Growing quick-service coffee chain Dutch Bros (BROS -0.97%) has fallen roughly 55% from its high. The stock came public in September of last year, near the height of the market before the painful slide that's taken place since then. The success of industry giant and competitor Starbucks has shown how lucrative the coffee business can be for shareholders, and Wall Street priced Dutch Bros for high expectations.
A lot has changed in a year, and you might wonder whether Dutch Bros can live up to the hype it once had and whether the stock is valued low enough to buy in a turbulent market. Fear not. Peeling back the layers of this onion will reveal some critical observations to help you decide whether to buy shares. Here is what you need to know.
"Dutch Luv" is still spreading, but not without challenges
Dutch Bros operates approximately 603 locations across 14 states in America. The company's brand offers quick, fun, drive-thru service with energetic employees ("Broistas"), and vibrant flavors of hot and cold brewed beverages, smoothies, and energy drinks. Dutch Bros refers to its growth as "sharing the Dutch Luv" on its website, and that's precisely what it's doing.
As of the second quarter, the company's 603 locations were up 28% from 471 the prior year. The company believes there is long-term potential for at least 4,000 stores in the United States, giving investors a roadmap to growth. Store expansion helped total revenue grow by 44% year over year in Q2 despite same-store sales declining by 3.3%. Dutch Bros feels the squeeze of the economy; management is currently guiding for flat same-store sales for 2022.
Seeing stagnant same-store sales isn't ideal, but it could be a temporary problem. The company's same-store sales grew 8.4% year over year in 2021; today, consumer sentiment is low, and one could reasonably expect same-store sales to resume growth as the economy improves. Starbucks has seen a similar dip in traffic, using price increases to make up for that shortfall.
Is the stock cheap today?
Investors will understandably compare Dutch Bros to Starbucks; doing so yields some interesting results when you look at valuation. Wall Street might emphasize profits in this market, and by that measure, the price-to-earnings (P/E) ratio, Starbucks is far cheaper than Dutch Bros. However, remember that Starbucks is a much more mature company versus Dutch Bros, which will likely multiply its store count over the coming decade and beyond. Look at the price-to-sales (P/S) ratio instead, and you'll see that Dutch Bros is less expensive at the moment:
BROS P/E Ratio (Forward) data by YCharts.
So which is it? Profits are always the long-term goal, and Dutch Bros stock still commands quite a premium. Analysts believe that Dutch Bros can grow its earnings per share (EPS) by 32% annually over the next three to five years, and Starbucks' management targets 15% to 20% earnings growth over the next several years. If you're a long-term investor, you might see that Dutch Bros could grow twice as fast as Starbucks and grow longer because of its smaller size.
However, it seems that Dutch Bros isn't a bargain at this valuation either; it could take years for the company to grow into this valuation, even if it meets analysts' estimates moving forward. If you're going to buy the stock, you should probably do so with a multi-year mindset and use dollar-cost averaging to slowly accumulate a position over time. That way, continued market volatility doesn't put you at risk of quickly ending up underwater if the stock continues sliding from here.
