Dutch Bros (BROS -0.81%) is a coffee chain trying to compete in what is a very crowded market. It is reasonable for investors to wonder if it can break into the upper echelon of the industry, which includes customer favorites like Dunkin Donuts and Starbucks as well as a plethora of mom-and-pop locations.
That said, Dutch Bros has been growing rapidly. Here's a look at some things you need to consider before you buy the stock.
Dutch Bros has not left you behind
Dutch Bros posted strong first-quarter earnings, encouraging investors who have bid up shares of the coffee chain by roughly 33% in just three months. But don't assume that you've missed out. The stock is still down more than 50% from its all-time highs in 2021, just after its initial public offering (IPO).
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In fact, if you compare the stock chart of industry heavyweight Starbucks with that of Dutch Bros, you can see that the upstart could have a long and fruitful future. The key is going to be how the company manages its growth. Its IPO happened a few years ago, so it is still a very young, publicly traded company.
A strong first quarter
And that's where the first-quarter results come in. Revenue increased 39% year over year, which is massive growth for any company. It opened a near-record number of new locations. And it increased its full-year 2024 earnings guidance for revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
One other metric might actually end up being the most important one: Same-store sales (or comps) increased 10% year over year, a very good number for a restaurant. The full-year expectation is for comps to be up by the low single digits, so the first quarter might end up being an outlier. Simple math suggests that the rest of the year could be much less impressive with regard to comps.
The key takeaway here for investors is that there are two ways for an upstart restaurant to grow. The quickest way to boost the top line is to open up lots of new locations, which Dutch Bros is doing.
The more sustainable way to boost revenue is to ensure that you are drawing more customers to existing locations with a great product and good service. That's basically what is captured by the comps figure.
The problem is that the revenue figure can hide weak store-level performance if a restaurant chain is opening a lot of new locations. Rapid geographic expansion isn't sustainable over the long term if a company's customers aren't sticking around.
Restaurants that let their core business falter by focusing too heavily on expanding their footprint tend to end up in a very bad place. This actually happens quite frequently on Wall Street, largely because investors are often overly focused on top-line growth, and companies like to give investors what they want.
Dutch Bros has to perform a balancing act
So investors have not missed the long-term opportunity with Dutch Bros, but that doesn't mean you should blindly buy the stock. The coffee chain has to find a balance between its expansion plans and operating its existing stores at the highest possible level.
This is not an easy task, so investors should be paying close attention to both revenue growth and comps growth. If the latter metric is weak over a sustained period, you might want to question whether or not Dutch Bros is worth owning.
