in profitability. Id. ¶ 13.

2. Rising Commodities Prices Before and During the Class Period

In the months leading up to, and during, the class period, inflation and commodities prices were rising in the United States. See id. ¶ 3. The Bureau of Labor Statistics' Consumer Price Index for All Urban Consumers rose to 5.4% in September 2021, 7.5% in January 2022, and reached 8.3% by April 2022. Id. Dairy and petroleum, the commodities most central to Dutch Bros' business, were subject to these trends. Id. The Department of Agriculture calculated the National All-Milk Price Received at $18.30 in September 2021, $23.90 in January 2022, and $27 in April 2022. The Department of Energy reported the Gasoline Average Retail Price in September 2021 as $3,272, as $3,413 in January 2022, $3.611 in February 2022, $4,322 in March 2022, and $4,213 in April 2022. Id. A September 2021 Wall Street Journal article noted that “[e]conomists anticipate that broader, longer-lasting inflationary pressures will emerge in coming quarters”; another, published November 2021, opined that “[t]hings are going to get worse before they get better.” Id. ¶ 26.

During the class period, Defendants made statements that were generally positive about Dutch Bros' past and forthcoming financial performance, notwithstanding that inflation in . general and commodities costs in particular were rising. These statements were made in, inter alia, SEC filings, conference calls, and interviews. See id. ¶¶ 55-101.

In particular, Defendants stated that they believed that (1) given the particular ingredients that Dutch Bros required, Dutch Bros was not as susceptible to rising inflation rates and supply chain issues as other companies, (2) a price increase implemented just before the class period, and the option of future price increases, would help Dutch Bros weather the inflation it would face, and (3) inflation in gas, more than dairy, prices, was the company's biggest concern, but consumers would not necessarily cease drive-through coffee purchases as a result of rising gas prices. See id. The Court below reviews the specific challenged statements to these effects.

A confidential witness (“CW1”)-who worked for Dutch Bros as a retail optimization manager-is cited in the AC as stating that, as of December 2021, Dutch Bros was aware of its potential need to combat rising dairy prices. Id. ¶¶ 18-21. CW1 and his team “worked on operational changes that would be effective in the field” and “created processes for field training,” and designed “processes that would create efficiencies at the retail store-level.” Id. ¶ 19. CW 1 stated that, in or around December 2021, his team was tasked with “troubleshooting the issue of rising dairy costs[.]” Id., ¶ 21. This entailed steps such as “switch[ing] from purchasing dairy by the gallon to purchasing it by the half gallon.” Id. CW1 stated that “finding additional sources of dairy, especially 2%, was important because the supply was also an issue around this time, not just the cost.” Id. The AC does not address whether Dutch Bros adopted these or other suggestions.

3. Dutch Bros' QI 2022 Earnings Drop, Reported May 11,2022

Through at least the end of 2021, Dutch Bros' performance remained stable. In the first quarter of 2022, ending March 31, 2022, however, Dutch Bros experienced “margin pressure”-• that is, a decrease in its profit margins. Cf., e.g., id. ¶¶ 102-111 (identifying QI losses in 2022 as turning point).

On May 11, 2022, the last day of the class period, after the markets closed, Dutch Bros issued its earnings release for the first quarter of 2022. It revealed a big drop in performance. See id. It reported a net loss that quarter of $16.3 million, compared to $4.8 million in the first quarter of 2021, and an adjusted net loss of $0.02 per share, “below the market's estimated earnings of $0.01 per share.” Id. ¶ 102

In public statements that day, Defendants attributed these losses to three factors

“[Dutch Bros'] decision to be disciplined on the price [they] took, which [they] believe[d] [wa]s less than half as much as many of [their] peers; faster inflation and cost of goods, especially in dairy; the pull forward of deferred expenses related to

the maintenance of shops; and normal new store inefficiency amplified by the volume of new and ramping units in quarter 1.”

Id. ¶ 103. As to rising costs, Ricci stated on an earnings call that day:

Unfortunately, in this past quarter, a confluence of cost pressures overwhelmed our decisions around price and resulted in near-term margin compression. We anticipated higher expenditures. However, we did not perceive the speed and magnitude of cost escalation within the quarter. Dairy, for example, which makes up 28% of our commodity based, rose almost 25% in QI. While costs rose throughout the quarter, we experienced a change in sales trajectory from mid-March onward as macroeconomic headwinds accelerated and comps turned negative. We are monitoring these factors and have chosen to take a more conservative stance on our 2022 outlook given macroeconomic uncertainty.

Id. ¶ 104. During the May 11, 2022 earnings call, Jemley attributed the drop in sales to rising gasoline prices:

[W]ithout claiming to be a macroeconomist, I will tell you that in mid-March when gas prices jumped the way they did, we saw an immediate flip on our daily sales, It was almost to the day of the way that, that works. So I think you could infer- and we believe that we've done some analysis on the gas prices and influence related to our daily sales, and we believe it has influenced it. And we believe that if gas prices stay inflated, it will continue to influence it.

Id. ¶ 110. Based on these metrics and what it termed “unanticipated” cost increases, Dutch Bros that day put forward a “more conservative” forecast of its earnings and “same shop sales” in .. 2022. Id. ¶ 105.

The next day, May 12, 2022, Dutch Bros' share price fell by $9.26 or 26.9%, Id. ¶ 111. That share price was 59.7% below what it had been at the start of the class period on November 10,2021. Id.

Throughout the second quarter of 2022, margin pressure continued. In its Q2 earnings call on August 10, 2022, Dutch Bros stated that, “[l]ike many of our peers, the macro-economic environment is impacting various aspects of our business, and our company-operated shop margins continue to be pressured by record inflation in the second quarter.” Id. ¶ 115. It

reported a 3% price increase in the second quarter and stated that it was continuing to evaluate “further menu pricing action as needed in the back half of the year. Id. On that earnings call, however, Jemley stated that Dutch Bros was “starting to [overcome] the inflation that began to show in Q2 of 2021.” Id. ¶ 116.

4. The Individual Defendants' Stock Sales

On approximately March 4, 2022-in the middle of the class period-Ricci and Jemley's “Lock-Up Agreements” with Dutch Bros' underwriters expired, freeing them to sell Dutch Bros' shares they owned. See id. ¶ 6. Each executive had entered into a Rule 10b5-1 trading plan three months earlier: Ricci on December 7, 2021, and Jemley on December 9, 2021. After the expiration of the lock-up periods, both defendants made sales pursuant to these plans. Ricci sold a total of 71,125 shares of Dutch Bros common stock, with some sales on March 7, 2022, and the rest on May 9, 2022. Id. ¶...