The future remains promising for the high-growth coffee chain Dutch Bros, NYSE symbol BROS, despite experiencing significant fluctuations since its initial public offering in September 2021. This American drive-thru coffee chain entered the public domain with shares priced at $23, which then surged to an all-time high of $76.25 within two months. Currently, the stock is trading at approximately $35.
Initially, investors were optimistic about Dutch Bros due to its rapid expansion and its potential to challenge Starbucks. However, this enthusiasm waned as the company’s growth decelerated and rising interest rates impacted valuations. Now, there is speculation about whether Dutch Bros can regain momentum over the next three years as the broader economic environment improves.
Dutch Bros began its journey with the first drive-thru location in 1994 and expanded swiftly post-1999, following the franchising of new locations. Prior to going public, the chain grew from 254 locations in seven states at the end of 2015 to 471 outlets across 11 states by June 2021. It nearly doubled this footprint to 912 stores, comprising 600 company-operated and 312 franchised locations, by June 2024. Company-operated stores accounted for 91% of its revenue in the first half of 2024.
Over the past nearly four years, Dutch Bros consistently increased its same-store sales, expanded its number of outlets, and achieved high double-digit revenue growth. The company’s adjusted EBITDA margins also saw improvements, with sustained profitability on a GAAP basis over the past 18 months.
The remarkable growth of Dutch Bros has been attributed to its “fortressing strategy,” which involves densely setting up new stores within regions to enhance brand visibility and market share without hefty marketing expenditures. Additionally, the company has elevated prices over the past two years to mitigate inflationary impacts on margins.
Looking forward, Dutch Bros plans to open at least 150 additional locations in 2024, anticipates single-digit growth in same-store sales, and projects total revenue growth of 26% to 27%. It also expects adjusted EBITDA to rise by 25% to 31%, targeting a full-year margin of 16.8%.
In a conference call during the second quarter, CEO Christine Barone stated that despite facing challenges from the macroeconomic environment and competitive pricing from peers, the company’s long-term strategies, which include enhanced advertising, an expanded rewards program, and new menu offerings, do not require fundamental adjustments.
Analysts predict a compound annual growth rate (CAGR) of 22% for Dutch Bros’ revenue and 24% for adjusted EBITDA from 2023 to 2026. On a GAAP basis, earnings per share are expected to increase from $0.03 in 2023 to $0.46 in 2026. In contrast, Starbucks’ projected CAGRs for revenue and EPS are 5% and 6%, respectively, within the same timeframe, contingent on its new CEO addressing performance issues in the North American and Chinese markets.
Given these expectations, Dutch Bros’ stock appears reasonably priced at three times next year’s sales and 18 times its adjusted EBITDA. If the company continues adhering to its successful growth strategies, its stock could see an upward trajectory over the next three years, potentially outperforming industry peers.
