Although Dutch Bros (BROS 1.04%) shares underperformed the S&P 500 in 2023, they still had a respectable year, up 12%. The stock rallied nicely over the last three months as investor optimism seemed to be building.
This coffeehouse chain is likely on your radar due to its potential for outsized growth. Should things go according to the leadership team's plans, its share price could rise significantly. But there are still risks to keep in mind.
With that being said, where will this coffee stock be in five years? Investors will find that there are two possible outcomes.
Dutch Bros is aggressively opening new stores
At the end of 2018, there were 328 Dutch Bros locations across the country. This figure has soared by 142% since then and now totals 794 (as of Sept. 30, 2023). It's clear that this operator and franchisor of drive-through coffee shops is focused fully on expanding its footprint.
"Dutch Bros will continue to confidently pursue high-quality investments in new shops in the path to 4,000," said former CEO Joth Ricci on the Q3 2023 earnings call.
This lofty target would amount to a roughly five-fold increase from the current store count. At that size, it's safe to assume that Dutch Bros would be generating much greater sales. And this could be a boon for the stock price.
Dutch Bros benefits from the fact that its small stores increase accessibility and convenience for customers who want to save time and are on the go. Moreover, the fact that a key priority of its menu is the ability to customize any order helps drive business.
The company has also made progress toward getting on a sustainable path. Dutch Bros produced net income of $13.4 million in the third quarter, a huge improvement from its $1.6 million profit in the prior-year period. Margins should continue expanding as the business scales up.
NYSE: BROS
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Facing intense competition
Despite those positive developments, investors can't forget how competitive both the broader restaurant sector and the coffee shop segment specifically can be. From a consumer's perspective, there is a wide array of options to choose from. This reality will make it difficult for Dutch Bros to reach the 4,000-shop mark.
At its current size, I don't believe that this business possesses an economic moat. The brand recognition isn't there, and it hasn't fully captured the advantages of economies of scale. Starbucks, on the other hand, has long excelled on both fronts, and even though it already has more than 16,300 locations in the U.S., it plans to continue expanding domestically.
Expanding rapidly from here will probably prove more difficult for Dutch Bros. It will have to compete with larger chains for favorable real estate locations and retail workers, for example, which could negatively impact its financials.
Investors must weigh the odds
As we look out over the next five years, it's clear that nothing is set in stone with this business. Dutch Bros could continue on its path of rapid expansion, or management's plans could get derailed due to the business's lack of an economic moat.
In my view, there's an equal chance for either of those outcomes, which leaves investors with a conundrum. Those who believe in the company's story and prospects might believe it's prudent to take a tiny position in the stock. Those who aren't so convinced and who don't like the high uncertainty will pass on buying shares.
