Dutch Bros Inc. Q3 results exceeded expectations, signaling continued growth and a bolstered balance sheet post-dilution.
Management's caution regarding the likelihood of achieving self-funding or positive free cash flow in 2024 introduces an element of uncertainty.
As I navigate its nuanced landscape of financial decisions and growth ambitions, I recommend caution.
Investment Thesis
Dutch Bros Inc. ( BROS ) delivered Q3 results that put a dent in the bear case. Succinctly put, its Q3 results demonstrate that Dutch Bros is evidently still in growth mode. It now appears highly likely that Dutch Bros will continue to grow in 2024 at approximately 30% CAGR.
On the question of how long until this business is self-funding, or free cash flow positive, management implies that investors should not expect this to take place in 2024.
I've been following Dutch Bros closely, and I must admit, I have my doubts about its future. While it's been a growth story, things seem to be changing. The era of cheap money is behind us, and Dutch Bros' unwavering commitment to growth has created a disconnect.
Author's work on BROS
As you can see above, despite its alluring narrative, this stock's performance has not been a rewarding investment, unless you managed to time your entry at the exact bottom tick of this year, which is an unlikely feat.
Dutch Bros' Near-Term Prospects
I'll first describe Dutch Bros' bull case, followed by describing the bearish argument.
Dutch Bros' recent results exhibit promising prospects, notably demonstrated by its robust 4% increase in comparable sales during Q3 .
BROS Q3 2023
What's more, its company-operated same-shop sales were also nicely positive with an increase of 2.8% y/y. When asked on the earnings call about the drivers, management openly noted that price increases were the main driver of this upswing.
Without turning too bearish too soon on Dutch Bros, I'll state that I'm not compelled toward companies that support their growth strategy through pricing increases. Those price hikes tend to be one-off and not supportive of long-term stable growth. It's better for the overall business to increase its customer base, rather than charging more for the same product.
Moving on, the company remains committed to opening more shops, for example in Texas, while maintaining a steady pace of development. Also, during the earnings call , there was a discussion around a change in shop manager roles and responsibilities, aligning incentives with revenue growth. Aligning employee incentives with more sales should translate into better growth over time.
All these indicators appear to reinforce the narrative that Dutch Bros is still in growth mode.
Revenue Growth Rates Are Stabilizing
BROS revenue growth rates
Dutch Bros doesn't have a history of massively sandbagging its results, as you can see below:
SA Premium
Consequently, assuming that Dutch Bros beats its own estimates by around 3% on the top line, this would see its revenue growth rates in Q4 reach 28% y/y.
That being said, its comparables in 2024 will ease up, which means that Dutch Bros is likely to continue growing at approximately 30%-35% CAGR in 2024. Once again supporting its narrative, that Dutch Bros is a growth company.
There are some minor pesky detractions worth considering. For example, Dutch Bros faces near-term challenges, particularly in managing labor costs. Despite impressive y/y gains in labor efficiency for five consecutive quarters, the company acknowledges upcoming challenges, including an investment in shop manager labor effective November 1 and the impending California wage increase as of April 1, 2024.
The latter poses a potential threat to margins, and while the company is evaluating productivity and other options before resorting to pricing, uncertainties in wage and incentive structures create a need for careful strategic planning.
Now, we'll turn our focus to the bearish arguments.
Balance Sheet in Focus
Dutch Bros holds $150 million of cash and equivalents. After successfully diluting shareholders in Q3, its balance sheet is in a much better position.
Last week during the earnings call, Dutch Bros noted how by diluting shareholders and shoring up its balance sheet, the company will be able to improve the interest payment on its debt.
I don't know what the updated interest payment will be going forward, but according to my rough estimates, I suspect that Dutch Bros will continue to pay at least $25 million per year as interest on its debt.
Put another way, 20% of its go-forward run-rate operating profits will be used to pay down its debt. And this is the absolute lowest estimate for its interest expense.
On top of that, when asked pointedly on the earnings call when the business would return to positive free cash flow, management gave the impression that it would not be free cash flow positive in 2024.
That being said, Dutch Bros has already diluted shareholders in 2023, therefore I can't imagine that management will be too eager to dilute shareholders further in the near term.
Consequently, I suspect that if necessary to choose between further capital raises and slowing down its growth ambitions, I believe that Dutch Bros will opt for a smaller business that can thrive, rather than a larger business that's striving to survive.
The Bottom Line
As I reflect on Dutch Bros' recent performance and the implications for its near-term trajectory, a sense of uncertainty lingers.
While Q3 results exceeded expectations, showcasing sustained growth and a strengthened balance sheet post-shareholder dilution, there's an air of caution.
Management's acknowledgment that the business might not achieve self-funding or positive free cash flow in 2024 introduces an element of unpredictability.
The recent Dutch Bros Inc. focus on improving the interest payment on debt, while enhancing financial resilience, raises questions about the potential trade-offs between debt servicing and sustaining growth momentum.
As an observer, I find myself in a neutral stance, grappling with doubts about Dutch Bros' ability to seamlessly navigate the evolving landscape and reconcile its growth aspirations with financial prudence.
News, Short Squeeze, Breakout and More Instantly...
Market Wire News is a media platform, the information on this page was provided by SeekingAlpha via Quote Media. Read our full disclaimer.
Link your Twitter Account to Market Wire News
When you linking your Twitter Account Market Wire News Trending Stocks news and your Portfolio Stocks News will automatically tweet from your Twitter account.
Be alerted of any news about your stocks and see what other stocks are trending.
Contact the Author
Stock Information
Get BROS Alerts
News, Short Squeeze, Breakout and More Instantly...
2024-07-13 14:00:00 ET If you invested $10,000 in shares of coffee giant Starbucks (NASDAQ: SBUX) 30 years ago, you would have well over $900,000 today. It's been a great long-term investment, but 2024 has been a different story. As of this writing, Starbucks stock is down 24% y...
2024-07-13 07:00:00 ET Although investors might gravitate to tech stocks hoping for outsize gains, many often overlook the growth in the consumer sector. Home Depot is one of the best-performing stocks in the history of the stock market, and more recently, consumer stocks such as Amaz...
2024-07-11 15:02:00 ET Shares of drive-thru coffee chain Dutch Bros (NYSE: BROS) jumped 30.7% in the first half of 2024, according to data provided by S&P Global Market Intelligence . The stock was underperforming the S&P 500 for the year until it reported financial ...
Link your Twitter Account
Link your Twitter Account to Market Wire News
When you linking your Twitter Account Market Wire News Trending Stocks news and your Portfolio Stocks News will automatically tweet from your Twitter account.
Be alerted of any news about your stocks and see what other stocks are trending.
Trending Stock Alerts
Trending Stock Alerts
Our Next Stock Alert could be Coming in Minutes!
Sign Up Today To Get Full Access To Our Next Stock Report!
Day Before Email and Text Notifications of New Alerts