Restaurant and food stocks have struggled mightily in 2024. Dutch Bros (BROS -4.41%) has bucked this trend. The coffee shop and drink chain's stock is up 43% in the past month after posting huge growth in the third quarter. Investors are betting big on this West Coast consumer favorite and its expansion plans across the rest of the United States.
Dutch Bros is coming for the coffee competition and proved yet again with these recent earnings results that it is a force to be reckoned with in the food and drink sector. Let's take a closer look at these third-quarter earnings and see whether Dutch Bros stock is a buy today.
Growing while Starbucks is declining
In Q3 of 2024, Dutch Bros revenue grew 27.9% year over year to $338 million. This was driven by a combination of 2.7% comparable store sales growth and 28 new shop openings in the quarter. The company now has 912 shops across the United States, with the majority on the West Coast.
Compared to Starbucks -- one of its most formidable competitors -- Dutch Bros's results look even better. Starbucks posted negative 7% comparable store sales growth in the most recent quarter, with total transactions dropping 8%. While Dutch Bros is nowhere near as big as the coffee giant, some of these declining transactions were likely drinkers switching to Dutch Bros.
Why do they change? It is hard to pinpoint, but Dutch Bros has been innovative with its drive-thru format, enthusiastic employees, and creative drink ideas that do well with a younger audience. Don't invest in the stock just because Dutch Bros offers creative coffee drinks, but this is a way for the company to build up its brand over the long term and find loyal customers.
Long runway for new store openings
The best part about Dutch Bros is how much opportunity there is to grow its store count over the next decade. At the end of last quarter, the company had 912 locations. Management believes it can achieve 4,000 locations in the United States, or more than 4 times its current store base.
Some of these stores will be franchised, meaning that someone else owns the actual store but pays a fee to license the Dutch Bros brand and coffee offerings. This is the same model as McDonald's and requires much less capital to grow, which is an advantage when wanting to increase locations. Most of the new stores, however, will be company-owned and operated. At the end of last quarter, Dutch Bros had 300 franchised stores and 612 that were owned by the company.
Company-owned stores have approximately 30% contribution margins, which is a fancy way of saying store-level profitability. Franchise revenue is just a high-margin licensing fee. Overall, it looks like Dutch Bros has rock-solid unit economics with a lot of room for bottom-line margin expansion. Over the last 12 months, the company's operating margin has hovered around 8%. With the combination of franchised and company-owned stores, profit margins have a lot of room to expand in the coming years as the company gains more scale.
BROS PE Ratio data by YCharts
Should you buy the stock?
Dutch Bros stock is up 43% this month and over 80% in the last 12 months. The stock's market cap is now around $7.5 billion, with a price-to-earnings ratio (P/E) of 168. While this P/E may seem extremely high at first glance, Dutch Bros is barely profitable today and still has a long runway of growth ahead of it.
Let's illustrate the company's profits at 4,000 restaurant locations, which is what it expects to grow into over the next 10-15 years. Today, each shop does $2 million in annual sales, which could grow to $2.5 million through consistent comparable store sales growth. $2.5 million in average unit volumes (AUV) and 4,000 Dutch Bros locations equals $10 billion in total systemwide sales.
Now, not all these sales will show up as revenue due to Dutch Bros's franchising strategy, but the profit impact will be the same. Assuming a 15% net income margin on that $10 billion sales figure turns into $1.5 billion in annual earnings for Dutch Bros once it reaches 4,000 locations. That is a P/E of around five vs. its current market cap of $7.5 billion.
The stock is clearly trading at a premium valuation today. However, if you believe in the Dutch Bros brand and its expansion strategy, the stock will do well for those who hold over the long term.
