Dutch Bros: The Goal Of Having 4000 Shops Is Not Impossible (NYSE:BROS)

Dutch Bros Inc. (NYSE:BROS) shares have fallen nearly 60% from their all-time high. This slump was primarily due to the very high valuation of the company. But today it is a very different situation. I think that given the expected growth of the company and current valuation, Dutch Bros may present an interesting opportunity for long-term investors. In addition, BROS can complement and diversify your portfolio more if you mainly own technology stocks.

The Story Of Dutch Bros

Dutch Bros Inc. was founded in 1992 in Oregon by brothers Dane and Travis Boersma, the latter of whom is the executive chairman. The current CEO of BROS, Jonathan Ricci, has done a good job since becoming CEO.

Dutch Bros sells coffees, energy drinks, and iced drinks. The company has become famous thanks to several of its original drinks. Some of the popular drinks include the likes of White Chocolate Annihilator, Dino Egg Rebel, White Zombie Mocha, etc… As you can probably see for yourself, these are not the drinks normally sold elsewhere. And, it is thanks to the fact that BROS is distinguished in this way, from other competitors, that the company has gained such great popularity with the younger generation. A lot of the company’s drinks contain quite a lot of sugar, and that’s why the company’s drinks are, in my opinion, quite addictive.

Currently, BROS has over 671 stores in 14 states. 42% of all Dutch Bros stores are franchises. In 2008, Boersma decided to stop offering franchise licenses to anyone but the company’s employees. In 2017, the company stopped offering licenses to anyone at all. And that, in my opinion, was a brilliant decision on the part of the management of the company, since company-operated stores are a lot more profitable. And in the long run, it will be best for the company.

The Coffee Shop Market

Dutch Bros certainly doesn’t have it easy. It faces many competitors, led by Starbucks Corporation (SBUX) and Dunkin’ Donuts. These dominate most of the U.S. market. But I think that if management takes the right steps, and BROS differentiates itself from the competition, the company has a chance to be successful in the long run. What do I mean by differentiating itself from the competition?

Mostly, this means concentrating on customer satisfaction as much as possible. Quickly respond to new trends. Not being afraid to try new products, even if they can then be unsuccessful. But, if the company does it cleverly, it will be able to create some new hits that customers will love. Constantly innovating. And through marketing, build the company a good name. These are, in my opinion, things that could help BROS distinguish itself from the competition.

The U.S. coffee sales were $85 billion in 2022. As you can see for yourself, this market is really big, and Dutch Bros certainly has room to grow. In 2022, Americans on average spent $269 on coffee per person. However, it is important to remember that Dutch Bros certainly does not only sell coffee. Now, iced drinks are becoming more popular, and the company is well aware of this. 80% of the drinks sold in the last 12 months were cold. Therefore, iced drinks are widely represented in the company’s offerings. That is a very good strategy, in my opinion.

The market in which Dutch Bros operates will continue to grow in the future, and BROS has a realistic chance of making a significant contribution to the growth of this market. But, it will depend a lot on how management deals with strong competition and the opening of new locations.

Financials

Now let’s look at the financials of the company. In the most recent quarter, Dutch Bros Inc. had sales of $199 million, a YoY growth of 53%. That’s pretty fast growth. BROS had gross margins of 25.5%. And in that quarter, the company was profitable, as it had a profit of $1.76 million. The company’s current cash position is $35 million. Its total current assets are $93 million. And the company has $1.129 billion in total assets. BROS currently has $190 in total current liabilities. And $885 million in total liabilities.

The reason Dutch Bros Inc. has less money in total current assets than in total current liabilities is that management has decided to invest the vast majority of the capital in opening new shops. This will make the company more profitable in the long run, but it now holds a smaller cash position.

The total equity of the company is $243 million, and the fact that in the last few quarters that number has been growing steadily is very positive. Overall, BROS has the financials in order.

The Growth Strategies

Now let’s focus on what strategies the company will use for further growth. The first strategy is to open new shops. What many people may not realize, but it’s very important, is that it depends on where the shops open. Whether the company opens a new shop somewhere on the edge of town, where there’s not much traffic, or somewhere near the city center, with a very busy road, will have a huge impact on the profitability of a particular shop. If you think about it, most people don’t regularly drive an extra 30 minutes just to have a coffee or a drink at Dutch Bros shop instead of stopping somewhere in some other coffee shop closer along the way. Therefore, picking good locations will have a big impact on the future profitability of BROS. In my opinion, this is one of the key things to the company’s long-term success.

