Dutch Bros Inc (BROS 1.65%) is a growing retailer of beverages in the United States. The company currently operates in 11 states and is rapidly expanding. The stock went public in September 2021 and has seen highs of over $80 per share and lows near $32 per share. 

If you happen to live in a city where a Dutch Bros location has opened, you may have noticed that there seems to be a line around the block nearly all day long. Or maybe you are already one of their fans and are waiting in line for your favorite "Broista" (get it?) to take your order so you can enjoy your favorite beverage. The company is rapidly expanding its footprint, so those who haven't yet had the Dutch Bros experience will have the chance soon. Dutch Bros prides itself on providing a uniquely enthusiastic and positive customer experience and has an extremely enthusiastic following. 

Person holding coffee

Source: Getty Images.

What makes Dutch Bros a unique experience

Dutch Bros is more than just another coffee retailer. In fact, the majority of their beverage sales are cool beverages. Only 16% of sales were hot coffee according to the company's registration filing. The rest were a mixture of cool beverages with the Blue Rebel being the most popular. The Blue Rebel is an energy drink line created by the company. This is a critical point as it means the company is not competing directly with entrenched coffee brands, such as Starbucks (SBUX 2.09%). The company also appeals to a much younger audience with 51% of rewards members being 16-25 and 72% being 35 and younger.The key will be getting these customers to stick as they age and not allow the company to go out of fashion. 

Switching the model 

Dutch Bros historically acted as a franchisor. In 2008 the company began to switch to a company-run model by limiting franchisees to those already within the system. In 2017 Dutch Bros stopped franchising altogether. This focus has proven to be a prudent strategy as the company-run stores are showing much better growth in terms of revenue-per-location. As shown below, growth rates in revenues for company-run stores are also growing faster than the store counts. This suggest that revenue is growing organically and not just as a result of expansion. 

Chart showing total revenue growth rate and store count growth rates.

SOURCE: DUTCH BROS

In terms of expansion, the company has grown to 503 locations at last report. This is an increase of 14% since the end of 2020. Being in only 11 states, there is ample room for this expansion to continue. The company predicts that at least 112 new shops will open in 2022.

A reasonable valuation

Dutch Bros stock rocketed to over $80 per share shortly after the IPO. Since this time, the stock price has come down considerably as shown below.

Dutch Bros stock chart

SOURCE: NYSE

In the near term, the stock may still have further to fall in order to become fairly valued. Revenues are expected to reach $486 million for fiscal 2021. This would put the PS ratio above 18 based on the current market cap of $8.9 billion. Sales in 2022 are expected to reach $671 million, a 38% increase. This would peg the forward PS ratio at just over 13. Dutch Bros has a profitable model, however it was not profitable on a generally accepted accounting principles (GAAP) basis in Q3 2021 due to heavy stock-based compensation expenses associated with the IPO. The company reported a GAAP loss of over $117 million, with an adjusted profit of $11,045. The company also posted an adjusted EBITDA margin of 1% for Q3 2021. Margins will likely be tight in the near-term due to the costs associated with rapidly opening new locations. Over time, investors should look for these margins to increase.

The Verdict

Dutch Bros is an exciting company which is only in the opening innings of its expansion strategy. The clientele is young and enthusiastic which is critically important to the company's success. The coffee industry is quite saturated, however the vast majority of Dutch Bros sales are in cold beverages. This provides a niche that is not directly competitive to some of the entrenched industry titans. The company-run model is proving to be successful and expansion is rapid and increasing. However, the valuation remains high even after the recent drop. Long-term investors should keep Dutch Bros on their radar as an attractive entry point may be coming soon.