When it comes to coffee stocks, Starbucks (SBUX 0.43%) has set the bar. Even if you bought the stock early in 1995 (a couple of years after its initial public offering), you could have a gain of more than 10,000% if you still owned the stock. That's the type of return that can set you up for life.
The next coffee stock trying to emulate Starbucks' success is Dutch Bros (BROS -4.41%), which is just a few years removed from its September 2021 IPO. Let's see if this stock has the same potential to set investors up for life.
Is Dutch Bros the next Starbucks?
While both companies are coffeehouse operators, their concepts are quite different. Starbucks has always aimed to be a high-end coffee establishment with a local coffeehouse feel and the aesthetics, service, and prices to match.
In that regard, Dutch Bros is not trying to be the next Starbucks. Its locations generally don't have places to come inside and sit down. Instead, the company largely focuses on delivering its beverages through drive-thrus, and not surprisingly its prices are generally cheaper.
Today, most newer Dutch Bros stores are 800 to 1,000 square feet in size, offering a walk-up window and multiple drive-thru lanes served by one window. Older legacy stores are only about 500 square feet with two drive-thru lanes on each side. The company also has a few larger end-cap locations that are about 1,200 square feet; these locations often include a lobby, but typically don't have indoor seating.
One thing the two companies do share in common, though, is that the traditional cup of coffee is not their biggest seller. In recent years, cold drinks have made up about 75% of Starbucks beverage sales. For Dutch Bros, about 50% of sales are coffee-based, but that includes fancy cold-coffee beverages. About 25% are its proprietary Blue Rebel energy drinks; the rest is a mix of "teas, lemonades, sodas, and smoothies." Hot coffee accounts for only about 16% of beverage sales.
Now Dutch Bros also has a few growth opportunities where it can follow in Starbucks' footsteps. One is food, which currently brings in about 2% of Dutch Bros sales, though the company has recently been piloting more items at a select few locations. Starbucks, meanwhile, derived 23% of its sales from food items in its last fiscal year (ended Sept. 29).
Online ordering is another area. While Starbucks has admittedly had some issues with its online ordering platform, digital orders have been a growth driver across the quick-service restaurant (QSR) industry. As such, this should be another nice growth opportunity for Dutch Bros.
The biggest opportunity for Dutch Bros, though, is expansion. At the end of last quarter, the company had 950 locations, of which 645 were company-owned. It's looking to expand to about 4,000 stores over the next 10 to 15 years. Starbucks, at the end of its last quarter, had 18,424 stores in North America alone, of which 11,161 were company-operated. That shows the long runway of expansion opportunities for Dutch Bros.
Given the relatively small size of its stores and no seating areas, development of new stores isn't overly expensive. Meanwhile, the company generates solid free cash flow, which allows it to fund its new-store buildout. And despite the small size of its locations, Dutch Bros' average unit volume (AUV) -- the typical amount of sales one of its stores produces -- is about $2 million.
Image source: Getty Images.
Valuation is relatively high
Given that Dutch Bros is still in the early days of its expansion, I think it's best to compare its valuation to Starbucks based on the price-to-sales (P/S) ratio. The reason is that as it scales and expansion moderates, profitability will increase. So on that front, Dutch Bros trades at 4.3 times trailing sales, while Starbucks trades at 2.8. However, in its early days, it wasn't uncommon for Starbucks to trade at a P/S of 4 or even above.
BROS PS Ratio data by YCharts.
Whether Dutch Bros can become the next huge coffee stock winner is still to be seen. But the company has a lot of long-term opportunities ahead with food, online ordering, and most of all expansion.
If the company can grow it's store base by four times over the next decade, it's going to be a solid winner. While that is strong growth, that likely won't be able to generate the type of returns needed to set you up for life. So overall Dutch Bros looks like a good potential buy, just not a generational one.
