In its most recent quarter, Dutch Bros' (BROS -1.04%) saw revenue jump 33% year over year -- an impressive result. Add this to the fact that the company plans to open at least 150 new stores in 2023, and it's obvious that growth is clearly the key part of this company's story.
Opportunistic investors looking for the potential to score huge gains might have their eyes on its beaten-down shares, which are 62% below their peak and trading at a price-to-sales multiple of 1.8. That valuation is close to the cheapest it has ever been.
Should you buy this coffee stock hand over fist with $1,000 right now? The answer might surprise you.
A latte with a splash of growth
Some investors are enamored with Dutch Bros' aggressive store openings. Since the start of 2021, it has added 353 drive-through coffee shops to its physical footprint, bringing its total to 794. And it looks like the pace is only going to accelerate. The management team, led by CEO Joth Ricci, has said the long-term goal is to operate 4,000 stores.
The company hasn't offered any specific timeline as to when it aims to achieve that lofty goal. Regardless, the idea that it will expand its store base by a whopping 400% is a premise that understandably draws in investors who believe in the growth story.
If the management team can execute its expansion plans, the result would be a business with higher sales, and hopefully, expanding profitability and potentially strong investor returns.
It won't be an easy road ahead
The plans Dutch Bros has certainly sound exciting, but reaching its goals is not going to be an easy task. I believe the most pressing factor that will get in the way is the intense competition in the quick-service coffee industry.
To its credit, what makes Dutch Bros stand out is the small format of its stores. Its typical location is about 950 square feet. Customers looking for increased accessibility, speed, and convenience when grabbing a beverage might frequent these stores. There might be more of a utility factor.
However, the fact that the restaurant sector is as competitive as it is means Dutch Bros isn't alone in attempting to use this strategy. Starbucks, the leader in the U.S. coffeehouse industry with more than 16,000 stores domestically, is focusing on smaller stores as part of its expansion plan. Dutch Bros is tiny by comparison, and lacks the brand power, scale advantages, and operational prowess that Starbucks has developed.
There's also McDonald's, the undisputed leader in the fast-food industry. The chain recently announced a new beverage concept, known as CosMc's, which will provide unique beverages and a limited menu of food items. The fact that McDonald's is trying to enter the market niche that Dutch Bros is in will only make things more difficult for the latter when it comes to expansion plans. I'm certain that far fewer consumers know about Dutch Bros than are familiar with the fast-food giant.
All of this is to say that it's far from certain that Dutch Bros will hit its 4,000-store goal. There will be constant competition for attractive real estate, talented employees, and loyal customers. These are things any long-term investor would be worried about.
Right now, I view these risks for Dutch Bros as more compelling than its growth story. So even though the stock is cheaply priced today, that $1,000 you have is likely better off invested elsewhere.
