Dutch Bros (BROS 6.67%) is not a typical restaurant stock. With most companies, investors have to worry about market saturation. Not with Dutch Bros. The coffee chain, based in the Pacific Northwest with 1,136 shops, thinks it can reach 3,500 locations before leaving the markets it's already in.
If you live east of Texas, you probably have never heard of Dutch Bros. The company sells cold beverages, coffee, and energy drinks through the drive-thru. That's pretty much the operational complexity-small footprint, minimal staffing, and iced drinks on the go. The model is simple.
The important part: Its customers love it. Roughly 7 in 10 transactions come from its 15 million loyalty members. The company just posted its 19th consecutive year of positive SSS growth. The model works, and it's no surprise it's spreading eastward.
More than coffee
Blue Rebel is the company's proprietary energy drink line. Think "have it your way" energy drinks at the window. Introduced in 2012, customized energy drinks now account for around 25% of total sales.
The category is outpacing coffee consumption industrywide, and Blue Rebel skews heavily toward Gen Z at generally higher margins. That said, all of us who choose not to partake in the pulse-pounding know that coffee consumption's not going anywhere either.
Over half of all U.S. coffee is now purchased at the drive-thru. Dutch Bros sells into both categories through a single window.
From cash burn to cash flow
Dutch Bros was bleeding cash just three years ago. Free cash flow went from negative $128 million in fiscal 2022 to positive $54 million last year. The fundamentals behind that are still strong. Fourth-quarter same-store sales grew 7.7% companywide and 9.7% for company-operated locations, driven mostly by traffic.
Image source: Getty Images.
For company-owned shops, restaurant-level margins are healthy, having reached close to 30% in 2024. Last year, margins pulled back to roughly 29%, largely due to rising coffee costs. In the near term, this is something for investors to watch, but it shouldn't cloud the long-term picture.
2,029 shops by 2029
That's the company's near-term goal, but management believes the existing markets have much more room to run. California and Texas, which together account for about 40% of total stores, provide the runway for much of that expansion.
After it achieves regional dominance, it has its sights set on expanding eastward, eventually reaching 7,000 total U.S. shops. While I enjoy taking cheap shots at absurdly large total addressable markets, Dutch Bros comes to this battle double-fisted: a coffee in one hand and Blue Rebel in the other.
NYSE: BROS
Key Data Points
Shares are down 15% this year, yet still trade at around 60 times forward earnings. That's a rich valuation for a company that just started generating positive FCF two years ago. But a market opportunity that large, backed by a model built for high-margin throughput, makes the valuation easier to reckon with. Dutch Bros looks like a buy right now.
