Dutch Bros (BROS 1.26%) shot higher last fall following its initial public offering. The coffee chain, based in Grants Pass, Oregon, has developed a following with its unique offerings. And a rapid expansion effort had helped fuel the stock after it launched last September.
However, rising costs have slowed growth rates, and Dutch Bros has begun to sell off like other growth stocks. Amid these struggles, the coffee stock has exhibited both green and red flags that could affect it over time.
Green flag: The potential for expansion
Dutch Bros has developed a following through its beverages. Its shops offer varieties of coffee as well as teas, energy drinks, lemonades, sodas, and other nonalcoholic beverages.
While it's existed since 1992, it's expanded more rapidly in recent years. At the end of the first quarter of 2022, Dutch Bros operated 572 locations in 12 states. It has set a goal of 130 total shop openings in 2022, and eventually wants to open 4,000 shops nationwide.
Moreover, it focuses on drive-thru locations. This gives it an advantage over Starbucks and Dunkin', which support indoor sitting areas that bring higher overhead costs. Starbucks has been increasing its own emphasis on drive-thru lanes recently, likely validating the Dutch Bros approach.
Dutch Bros has also emphasized "diversity, equity, and inclusion" to attract employees. Indeed, addressing challenges such as child care or work-related stress makes working conditions more favorable. The company claimed in 2019 that it had no trouble finding job applicants for this reason.
Red flag: The effects of inflation
Nonetheless, inflation has proven a challenge for Dutch Bros. Even as it opens new locations, rising prices have left less room in the family budget for coffee runs.
This came to light in the company's earnings report. Sales grew to $152 million, 54% higher than year-ago levels. However, the cost of sales rose 82%, which caused quarterly losses of $16.3 million versus $4.8 million in the first quarter of 2021.
Dutch Bros kept its revenue forecast for 2022 between $700 million and $715 million. But on the Q1 2022 earnings call, management admitted sales growth had slowed amid rising fuel prices. That and other challenges sent shares plummeting by 26% in the next trading session, taking Dutch Bros below the IPO price of last September.
The effects of inflation are not limited to the company. Most stocks have dropped over the last few months, and Dutch Bros has not escaped the sell-off. It sells at a discount of almost 60% from its October high.
Investors may also notice that Dutch Bros trades at 3.1 times sales. This is not significantly higher than Starbucks' multiple of 2.9 times sales, so its stock doesn't stand out based on valuation.
Assessing Dutch Bros' attributes and challenges
Despite inflation, Dutch Bros will probably continue to add stores at a rapid pace, which should keep revenue growth high with or without inflation. Its innovative drinks and unique approach could serve it well, even in an environment of falling discretionary income.
Nonetheless, the recent drop in the stock price shows that Dutch Bros is not immune to inflation. Moreover, the competition from Starbucks, Dunkin', and others will continue to challenge the company. While its store expansions should help Dutch Bros stock rise in the long term, investors may want to avoid this consumer discretionary stock in an inflationary environment.
