Is it Time to Buy Dutch Bros Stock?

Introduction

Dutch Bros (BROS -0.72%) was one of the record 3,260 initial public offerings (IPO) in 2021, many of which soared before tanking. More than 600 of those were special-purpose acquisition companies, also known as SPACs, a trend that shrank in 2022 as the market lost value and investors stopped throwing money at IPOs.

Not all those new stocks sank into oblivion, however. Dutch Bros was one of the rare stocks from that year that has caught investors’ eyes due to its robust growth and incredible potential. It’s still roughly 40% off of its highs, and it’s looking like a better value. Is it time to buy?

More coffee, please

Dutch Bros posted a 53% year-over-year sales increase in the 2022 third quarter and raised its full-year outlook from a 44% sales increase to a 46% increase.

That seems quite impressive at first glance considering the macro environment, but upon further digging, you can see that most of the growth is coming from new stores. Dutch Bros is still a fairly small operation, with 671 stores in 14 states. It’s opening new stores at a brisk pace, and those are providing revenue; whereas, comparable sales (comps), or those from shops already open at least a year, aren’t growing quite so quickly.

Comps increased 1.7% year over year in the third quarter, which could be worrisomely low if that develops into a pattern. Comps in fact declined 3.3% in the second quarter, and this is a number investors need to keep an eye on.

Inflationary pressure, like everyone else

There are a two other things I would point out here. First of all, everyone is dealing with this. This tells you more about the state of the economy than the company. If it was so risky that the company could not manage in a challenging environment, that would be a red flag. There are companies that are collapsing right now. Dutch Bros is experiencing normal inflationary pressure, and it’s posting pretty darn good results regardless.

The second thing is that it’s a young company, so it doesn’t have quite the same leverage as a company like Starbucks. That means it’s bound to be impacted more strongly by macro concerns. On the flip side, as a young coffee company, it’s demonstrating much faster growth than Starbucks.

It’s already demonstrating better leverage at scale, with metrics like company-operated shop gross margin improving as more stores open. Company-operated shop gross margin improved 0.6% to 20% from the second quarter to the third quarter in 2022.

A Dutch Bros store on every corner?

First there was the corner coffee shop, and then the corner Starbucks (at least in my New York City stomping grounds). Is that where Dutch Bros is headed?

The company is well on its way to surpassing its goal of having 800 stores by the end of 2023, and it’s now working toward 1,000 stores by 2025. It sees the opportunity for 4,000 stores over the next 10 to 15 years, slowly working its way across the U.S. Even if it gets to those numbers, it will be nowhere near the size that Starbucks is today, with nearly 16,000 U.S. stores and more than 36,000 global stores. It certainly looks like potential it can reach.

It’s also becoming more profitable as it opens new stores and benefits from economies of scale. Dutch Bros had $1.6 million in net income in the 2022 third quarter after several quarters of losses.

Is now the time to buy?

Dutch Bros stock looked expensive for a while when the price shot up out of the gate. Now at roughly 40% off of its highs and with growing revenue, shares trade at a price-to-sales ratio of 2.8. That’s very reasonable for a growth stock; the stock is already up 44% this year. Now does look like a good time to buy.