There's little question that early investors in Starbucks (SBUX 1.00%) have been amply rewarded. Since the company's $17 IPO in mid-1992, the stock has returned an incredible 40,000% -- even after the recent beating inflicted at the claws of the ongoing bear market. Starbucks redefined expectations in the takeout coffee market by providing a welcoming atmosphere and a consistent product -- becoming the bar by which all other coffee shops were measured. Because of the company's rampant success, investors are always on the lookout for the "next" Starbucks.
With that in mind, Dutch Bros (BROS -0.97%) may be worth a taste. While investors may not yet be familiar with this regional coffee chain, it has many of the same attributes that helped make Starbucks the king of the coffee shop. Dutch Bros' steady growth, loyal clientele, and dedicated workforce have put the company on the fast lane to long-term success.
Image source: Getty Images.
Loyal, thirsty fans
Dutch Bros describes itself "a fun-loving, mind-blowing company making a massive difference one cup at a time." The company started out with a single espresso machine mounted on a pushcart in 1992. From these humble beginnings, the company has risen through the ranks to become a small but growing powerhouse in the space. In fact, during the 12-month period ended June 2022, Dutch Bros was cited as the fastest-growing major U.S.-branded coffee chain, up 28% year over year, outperforming industry bigwigs Starbucks and privately held Dunkin', according to market intelligence firm World Coffee Portal.
The chain focuses on core values of speed, quality, and service, which its works to infuse in every customer interaction. Dutch Bros boasts a vibrant culture, and its "broistas" are trained to connect with each customer and add a personal touch. As a result, the company has attracted a large and devoted fan base. Monthly visits for July, August, and September 2022 grew 32.7%, 23.6%, and 30%, respectively, compared to the prior-year periods, according to Placer.ai.
Another factor fueling those strong results is the company's specialty beverages. Dutch Bros offers up cutting-edge flavors and customizable drinks, which includes hot and cold espresso drinks, cold-brew coffees, tea, their proprietary Dutch Bros Blue Rebel energy drinks, lemonade, and smoothies -- as well as fan favorites on its not-so "secret" menu.
This helps explain how Dutch Bros has cultivated a group of die-hard coffee enthusiasts and repeat visitors at 671 locations in 14 states.
Happy employees = happy customers
Since the beginning, Dutch Bros has focused on its people-first culture, which gives the company a strong competitive edge in the cutthroat coffee shop business, which is known for its extremely high turnover rate.
Late last year, Dutch Bros was named to industry publication QSR magazine's 2022 Best Brands to Work For list. Among other factors, QSR cited the company's benefits and culture as key factors in the company's "impressive" 66% turnover rate -- well below the industry average of 144%.
QSR also noted Dutch Bros' stellar Glassdoor ratings, which ranked fifth overall in terms of employees who would recommend their job to a friend. Dutch Bros also held the top spot in Glassdoor's "specialty" rankings, nabbing No. 1 or No. 2 spots in all five categories measured: overall employee rating (4.2 of 5), culture and values (4.3), work/life balance (3.8), senior management (3.6), and career opportunities (3.7). It also cited Dutch Bros' clearly defined career progression -- broista to shift leader to shop manager to operator -- as a distinguishing factor.
If that isn't enough, Dutch Bros has been cited by Top Workplaces as No. 12 in the nation for prioritizing its people-centered culture and making the Top Workplaces list each and every year going back to 2017.
A rising star
Dutch Bros is recognized for having among the best unit-level economics in the industry. Stores opened in 2020 and 2021 posted trailing-12-month average unit volume (AUV) of $2.1 million, above the company's average of $1.8 million. The shops opened in the third quarter are on track for an annualized AUV of $1.9 million. This outpaced both Starbucks and Dunkin', which posted AUV of $1.5 and $1 million, respectively, in 2021.
Management has embarked on a relentless campaign of expansion -- without sacrificing the personal touch -- more than doubling its store count since 2019. That helped Dutch Bros generate more than $1 billion in sales for the 12 months ended June 2022.
Recent results help illustrate how Dutch Bros' strong growth translates to awesome financials. In the third quarter, revenue grew 53% to $199 million. At the same time, the company swung from a loss to a profit, generating net income of $1.6 million, compared to a loss of $117 million in the prior-year quarter. That requires context, however, as the prior-year loss was related to a noncash charge of $124 million for stock-based compensation related to its just-completed initial public offering (IPO).
Even in the midst of its stellar results, challenges remain. In the face of rampant inflation, Dutch Bros was forced to raise prices by 9% over the preceding 12 months. This, in turn, weighed on same-store sales, which grew 1.7%. Furthermore, management is expecting comps to be essentially flat in the current quarter.
Selling at a discount
Given the macroeconomic headwinds and the ongoing bear market, Dutch Bros hasn't been immune. The stock has taken a header, falling 55% from its peak in late 2021. As result, the stock currently trades for less than 1.7 times next year's sales, placing its squarely in the bargain bin.
To be clear, Dutch Bros has its work cut out for it if it wants to be the next Starbucks, but given its loyal customers, satisfied employees, and strong financial results, the company has made all the right moves thus far.
