Shares of coffee house giant Starbucks (SBUX 0.47%) are down roughly 2% over the past 12 months. The stock of tiny competitor Dutch Bros (BROS -1.04%) is basically flat over that same span. Clearly, investors wouldn't have benefited any more from owning one or the other of these two stocks over the past year. But if you are a growth-oriented investor, the opportunity set looks like it could be very different here as you look out to the distant future.
Starbucks is a giant success; Dutch Bros is tiny
Starbucks has grown into a global coffee powerhouse. It has more than 38,000 locations around the world. In the United States alone it has a bit over 16,300 stores, or just about 43% of its total. The company turned in a strong year in fiscal 2023, which ended in October.
To put some numbers on that, Starbucks' revenue rose 11%. Same-store sales, which tracks the performance of locations open for at least a year, were up 8%. That was driven by a mixture of price (5 percentage points) and traffic (3 percentage points). Globally, the company opened 816 stores in the fourth quarter and more than 2,300 for the year. Starbucks is still a growing business.
By comparison, Dutch Bros would be a rounding error. The restaurateur ended its fiscal third quarter with 794 stores. That's less than Starbucks opened in a single quarter. And all of Dutch Bros locations are domestic. But here's where things start to get a bit more interesting. Dutch Bros' top line grew 33.2% year over year in the third quarter. And while same-store sales only came in up 4%, that is influenced by the company's plan to open new locations near existing locations as it expands. Although this leads to customer cannibalization, Dutch Bros doesn't have a globally recognized name to rely on to attract new buyers. It is a trade-off of sorts that balances growth against the risk of trying to start a new location with zero brand awareness.
That said, growth is the big story here and one that will likely dictate which company you think is more attractive.
Dutch Bros' small base is a big benefit
As noted, Starbucks opened more stores in a single quarter than Dutch Bros has in its entire chain. But the company is huge and has to open a lot of stores to move the needle. As it stands, the new stores it opened in fiscal 2023 only increased the total store count by about 6.5%. The U.S. business only grew its store count by roughly 3%. So all of that store growth really wasn't as notable as it may seem when you look at the absolute numbers. By comparison, tiny little Dutch Bros grew its store count by a massive 29% year over year in the third quarter. That helps to explain the huge jump in revenue the company achieved relative to Starbucks.
This isn't going to be a one-time event. A Goliath like Starbucks just can't grow as quickly as a tiny competitor like Dutch Bros. So if you are interested in a growth story, Dutch Bros will probably be more appealing to you. Only there's a notable trade-off you have to consider since opening stores is an expensive task. Dutch Bros is nowhere near as profitable as Starbucks. To put some numbers on that, Dutch Bros earned $0.07 per share in the third quarter. In the fiscal fourth quarter, Starbucks earned $1.06 per share. While it is highly likely that Dutch Bros' earnings will be meager while it continues to build out its footprint, it is actually pretty impressive that it can grow so fast and turn a profit at the same time.
With that in mind, investors need to consider the valuation differences between Starbucks and Dutch Bros. If you use price-to-earnings, Dutch Bros' P/E of more than 700 seems outlandish. Starbucks' 26, while not exactly cheap, will seem far more reasonable. The problem is that, given the stage of growth in which Dutch Bros is in, earnings aren't really the prime focus.
BROS PE Ratio data by YCharts
Looking at the top line (sales) might be more productive, as that is what the smaller company is focused on growing. Here, Dutch Bros' price-to-sales ratio is 1.8 times, which happens to be notably lower than the roughly 3 times at which Starbucks trades. From this perspective, investors are paying much less per dollar of sales for the upstart with huge growth potential (if the size of Starbucks in any indication) than for the industry giant that simply isn't growing as fast.
BROS PS Ratio data by YCharts
This alone doesn't make Dutch Bros a better investment. Indeed, for conservative investors Starbucks could easily be seen as the better option. Sure, slower and steadier growth is the most likely outcome, relative to Dutch Bros, but if you don't like surprises, that will probably be a good outcome for you. However, if you are thinking in decades and believe that Dutch Bros' early success is going to lead to future success, then there's simply more growth potential at the smaller brand.
Not an easy choice
Every investment decision involves making trade-offs between risk and reward. This comparison is no different. Conservative investors will probably prefer industry heavyweight Starbucks given its still-growing business, strong brand recognition, and global footprint. Growth investors, however, might actually find the opportunity presented by a relatively tiny upstart like Dutch Bros extremely compelling. Add in the lower price-to-sales ratio, and it looks like Dutch Bros stock could even be viewed as a bargain, relatively speaking.
