What happened
Shares of Dutch Bros (BROS -2.86%) continued their run higher this holiday-shortened week, closing up 11.6% compared to where they ended last Friday, according to data from S&P Global Market Intelligence.
It was the second consecutive week the drive-thru coffee shop posted double-digit gains, having soared over 34% the week before as short interest shot up almost 30% from the previous reporting period.
Image source: Dutch Bros.
So what
Short sellers undoubtedly believe Dutch Bros will face significant headwinds in this period of rampant inflation and record-high gas prices. A gallon of gas was recently above $4 per gallon in all 50 states, the first time that has ever happened.
For a company that relies upon drive-thru traffic for its sales, the heavy burden of inflated gas prices should weigh on its performance as consumers cut back on spending. Indeed, inflation has proved a challenge for Dutch Bros even though comparable sales still rose in the first quarter. But its input costs, especially dairy, which accounts for 28% of its commodity costs and jumped 25% for the period, are taking a toll and helped cause the coffee shop to lower its outlook for adjusted earnings and same-store sales for the year.
Dutch Bros is also raising prices this year to help offset the rising costs, including labor, which should all conspire to work against the robust growth it was achieving.
Now what
So why is Dutch Bros stock rising? Well, it's part of the meme stock crowd, and perhaps not as high profile as AMC Entertainment and GameStop, it does enjoy a certain volatility based on internet chatter rather than the underlying fundamentals of its business.
Unlike the poster children for meme stocks, though, Dutch Bros' business is still sound and growing rapidly. The coffee stock reiterated its guidance for full-year revenue of $700 million to $715 million and it remains in expansion mode, planning to add 130 stores this year to the 572 locations it currently has in 12 states.
Short sellers may have bet the worsening economy would hit the coffee shop harder. Short interest went from 7.3 million shares sold short at the end of April to over 9.4 million in mid-May, a better than 28% increase. It might take the next two short interest reports to determine whether there was a change of heart by short sellers.
There is a lag on when the levels are reported -- the next one due out is June 9 for the period covering up to May 31, which won't necessarily reflect how short sellers have been impacted by the run-up in Dutch Bros' stock price since.
