I first wrote about the up-and-coming handcrafted beverages chain Dutch Bros (BROS 0.08%) on March 12, 2024, when its share price was around $33.
Since then, I've written several more positive articles about why I still like the promising growth stock -- even though its share price has more than doubled from the time of my first article.
Despite Dutch Bros' rapid rise, however, I have no interest in selling my shares. In fact, I have been adding along the way and intend to continue doing so soon.
Here are the main reasons why I'm happy to keep buying Dutch Bros stock at (and around) today's prices, even after its dramatic share price turnaround over the last year.
Dutch Bros' one-of-a-kind culture
Dutch Bros emphasizes speed, quality, and service for its customers. Its customizable drinks have taken the West Coast and Southwestern United States by storm. With virtually 100% of its drink orders to-go, the company is a drive-thru specialist famous for its "escape lanes," which prioritize getting customers their drinks and back on the road as quickly as possible.
While this is a differentiator by itself, Dutch Bros also strays from being a "traditional" coffee chain, with 87% of its drinks being iced or blended. Half of its sales come from coffee drinks (with variations such as protein lattes), a quarter from its Rebel energy drinks, and the remainder from smoothies, teas, lemonades, and poppin' boba, making it more diversified than its coffee peers.
While quantifying the "it" factor behind Dutch Bros' cult-like following is difficult, the fact that it generates 72% of its sales from Dutch Rewards members lends credence to its one-of-a-kind culture. Once customers join, they tend to stay for the long haul.
This Dutch Rewards program is a powerful tool for the company, as it establishes a direct line of communication between loyal members and Dutch Bros itself. For example, the company's recent mobile ordering rollout and its new food offerings are a result of receiving feedback from its members.
As for Dutch Bros' work culture, its employees have numerous best customer service awards from Newsweek, USA Today, and Forbes. Additionally, Dutch Bros ranked fourth on Forbes' 2024 list of "Best Employers for New Grads," which helps explain how the company received over 500,000 applications for 14,000 job openings at the beverage chain.
Whether it is Dutch Bros' employees, its loyal customers, or the bond between the two, it's clear that the company has a top-tier culture.
Image source: Getty Images.
A lengthy growth runway ahead
Dutch Bros currently has about 1,000 locations. However, management aims to reach 2,029 shops by 2029, with a long-term goal of exceeding 7,000 stores. While this store count growth may seem overly aggressive, it may not be as audacious as it sounds.
First, over two-thirds of Dutch Bros' stores are located in just five states: Washington, Oregon, California, Arizona, and Texas. This fact highlights the long growth runway ahead for the company as it expands further into the Midwest and Southeastern regions of the U.S.
Second, the company's brand power and unique culture seem to be resonating with the new geographies it is entering. CEO Christine Barone spoke to this fact during Dutch Bros' latest earnings call, saying: "We had some of the top openings of all time in this quarter. So it was definitely a great signal, I think, of how the brand is being received as we're opening these new shops."
Furthermore, the company's pipeline of over 450 operator candidates (with an average of seven years of experience) is ready to take the Dutch Bros brand to new places.
Finally, the company won't be entirely reliant upon new stores for growth. As its existing locations mature, they should become more profitable over time, as shown by their oldest stores' performance.
The company's same-store sales (SSS) have risen for 15 consecutive years. With mobile ordering capabilities promising higher throughput potential -- and Dutch Bros making a measured move into food sales as requested by members -- I'm optimistic that this SSS streak will continue.
Dutch Bros is funding its growth in-house
Although Dutch Bros' growth potential is the central pillar of its investment thesis, its improving cash from operations (CFO) is what catches my attention.
CFO measures the cash that comes through the door before spending on capital expenditures (capex) like building new stores. A rising CFO figure like Dutch Bros' could be paramount to the company's success.
BROS Cash from Operations, Capex, and Free Cash Flow (TTM) data by YCharts.
By generating more CFO than it is spending in capex -- despite being in hypergrowth mode -- Dutch Bros has reached breakeven free cash flow (FCF). This positive FCF signifies that the company is funding its expansion plans "in-house," rather than needing new share offerings that dilute shareholder value.
For example, Dutch Bros plans to spend $250 million in capex on 160 new stores in 2025. The vast majority of this spending should be funded by CFO, as shown by the $242 million it generated over the last year.
This self-funding could be a significant tipping point for the stock. Rather than being a "growth at all costs" growth stock, Dutch Bros may become a quickly growing compounder capable of funding its own growth.
While this is a promising development for the company, it currently trades at a very lofty 53 times CFO. However, I believe that the company could outgrow this premium valuation, considering its:
- Loyal customer base
- Top-tier culture and brand
- Potential to double its store count by 2029
- Opportunity to grow its locations sevenfold over the longer term
- Track record of SSS growth
- Improving CFO generation
- Potential to lessen shareholder dilution
Yes, Dutch Bros stock has a lot to live up to. But I believe its numerous tailwinds for long-term success make the company an excellent growth stock to buy right now, even with its stock up dramatically over the last year.
