Stock Market Sell-Off: Is Dutch Bros a Buy?

A drive-thru coffee chain Dutch Bros (BROS -2.86%) continues to expand its footprint while providing thermal growth. The third largest coffee chain (behind Starbucks and Dunkin Brands) plans to have 800 stores open by the end of next year, while Wall Street expects to generate nearly $1 billion in annual revenue.

However, the market has dropped a stock or two this year with sales trading 31% below where they started in 2022.

A person holding a coffee cup at Dutch Bros.

Image Source: Dutch Bros.

the S&P 500 It is down 15% year to date, and there is a possibility that the US will enter a recession early next year. With rising costs, ever-increasing energy costs, and rising interest rates hurting consumer pockets and self-confidence, can Dutch Bros make a comeback?

Let’s take a closer look at whether this up-and-coming national coffee chain can weather the storm.

Build security for growth

Dutch Bros. is constantly opening new locations, most of which are open for business, through a process known as “intensification,” or placing new stores next to existing ones.

Famous for Domino’s (DPZ -0.73%) ten years ago because it sought to reduce the cost of sales and ensure that it remains top of the line with customers and helped to reduce time and costs. If there is a Domino’s pizzeria anywhere, you may decide to call the nearby Domino’s the next time you need a pizza.

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But fortressing often causes sales to eat away at individual restaurants, even as the company’s overall sales increase. It’s also a cost-effective option, because you’re spending more money on your existing area. This may prove to be an unsatisfactory strategy for Dutch Bros as it did for Domino’s.

Eat their own

Last quarter, the drive-thru coffee shop reported a 53% increase in revenue to $199 million. It opened 38 new locations on its way to opening a total of 130 new stores this year. It ended the quarter with 641 restaurants in 14 states and plans to open another 150 stores next year. In the end, there are 4,000 Dutch Bros. stores across the United States

Despite the increase in revenue, comparable store sales were up just 1.7% in the period, and that’s almost entirely because it has tripled prices this year to offset the impact of life. The impact of fortressing has resulted in a 150-basis-point increase in system-wide comps. The company’s stock had a bigger gain than the 240-basis-point decline.

The tough environment in which Dutch Bros operates is also reflected in the cost of sales, which jumped 63% to $148 million during that period as interest expenses doubled to $5 million.

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Dutch Bros has approximately $98 million in long-term debt and $34 million in cash and cash equivalents. He has $2.7 million in debt maturing next year, along with $4.5 million in 2024, and $7 million in 2025. Though he shouldn’t be in trouble If the coffee chain does not pay these payments, it has changed the way it finances itself. advanced growth – and in a high-interest-rate environment, it can be expensive.

Dutch Bros. Store

Image Source: Dutch Bros.

A more expensive method of repair

Earlier this year, Dutch Bros switched from a residential lease agreement to a land lease agreement. In the first type, the owner of the building spends the cost of developing the building on the terms of the tenant and pays the rent of the tenant for the place. On the one hand, the tenant rents the house, but the development and the owner of the house.

This means Dutch Bros will face higher prices for each new store it opens. Although it should pay for itself in the long term – ground leases are usually very long, as in decades – the cafe will bear all the costs.

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Another factor that Dutch Bros investors should consider is the effects of the recession and whether energy prices will continue to rise. As we saw in the early stages of the pandemic, driving habits were greatly disrupted due to business closures, causing car chains to significantly reduce visits. If gas prices stay high (or go higher, as possible), it could cause people to drive fewer miles, which could hurt auto companies like Dutch Bros.

Now it’s over

The coffee chain’s stock isn’t deeply discounted either, trading at more than 8 times sales and 99 times next year’s estimated earnings.

While I like the long-term outlook for Dutch Bros as a company, taking advantage of sales and the high costs associated with opening more stores in a dicey macroeconomic environment means but buying the coffee stock right now leaves me as cold as joe day. .

Rich Duprey has no position in the stocks mentioned. The Motley Fool ranks and recommends Domino’s Pizza and Starbucks. The Motley Fool recommends the following options: short January 2023 $92.50 put on Starbucks. The Motley Fool has a publishing policy.

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