Dutch Bros' (BROS +3.41%) business is growing rapidly, which is impressive given that it faces material competition in the coffee niche. If you are wondering where the chain will be in a year, the easy answer is bigger -- much bigger. But that's not enough; you need to look deeper if you are going to invest in this company. Here are the key stats you'll need to know about.
Dutch Bros is setting a quick pace
In 2019 Dutch Bros had 370 restaurants. A year later that figure was 441, despite the headwinds presented by the coronavirus pandemic in 2020. It was another year of rapid store growth in 2021, with the year-end tally at 538. And, in the just-completed 2022, the company finished off with a store count of 671. That's an impressive pace of expansion, with management highlighting that it has been opening 30 or more stores each quarter for a year and half.
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Each new location, meanwhile, adds revenue as it opens up. So revenue growth has been similarly impressive. In 2019 revenue was $238 million, and in 2022 the figure is expected to be $725 million or so, representing compound annual growth of 45% over the entire span. Dutch Bros is in expansion mode in a very big way.
That's going to continue over the next year. Management is guiding toward a year-end 2023 store count of 800. But, it already expects to beat that figure. Revenue, meanwhile, could get as high as $1 billion. So in one year, Dutch Bros is going to be a much bigger company.
The fly in the ointment for Dutch Bros
There are two things investors need to monitor closely here, and Wall Street probably isn't going to help them do it. That's because growth is the name of the game at Dutch Bros, and revenue growth is where it is showing up the most. So that's what the company and analysts are likely to be highlighting. That makes sense in some ways, but companies need to make money, too.
Which is why earnings should be a notable focal point. In the third quarter of 2022, Dutch Bros earned $0.03 per share. But it lost $0.08 per share through the first nine months of the year. That was an improvement over the $0.24-per-share loss over the same span in 2021, but the company needs to get to a point where it is consistently profitable. And the sooner the better, since positive earnings will allow it to more easily fund continued growth and give it some leeway should its business face any headwinds.
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Key Data Points
The other important issue to monitor, and perhaps the more important one is same-store sales, which measure results at existing restaurants. In the third quarter of 2022, same-store sales rose 1.7% year over year. That sounds great, but it included pricing actions totaling 9.1%. If you pulled those price hikes out, same-store sales would have been negative. That's a bit too simplistic since higher prices often lead to consumers reducing purchases in an effort to save money, but the key takeaway is that the modest same-store sales growth wasn't as good as it at first seems.
On top of that, management noted that "sales transferred from existing shops to new shops" was a 1.5-percentage-point headwind. Essentially, new stores near old ones end up cannibalizing the old stores' sales. If that becomes a bigger issue, it could be a problem for the company.
You see, sometimes restaurants get so focused on growth, often to satisfy Wall Street, that they start to ignore store-level performance. That's easy to do because each new store adds materially to sales, which is the metric to which investors are likely paying the most attention. But the top line in such situations may actually be hiding a business that is fundamentally deteriorating because of aggressive overexpansion. And it's why you need to look deeper so you understand the hidden trends even as the company's store count and revenue growth continue to rocket higher.
Accentuating the positives
It's hard to fault management for focusing on growth, especially since that's what Wall Street is almost always clamoring for. However, as an investor, you need to keep track of the company's performance in a more detailed way. Growth without earnings can only go on for so long. And growth at the expense of the existing store base may actually end up weakening the brand. Bigger isn't always better, even if you are a growth-minded investor.
