Dutch Bros: Can It Grow into Its Valuation?

Dutch Bros (BROS) is a fast-growing beverage shop operator and franchiser. The company may be best known for its cold beverages, such as the Blue Rebel energy drinks.

Dutch Bros went public in September of 2021 to much fanfare, and the stock has traded from a low of $32.42 to a high of $81.40. The stock now trades in the $50 range, and the question is whether it will regain its highs or settle back near its 52-week low.

The author is neutral on Dutch Bros stock.

A Unique Business Model

Dutch Bros’ business model is focused on quality, speed, and service. The company’s “broistas” strive to make a visit to Dutch Bros a fun experience. Someone will typically greet the customer before they reach the drive-thru window and take their order on a tablet. This creates a more personal experience and allows for better order customization.

The model appears to be effective, judging by the company’s rapid expansion, rapidly growing revenue, and the long lines often seen outside of the stores.

Many investors and commentators have compared the company to Starbucks because it is a fellow coffee shop; however, there are apparent differences. First, Dutch Bros sales are predominantly cold beverages.

According to the company’s prospectus, or S-1 filing, 82% of sales in 2020 were cold drinks. This is a crucial differentiator that should work in the company’s favor by avoiding direct competition with the industry titans.

Impressive Growth

Dutch Bros reported Q4 and full-year 2021 earnings on March 1, 2022, and the results were impressive. 98 new locations were opened, bringing total shops to 538 at the end of 2021. There are now locations in 12 states, and Dutch Bros plans to open 125 shops in 2022. This growth is impressive, and it is accelerating, which is encouraging for shareholders.

Sales at existing stores were also strong. For the full-year 2021, same-store sales rose 8.4%. For Q4 2021 alone, same-store sales increased 10.1%. Again, the acceleration of growth is a positive sign. It shows that customer enthusiasm is growing.

Total sales in 2021 reached $497.9 million, up 52.1% from 2020. Since 2018, sales have grown at a compound annual growth rate of almost 39%. Dutch Bros lost $121.1 million in 2021 on a GAAP basis; however, the company does report non-GAAP adjusted EBITDA of $82.1 million and non-GAAP adjusted net income of $48.3 million. In 2022, the company expects to grow revenue by at least 40%.

Difficult Valuation

Dutch Bros currently has a market capitalization of over $8.3 billion. That puts the price-to-sales (P/S) ratio at close to 17x, based on 2021 full-year sales. This is relatively high for a low-margin business. For 2021, the company’s gross margin was just 30.5%. It also values each of the 538 stores open at the end of 2021 at over $15 million.

For comparison, Starbucks currently reports grand total worldwide locations of 34,317. This values its locations at just under $3 million based on the current market cap. Investors are betting on Dutch Bros’ ability to continue to grow into its valuation.

Wall Street’s Take

Over on Wall Street, analysts are quite bullish on Dutch Bros stock. Analysts have a Strong Buy consensus rating based on five Buys, one Hold, and no Sell ratings. This is a solid bullish consensus despite the company’s valuation.

The average Dutch Bros price target of $63 implies over 21.7% upside potential.

Can Dutch Bros Grow into Its Valuation?

Dutch Bros has many impressive metrics. Perhaps the most encouraging quantitative sign is that growth is rapid and accelerating. The growth is not just from opening new locations; same-store sales are also growing.

On the qualitative side, the company has an enthusiastic customer base, and long lines are often seen outside the shops. Many investors and analysts share the enthusiasm, and the company has a high valuation. It remains to be seen whether the company can support it.

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