What happened

Shares of Dutch Bros (BROS 0.38%), a coffee-focused restaurant chain, fell dramatically at the open of trading on May 12, losing a huge 41% of their value in the first few minutes of the day. The big driver of the decline was the company's first-quarter 2022 earnings update, which was released after the close on May 11. It was clearly not a well-received report. 

So what

In some ways, Dutch Bros is doing just fine. For example, first-quarter 2022 revenues of $152.2 million were up an impressive 54% from the same period in 2021. That's not exactly shocking, however, given that the company has been opening locations at a rapid clip. In the first quarter alone it increased its store count by 34, all of which are company owned. This is what you expect from a fairly young restaurant company, with new locations basically juicing the top line. The problem is that top-line growth can sometimes hide problems on the bottom line.

A person holding their face with a computer showing stock losses in the background.

Image source: Getty Images.

For example, Dutch Bros' adjusted loss in the first quarter of 2022 was $0.02 per share. The company only IPOed in Sept. 2021, so there's no comparable period to look at. At first blush, it's not really shocking that a small, fast-growing company would lose money as it builds out its business. And yet CEO ​​Joth Ricci noted, "Still, we were not immune to the record inflation that surpassed our expectations and pressured margins in our company-operated shops. While we believe these margin impacts may be short-term, we have opted to take a more conservative stance regarding adjusted EBITDA for 2022 as we monitor our pricing and the escalating cost environment." In plain English, inflation is a big issue for the coffee chain, and it not only caused the weak earnings performance in the first quarter, but it's going to keep hurting the company.

Now what

Inflation is a big issue for investors today, and the news out of Dutch Bros is not comforting, as management brought its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance down to roughly $90 million for 2022 from a range of $115 million to $120 million. That's a lot of margin pressure, noting that the company still intends to invest heavily in store openings and foresees the top line continuing to expand into the $700 million to $715 million range it had previously guided toward. So the growth story here is still roughly the same, but the profitability story has drastically altered. It's little wonder investors were displeased.