Dutch Bros (BROS -1.04%) is a tiny business, but it might not stay small for long. In early November, the beverage retailer announced solid growth trends for the third-quarter period that ran through late September, giving shareholders a few reasons to celebrate.
Management is doubling down on its expansion strategy, too, as it sees a long runway ahead to improve its current footprint that spans just 16 states. Dutch Bros operates 800 locations, after all, compared to the 18,000 that industry leader Starbucks maintains in the U.S. market.
Before Dutch Bros can even hope to compete with national chains, though, it first needs to prove it can balance strong growth with stable profitability. Let's look at some positive news on these points as the chain heads into its final quarter of its fiscal year.
1. A double shot of growth
Dutch Bros likes to bill itself as one of the fastest-growing brands in the food service space, and this quarter's results should help solidify that reputation. Revenue was up 33% through late September as the company boosted its store base by 39 locations, or 24%, year over year.
Management is targeting at least 150 store launches for the full 2023 year that should help propel sales to around $1 billion from $739 million in 2022. "I am encouraged by the strength of the underlying business as we execute on our plan," CEO Joth Ricci said in a press release.
To be sure, investors would have liked to see faster growth at existing locations. Dutch Bros managed just a 4% uptick in comparable-store sales this quarter, while Starbucks' gains were much stronger, at 8%. If there's a missing piece to this growth story, it's robust traffic growth at Dutch Bros' established stores.
2. Improving finances
It takes a lot of resources to fund such an aggressive expansion strategy. That factor helps explain why Dutch Bros made two big fundraising moves in Q3: It issued more stock, and it negotiated a higher limit on its credit facility.
Yet the company also made progress at establishing a self-funding enterprise. Gross profit margin improved by four percentage points to 24% of sales. Expenses fell as a percentage of revenue, too.
Those trends combined to push earnings and cash flow higher. Operating cash flow has more than doubled in the past nine months compared to the prior year. Successes here are putting Dutch Bros on a stronger financial footing, which will come in handy even if the U.S. economy avoids a recession in the coming quarters.
3. The price discount
Dutch Bros recently affirmed its 2023 outlook that calls for modest growth at existing locations, along with a quickly expanding store base. Adjusted profits will likely land a bit higher than executives originally forecast, management said, despite higher spending on things like training.
Most growth-focused investors will want to watch this stock over the next few quarters for more concrete signs that the business can win market share in the highly competitive beverage niche. Sure, shares are priced at a discount of less than 2 times annual sales. For context, investors were paying nearly 3 times sales in early 2023.
But that lower valuation makes sense, given Dutch Bros' tiny sales footprint and relatively low comps metric. Its sales base is expanding, but the stock won't fulfill its true growth potential until comps accelerate a bit beyond the current low-single-digit rate.
