Dutch Bros (BROS -3.15%) just reported second-quarter earnings, and clearly the market likes what it heard as the stock is up 17% as of this writing. As a Dutch Bros shareholder, I'm pleased with the quarter and encouraged that the company is executing across many fronts. However, I did find one possible cause for concern.
Let's dive in and take a deeper look at what's going on at Dutch Bros, and examine two green flags and one red flag that this quarter revealed.
Supercharged revenue growth
Perhaps the only thing more supercharged than the Blue Rebel energy drinks that Dutch Bros serves up is the company's revenue growth. The Grants Pass, Oregon-based purveyor of coffees, lattes, and Dutch sodas brought in revenue of $186.4 million in revenue for a year-over-year increase of 44% during the quarter. The company opened 31 shops during the quarter and now has 132 more locations than it did at the end of last year's second quarter.
Store count surging
These 132 new shops are contributing to this scorching revenue growth, which is a good thing, since a big part of the investment thesis for Dutch Bros is that the company will continue to rapidly expand its footprint across the United States as it successfully enters new markets. Dutch Bros, which had been predominantly a West Coast-based enterprise, has now opened 61 locations in Texas over the last 18 months, showing that it has the ability to enter major new markets at scale.
One of Dutch Bros' key objectives when it went public was to "open new shops wherever people want great beverages with an eye on 4,000 shops in the next 10 to 15 years." With 130 openings planned for 2022, Dutch Bros is making progress toward this goal. With 600 locations now open, Dutch Bros has grown its store count at an impressive 28% since last year, but there is still plenty of runway ahead as it grows toward 4,000.
A closer look at the same-store sales decline
It's hard to complain about 44% revenue growth, but as a shareholder who has a large portion of my portfolio allocated to Dutch Bros, I do have one concern. While revenue is increasing thanks to this plethora of new stores, same-store sales, which measure the change in revenue from units that have been open for at least a year, were actually down 3.3% year over year, which gives me some pause. Declining same-store sales could be a sign that now that these locations have been open for a while, some customers may have grown bored and moved on.
But upon closer examination beyond the headline, it seems that a lot of this can be attributed to sales transfer, which is when a company's new location is siphoning some traffic (and sales) away from a different location. This may sound counterintuitive, and skeptics would call this "cannibalization," but CEO Joth Ricci points out that this allows Dutch Bros to enter a new market in a bigger way and to grow brand awareness more quickly.
These new shops could also be taking sales away from competitors and growing Dutch Bros' market share overall. Domino's Pizza (DPZ 0.67%) is an example of a company that has successfully implemented a similar strategy (Domino's calls it fortressing), and Domino's has been one of the stock market's great success stories for the last decade-plus. Having more locations can also help to ease demand-related problems, such as too many cars lined up at the drive-through of one location and potential customers leaving instead of waiting in line.
Ricci also alluded to higher gas prices, especially in California, where the company has a heavy concentration, as a factor in the decline. This seems reasonable as gas prices spiked during the second quarter of 2022 and, since most Dutch Bros locations are drive-thrus, this could certainly put a bit of a damper on demand. The company also raised prices slightly to deal with inflation of its key inputs like dairy and freight, so this could have played a role as well.
Overall, I am still very bullish on Dutch Bros and am pleased to see the company executing on its plans of growing store count, entering new geographies, and growing revenue, but I am going to keep an eye on same-store sales as a key metric. One quarter of same-store sales declining is easy to brush off, especially as it seems that sales transfer was a major contributor. If same-store sales decline further at a more accelerated pace, then it will become more of a cause for concern.
All in all, these are encouraging results, and Dutch Bros shareholders can go out and grab a Blue Rebel to celebrate.