Growing pains are normal for young growth stocks.
Restaurant stocks plunged recently after reports warned that people might not be spending as much as they usually do at their favorite restaurants. But what about where they get their morning caffeine fix? Coffee chain Dutch Bros (BROS -2.42%) is down 10% over the past month and 50% from its highs.
The market didn’t love its most recent update, but investors should take the long view. Here’s why Dutch Bros could be a top long-term buy.
It’s all about a great product
Dutch Bros has more than 900 stores as of the end of the second quarter, including 36 that it opened in the quarter. It’s expanding at a steady pace, expecting up to 165 new stores this year, and it envisions up to 4,000 stores over the next 10 to 15 years.
Customers like its concept, which is why it has been able to successfully open many new stores. It’s having a harder time, though, growing its same-store sales, for various reasons. There are the external headwinds of pressure for the restaurant industry as people try to save money, and some internal pressure as new stores draw customers from existing stores.
Investors were reassured when same-store accelerated to 10% in the first quarter, but they fell to 4% in the second quarter. Total revenue increased 30% year over year.
It’s steadily increasing profitability as well. Net income increased from $9.7 million last year to $22.2 million this year, and company-operated shop contribution margin expanded 0.5 points to 30.8%. Management raised guidance for revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the full year.
Something I didn’t even realize right away is that Dutch Bros only recently rolled out mobile ordering. It was live in 38 stores in the second quarter and is already live in 200 since then. I find it impressive that it was growing fast without a mobile feature, and this should be a strong growth driver going forward.
Growing pains are normal
So what ticked off the market? The decrease in same-store sales growth is one thing that could be alarming for investors who were expecting better. Management is guiding for similar same-store sales growth for the full year.
On top of that, even though management raised its full-year guidance, it still came in slightly below analyst expectations. Dutch Bros provided revised revenue guidance of $1.22 billion at the midpoint, whereas the average analyst expectation is $1.23 billion.
Part of that is likely due to management scaling down its planned new openings this year. It said that it’s reassessing some of the units it had in its pipeline based on insights from its expansion, and it’s letting go of some of its planned store openings that don’t meet its average unit volume or capital lease expectations.
Is this something to worry about? Whenever a young company without a long track record makes changes like this, alarm bells start ringing.
Does it point to a deeper flaw in the company’s model? It may or may not. Management’s version of what’s happening inspires confidence; it can improve its models and adapt accordingly, deliberately opening stores in the right places, which should lead to higher output and cost savings over time. The way the market sees it, Dutch Bros is reducing its expected new store count for the year and may not reach expected full-year revenue expectations.
There’s also a lot of change happening at Dutch Bros. New CEO Christine Barone has been there for about a year, and she has completely redone the C-suite. The company is redeploying some of its labor force to handle mobile orders, and is still in the process of laying out the system for the mobile switch. There are still many unknowns on Dutch Bros’ journey.
Zoom out and see the big picture
It’s important to keep everything in mind when making an investing decision. It doesn’t help to ignore red flags or negative information in favor of the rosy view. However, this needs to be put into the context of the entire story. When you fit everything together, I see a picture with many positives than negatives.
Even with the recent drop, Dutch Bros stock is up 20% this year. This is an opportunity to buy the dip before the stock potentially climbs even higher.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
