When Dutch Bros (BROS -0.97%) reported second-quarter results, the restaurant chain had a lot of good news to report. But there was some bad news hidden in the mix, too. Management tried to put a positive spin on the negatives as best it could, but at this point investors need to pay increasing attention to same-store sales trends. Here's why.
Huge top-line gains
The top line on the income statement is labeled revenue or sales, and it is one of the most important numbers that investors can watch. In some ways it is even more important than earnings, which are often impacted by all sorts of adjustments that can make the so-called bottom-line number a little harder to use than it should probably be.
Dutch Bros' top line was impressive in the second quarter, rising 44% year-over-year. That's a number management was happy to trumpet at the top of the news release.
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Right along with that huge sales gain figure were the 31 shops the company opened in the quarter. That's an important number, too, because Dutch Bros is a relatively young restaurant chain. Its growth is highly dependent on its ability to open additional locations. The fact that store openings are going strongly and that this is driving top-line expansion is pretty much what investors want to see.
A fly in the ointment
But if you step back just a little, you can start to see some issues taking shape. For example, same-shop sales, more broadly known as same-store sales in the industry, fell 3.3% year-over-year. This information, which is not good, was not discussed directly in management's commentary in the news release. And management highlighted that same-shop sales were up 6.9% compared to 2019, basically attempting to assuage any concerns about the year-over-year drop.
Same-shop sales is essentially the sales growth, or lack thereof, achieved at stores open for more than a year. The company noted that "included in this result is a positive benefit of aggregate pricing of approximately 5.3% taken since November 2021 and headwinds from sales transfer from existing to new units of approximately 1.4%." There's a little bit to unpack here.
Price increases add to sales, so the same-shop decline suggests that the price increase led to reduced demand. That's not a good trend, but not unreasonable. It could take some time for customers to adjust to the higher prices, but since inflation is increasing prices throughout the economy, this seems like a headwind that will be temporary, or at least broad-based across the restaurant industry.
What should be more troubling is the 1.4-percentage-point headwind attributable to "sales transfers." For starters, that number -- which measures how many customers shifted their buying to a new shop -- has to be a very hard to calculate since it would require guessing.
Secondly, it basically admits to investors that new stores are, to some degree, cannibalizing sales at existing locations. There's bound to be some of that, and if it is just 1.4 percentage points of same-shop sales it isn't a huge deal. But same-shop sales are going to be an increasingly important metric to watch to ensure that Dutch Bros manages its growth effectively.
The risk here is that many restaurants which, like Dutch Bros, have owned locations and franchised locations will shift their focus from selling food (or coffee in this situation) to selling franchises. When this happens, same-store sales will frequently deteriorate even as the top line continues to grow because of the store expansion. But that store expansion and sales growth are often hiding an increasingly weak business.
Time to pay more attention
None of this is to suggest that Dutch Bros is at a point where it has lost its focus. However, the fact that same-shop sales dropped while the top line grew robustly is worth monitoring closely. If the company begins to lose its way, as many restaurant chains have before, this is most likely where it will show up first. And since these two numbers are going in opposite directions, now is the time to start paying more attention.
