2023-06-12 04:37:24 ET
Summary
- Dutch Bros Inc. is a strong regional brand with potential for market share growth in the coffee and beverage industry, boasting impressive co-op unit growth and a positive sales track record.
- Despite challenges such as high investment costs and disappointing comp performance, BROS expects significant revenue and EBITDA growth in 2023, driven by new unit openings and low single-digit comp sales.
- However, due to the company's premium valuation, I remain cautious and assign a hold rating to the stock.
Thesis
I believe that Dutch Bros Inc. ( BROS ) is a strong regional brand with the potential to gain market share in the growing coffee and beverage industry. Dutch Bros stands out in terms of its impressive co-op unit growth and a track record of positive comparable sales growth spanning approximately 15 years. The company's growth strategy primarily revolves around drive-thru sales of beverages, which has proven to be an attractive attribute. Additionally, Dutch Bros' focus on beverages enables them to maintain low food costs and achieve industry-leading restaurant margins. However, in terms of valuation, Dutch Bros' stock is trading at a considerable premium to peers. Although I recognize that BROS remains an attractive industry leader in co-op unit growth with compelling fundamentals, especially in a more normal consumer environment, I assign a hold rating to the stock due to the current valuation levels.
Company Description
Dutch Bros Inc. operates drive-through shops specializing in customizable and hand-crafted beverages. The company primarily focus on selling espresso and its proprietary energy drink called Blue Rebel, which together make up more than 55% of its product mix. Cold beverages, which have higher profit margins, account for approximately 82% of their sales.
Q1 Review & 2023 Outlook
BROS, a company with strong co-op unit growth and a track record of positive comp growth for almost 16 years, is currently facing challenges. Investors are cautious due to recent disappointing comp performance, particularly from the lower third of the customer base and the afternoon/daypart with discretionary spending. On the other hand, unit growth is stable, but investment costs are high, and new units are not meeting the targeted annualized average unit volumes (AUVs). Despite these challenges, BROS managed to achieve impressive first-quarter 2023 EBITDA due to effective cost-control measures.
The company has reiterated its formal guidance, expecting adjusted EBITDA of over $125 million, a 37% increase year-on-year. The key drivers for this growth are expected revenues ranging from $950 million to $1 billion, a 28-35% increase year-on-year. The long-term guidance for both EBITDA and revenue growth is set at 20% or higher. The revenue growth is expected to come from low single-digit comp sales (consistent with long-term guidance, including sales transfer of 200-300 basis points) and the opening of 150+ new units, a 22% increase year-on-year (compared to mid-teens long-term guidance), including 130+ co-op new unit openings, a 33% increase year-on-year.
Coffee Remains Popular But Headwinds Remain
A significant majority of Americans consume coffee on a regular basis, with 3 in 4 Americans drinking coffee every day. With that said, coffee bean consumption has been on the decline , driven by the growing popularity of single-serve pod such as K-cups (leading consumers to brew only what they intend to drink) and a plethora of caffeine-infused alternatives (i.e. energy drinks). These trends have been exacerbated as many office workers are working from home. The NCA conducts an annual coffee consumption survey (nationally representative sample of 1,500+ individuals aged 18+ years). At the onset of 2021, 66% of Americans reported drinking at least one cup of coffee during the past week, down 5pp from 2019 levels.
Valuation
I believe investors view Dutch Bros. as an emerging fast-casual concept. Characteristics supporting that view include the quality of the product being offered, the price at which the product is being sold, and the rate of unit growth. But importantly, Dutch Bros retains characteristics similar to QSRs, based on their 100% drive-thru business model predicated on off-premise consumption., & a modest average check.
In terms of valuation, BROS shares are trading at a relatively high multiple of around 20 times the estimated 2024 EBITDA, which is justified given their strong performance. However, I remain cautious approach to valuation keeps us wary, although I recognize that BROS remains an attractive industry leader in co-op unit growth with compelling fundamentals, especially in a more normal consumer environment.
Conclusion
Dutch Bros is known for its high-energy drive-through and pickup window service, which attracts customers. Dutch Bros has achieved impressive growth in terms of both expanding their number of locations and maintaining positive comparable sales for approximately 15 years. However, I maintain a cautious stance and assign a hold rating to the stock due to the company's premium valuation.
For further details see:
Dutch Bros: Valuation Concerns Temper My Enthusiasm