Three Essential Facts about Dutch Bros for Financial Backers
Just like the energizing concoctions it serves, Dutch Bros (BROS 0.07%) has been a fantastic booster for investor wallets. Since November began, this coffeehouse chain's shares have experienced a staggering 57% surge, fueled by renewed market enthusiasm.
This consumer discretionary stock has had a brief rest period per se. At present, it lingers 31% below its all-time peak from November 2021. If you're considering jumping on the bandwagon during a potential price dip, here are three vital points to keep in mind about Dutch Bros.
1. Growth
During the September 30th quarter-end, Dutch Bros reported a significant 28% year-over-year revenue growth spurt. This impressive increase stemmed partly from a 2.7% surge in same-store sales and mostly from the addition of 38 net new stores during the period. The company aims to have 150 new locations by the end of 2024.
Expansion is the primary growth strategy for Dutch Bros. Currently it boasts 950 stores, which is almost double its count from the end of 2020. However, the leadership team has set an ambitious target of operating 4,000 locations within the next 10 to 15 years, implying a substantial increase in store count.
On average, each outlet generates $2 million annually in sales. Furthermore, they reported a contribution margin of nearly 30% during the third quarter, indicating highly profitable operations.
2. Competitive Advantage
To secure long-term investment gains, investors should seek out companies that possess competitive advantages. Companies with durable competitive positions can defend their market turf against opponents and upstarts, symbolizing a high-quality investment.
Although Dutch Bros has impressive growth figures, it is minuscule in comparison to the overall restaurant sector with Q3 revenue of $338 million and less than 1,000 locations. One may argue that the company hasn't yet established a competitive advantage.
In this industry, successful restaurant chains have strong brand recognition. Over five-decade old rival Starbucks, with 17,000 U.S.-based stores and a top-notch digital platform, serves as a prime example. Additionally, its cost advantages can also serve as a key component of a restaurant's competitive advantage.
Dutch Bros has undoubtedly made significant strides in terms of growth. However, can an investor with confidence claim that this company holds strong competitive advantages when compared to Starbucks? I'm skeptical, given Starbucks' powerful global brand recognition and significant scale benefits.
Dutch Bros may eventually develop a competitive advantage. But for now, its absence represents a risk in the investment outlook.
3. Valuation
The stock's remarkable upward trend in recent weeks has resulted in it trading 31% below its all-time high. Nevertheless, investors exhibited high optimism, particularly following the latest financial report.
Consequently, valuation has stretched further. Shares can be purchased at a forward price-to-earnings (P/E) ratio of 116. This suggests that investors believe Dutch Bros will flawlessly execute its growth strategy, hit the 4,000 store goal within the stipulated time frame, and subsequently witness a rapid profit growth. It's challenging to invest in such scenarios given the immense uncertainty ahead.
In all fairness, the company is still in its early phases, so another valuation metric might be beneficial. Regarding a price-to-sales (P/S) basis, the stock currently trades at a 32% premium compared to Starbucks. Some investors might find this ratio more palatable than the forward P/E multiple.
However, Dutch Bros' future success is not guaranteed, so I wouldn't recommend buying shares.
After experiencing a significant surge in its share price, some investors might be considering investing more in Dutch Bros, given its impressive growth. However, with the stock currently trading at a high forward price-to-earnings ratio of 116, the valuation might be stretching too far, indicating high optimism and immense uncertainty ahead.
If you decide to invest in Dutch Bros, it's important to consider the company's competitive advantage in the highly competitive coffeehouse industry. While Dutch Bros has shown impressive growth, it lags behind industry giants like Starbucks in terms of brand recognition and scale benefits. Therefore, it's essential to assess whether Dutch Bros can develop a strong competitive position to defend against competition and ensure long-term investment gains.
