Starbucks (SBUX 1.38%) has long driven investor profits by capitalizing on America's love for coffee and by creating a social experience. It has also successfully exported this concept to other countries, driving its size and stock price higher over time.
However, emerging beverage shop Dutch Bros (BROS 11.79%) has rapidly expanded its footprint east from its headquarters in Grants Pass, Oregon. Its popular beverages, growing store count, and recent initial public offering have attracted the attention of customers and investors alike. The question for investors is whether they can profit more by owning Dutch Bros or by sticking with Starbucks.
A look at the businesses
Investors should understand that Starbucks and Dutch Bros do not compete as directly as many might assume. Yes, they both focus heavily on coffee and other beverage choices. And both stores sell drinks via drive-thrus.
Nonetheless, they differ significantly from the perspective of customer experiences. Most Starbucks locations include indoor tables and seating areas. This is because longtime CEO Howard Schultz sought to emulate Italian coffee shops. Schultz envisioned a place to enjoy a beverage and perhaps some food while socializing.
Dutch Bros has a sparser food menu, choosing instead to focus almost exclusively on beverage sales. Its locations might have outdoor seating, but most of its sales are made via a drive-thru.
Moreover, Dutch Bros offers a wider variety of beverages. Its Dutch Classic, based on espresso and half-and-half, is similar to the Starbucks Frappuccino. And both sell various teas and lemonades.
But Dutch Bros takes it further by selling smoothies and energy drinks. Hence, nearly all of its customers visit exclusively for its beverages.
Dutch Bros is dwarfed in size by Starbucks. The former had 641 locations as of the end of the third quarter (138 of which were added over the previous year) versus nearly 36,000 for Starbucks. Thus, investors are comparing a small growth company to an established leader.
How they compare financially
That difference in development stages is reflected in their radically different finances. Dutch Bros' growth insulated it from a slowing economy. Its revenue for the 12-month period through Sept. 30 increased by 61% versus the previous 12-month period. Also, as a growth company, it continued to lose money, though it reduced losses to $26 million over the trailing 12 months and posted positive earnings in the third quarter.
Starbucks had no issue earning a profit in its fiscal 2022 year, which ended Oct. 2. But net income fell 22% versus the last fiscal year, mostly due to rising input and labor costs. Net revenue grew 11% in fiscal 2022 over the prior fiscal year.
But the smartest investors know that Starbucks' stability pays off in some crucial ways. Its stock made modest gains over the last year, while Dutch Bros lost more than 30% of its value. Also, shareholders receive $2.12 per share in annual dividends, and that number has risen yearly since Starbucks began payouts in 2010. New shareholders will earn a cash return of about 2% at today's prices.
Since Dutch Bros is not profitable, investors must use the price-to-sales (P/S) ratio to compare the stocks. The shares' price drop tilted the valuation in favor of Dutch Bros. It sells for just over 2.5 times sales versus a multiple of almost 4 for Starbucks. This is quite unusual since desirable growth stocks often trade at a premium.
Starbucks or Dutch Bros?
Given that valuation difference and other factors, Dutch Bros looks to be the better choice for everyone but perhaps the most risk-averse investors. Admittedly, Dutch Bros does not have the worldwide reach or the dividend of Starbucks. Nonetheless, it is many years away from reaching a saturation point in the U.S., making it likely that Dutch Bros' rapid revenue growth will endure for some time to come. Investors would do well to warm up to this coffee stock.
