Dutch Bros Shares Surge on Positive Outlook: Is It the Right Time to Invest?

Shares of Dutch Bros (BROS) have experienced a remarkable rise after the coffeehouse chain reported impressive fourth-quarter results coupled with optimistic projections. The stock has seen nearly a 200% increase over the past year and has risen over 50% just this year.

In this article, we will delve deeper into Dutch Bros' performance and discuss whether it's still a good time to invest in their stock.

Strong Expansion on the Horizon

At its core, Dutch Bros is focused on expansion. In 2024, the company launched 151 new locations, with 128 being company-owned. This included 32 total new stores and 25 company-owned openings in the fourth quarter, bringing the total count to 982 stores, of which 670 are under direct company ownership.

Looking ahead, Dutch Bros aims to open at least 160 new locations in 2025, translating to around 16% growth in its number of units. The company expects to ramp up its expansion efforts in the second half of the year.

These newer stores are typically compact, ranging from 800 to 1,000 square feet. They feature multiple drive-thru lanes and a walk-up window, allowing for efficient customer service. Since its initial public offering (IPO) in 2021, the company has reported cash-on-cash returns ranging from 35% to 75%, depending on whether they utilized a build-to-suit arrangement or a ground lease. These returns are appealing, and Dutch Bros has funded new store openings through its cash flow.

Thanks to this expansion, fourth-quarter revenue increased by 35%, reaching $342.8 million and exceeding analyst expectations that estimated revenue at $318.8 million.

Same-store sales increased by 6.9%, with transactions up by 2.3%. Notably, company-operated comparable store sales rose by 9.5% with a transaction increase of 5.2%. These company-owned stores are a more significant contributor to revenue compared to franchise sales. The company attributes this success to innovative strategies and effective limited-time product offerings.

Currently, 96% of Dutch Bros' locations offer mobile ordering, with mobile devices accounting for approximately 8% of orders. The company is also seeing success with its rewards program, which has led to 71% of transactions originating from rewards members.

Moreover, company-operated store gross margins increased by 280 basis points to 21.4%, even amid rising coffee prices. Improved gross margins can significantly enhance profitability metrics.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared by 41% year-over-year to $48.8 million, while adjusted earnings per share (EPS) rose by 75%, moving from $0.04 to $0.07. This result greatly exceeded the analyst expectations of $0.02 in adjusted EPS.

For the upcoming year, the company forecasts revenue between $1.555 billion and $1.575 billion, which marks a projected growth of 22% at the midpoint. Its expectations for same-store sales range between 2% and 4%, while adjusted EBITDA is anticipated to be between $265 million and $275 million.

Dutch Bros has begun initial food tests, recognizing the demand for food options alongside coffee. Currently, food sales comprise approximately 2% of their overall sales, in contrast to Starbucks, where food represented 19% of sales last quarter. To capture more revenue, the company plans to expand its food offerings without compromising employee satisfaction or service speed.

Is Now the Right Time to Buy the Stock?

Dutch Bros has successfully propelled same-store sales while growing its food options, creating potential for significant revenue growth. With fewer than 1,000 stores, there is significant room for further expansion. In comparison, Starbucks boasted over 11,242 company-owned locations and a total of 18,537 stores across North America at the end of last year.

In the previous year, Dutch Bros' shares sometimes traded at a forward price-to-sales (P/S) ratio of 3 or lower, making their valuation comparable to that of Starbucks. However, with the recent spike in share price, the company now trades at around 7 times its 2025 estimates, which is significantly higher than Starbucks.

While Dutch Bros holds considerable growth potential through expansion and food offerings, the stock may no longer be a bargain. Therefore, it may not be the best time to invest in the stock at its current levels.

Note: The author does not hold any position in the stocks mentioned. The information provided is for informational purposes only and is not financial advice.

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