Key Points
- Dutch Bros plans to add 165 new stores this year, with potential for more if new states are targeted.
- Comparable same-store sales growth is accelerating, hitting double digits in Q1, signaling strong existing store performance.
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Among the world-class coffee chains out there, Dutch Bros (NYSE: BROS) is certainly a stock that many investors continue to focus on. Unlike rivals such as Starbucks (NASDAQ: SBUX), Dutch Bros’ stock price has been moving in the right direction, as the company continues to grow and add locations at an impressive rate.
For those looking at consumer discretionary stocks with big upside in the coming years, here’s why Dutch Bros may be a company worth considering right now.
Expansion Is Key
Often compared to Starbucks in terms of the company’s future growth potential, Dutch Bros’ team has been hard at work adding new locations to its portfolio. The company’s focus is on adding 165 stores this year, though if new states come onto the radar in the near future, this number could rise substantially. And while the company is still U.S.-focused, there’s always global possibilities that could come to fruition if this currently regional chain truly aims to expand its way to meaningful long-term growth.
A Sustainable Business Model
Growth is great, but being able to generate consistent same-store sales growth at the locations the company opens is even more important. Far too often, chains in various sectors expand too quickly, only to realize that their existing locations are cannabilizing sales from each other, or the competitive environment or customer set isn’t right for a given brand.
In Dutch Bros’ case, the company’s management team has done a great job of identifying new markets to expand into that have proven to be successful. The ability to continue this trend will be important, but bulls may take solace in the fact that the company’s strategy has paid off nicely thus far.
The Dutch Bros Brand
In order to build a sustainable business model based on expansion into new markets, brand recognition and customer loyalty are key aspects to consider. In Dutch Bros’ case, the company has successfully created a culture around its brand, with a devoted clientele that’s hard to compare to other companies. Differing from Starbucks’ key audience, Dutch Bros has built a repeat customer base that’s among the best in this sector, emphasizing customer service and ambiance over commoditized offerings.
Excellent Growth
I’ll be the first to say that Dutch Bros’ valuation isn’t necessarily to die for. Now, the company is profitable, which is important given the amount of capital that’s going into Dutch Bros’ expansion into new markets. It’s important to generate strong free cash flow to support the addition of new stores, without having to add too much debt to do so. But at a trailing price-earnings multiple of 230-times, and a forward multiple just shy of 94-times, this stock isn’t cheap.
The thing is, investors in BROS stock are here for the growth. With year-over-year growth continuing to come in around 40%, this is a stock that could reasonably grow into its valuation in short order. And if growth accelerates, there’s a lot to like about a company with a PEG ratio of 2 at current levels. Looking a couple years down the road, this stock may be viewed as cheap, if growth materializes as expected.
Strong Cash Flow
On that note, Dutch Bros’ operating cash flow of around $178 million should grow over time, allowing the company to reinvest further into its endeavors. The company’s balance sheet does have substantial debt (around $860 million in debt versus $265 million in cash), but it’s stable. And with increased cash flow comes the ability to continue to open new stores and get the snowball growing even larger. Profitable growth is what Dutch Bros is after, and thus far, the company appears to have been successful in that endeavor.
Comparable Sales Growth Continues to Improve
One of the encouraging features of Dutch Bros’ recent earnings report is that comparable same-store sales growth appears to be accelerating. Hitting double-digits in Q1, this metric is important for investors to consider, as it measures not only the increase in foot traffic and spend per customer, but also the viability of existing stores. With a strong and stable base of existing locations, cash flow growth in the double-digit range should reasonably follow, as margins improve over time.
Margin Improvement
On that note, it’s important to point out that Dutch Bros’ quest for additional market share has come at a cost. With an operating margin of 10% and a net profit margin of just 1.3%, it’s clear Dutch Bros is not necessarily pulling all the levers it can with respect to generating outsized profits, just yet.
Like other companies that have engaged in the market share game first, with profitability to follow, investors appear to be placing their bets that pricing power over time (as a function of Dutch Bros’ brand power) will result in Starbucks-like hordes of cash being generated every quarter. We may be a ways away from such a scenario, but there’s a reason why so many investors are so bullish on this company’s profit potential long-term.
The Macro Environment
Every company operating in the global marketplace is hostage to the macro environment, and Dutch Bros is no different. However, with many pricing in a high probability of a soft landing, this is a stock that can certainly benefit from interest rate cuts if they materialize (due to its debt load), allowing for greater cash flow to reinvest in its core business.
If the economy does sour, it will certainly be an intriguing test for the company with respect to how well it can weather the storm. Judging by the company’s competitors, previous downturns haven’t really detracted too much from consumers’ demand for coffee and related goods. Thus, as far as consumer discretionary stocks are concerned, Dutch Bros appears to be well-positioned right now.
BROS Stock Is Fairly Priced
As mentioned, valuation does matter, and on specific metrics, this stock does look expensive. However, I think investors looking at Dutch Bros today really need to take the longer-term view of where this stock is headed. If one uses 2026 revenue and earnings estimates, this stock looks much more reasonable. How fast the company can get to its stated targets (and those implicitly set by the market) is uncertain. But if Dutch Bros continues to outperform in future quarters, this is a stock that could clearly have more upside from here.
Take the Long-Term View with Dutch Bros
Dutch Bros still has a ways to go to prove it can be sustainable (and increasingly) profitable over time. But it’s clear the company has moved in the right direction, and isn’t necessarily going to give up profitability and grow just for the sake of growth. This is a company that’s thought through its growth plan very extensively, and appears to be moving in a sustainable fashion forward.
That’s why I think investors looking to own this stock today ought to take the long-term view of where this company is headed, when looking to value this company as a holding. For those with a five or 10 year time horizon, I think buying and holding this stock makes sense. Dollar cost averaging into a position may be even better, for those with valuation concerns.
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