This small-but-growing coffee chain should be on your buy list.
Starbucks has developed such a strong brand that it’s synonymous with coffee. If you say you got a Starbucks this morning, everyone knows what you mean.
But the company is struggling right now. It’s gotten large and clunky, and although it identified where it needs to change a few years ago, it’s been slow on the uptake. Large organizations can become unwieldy.
That doesn’t mean it can’t stage a comeback, and I would bet on it springing back to growth sometime soon. But there’s a new player in the coffee chain world: Dutch Bros (BROS 3.15%). Although right now there may not be so many people who know what you’re talking about if you said “I got Dutch Bros this morning,” that’s going to change quickly.
A new coffee shop in town
There are certain brands you just can’t compete with. No one is going to knock Nike off its pedestal anytime soon, and there’s no real competition for Amazon in e-commerce. Starbucks has a similar lead in coffee chains with nearly 39,000 locations.
But there’s room for smaller players to carve out niches and create a real alternative for those seeking something a little different. That’s how Dutch Bros is distinguishing itself. It has no plans to challenge Starbucks, but it can see its store count more than quadrupling from the current 876 over the next 10 to 15 years, providing excellent growth opportunities for investors.
Since Dutch Bros is so small, its expansion opportunities are large. And there’s reason to be confident in its prospects because customers really like the Dutch Bros experience. Plus, it has an edge, especially right now, in its lower prices.
The company opened 159 new shops last year ahead of schedule and plans to open up to 165 more this year. This is steady pacing that allows it to scale comfortably while achieving profitability and keeping its growth runway long and strong.
There are Dutch Bros locations across the West Coast, and it’s been making strides as it crosses eastward, mostly in the southern states.
The Dutch Bros concept is taking off
Dutch Bros is reporting high revenue growth, as any company opening many stores should be. Revenue increased 39% year over year in the 2024 first quarter. As the company opens more stores, that number should remain high.
However, it would be concerning if it was getting all of its growth from new stores. Comparable-store (comps) sales growth is a key element of any growth strategy, and Dutch Bros’ comps growth took a dive when high inflation set in.
Since the company is so small and many stores are new, the impact of low or declining comps growth on overall sales growth has been minimal. But management raised prices effectively to combat rising costs, and customers may be switching down to its cheaper beverages.
Comps growth is now back on the upswing and increased 10% year over year in the first quarter. This is something to monitor, but so far, management has handled it effectively.
Co-founder and CEO Joth Ricci stepped down last year to make way for Christine Barone, who has experience at Starbucks and other consumer goods companies. She has assembled a team of seasoned executives to bring Dutch Bros to the next level as it scales and manages through these types of scenarios.
So far, the company has been performing well under the new leadership and inspiring confidence in its potential. Dutch posted a strong profit in the first quarter with $16 million in positive net income after a $9 million loss last year.
Years of growth coming right up
If you don’t live in the 17 states where Dutch Bros operates today, you may not have had a chance to sample its products — yet. But you can buy its stock at an excellent price. It’s down 50% from its highs in 2021 and trades at a price-to-sales ratio of 2.5. Its forward one-year price-to-earnings ratio of 82 makes it look like less of a bargain, but high-growth stocks do get a premium.
Putting it all together, I think Dutch Bros is the next big name in coffee, and now is a great time to buy its stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Nike, and Starbucks. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.