Fast food is a staple of modern life. Despite the industry being highly competitive, there always seems to be room for new entrants. That is, basically, what coffee chain Dutch Bros (BROS -1.04%) is. But the new players need to compete with older names, including industry giants like McDonald's (MCD -0.91%). Investors trying to choose between companies like Dutch Bros and McDonald's need to think carefully about what they want to own and what they are buying.
Slow and steady
At one point in its history, McDonald's was a growth stock. That time has passed. Today, it is so large that it can't grow at a rapid clip. To put some numbers on that, the fast food burger chain has over 40,000 locations in around 100 countries around the world. Roughly 95% of those locations are franchised, so it doesn't actually run most of them, but the ubiquity of the brand and consistency of the food offered make the company a go-to restaurant globally.
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In the first quarter of 2023, McDonald's posted revenues of roughly $5.9 billion with earnings of $2.45 per share. Earnings were materially higher than the prior year thanks to one-time charges in Q1 2022. Overall sales rose just 4%. That's actually a pretty good figure for a company the size of McDonald's and represents strong execution.
Notably, the company has increased its dividend annually for 48 consecutive years. That's not a record you build by accident, and it speaks to the real attractiveness of the company. It is a great option for income-focused investors looking to invest in a reliable dividend payer for the long term. The yield is currently around 2.1%, hardly huge but still well higher than the broader market's 1.6% or so.
A rising brand
Dutch Bros is at the other end of the spectrum here, with Q1 2023 revenues of a touch under $200 million and just 716 or so locations in the U.S. market (about 60% are company-owned). It opened 45 locations in Q1 alone, which speaks to the growth the company can achieve from such a small base. Those 45 locations represent a store count increase of nearly 7% in a single quarter! Year over year, Dutch Bros' store count rose by 25%. McDonald's is well past the point in time when it could grow by percentages like that.
The problem is that rapid growth costs money. Dutch Bros' Q1 2023 loss was $0.07 per share, a bit better than the prior year when it lost $0.10 per share in Q1. That makes sense, however, as the greater store count means a larger base of revenue. Thus, building out the franchise becomes less burdensome as the company expands. Eventually, it should turn a corner and become sustainably profitable and, very likely, an earnings growth story rather than just a business growth story.
The problem here is that Wall Street tends to push small restaurant chains to grow as fast as they can. This often leads to a "growth at any cost" mentality, with management teams pushing the envelope too far. Investors need to watch to ensure that new Dutch Bros locations don't start to materially cannibalize existing locations, something that store count growth can cover over on the top line. In Q1, same-store sales fell 2%, at least partly, according to the company, because of new locations. In the end, Dutch Bros is a growth stock, but one that needs close monitoring.
The winner?
The truth is that there is no clear winner here, and some investors might actually want to own both stocks. McDonald's is a solid option for long-term investors. It probably won't be exciting, but that's the point. Slow and steady is the name of the game, which conservative dividend investors will probably find attractive. Dutch Bros is an industry upstart looking to grow its business quickly. That's the type of thing that growth investors will like, but with rapid business growth comes the potential for over-expansion. In other words, Dutch Bros has an added level of risk about which investors need to be keenly aware.
