There's nothing inherently wrong with paying a premium for a quality investment. If you can step into a compelling stock prospect at a lower price, though, why wouldn't you?
With that as the backdrop, risk-tolerant investors looking for a bargain-priced growth name may want to scoop up some shares of coffee outfit Dutch Bros (BROS +5.63%) while they're still down 66% from their late-2021 peak. Its expansion plans are percolating, which could make its stock piping hot in the coming year.
Dutch Bros is different by design
It's not exactly a household name ... at least not yet. The company operates only around 800 drive-thru coffee stands, mostly along the West Coast and in the Southwestern United States. For perspective, Starbucks (SBUX +1.64%) boasts more than 36,000 stores worldwide, with more than 16,000 located in the United States alone. If Dutch Bros is going to make a dent in a market dominated by Starbucks, it will need to do and be something distinctly different.
The thing is, Dutch Bros is distinctly different. In addition to operating strictly as a drive-thru service (rather than managing sit-down destinations like Starbucks), Dutch Bros' casual, less-polished, more neighborhoody atmosphere has its clear charm. It's neither unusual for a local stand to participate in a neighborhood fundraiser, for instance, nor for Dutch Bros employees to help raise money for fellow workers in need.
Its menu is different, too. Although it still serves the requisite coffee in all its key forms, smoothies, energy drinks, iced beverages, and shakes are additional options for in-car customers often in a hurry to get somewhere else. Dutch Bros even offers kid-friendly options.
Together, it all looks more like what consumers increasingly want -- affordable, healthy, flavorful treats served up in a jiffy. Its customers also appreciate how civic-minded the company's culture is.
And the numbers say as much. Last quarter's same-store sales growth of 4% may be merely so-so. Just bear in mind that it's still comparing its results to sales that soared during and because of the COVID-19 pandemic. There's still enough business to be won to report companywide revenue growth of 33% (year over year) last quarter, thanks to the addition of 39 new stores. That brings the count to 794 stores, en route to a goal of 1,000 locales by early 2025.
NYSE: BROS
Key Data Points
However, the company's longer-term goal should truly excite interested investors. Dutch Bros is laying the groundwork for what will eventually be a chain of 4,000 locations. Given that it's found a winning formula for gaining and retaining customers, it's difficult to doubt the coffee company will get there soon enough.
The kicker: Incoming CEO Christine Barone is a former Starbucks executive. She obviously knows a thing or two about the business.
McDonald's enters the race, but it's not a worry
Investors keeping tabs on Dutch Bros likely already know fast food giant McDonald's (MCD +1.55%) just unveiled a new restaurant brand that could prove problematic for Dutch Bros' plans. Specifically, McDonald's is testing the waters of a "beverage-led concept" called CosMc's that's "rooted in beverage exploration, with bold and unexpected flavor combinations, vibrant colors and functional boosts."
It's a bit of a stretch to say McDonald's completely ripped off Dutch Bros' menu full of chilled and frozen drinks or coffee-based treats. Dutch Bros didn't exactly invent the goods it sells either. It's also a stretch to suggest CosMc's will truly be a threat to Dutch Bros anytime soon, if ever. After all, only one such store is up and running right now, with only about 10 more to be established by the end of 2024.
It would be short-sighted, however, to not also point out the stark parallels between the two brands. In addition to the menu itself, "CosMc's blazes its own path with a uniquely seamless digital and drive-thru experience" so customers can "breeze through the ordering and payment process." It seems eerily familiar.
Still, it's not a problem simply because McDonald's Corp. will likely struggle to replicate the human touch that Dutch Bros' drive-thru stands are known for.
Image source: Getty Images.
See, McDonald's deliberately designs stores and establishes training standards so consumers' dining experiences at any of its restaurants are more or less the same; it probably intends to do the same with CosMc's. That's not necessarily what consumers want, though. Again, its customers like that Dutch Bros' stores each seem to have their own personality.
Moreover, the fact that McDonald's is entering this new territory may actually be a bullish sign for Dutch Bros. Think about it.
McDonald's has mastered the art and science of selling fast food. Even if CosMc's is more of an experiment than a growth initiative at this point, that it's spending time and money to conduct an experiment in the customized and premium beverage space speaks volumes about the market opportunity it sees on this front.
And it's not the only name making such a move on this quickly developing sliver of the drive-thru market. Smaller outfits, like Scooter's, Jamba, Swig, Ellianos, and 7 Brew, are just some of the other players looking to capitalize on the fast-growing demand for quality beverages sold via drive-thrus. Even Starbucks is responding after three-fourths of its third-quarter sales came from its cold-drink category, prompting the rollout of cold foam blenders, "one of the fastest rollouts [of new equipment] in our history."
Dutch Bros, however, is arguably the only such player with the size, strength, skill, and culture to fully capitalize on this category's growth.
Not for everyone, but maybe for you
While its backstory and potential upside are tasty, Dutch Bros still isn't the right pick for everyone's portfolio. Though profitable, it's a young company and is shelling out quite a bit of cash on its expansion efforts. The stock's also relatively young, only issued via the company's public offering in September 2021. Shares may still be shrugging off the usual post-IPO (initial public offering) impact.
If you can deal with the likely volatility and keep your eyes on the longer-term prize, however, it wouldn't be crazy to take a shot on Dutch Bros while the stock's still down.
