Although Dutch Bros (BROS -0.97%) came up a little short of Wall Street's earnings expectations, the fast-growing coffee chain easily topped analysts' fourth-quarter revenue forecasts and says it remains on a caffeinated growth trajectory.
Yet Dutch Bros is changing how it wants to finance that expansion, and if it pans out as expected, it could jolt its bottom line in the years to come. Because the coffee shop will be front-loading its costs, the immediate picture might look as tasty as a cup of day-old joe, causing the market to knock Dutch Bros back.
Since the change promises greater cost-savings and ultimately an improved bottom line, investors might want to pick up shares of the drive-thru coffee chain on such weakness.
Image source: Dutch Bros.
A morning jolt
Dutch Bros business is doing exceptionally well. Revenue surged 56% to $140 million on a better than 10% increase in same-store sales. That really wasn't a surprise as the coffee joint released preliminary results last month hinting at rising sales on strong comps, but adjusted losses of $0.02 per share just missed analyst expectations of a loss of a penny per share.
The chain ended 2021 with 98 more stores than it started with, for a total of 538 stores in 12 states, but it plans to accelerate the store-opening process by adding an additional 125 locations this year. In all, it believes it can have 4,000 all across the country over the next 10 to 15 years, meaning it plans to expand at a compound growth rate of 15% to 20% annually.
That kind of growth is going to cost some serious money, and Dutch Bros caught analysts off guard with its forecast of as much as $200 million in new capital expenditures in the first quarter of the new year.
While it will build a new roasting facility that will become operational in 2023 will account for $15 million to $20 million of the costs for the period, the balance is still considerably higher than it's historically been. In both 2019 and 2020, capital expenditures were around $40 million and it comes down to having to pay more costs up front for how it will build out its stores going forward.
Image source: Dutch Bros.
A well-grounded opportunity
Dutch Bros is moving from a build-to-suit lease model to a ground lease one for the new stores it will be opening, and while the details of lease contracts are boring as all get out, the change is important because it will save the coffee shop considerable sums of money as it grows.
In a build-to-suit lease, as its name implies, the landlord develops a property according to the needs of the tenant. The property owner incurs the total cost of development and leases the structure and property to the tenant afterwards. It can help a small business grow that doesn't have the capital to buy and build everything itself.
With ground leases, also as the name implies, the tenant is leasing the ground a building is built on, but it builds and owns the structure afterwards and pays rent only for the property. Typically they come with very long leases, we're talking decades.
There are benefits and disadvantages to both, but the ground lease model is very common in the retail world, and with the backing of its lenders, Dutch Bros now has sufficient liquidity available to make the change. But it comes at a cost.
Long-term payoff
Ground leases are obviously going to cost a lot more, and for Dutch Bros, its cash contribution of around $500,000 on the built-to-suit model will now balloon to around $1.3 million or $1.4 million. The benefit, though, will come in the savings it realizes in the rent it pays over the life of the lease.
That's why the market may not like the look of Dutch Bros financials initially because it will cost the coffee shop more up front to build out its footprint, but it will realize substantial savings over the life of the store.
Dutch Bros new stores are already performing well above the average now, so this change should eventually benefit the bottom line. As the third-largest coffee shop behind Starbucks and Dunkin Brands, Dutch Bros is a fast-growing chain that could entice investors with faster profitable growth and a substantial increase in its stock price over time.