Next, there is the continuous improvement of products and, in general, innovation at Dutch Bros. Management must be careful that the company does not fall behind with the industry, but instead comes up with new products and improves the customer experience overall. If the customer experience is good, people will be happy to buy drinks at Dutch Bros and become loyal customers, and they can recommend BROS to other people. According to the company, there are more than 10,000 unique drink combinations at BROS. That’s quite a wide offering of drinks.

Good marketing is another important factor for growth. The company does marketing in several ways. But in my opinion, digital marketing is the most important. That means promoting the company over social media. This will make people aware of the company and when they drive past the Dutch Bros shop at some point, there’s a better chance of them stopping there.

Overall, the company’s growth strategy consists of opening new shops at great locations, having loyal customers, constant innovation, and using digital marketing to expand brand awareness.

Valuation

The current valuation of Dutch Bros Inc. is now more reasonable than it was at an all-time high, in November 2021. Somewhere around the levels at an all-time high, the company was trading at a Price/Sales of 7.9x. Now the company trades at a Price/Sales of 2.7x and that’s quite a significant difference.

Analysts estimate that the company’s sales should grow by 33.9% in 2023 and that’s very good expected growth, given the industry Dutch Bros is in. For the coffee industry, the expected growth is 4.47% p.a. (CAGR 2023-2025) and this means BROS is projected to grow 7 times faster than the whole market in 2023. Analysts also estimate that the company will make a pretty good profit this year, specifically about $64 million. Overall, the company’s current valuation is reasonable, but it is certainly not cheap in my opinion.

What About The Future Of Dutch Bros?

The company’s goal is to have over 4,000 shops in the next 10-15 years. It currently has around 671 shops. In 2023, BROS expects to open 150 new shops to 800+ total shops. The near-term focus of the company will be on California and Texas, where about 60% of all shops in 2023 are likely to be built.

As I mentioned earlier, all the new states where Dutch Bros Inc. will be opening its shops will be company-operated. This will make BROS more profitable. Over the next 5-10 years, the company estimates, sales growth averaged about 20%. The Adj. EBITDA growth should always be higher than sales growth. Over the next 5-10 years, the company estimates the growth of total shops in the mid-teens.

But now let’s figure out what needs to happen for the company to achieve its goal of having 4,000 shops in the next 10-15 years. If we count on BROS currently having 671 shops and reaching its target within the next 15 years, it needs to have a growth of shops of 13% p.a. In that case, the company would have 4,196 shops in 2037. Currently, I can’t say if the company will succeed in the opening over 4000 shops.

Risks

Like any investment, Dutch Bros has a few risks to keep in mind. Among the first risks, is competition as already mentioned. The company must succeed in combating this competition. If they fail to do so, customers can go to other coffee shops, as there are so many to choose from. Competition, in my opinion, is probably the biggest risk.

As an added risk, there’s a change in Dutch Bros’ customer preferences. The demand for BROS drinks may be diminishing. If, for example, the company fails to adapt to new trends. Whether Dutch Bros is popular is also important to watch.

Then there is the fact that the company is not yet profitable, although this should change in 2023. If management fails to have good margins in the long run, this could pose a problem, with the financing of new shops. And, while we’re on the subject of shops, there could be problems if management fails to open new shops at good locations with high demand for Dutch Bros coffee and drinks. It will mean a lot fewer sales and profits than are now expected. Overall, I think Dutch Bros has some pretty significant risks that investors should factor in.

Conclusion

The management of Dutch Bros Inc. has been doing a good job over the last few years in terms of sales growth and newly opened stores. The company has a clear goal to have over 4,000 shops over the next 10-15 years, and is taking concrete steps to meet it. Whether Dutch Bros will accomplish that goal or not, no one can say for sure now.

Personally, though, I think the potential is there. There are, however, some quite significant risks that could thwart this Dutch Bros goal. It is because of these risks that I am not currently going to buy shares in the company. However, this does not mean that Dutch Bros Inc. will not be successful.

I think there are more interesting opportunities in the market right now. Still, Dutch Bros Inc. is a very interesting company and I will certainly continue to follow it, in the future.