The economic landscape is getting even tougher for many companies to navigate. Many top stocks are falling as sales growth decelerates or declines, and profits shrink or turn into losses.
Although there are companies that are doing just fine, for many of the ones that aren't, the declines are more about the environment than the health of the overall business. Now is actually a great time to see which companies are prepared for these eventualities and well-capitalized with "backup" strategies to survive when the going gets tough.
As for their stocks, the ones that have incredible long-term potential start to look like exciting buying opportunities. Dutch Bros (BROS -0.19%) stock fell after its first-quarter report last week, and it looks like a great buy. Here are three reasons why.
1. Dutch Bros' profitability is improving
Sales growth was strong in the 2023 first quarter at 30% over last year, but investors weren't happy with a 2% decline in comparable sales (comps). A comps decline is generally a red flag, but I don't think it's a dealbreaker here, even though investors definitely have to keep an eye on it. Management reminded investors that only 70% of stores fall within the group of stores to be considered comps, which makes it less of an indication of business health than in more mature companies. It also said momentum was picking up toward the end of the quarter, and it reiterated guidance of low single-digit comps for the full year.
In better news, profitability was substantially improved in the first quarter. Net loss contracted from $16 million last year to $9 million, and adjusted EBITDA widened from $10 million to $24 million, or by 147%.
Image source: Dutch Bros.
2. There are huge expansion opportunities
Dutch Bros currently operates 716 stores in 14 states, up from 12 last year. It's very popular in the areas where it operates, and it's on schedule to reach its goal of 800 stores by the end of 2023. It opened 45 stores in Q1 2023, with plans for 150 for the full year.
Its next ambitious goal is to open 4,000 stores over the next 10 to 15 years. That's still a drop in the bucket compared to coffee king Starbucks. Dutch Bros operates both company-owned and franchised stores, and most of its franchisees are loyal Dutch Bros workers who began in a store and own several shops.
Contribution margin, which measures how much money stores are generating above certain costs and is similar to gross margin, improved from 18.3% last year to 24.2% this year for company-operated shops. But that hit the target 30% rate for more mature shops, and it indicates that as the company expands, its unit economics improve and lead to better profitability.
3. The price looks right
Dutch Bros went public about a year and a half ago, and its stock is now trading roughly 30% below its first-day closing price. Since it doesn't have positive net income, investors can assess its valuation using a price-to-sales ratio, which is now only 2. That's incredibly cheap for a stock posting revenue growth of 30% or higher.
Management reaffirmed its guidance of $950 million to $1 billion in 2023 sales, which is 32% year-over-year growth at the midpoint. With sales increasing and the price decreasing, the valuation plummets. Management is also guiding for adjusted EBITDA of $125 million, up from $91 million last year.
Investors don't seem to have a lot of confidence right now, but the current pressure Dutch Bros is facing doesn't take away from the coffee company's overall health and its long-term potential. That makes Dutch Bros stock look like an excellent buying opportunity right now, as long as you have a long time horizon.
