Finding an exciting high-growth stock to buy can lead to outsized returns. Identifying companies with long-term competitive advantages and holding them for the long term allows the company to grow and execute. Over time, shareholders are rewarded as their small slice of the business gains value. While it may not be the most well-known coffee brand, Dutch Bros (BROS +1.32%) is certainly looking like the kind of company that can be a massive winner.
The fast-growing coffee chain might be the next big thing. If it's able to continue to grow at its current pace, it could be the perfect place to invest $500 right now.
NYSE: BROS
Key Data Points
Rapid store growth
For most investors, the term "fast-growing coffee chain" probably brings up thoughts of other businesses, rather than Dutch Bros. However, that may depend on where you live. Founded in Oregon in 1992, Dutch Bros now has 876 locations in 17 states, mostly concentrated in the West and Southwest. So if you live in one of the states that doesn't have a Dutch Bros location, you may never have heard of this company.
Based on Dutch Bros' current growth trajectory, its relative obscurity may not last for long.
| Metric |
Q1 2022 |
Q1 2023 |
Q1 2024 |
|---|---|---|---|
|
Total shop count |
572 |
716 |
876 |
|
Growth (YoY) |
26% |
25% |
22% |
Data Source: Dutch Bros. YoY = Year over year.
When it comes to opening new shops, Dutch Bros has big ambitions. Management has a goal to grow the chain to more than 4,000 locations. While that would be a significant increase from today's shop count, it's important to put that into perspective. Starbucks, for example, has nearly 40,000 locations across the globe.
Fiscally responsible growth
With any fast-growing chain, investors should pay attention to the economics of opening new locations. The most obvious place to look is the cash flow statement to see how much the business spends on capital expenditures. As one might expect, Dutch Bros is spending a lot to open new locations. While it is operating cash flow positive, it has yet to generate any free cash flow because of these expenses.
However, new locations get up and running pretty quickly in terms of their ability to contribute positively to the company's financial performance. Dutch Bros targets a 30% contribution margin for a new location within two years of its opening. Contribution margin is defined by the company as company-operated gross profit plus depreciation. In the first quarter, its contribution margin was 29.8%, compared to 24.2% in the prior-year period.
Dutch Bros locations also tend to generate more revenue over time. In Q1, systemwide same-shop sales were up 10%, a significant acceleration from the growth rates of the previous couple of years. This was driven by both increased traffic and increased average tickets. It's also worth noting that management's guidance for the full year is for same-shop sales to grow by a low single-digit percentage, so there should be a return to normal growth rates during the rest of 2024.
The bottom line for investors
There's no doubt that Dutch Bros is a fast-growing company, with its sustained double-digit percentage growth in revenues and shop count. What's impressive is that it has been able to grow so rapidly without incurring massive net losses. In fact, the company's bottom line has hovered around breakeven pretty consistently. Investors should keep an eye on its profit margins, but given its growth profile and the opportunity ahead of it, Dutch Bros looks like a great stock to buy right now.
