In the wake of a recent stock-market downturn and ongoing uncertainty related to tariffs, several growth stocks are currently available at significantly reduced prices compared to a few months ago. A notably impacted stock is Dutch Bros, which has seen a decrease of approximately 35% from its peak value.
Dutch Bros, a seller of coffee-based beverages, is not insulated from tariffs. The U.S. imports almost all coffee, aside from small amounts produced in Hawaii, Puerto Rico, and, to a lesser extent, California. Additionally, essential supplies like cups and paper products often come from countries such as China, which could lead to increased prices for coffee drinks universally, affecting small coffee shops and large chains such as Starbucks. As businesses may need to raise prices, there is potential for consumers to reduce their consumption of these beverages.
Nonetheless, Dutch Bros remains in a potentially advantageous position. Its drinks are priced lower than those of Starbucks, making it a viable alternative. Furthermore, Dutch Bros, being larger than local coffee shops, is better equipped to manage the increased costs resulting from the recent tariffs.
Historically, coffee has generally been exempt from tariffs, given the impracticality of large-scale coffee farming in the U.S. There remains a possibility that an exemption could be established if the tariffs persist. Absent a significant decline in customer traffic, restaurants and coffee-shop operators often perform well in inflationary times. Sales figures tend to increase with price hikes, and if companies manage prices to maintain gross margins, they can benefit financially. For instance, the profit from a $6 drink with an 18% gross margin exceeds that of a $5 drink with a 20% gross margin.
In terms of long-term prospects, the outlook for Dutch Bros remains strong despite short- to medium-term uncertainties related to tariffs. An increase in prices could lead to higher same-store sales. Additionally, the introduction of more food options and mobile ordering is expected to boost growth in comparable-store sales.
Currently, Dutch Bros lacks an extensive range of food options compared to competitors like Starbucks, impacting its traffic, particularly during breakfast hours. The company is experimenting with offering more food items at select locations, which, if expanded to more outlets, presents a significant opportunity. Presently, only 2% of Dutch Bros’ sales come from food, whereas food accounted for 19% of Starbucks’ sales last year.
Dutch Bros has also recently implemented mobile ordering, albeit later than some peers, acknowledging its effectiveness in driving traffic. Considering that Dutch Bros generally operates as a takeaway business, the addition of mobile ordering is expected to further increase sales.
The primary growth opportunity for Dutch Bros lies in its expansion from a regional to a national coffee-shop chain. At the end of last year, Dutch Bros operated in 18 states with 982 locations, 670 of which were company-owned. The company has room to expand into new markets and further develop existing ones.
Oregon and California are Dutch Bros’ largest markets, yet it has only half the number of locations as Starbucks in Oregon and significantly fewer in California. Nationally, Dutch Bros’ U.S. locations number far below Starbucks’ tally of over 17,000.
Dutch Bros faces a significant long-term expansion opportunity. If it increases its number of stores by 15% annually over the next 20 years, it would still trail Starbucks’ current number of U.S. locations. Its store model, featuring two drive-up windows and a walk-up window, is cost-effective to build and supports strong sales.
The company generates robust free cash flow, enabling it to expand without accruing debt. Dutch Bros plans to open at least 160 new locations in 2025, which denotes unit growth of 16%.
Considering its prospects for same-store improvements and expansion, Dutch Bros is viewed as a promising long-term investment.
