With the debut of Dutch Bros (NYSE:BROS) stock, some traders harbored fantasies of discovering of the next Starbucks (NASDAQ:SBUX) or, at least, the next Dunkin' Donuts (which went private a year ago). But that doesn't necessarily mean that Dutch Bros is looking to topple Starbucks -- or that the two businesses should even be put in the same category.
Crossing the moat
If you're going to take on a giant company with broad brand-name recognition and deep customer loyalty like Starbucks (and to a much lesser extent, Dunkin' Donuts), you'd better have a major competitive advantage. So how can Dutch Bros breach Starbucks's moat? The company's prospectus offers some possibilities, but they're not necessarily quantifiable:
- Fun-loving culture, featuring baristas (or rather, "broistas") who "work hard and care deeply." Every local coffee shop touts this. It doesn't seem to save them from Starbucks.
- Strong word-of-mouth: The idea that one's customers will become "enthusiastic brand ambassadors" (Dutch Bros's words, not mine) sounds more like a fantasy than a road map to profitability.
- Philanthropy and commitment to local communities: That's highly commendable, but do customers frequent a coffee shop primarily for its good deeds?
- Wide-ranging product portfolio: Dutch Bros offers more than just coffee, sure, but so does Starbucks.
We can all cheer the company's altruistic spirit, but Dutch Bros will still have to prove that warm and fuzzy feelings can translate into cold, hard cash.
Acknowledging the growth
Dutch Bros is expanding, at least in its location count, and a number of analysts seem obsessed with the company as a growth story.
Thankfully, this part of Dutch Bros's story is quantifiable. Impressively, the company increased its shop count from 254 shops in seven states at the end of 2015, to 471 shops in 11 states as of June 30, 2021. That would translate to around 85% growth in 5.5 years, or roughly 15.5% per year.
Of course, that's not even close to Starbucks' 33,295 global store count, which includes 5,000+ in China. Percentage-wise, from around 23,000 locations at the end of 2015, that equates to around 45% growth in 5.5 years, or close to 8% per year-- not the same growth pace as Dutch Bros during that time frame, but still impressive for an already massive global entity that's already practically saturated the market.
We can also cheer Dutch Bros' revenue growth from $186 million in 2018, to $327.4 million in 2020, representing a CAGR of 38%.
However, that's a drop in the bucket compared to Starbucks' consolidated net revenues of $24.7 billion in 2018, , and $23.5 billion in 2020-- not growing, but still humongous.
Minding the bottom line
Despite Dutch Bros' acknowledged and touted revenue and store-count growth, the company seems to have trouble maintaining a positive profit profile. It's difficult to trace a long-term earnings-loss pattern as there are no 10-K or 10-Q reports to be found. But the company's prospectus doesn't offer encouraging figures.
For the year ending Dec. 31, 2020, Dutch Bros posted a pro forma net earnings loss of $78.9 million. Moreover, just for the six-month period ending on June 30, 2021, the company's net loss was $66.6 million.
Such is the price of hypergrowth, perhaps. There's no specific explanation of where Dutch Bros is bleeding out its revenues, but we can look for clues. In 2019, the company's operating cash flow ($56.702 million) exceeded its cash used in investing activities ($39.948 million); in 2020, Dutch Bros' operating cash flow ($53.549 million) also exceeded its cash used in investing activities ($45.570 million), but by a smaller margin. The company admits that the increase in cash spent on investment activities is "primarily due to cash used for investment in capital expenditures as a result of new company-operated shop openings." In short, Dutch Bros has been plowing a whole lot of capital into building out its stores.
Moreover, this grow-the-store-count-at-all-costs strategy isn't abating. For the six months ending on June 30, 2021, Dutch Bros' cash used in investing activities was $36.4 million, a 153% increase over the $14.4 million for the six months ending on June 30, 2020-again, primarily resulting from new shop openings.
A closer look into Dutch Bros' company-operated shop revenue ($151.543 million in 2019 vs. $244,514 in 2020) versus the components of its cost of sales is also revealing. Dutch Bros expended 30.9% in 2019 and 29.3% in 2020 of its revenues on labor costs, and 15.2% in 2019 and 15.8% in 2020 on "Occupancy and other costs," suggesting little to no improvement in reducing outlays on keeping all of those coffee shops up and running.
In contrast, Starbucks reported fiscal third-quarter 2021 net income of $1.15 billion, a huge improvement over the net loss of $678.4 million from the pandemic-panicked year-ago quarter.
A cold cup of brew
Ultimately, Dutch Bros' obstacles aren't just the comparative paucity of name-brand recognition and the cavernous store-count differential (though those issues certainly aren't helping the bull thesis). Cost-conscious investors should be irked, if not downright flummoxed, by a revenue-rich company managing to print a $66.6 million net earnings loss in just six months' time. Clearly, in the land of the Dutch Bros, something is rotten in Denmark.
And speaking of cost-conscious, Dutch Bros isn't necessarily cheaper for its consumers. A medium coffee at Dutch Bros will set you back around $3.50, while an equivalent Starbucks Grande Caffe Latte costs $3.45 (though admittedly, the fancier Starbucks Grande-sized fare generally costs $4 and change). As for the product quality, that's all in the eye (and the taste buds) of the beholder. Glowing reviews of Dutch Bros can be found on social media, but like most breakfast-menu items, online reviews are best taken with a grain of salt.
Granted, Dutch Bros might have a small following of well-wishers, and its commitment to community offers a nice contrast to Starbucks's chain-restaurant feel. That being said, Dutch Bros' investors should be happy to have the company co-exist with Starbucks for any length of time.
Toppling the 800-pound java gorilla isn't going to happen. And with that realization, let's see BROS stock for what it is: a feel-good gamble that could upderperform. But hey, at least you'll get a good story out of it.