Recent IPO Dutch Bros (BROS 0.65%) has grown from humble beginnings. Starting in the sleepy rest stop town Grants Pass in southern Oregon three decades ago, the drive-thru coffee stand chain now sports 671 locations across the western United States.

But management thinks the innovative drink stand concept is just getting started, with plans to almost 10x its store count across the country over the next 10 to 15 years. Even with the stock down 30% this year, investors are betting big that management can execute this growth strategy, assigning the stock a hefty earnings multiple at the moment.

The future is wide and uncertain for Dutch Bros. Can the brand become a nationwide phenomenon? Is it poised to grow into its premium valuation? Let's take a look. 

Q4 results: Context on store footprint

At the end of 2022, Dutch Bros sported 671 unit locations, up from 538 in 2021. Next year, it plans to open 150 new stand locations, with approximately 130 company owned.

Historically, Dutch Bros franchised a lot of its coffee stands to third parties but is increasingly going with wholly owned units for its new openings. This takes more capital expenditures and up-front costs but leads to better unit economics over the long term.

Through these 671 stores, Dutch Bros generated $739 million in revenue ($640 million from company-owned stores) and was around breakeven on an operating income basis last year. This is not a red flag, given how much Dutch Bros is pouring into growth, but it does make the stock difficult to value on a bottom-line earnings basis.

Luckily, management gives investors an earnings metric it calls "company-owned contribution margin" to measure store-level profitability. In 2022, this margin was 24.6%, meaning its wholly owned stores generated $158 million in contribution profit last year. 

Long-term opportunity

So how many coffee stands does Dutch Bros think it can open in the United States? According to management, over the next 10 or so years it thinks there is room for 4,000 units just in its home market.

If this sounds like a lot, note that competitor Starbucks has almost 16,000 locations within the United States alone. As long as consumers continue to love the Dutch Bros drive-thru model, 4,000 units seems a reasonable level for the company to reach. At current levels, units will need to grow at just under 20% annually in order to reach 4,000 10 years from now.

Doable? Yes. But it will take an intense growth plan from management. Building out a physical footprint is tough and does not happen overnight. 

Valuing a restaurant is simple

Generally, restaurants are simple to value. There are three things that matter: unit count, annual sales volumes per store, and store-level profit margin. Of course, corporate overhead expenses come into play as well. Using these metrics, we can estimate how much annual contribution profit that Dutch Bros will generate 10 years hence.

First, as mentioned, the unit count should be around 4,000 if things go according to plan. Annual sales volume per store is around $2.1 million at mature, wholly owned Dutch Bros locations.

To be conservative, but also adjust for inflation, let's estimate per store unit volumes hit $2.5 million 10 years from now, and for the sake of simplicity that all stores are eventually fully owned by the company. The contribution margin is a lot more difficult to model, but let's try and be conservative, given the uncertainty of 10-year projections, and assume Dutch Bros can maintain around 25% store-level margins 10 years from now.

Multiply these three numbers together, and you get $2.5 billion in annual contribution profit. Unless the company spends lavishly on corporate expenses, this should lead to healthy cash flow generation. 

Today, Dutch Bros has a market cap of $4.94 billion, or less than 2 times my estimate for 10-year forward contribution profit. Of course, these are just estimates and could easily be wrong, but if you believe in the growth story at Dutch Bros, now could be a great time to buy some shares regardless of what current earnings multiple the stock sports.