4 Reasons to Buy Dutch Bros Stock Like There’s No Tomorrow

Upstart espresso and hand-crafted drinks chain Dutch Bros (NYSE: BROS) launched its earnings report on Aug. 7. The corporate grew gross sales and adjusted earnings per share (EPS) by 30% and 46%, respectively, topping analysts’ expectations. Regardless of these spectacular outcomes, the market despatched Dutch Bros’ inventory down roughly 21% as the corporate admitted that its new retailer openings can be nearer to the decrease finish of its 150- to 165-shop rely in 2024.

Whereas this response to the potential of slowing growth plans is comprehensible for a development inventory like Dutch Bros, wiping away one-fifth of the corporate’s worth in 24 hours looks as if an overreaction. Because of this important drop — and the 4 causes I’ll focus on under — I am unable to assist however be optimistic about Dutch Bros shares now.

1. Dutch Bros’ development marathon is in its early miles

Despite the fact that the corporate greater than doubled its store rely from 441 places in 2020 to at this time’s 900-plus shops, roughly 75% of Dutch Bros’ places are in simply 5 states: Washington, Oregon, California, Arizona, and Texas. This distinctive density of places in sure states is engaging in regard to the corporate’s long-term potential for 2 causes.

The primary one is kind of easy — there’s a huge greenfield growth alternative forward for the corporate. It is at the moment solely working in 16 states throughout the western and southern parts of the USA, however Dutch Bros believes its retailer rely might develop to over 4,000 within the many years forward because it expands geographically.

Secondly, regardless of being closely concentrated in 5 key states, the corporate is worthwhile. It is proven that it’s able to successfully including new shops in a given metropolis or state the place it already operates with out consuming into its personal earnings.

2. Dutch Rewards members

A part of the rationale that Dutch Bros has confirmed profitable at rising its retailer rely with out having to rely closely upon geographic growth to this point is that it has a really loyal buyer base. It is producing 67% of its transactions from Dutch Rewards members as of its most up-to-date quarter, so the corporate’s skill to retain clients is top-tier.

Moreover, this profitable rewards program permits the corporate to glean insights from its clients. This knowledge helps Dutch Bros create choices its members can be curious about, and later permits the corporate to advertise these new merchandise on to its members, preserving them engaged with the model.

3. Innovating to take care of excessive buyer satisfaction

Powered by these insights, Dutch Bros is ready to launch new product concepts, similar to its new Poppin’ Boba drinks, protein coffees, or its limited-time “Gold Medal Insurgent” power drink. Dutch Bros generates roughly 50% of its gross sales from espresso, 25% from power drinks, and 25% from teas, lemonades, smoothies, and sodas.

Along with new flavors, the corporate collects concepts that its clients wish to see carried out, similar to cell order-ahead capabilities. It is quickly testing and implementing this concept, and Dutch Bros believes nearly all of its shops will help order-ahead purchases by the tip of the yr.

Along with ordering forward, Dutch Bros focuses on places that use “escape lanes,” which let clients go away as quickly as their order is prepared, and walk-up home windows for non-drive-thru purchases.

4. A just lately discounted (and possibly low cost) valuation

Whereas it’s tough to assign a valuation to development shares like Dutch Bros, its price-to-sales (P/S) ratio of 1.9 is under that of the S&P 500 index’s common of two.8 regardless of the corporate’s a lot sooner development fee. Moreover, whereas Dutch Bros has but to succeed in constructive free money circulate (FCF) as a result of its heavy spending on capital expenditures (capex) for brand spanking new shops, its money from operations (CFO) is powerful, equaling 17% of gross sales.

What this 17% margin means is that if the corporate determined it was achieved constructing new shops and would solely spend capex on upkeep, it could create gobs of FCF for buyers (as FCF equals CFO minus capex).

On a price-to-CFO foundation, the corporate appears deeply discounted. It is even buying and selling at a valuation under that of its huge peer, Starbucks, which already has 18 instances extra places than Dutch Bros within the U.S.

As low cost as its valuations could also be, nevertheless, Dutch Bros must be monitored for continued shareholder dilution. Merely put, the corporate is known for issuing new shares to fund its development — greater than doubling its excellent shares since its preliminary public providing in 2021. As Dutch Bros grows, will probably be important for buyers to see the corporate finally generate sufficient CFO to self-fund its capex over the subsequent yr or so, making it a extra shareholder-friendly development machine.

Do you have to make investments $1,000 in Dutch Bros proper now?

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Josh Kohn-Lindquist has positions in Dutch Bros and Starbucks. The Motley Idiot has positions in and recommends Starbucks. The Motley Idiot has a disclosure coverage.

4 Causes to Purchase Dutch Bros Inventory Like There’s No Tomorrow was initially printed by The Motley Idiot