There are some well-established chains in the restaurant sector that have become household names at this point. But there are also smaller businesses in the industry that investors might want to take a closer look at these days.
With a market capitalization of just $6 billion, one particular restaurant stock likely flies under the radar. It also doesn’t help that its shares are trading 53% below their all-time high, a milestone that was reached in November 2021.
So should you buy Dutch Bros (NYSE: BROS) shares right now?
The story is all about growth
Although well off their peak price, shares of this up-and-coming coffee chain have surged 27% since Dutch Bros reported Q1 2024 financial results on May 7. Investors were certainly pleased that the company continues to grow at a blistering pace.
During the three-month period that ended March 31, the company posted revenue of $275.1 million, up 39.5% year over year. This was the fastest rate since the fourth quarter of 2022. That impressive top-line gain was boosted by 45 new store openings, which is management’s core growth playbook. For the full year, the plan is to open 150 to 165 new locations.
It’s not surprising that when new stores are opened, revenue should easily get a bump. That’s why it’s critical to also pay attention to same-store sales, a measure of the growth of revenue at locations open at least 15 months. This helps assess how existing stores are performing over time.
Dutch Bros reported a 10% same-store sales gain in the first quarter. The good news was that this consisted of a “healthy combination of ticket expansion and traffic.” The bad news was that not only was this after registering a 2% decline in this metric in the year-ago period, but management still expects full-year same-store sales to rise in the low single digits.
Today, Dutch Bros operates 831 coffee shops, primarily in the Western and Southern U.S. However, management has huge ambitions. Executives believe that there is capacity to have 4,000 locations open one day, translating into a potential nearly fivefold expansion of the current physical footprint. At this level of scale, revenue will certainly be astronomically higher than it is today.
No sure thing
Investors always seem to be enamored with businesses that possess sizable growth prospects. This is easy to spot, it’s exciting, and if all goes well, there is the prospect to score big returns.
To be fair, Dutch Bros is experiencing strong momentum right now, but I’m less optimistic if we look out over the next five or 10 years. One key reason why is because I don’t believe Dutch Bros has an economic moat yet. And this introduces lots of uncertainty as it relates to its long-term success.
At this point, the company lacks the scale necessary to have built up a well-recognized brand. It has made a splash thus far, but it’s hard to say how relevant Dutch Bros will be far into the future.
Competition in the restaurant sector is probably more intense than in any other industry. Dutch Bros has to go up against the vast number of independent coffee shops out there, as well as heavyweights like and Starbucks and McDonald’s, both of which have deep pockets, consumer loyalty, and plans to continue growing.
Dutch Bros also hasn’t proven an ability to generate consistent profits. It was able to generate positive net income of $16.2 million last quarter, but this performance is spotty at best. Perhaps when there are more stores open and more revenue being generated, the bottom line will look stronger. But it’s hard to know when — or if — this will happen.
Shares are well off their high, but they still trade at a price-to-earnings ratio of 200. That illustrates the extreme optimism investors have for this business and its outlook. Based on the risk factors outlined above, I believe it’s best to avoid buying Dutch Bros stock today.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
With Shares Down Nearly 55%, Is Now the Time to Buy This Restaurant Stock? was originally published by The Motley Fool
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