Despite inflation and a volatile economy, many companies are still pumping out strong sales and even increased earnings. It's often in tough times that a company's true operational capabilities come out, so that even if performance is pressured, or stock prices tank, savvy investors can note the achievements.
That might apply to coffee giant Starbucks (SBUX 1.00%). But what about relative newcomer Dutch Bros (BROS -0.97%), which is just getting its feet wet and doesn't have quite the same muscle as its erstwhile competitor? Let's compare the two and see which is the better buy today.
Starbucks: The unrivaled leader in coffee shops
Starbucks practically invented the premium cup of coffee, and it has fended off rivals for decades while expanding its store count and escalating its dominance. It operates more than 36,000 stores globally and has plans to reach up to 45,000 by 2025.
In the 2023 first fiscal quarter (ended Jan. 1), sales increased 8% over last year, while comparable sales (comps) rose 5%. That was inclusive of store closures in China for much of the quarter. Although operating margin decreased from 14.6% last year to 14.4% this year, due to inflation and other economic factors as well as deleverage from the China store closures, earnings per share (EPS) increased from $0.69 to $0.74.
One metric I really liked from the first-quarter report is that comps were up 10% in the North America market. That nicely illustrates how well liked the company is in its core market, and that it has not yet reached saturation despite the perception that there's a Starbucks on every corner.
The company opened 86 stores in North America in the first quarter and now has nearly 16,000 stores in the U.S. and over 17,000 in the North America region. It opened 459 total stores in the quarter, which ironically enough is not so far off from the entirety of the Dutch Bros store fleet.
Its rewards program is still attracting members and generating business, with 30.4 million members at the end of the quarter, a 15% year-over-year increase and 6% sequential increase.
The China region continues to pose headwinds for Starbucks, and management said that the second half of the year would be stronger than the first. But there are still too many unknowns to say there will be a complete recovery. Long term, there's massive potential in China, and Starbucks has plans for 9,000 stores there by the end of 2025, up from 6,100 today. In the short term, the company is navigating around that region's uncertainty.
One important factor to keep in mind is that Starbucks pays a growing dividend that yields 1.89% at the current price. That itself is an attractive feature. At the same time, Starbucks stock trades at 38 times trailing-12-month earnings -- not cheap, but it demonstrates the confidence investors are feeling right now.
Dutch Bros: The new coffee shop on the block
Dutch Bros is a much smaller coffee chain with a different cultural feel than Starbucks. On one level, it is a Starbucks rival, because both sell various handcrafted coffee beverages -- essentially, the same kind of business. But at its current stage, it's developing its own flavor and branching out from its humble store count of 671. Even when it reaches the 4,000 stores it expects to open over the next 10 to 15 years, it will be its own self-contained coffee ecosystem rather than a threat to Starbucks.
There are both advantages and disadvantages to its size. The obvious advantage is the room to grow. Dutch Bros plans to expand to several times its current size, which should lead to extravagant revenue increases over time even without the benefit of comparable sales increases. Ditto for net income, which is currently negative. That itself should lead to no-brainer stock growth over the next few years.
The disadvantage is that in the short term, Dutch Bros has much less leverage than a company of Starbucks' size, which is why it's harder to turn sales into earnings. Scale is often necessary to make each dollar of expenses go further, especially in retail. It will take Dutch Bros time to reach that level of scale.
Revenue increased 44% year over year in the 2022 fourth quarter and nearly 50% for the full year. However, almost all of that growth came from new stores. Comps slightly decreased in the fourth quarter and were down 1% for the year.
Management stressed that part of that was due to its fortressing strategy, which entails opening several stores in a small area to kind of "shock" the region and make a quick and massive presence. Net loss was $2.8 million for the quarter and $19.3 million for the full year. Dutch Bros has been profitable in the past, and this isn't a company that's bleeding cash as it tries to expand.
Dutch Bros stock trades at a very reasonable 2 times trailing-12-month sales, and its stock is down 40% over the past year, while Starbucks stock is up 39% at the same time.
The better buy is the right stock for you
I think the differences in stock movement over the past year speaks volumes about the climate in the investing world right now. Starbucks is a solid and reliable dividend stock with continued robust opportunities, a capable management team, and an efficient operational network.
Dutch Bros is still trying to carve out its niche and make a name for itself. Its losses and lower name recognition make it riskier to own in this market. At the same time, it's quite popular in its markets, and it's making a sustained effort to enter more markets. Its unit economics are healthy, and when it returns to profitability, its stock could skyrocket.
It really comes down to the kind of stock you're looking for today. Starbucks is safer, but Dutch Bros could offer potentially explosive growth. The better buy is the one you need right now to balance out your portfolio -- or buy both to add different dimensions.
