Dutch Bros (BROS 0.51%) stock fell 15% in April according to data provided by S&P Global Market Intelligence. There wasn't any specific news for the company in April, but investors were unenthused by the 2023 fourth-quarter report in March, and negative sentiment about the economy continued into April.
Meet the newest coffee chain in town
Dutch Bros operates a small chain of coffee shops across the West Coast, but it has large expansion plans and has been steadily moving east, opening new stores. As of the end of 2023, it has 831 stores in 16 U.S. states and it plans on opening up to 165 more this year.
Although it's often compared to mammoth competitor Starbucks, Dutch Bros has its own culture and feel. It's focused on speed and a friendly atmosphere, and it's slightly cheaper than Starbucks.
It opened 159 stores last year, exceeding its guidance for 150, and it sees the opportunity for at least 4,000 stores over the next eight or so years. While these stores are generating higher revenue, comparable sales (comps) haven't been growing at a fast clip. They fell to declines for a short time, though they've been accelerating. But comps are often the bellwether for how a company is doing, and weak comps can indicate problems in the business.
It's something to watch, but there are reasons to suspect they don't tell the whole story right now. Many companies, even the top ones, are struggling with comps growth in the thick of a high-inflation operating environment. As a young company, it may take time for Dutch Bros to find its footing. And it has a smaller base of stores in its comps cohort since it's rapidly expanding. It also operates a fortress marketing strategy, which means it opens up several new stores in one area to build a strong brand presence. That could suppress comps growth in the short term.
Is this an opportunity to buy on the dip?
There are other growing pains, as well. The company is opening a new operating center in Pheonix, which is going to add to its near-term expenses, and it already posted a net loss in the fourth quarter that increased year over year.
So why should investors consider Dutch Bros stock? The store expansion opportunity looks very compelling, and comps are likely to improve as the economy does and as the company adds stores. It has also become profitable on a generally accepted accounting principles (GAAP) basis, although not yet consistently. And customers really like it, which is why it's likely to keep up its growth. This looks like an opportunity for patient, risk-tolerant investors to buy on the dip.
