Shares of Dutch Bros (BROS 0.90%) sank as much as 41% at the open, and settled with a 26% loss for the day after its first-quarter earnings report on Thursday. So what happened?
The investment community had a hard time digesting news that labor and commodity inflation are wreaking havoc on the company's bottom line. Because it is a key input, dairy prices hit Dutch Bros hard when they rose 25% in March . Even worse, the company said sales are trending downwards as of mid-March as higher gas prices are having an effect on discretionary income.
Dutch Bros acknowledged that these pressures could remain an overhang for an extended period of time, which was not well-received by investors. Earnings fell and missed expectations as Dutch Bros dealt with the aforementioned dairy spike and increased labor costs, plus elevated costs from the store openings.
We are in a market environment where these types of results and outlook are going to spook many investors. But zooming out, there are also plenty of positives here and the long-term investment thesis still looks like it is in good shape. The 26% sell-off looks like an overreaction, and Dutch Bros is a strong bounce-back candidate.
Image source: Getty Images.
Store count and revenue continue growing
Long-term investors are buying Dutch Bros for the future store growth potential, which remains intact. The company grew its store count by 34 locations in the first quarter (39 new openings minus the closure of five franchise-owned stores). With 572 total locations, Dutch Bros now has 26% more stores than it did last year, and it is expanding its store count at a compound annual growth rate (CAGR) of 36% over the past five years. Starbucks (SBUX -0.64%) has over 15,000 locations in the United States , so even with the rapid expansion so far and the goal of 4,000 locations, Dutch Bros still has plenty of runway ahead.
Dutch Bros is also expanding its geographic footprint further than ever before, moving east of the Mississippi River for the first time by opening a location in Nashville, Tennessee. The company soon followed this with multiple other openings in the area surrounding Nashville, leveraging its strategy of building brand awareness in an area. Half of the 34 new openings were in Texas and Oklahoma, so the company is continuing to expand its horizons beyond its home base on the West Coast. CEO Joth Ricci says that these new locations are exceeding expectations and "validate our optimism for further development as we move from West to East."
In addition to the store count growth, the company is also growing revenue at a prodigious rate. Sales rose from $99 million in the first quarter of 2021 to $152 million in this quarter, representing an impressive 53.5% increase year over year.
Growing up with Dutch Bros
Ultimately, Dutch Bros has a bright future because of the compelling unit growth story and the unique demographic of its core customer base. The company finds that about 55% of its customers are under the age of 25 . Dutch Bros connects with this younger cohort of customers with its cold brews and iced coffees, and its extensive selection of Dutch Bros Rebel energy drinks which come in an eclectic mix of flavors and names like Fire Lizard, Laser Cat, and OG Gummybear.
Dutch Bros also says it experiences more traffic in the afternoon than in the morning, so it differs from the typical coffee chain where customers are stopping in to pick up a coffee on their way to work. As the young people who enjoy Dutch Bros get older, they are likely to grow with the brand and may incorporate Dutch Bros as part of their morning routine when they enter the workforce.
Is Dutch Bros a buy?
The sell-off shares of Dutch Bros endured could be the buying opportunity that patient long-term investors have been waiting for in order to become a part of this compelling growth story. The massive unit growth that the company is targeting and executing on and its strong foothold with younger consumers make it a buy and hold for the long term.
