There are a number of renowned chains in the restaurant sector that have now become household names. But there are also smaller companies in the sector that investors may want to take a closer look at these days.
With a market cap of just $6 billion, one special restaurant inventory probably flies under the radar. It also doesn’t help that the shares are trading 53% below their all-time high, a milestone reached in November 2021.
You should too to buy Dutch Brothers (NYSE: BROS) shares now?
The story is about growth
Although well above their peak price, shares of this emerging coffee chain have risen 27% since Dutch Bros reported first-quarter 2024 financial results on May 7. Investors were certainly happy that the company continues to grow at a blistering pace.
During the three-month period ended March 31, the company posted revenue of $275.1 million, up 39.5% year over year. This was the fastest figure since the fourth quarter of 2022. This impressive sales gain was driven by 45 new store openings, which is management’s main growth scenario. The plan is to open 150 to 165 new locations throughout the year.
It is not surprising that when new stores are opened, sales easily get a boost. That is why it is crucial to pay attention to this sales in the same store, a measure of sales growth at locations that have been open for at least 15 months. This helps assess how existing stores are performing over time.
Dutch Bros reported 10% same-store sales growth in the first quarter. The good news was that this consisted of a “healthy combination of ticket expansion and traffic.” The bad news was that not only did this come after a 2% decline in this metric in the year-ago period, but management still expects full-year same-store sales growth in the low single digits.
Today, Dutch Bros operates 831 coffee shops, mainly in the western and southern US. However, management has enormous ambitions. Executives believe there is capacity to have 4,000 locations open one day, which translates to a potential nearly fivefold increase in the current physical footprint. At this level of scale, revenues will certainly be astronomically higher than they are now.
No security
Investors always seem to like companies with significant growth prospects. This is easy to recognize, it is exciting and if all goes well, there is a chance of big returns.
To be honest, Dutch Bros is experiencing strong momentum right now, but I’m less optimistic looking at the next five or ten years. An important reason for this is that I don’t believe that Dutch Bros is a economic moat yet. And this introduces a lot of uncertainty when it comes to long-term success.
Currently, the company lacks the scale necessary to build a well-known brand. It’s made a big impression so far, but it’s hard to say how relevant Dutch Bros will be well into the future.
Competition in the restaurant industry is probably fiercer than in any other industry. Dutch Bros has to compete against the large number of independent coffee shops out there, as well as heavyweights like and Starbucks And McDonald’sboth of which have deep pockets, consumer loyalty and plans to continue growing.
Dutch Bros has also not proven its ability to generate consistent profits. The company managed to generate positive net income of $16.2 million last quarter, but this performance is mixed at best. Perhaps with more stores open and more sales generated, the bottom line will be stronger. But it’s hard to know when – or if – this will happen.
The shares are well above their all-time highs, but are still trading at a price-to-earnings ratio of 200. That illustrates the extreme optimism investors have about this company and its prospects. Based on the risk factors outlined above, I think it is best not to buy Dutch Bros stock today.
Should you invest $1,000 in Dutch Bros now?
Consider the following before purchasing shares in Dutch Bros:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Dutch Bros wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $579,803!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Starbucks. The Motley Fool has a disclosure policy.
With shares down nearly 55%, is now the time to buy these restaurant stocks? was originally published by The Motley Fool
