Dutch Bros (BROS -3.90%) delivered another quarter of strong growth, finally reaching $1 billion in revenue on a trailing 12-month basis, but inflation is taking a toll on profit margins and on its lower-income customers even as it forces the drive-thru coffee chain to continuously raise prices.

Although management raised its full-year revenue guidance, investors still need to take the long view when buying its stock because almost all of Dutch Bros' gains are coming from new store openings. Comparable-store sales fell during the quarter, and though they are still above 2019 levels, this period of rising prices and higher costs is going to be challenging. 

A person getting coffee at the drive-thru window.

Image source: Getty Images.

Driving growth higher

The coffee shop beat analyst top-line expectations of $182 million by seeing revenue surge 44% to $186.4 million as it opened its 600th store in the period. The new stores are performing above expectations with an annualized unit volume (AUV) of $2.1 million, while those opened in 2020 and 2021 are generating AUVs 10% above the systemwide average.

It indicates Dutch Bros' business model can be successfully replicated as it expands its footprint across the country. The drive-thru chain currently operates in 14 states, suggesting there is plenty of room for future expansion.

Yet Dutch Bros came up short on the bottom line, reporting adjusted profits of $0.05 per share compared to Wall Street's forecast of $0.07 per share, even though it has been raising prices to offset the impact of inflation.

The coffee shop completed a second round of 3% price hikes on June 1, which followed a similar increase back in November, and Dutch Bros is contemplating raising prices again in the back half of the current year.

Running out of gas

Although you can't blame Dutch Bros for needing to offset its own higher expenses, it's finding that its customers can't afford to pay for the increases, and those with incomes below $40,000 a year are not coming back.

Especially in California, where gas prices are much higher than the national average, but also in Oregon, lower-income customers are falling off the edge. Dutch Bros found store traffic in California, for example, plunged 40% among those making under $40,000 a year.

It may be they're still getting their morning cup of coffee, but they're not coming back again as much of the drop-off is occurring in the afternoon and evening. 

As primarily a drive-thru shop, Dutch Bros is going to be particularly affected by the historically high gas prices. Although the national average has finally dipped below $4 a gallon, that's still 25% above where it was a year ago.

For comparison to see what Dutch Bros is up against in California, gasoline's statewide average is still $5.38 per gallon, or 35% higher. It's $4.88 per gallon in Oregon. At the end of last year, Oregon and California represented over 48% of Dutch Bros' total locations.

Keep your eyes on the horizon

Dutch Bros remains upbeat, however, and expects total revenue for the year to reach at least $715 million, an improvement over the $700 million to $715 million range it previously guided toward.

Wall Street also has a positive outlook for the coffee stock, with analysts at Baird, Barclays, and Piper Sandler all raising their price targets on its shares, ranging from $37 per share to $50 per share. Dutch Bros' stock is down 13% for the year and 46% below its recent highs, while shares have more than doubled off the lows it hit back in May. 

The drive-thru chain remains a growing company, but macroeconomic events may wreak havoc on performance quarter to quarter, which is why investors will need to focus on the long-term opportunity this growth stock represents.