The success of Starbucks (SBUX +1.77%) has led to competitors emerging in the form of independents and smaller chains. One of these emerging names is BRC (BRCC +10.75%), otherwise known as Black Rifle Coffee.
When comparing the two coffee stocks, Starbucks has a clear advantage with regard to funding and name recognition. Still, because of its modest size (BRC's market capitalization is $365 million versus $122 billion for Starbucks), BRC stands to grow more rapidly.
The question for investors is whether BRC's growth potential can outweigh Starbucks' size and recognition advantages. Let's take a closer look.
Competitive similarities and differences
Despite an orientation toward coffee, each company takes a significantly different approach to the market. Starbucks depends mostly on shop locations, while BRC primarily derives most of its revenue from packaged products.
Starbucks operates nearly 36,000 coffee shops worldwide. This comes from Howard Schultz's successful concept of replicating the Italian coffee shop experience in the U.S. Its success fostered a worldwide expansion and competing coffee shops of all sizes.
Starbucks also operates a channel development segment. It sells coffees, teas, ready-made drinks, and foods in grocery stores and restaurant establishments. Still, channel development comprised less than 6% of company revenue in its fiscal fourth quarter (which ended Oct. 2).
NASDAQ: SBUX
Key Data Points
In contrast, around 38% of BRC's revenue comes from its wholesale channel, which sells packaged products to other retailers for resale to the public. An additional 55% is its direct-to-consumer segment, which offers packaged products through its e-commerce website.
Less than 8% of its revenue comes from its 21 shop locations, called outposts. Of the outposts, 10 are franchises, while the company owns the remaining 11. This makes BRC much smaller than privately-owned coffee franchises such as Biggby Coffee or Scooter's Coffee. BRC also explicitly targets Second Amendment supporters and veterans, a departure from peers who do not employ such an approach.
How the financials compare
Still, being a small company in growth mode can mitigate the effects of the current economic downturn. Over the previous year, BRC reported almost $280 million in trailing-12-month revenue. This represents a 26% increase compared to the last 12-month period.
However, this did not stop its net loss during this period from spiking to $323 million compared with only $8 million for the previous 12-month time frame. This was due in part to increases in costs and expenses.
NYSE: BRCC
Key Data Points
Rising costs and expenses also affected Starbucks. Its earnings of $3.3 billion in fiscal 2022 marked a 22% drop from the prior fiscal year. Starbucks also made $865 million from divestitures in 2021, a feat not repeated in fiscal 2022. The giant coffee chain saw lower earnings despite an 11% rise in revenue to $32 billion.
Nonetheless, Starbucks stock has held up better -- gaining ground over the last 12 months while BRC lost over half of its value.
Starbucks shares trade for about 4 times sales versus just over 1 for BRC. That multiple and its 38 price-to-earnings (P/E) ratio make Starbucks appear somewhat expensive, though without earnings, BRC does not have a P/E ratio at all.
Starbucks or BRC?
Given both companies' competitive positions and financials, Starbucks is likely the more suitable stock for investors. BRC's much smaller size offers faster growth potential. And since most of its losses were equity-related, it could be within striking distance of turning a profit.
However, its online and wholesale coffee businesses lack an obvious competitive moat. Also, with only 21 locations, it is not yet clear whether the outposts or the product sales will become its principal growth driver. Admittedly, BRC's outlook could improve if the outposts succeed to a greater degree. But without that clear direction, investors should watch and wait.
Conversely, whether Starbucks is poised for a bull run or not, few doubt its direction. The continuing revenue growth shows it can likely endure the increasing costs and expenses that have weighed on its profits. That gives it a more straightforward path than BRC for continued investor returns.
