Dutch Bros (BROS 1.29%) launched an IPO in September 2021 amid a pandemic-driven bull market. The initial excitement took it from an IPO price of $23 per share to an intraday high of more than $81 per share within a few weeks.
However, the coffee stock dropped precipitously as the bear market took hold, and today it sells at almost a 60% discount to that high. The question for investors is whether the lower stock price makes Dutch Bros a buy. Let's take a closer look.
NYSE: BROS
Key Data Points
The state of Dutch Bros
Admittedly, the bears may have their best case against Dutch Bros stock in its short 18-month history. In 2022, same-shop sales grew by only 1% and fell slightly in the fourth quarter. This is a dramatic decline from 2021, when same-shop sales rose by 8.4% per year.
Dutch Bros attracted that larger following with its Dutch Classics, lattes made with half and half and espresso. Other Dutch Bros drinks, such as teas, smoothies, lemonades, and energy drinks, contributed to this popularity.
However, inflation has deeply affected Dutch Bros due to the rising price of coffee, milk, sugar, labor, and other inputs that go into hand-crafting beverages. Those rising costs forced Dutch Bros to pass on price increases to consumers, a likely factor in its more sluggish same-shop sales.
Dutch Bros' advantage
But despite the negligible performance of stores open for 15 months or longer, Dutch Bros managed to generate $739 million in revenue in 2022, an increase of 48%. Factors such as the 133 shop openings in 2022 and rising prices allowed the company to book that massive increase.
Additionally, Dutch Bros slashed its selling, general, and administrative expenses by more than 30%, helping to offset increases in the costs of sales, interest, and income taxes. In 2022, the company lost just $19 million, a massive improvement over the $118 million loss in 2021.
Moreover, Dutch Bros believes it will increase revenues in 2023 to between $950 million and $1 billion, as the regional coffee chain seeks to add at least 150 new locations this year alone. Hence, even if same-shop sales rise by only low single digits this year, the company can still grow rapidly.
Furthermore, thanks to the lower stock price, the price-to-sales (P/S) ratio stands at just 2.3. This is near record lows and lower than the P/S ratio of Dutch Bros' largest rival, Starbucks, which sells at 3.6 times sales. Starbucks also grows much slower, with its net revenues rising 8% in its latest quarter.
As the industry leader, Starbucks earns profits and maintains a P/E ratio, goals that Dutch Bros has yet to achieve. However, Dutch Bros forecasts $125 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2023, which could make the company profitable soon.
Consider Dutch Bros
That likely future profit is one of many factors that make Dutch Bros stock a buy. Although it has not escaped the effects of inflation, its ability to add stores in new areas still allows it to maintain an elevated growth rate.
Additionally, inflation will likely decrease at some point, and as conditions improve, Dutch Bros could again return to higher same-shop sales growth, which would serve as a strong tailwind for this stock. This temporary setback and discounted valuation could make now an opportune time to add shares.
