Stock Dutch Bros: 2 green flags and 1 red flag

dutch brothers (NYSE:BROS) just released its second quarter results, and it’s clear the market likes what it’s heard, as the stock is up 17% at the time of this writing. As a shareholder of Dutch Bros, I am pleased with the quarter and encouraged that the company is executing on many fronts. However, I found a possible cause for concern.

Let’s dive in and take a deeper look at what’s going on at Dutch Bros, and look at two green flags and one red flag that this quarter has revealed.

Image source: Getty Images.

Accelerated revenue growth

Perhaps the only thing more supercharged than the Blue Rebel energy drinks that Dutch Bros serves up is the company’s revenue growth. The Grants Pass, Oregon-based Dutch coffee, latte and soda supplier generated revenue of $186.4 million, a 44% year-over-year increase in the trimester. The company opened 31 stores during the quarter and now has 132 more locations than at the end of the second quarter of last year.

The number of stores is increasing

These 132 new stores are contributing to this meteoric revenue growth, which is a good thing, because a big part of Dutch Bros’ investment thesis is that the company will continue to rapidly expand its footprint across the United States as that it successfully penetrates new markets. . Dutch Bros, which was primarily a West Coast-based company, has now opened 61 locations in Texas in the past 18 months, showing it has the ability to enter major new markets at scale.

One of Dutch Bros’ main goals when it went public was “to open new stores wherever people want good drinks with an eye on 4,000 stores in the next 10-15 years.” With 130 openings planned for 2022, Dutch Bros is making progress towards this goal. With 600 locations now open, Dutch Bros has grown its store count at an impressive 28% since last year, but there’s still a long way to go as it hits 4,000.

Focus on the drop in comparable store sales

It’s hard to complain about 44% revenue growth, but as a shareholder with a large portion of my portfolio allocated to Dutch Bros, I have one concern. While revenue is growing thanks to this plethora of new stores, same-store sales, which measures the change in revenue from units that have been open for at least a year, actually fell 3.3% year-over-year. another, which makes me think. Declining comparable store sales could be a sign that now that those stores have been open for a while, some customers may be bored and moving on.

But upon closer examination beyond the title, it seems that much of this can be attributed to shifting sales, which is when a company’s new site diverts some of the traffic ( and sales) from another site. It might sound counter-intuitive, and skeptics would call it ‘cannibalization’, but CEO Joth Ricci points out that it allows Dutch Bros to enter a new market in a bigger way and build brand awareness faster. .

These new stores could also reduce competitors’ sales and increase Dutch Bros.’ overall market share. Dominos Pizza (NYSE:DPZ) is an example of a company that has successfully implemented a similar strategy (Domino’s calls it Fortress), and Domino’s has been one of the stock market’s great success stories over the past decade-plus. Having more locations can also help alleviate demand-side issues, such as too many cars lining up at one location’s drive-thru and potential customers leaving instead of waiting in line.

Ricci also pointed to rising gasoline prices, particularly in California, where the company is heavily concentrated, as a factor in the decline. This seems reasonable as petrol prices have skyrocketed in the second quarter of 2022 and since most Dutch Bros locations are drive-thru this could certainly dampen demand a bit. The company also raised prices slightly to deal with inflation in its main inputs like dairy and freight, so that could also have played a role.

Overall, I’m still very optimistic about Dutch Bros and I’m excited to see the company execute on its plans to increase the number of stores, enter new geographies and expand. increase in revenue, but I’ll keep an eye on comparable store sales as a key. metric. A quarter of the drop in same-store sales is easy to wipe out, especially since it appears shifting sales were a major contributor. If comparable store sales decline further at a faster pace, then that becomes more of a concern.

All in all, these are encouraging results, and Dutch Bros shareholders can go out and grab a Blue Rebel to celebrate.

10 Stocks We Like Better Than Dutch Bros Inc.
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and Dutch Bros Inc. wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of July 27, 2022

Michael Byrne holds positions at Dutch Bros Inc. The Motley Fool holds positions and recommends Domino’s Pizza. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.