Wall Street isn't sure what to make of Dutch Bros' (BROS -2.86%) potential right now. The coffee seller's stock has sat out the market's rally so far in 2023, down slightly to roughly match Starbucks' return.
There are some huge differences between the two companies, beyond the fact that Dutch Bros is much earlier along in its growth story. Let's take a closer look at some factors about this growth business that could tempt smart investors to buy the stock for the long term.
1. Store expansion
Like Starbucks, Dutch Bros runs most of its restaurants, with a smaller proportion being operated by franchisees. This approach delivers lower profit margins than a company like McDonald's, which is almost completely franchised. But it allows for more control over the brand and the customer experience.
BROS Revenue (TTM) data by YCharts
Store expansion is a huge part of the thesis for this stock. Dutch Bros added 45 new locations last quarter, for example, helping to deliver 30% sales growth. Starbucks' more mature business expanded 14% last quarter, by contrast, mainly thanks to rising spending at its existing locations.
That's why investors looking at this stock need to follow key metrics like store growth and comparable-store sales for signs that the business might be struggling to expand its concept.
2. More than losses
There is more to Dutch Bros' finances than the losses it recently reported. That red ink is mainly a consequence of its aggressive growth strategy and relatively small scale, and it isn't likely to persist for long if management has its way.
"We doubled down in our pursuit of more profitable growth [in Q1 ]," CEO Joth Ricci said.
Gross profit is a more useful metric to follow on this score, especially over time. That figure has risen from 19% of sales for company-owned locations two quarters ago to 26% currently. In fact, Dutch Bros is nearing Starbucks' level on this key metric.
3. A decaf price
Dutch Bros' stock price looks attractive following its early 2023 slump. Shares are now valued at less than 2 times annual sales compared to a price-to-sales ratio of 3.3 for Starbucks.
Sure, there are good reasons for this discount, including Dutch Bros' weaker earnings profile and its slight drop in comparable-store sales this past quarter. Cautious investors might want to wait for a return to growth on this core metric, and more progress at generating net profits, before buying the stock.
If you're less risk-averse, you might consider adding the stock to your portfolio right now. In a few years, Dutch Bros should have a much larger annual sales profile and could be generating sustainably strong profits, consistent with the steps it has taken in those directions over the last few quarters.
The coffee chain industry is highly competitive, and not every player can succeed over the long term. But smart investors can be cautiously optimistic that Dutch Bros' recent successes are paving the way for excellent returns from here.
