The rising cost of milk curdled coffee shop Dutch Bros' (BROS 1.07%) first-quarter earnings report, causing the market to pour out its stock like day-old joe. The company, which went public last September at a price of $23 per share, saw its stock briefly trade below the IPO offering price as a result -- and the shares are down some 70% from its early, heady days.
While first-quarter sales and profits beat Wall Street expectations, the ravages of inflation hit harder than expected, leading Dutch Bros to lower its outlook for adjusted earnings and same-store sales for the year. It also caused the company to raise prices to offset the impact, albeit more modestly than the competition.
Image source: Dutch Bros.
Business is growing, but so are costs
The fast-growing coffee shop is still in expansion mode, boosting the number of new locations it will open this year by five to 130, most of which will be company-owned stores. However, because it will change how it finances those new store openings, switching to leases that front load expenses, but makes them cheaper later, it will experience those costs sooner. Comparable-store sales, which were up 6% this quarter, are expected to be flat to negative in the second quarter -- and flat for the full year.
On the one hand, Dutch Bros has benefited from the reopened economy and consumers returning to the office, increasing its early morning business. Instead, it is the afternoon-to-evening crowd where the coffee chain got hurt, because the younger demographic that frequents its coffee shops has less disposable income these days.
Rampant inflation -- higher than it's been in over 40 years -- and gas prices at all-time record highs have left consumers with precious few dollars to spend, even on cups of coffee. Starbucks (SBUX +0.59%) is seeing a similar effect with operating margins decreasing 300 basis points from last year to 13%.
Image source: Dutch Bros
Clouds on the horizon
Dutch Bros said it expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $90 million, but that's down from its prior guidance of $115 million to $120 million. It said that reflects "near-term margin pressure in our company-operated shops and our decision to take modest price increases during the year."
And though revenue should remain in a range between $700 million and $715 million, that's predicated on its store openings, which as noted, now includes five additional stores. While Dutch Bros' quarter started off fine, things took a turn for the worse in mid-March as the broader economy got socked by spiking costs. Dairy is a big cost for the coffee shop -- one of the biggest, in fact, comprising 28% of its commodity costs -- and that expense rocketed 25% higher in the quarter.
NYSE: BROS
Key Data Points
Still in growth mode
Dutch Bros is still growing, even faster than some of the competition, but it's also feeling the effect of macroeconomic forces beyond its control, much as the rest of the industry is suffering. Because it's not a situation likely to fix itself soon, it's smart that management hasn't tried to suggest it will quickly bounce back, but rather is rightly focused on the long-term opportunity.
Even so, it did see inefficiencies in its new store openings as a result of training new personnel, learning about the new markets it's entering, and an inability to hire sufficient qualified staff. Dutch Bros did say it is normal for that to happen with new stores, but with even more stores due to be opened in the coming year than originally planned, it needs to correct course to keep things on track.
Dutch Bros CEO Joth Ricci remains undaunted, saying, "Our ability to increase revenues while successfully developing new shops reinforces our commitment to offering exceptional drive-thru experiences and confidence in our long-term strategy and growth targets."
The coffee stock's new, lower price level -- only slightly above its IPO -- may just be an enticing entry point for investors who felt they missed out on Dutch Bros the first time around.
