Investors are feeling bullish after a strong finish to 2023, but even after a 24% gain for the S&P 500 last year, many great stocks are still trading below their previous highs and at cheap valuations. Before the rising tide lifts even more stocks, don’t miss the opportunity to pick up bargains in the market right now.
Dutch Bros (BROS -6.37%) isn’t well known outside the states where it operates, but if you’re interested in quality investments, you should get to know it better. Dutch Bros stock trades 60% below its all-time high at a price-to-sales ratio of less than 2, but it could soar this year. Here’s why.
A simple formula for success
Dutch Bros operates a chain of coffee shops similar to Starbucks but different in feel and vibe. It sells itself as a fun-loving and friendly alternative with a focus on high-level customer service and speed. It has 794 stores in 16 states as of the end of Q3 2023, including 39 new openings during the quarter, but it has serious expansion plans. It has die-hard fans in its current locations, and it’s a concept that could translate well all over the country. Management sees an opportunity for 4,000 locations over the next 10 to 15 years.
The new stores have been essential to generating high growth despite the inflationary environment. Sales increased 33% year over year in the third quarter, and the company’s aggressive store target should keep up that kind of growth for the foreseeable future.
Making customers happy
One problem Dutch Bros has had recently is declining comparable sales growth. In the restaurant industry, comparable sales, or comps, are often the determining factor between a great company with future potential and a ho-hum company with weak prospects. For Dutch Bros, which reports this number as “same shop sales,” the metric measures the change in sales at locations that have been open at least 15 months. Same shop sales tell investors how the company is growing the business at established locations, excluding the effect of new store openings.
Comps growth was strong before high inflation kicked in, but it decelerated and even fell into negative territory as recently as Q1 2023. It’s on the mend now, up 4% in the third quarter. Management has made the case that lower comps are due in part to its “fortressing strategy,” which involves opening up several stores in a region to generate high brand awareness and attract new customers. That strategy leads to pressured comps in the near term but higher overall sales growth and better long-term outcomes (at least, that’s the plan).
A likely move toward profitability
Dutch Bros has successfully navigated the tough environment with price increases, and it’s been profitable for two consecutive quarters. In its most recent report, company-operated shop contribution margin rose from 25.6% to 31.0% year over year.
Dutch Bros is well positioned to drive further improvements here as the economic landscape seems to be getting better. Meanwhile, founder and CEO Joth Ricci is stepping down and making way for Christine Barone, a seasoned restaurant industry executive, to take over and bring the company to the next level.
Buy Dutch Bros stock before it’s too late
Dutch Bros stock underperformed the market in 2023 with a gain of only 14%. But as the company executes on its ambitious growth strategy, it’s not likely to stay down. Consider buying Dutch Bros stock because its long-term outlook looks very bright.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
