It has been a rough year for Starbucks (SBUX 1.85%). The international coffee chain's stock is down around 20% year to date after posting weak traffic numbers and revenue growth for the first quarter. CEO Howard Schultz is giving confusing advice to the management team on LinkedIn, and the Chinese market is proving highly competitive as cheap coffee shops flood the market.
Right now, Starbucks is an uncertain story facing major headwinds. The same can't be said for the up-and-coming coffee chain Dutch Bros (BROS -0.81%). Shares are up nearly 20% this year after putting up great volume growth, profit margins, and unit count growth. Its brand is becoming more popular as management hopes to spread from its Northwest roots to other markets in the U.S.
Between these two coffee specialists, here's why you should consider buying Dutch Bros over Starbucks for your portfolio right now.
Dutch Bros: Double-digit comparable sales growth
For the first quarter of 2024, Dutch Bros reported 10% same-shop sales growth. The company defines this number as the year-over-year revenue growth from restaurants that have been open at least 15 months as of the start of the reporting period. Also known as comparable sales, this is an important metric for analyzing traffic shifts and pricing power for a restaurant brand.
Management said both traffic and ticket size increased in the quarter, marking two straight quarters of traffic growth to Dutch Bros locations.
The rest of the earnings report looked solid too. Dutch Bros' restaurant contribution margin expanded from 24.2% in Q1 2023 to 29.8% last quarter. This led to the company reporting a positive operating margin of 9.3%, while net income flipped from a $9.4 million loss a year ago to a $16.2 million profit.
Starbucks' numbers moved in the opposite direction. Its comparable sales declined 4% globally with traffic to stores falling 6% year over year. Operating margin contracted to 12.8% in the period. It's possible Dutch Bros will surpass Starbucks based on operating margin in the near future. This would have been unthinkable when Dutch Bros went public with steady losses. That shows the impressive progress the brand has made in the last few quarters.
Unit expansion, growing membership program
At the end of Q1, Dutch Bros had 876 shops, up from 716 a year ago. The company is opening over 30 shops a quarter as it spreads from the West Coast to the East Coast. Its long-term goal is to have over 4,000 drive-up coffee stands in its home market, meaning it can still steadily grow its unit count over the next 10 to 20 years.
Management also noted that members of its Dutch Rewards program accounted for 66% of all transactions last quarter, up approximately 150 basis points year over year. Loyal customers contribute to the company's positive comparable sales growth, giving Dutch Bros the opportunity to profitably expand its business long term.
On the other end of the unit count spectrum is Starbucks. It has 16,600 stores in the U.S. and 38,951 total around the globe. While it's possible for Starbucks to grow its store count too as management hopes to reach 55,000 locations, it's not the the same growth opportunity Dutch Bros has to more than quadruple its footprint.
Dutch Bros stock offers growth at the right price
Dutch Bros clearly has a lot of momentum, but that doesn't mean it's automatically a good stock to buy. Good stocks are high-quality businesses with undemanding valuations.
Today, Dutch Bros has average unit volumes (AUVs) from its coffee stands of $2 million. Even if AUV remains unchanged, the company's expansion will see its revenue rise proportionally to its store count. In reality, steady same-shop sales growth will likely see AUV increase too, again highlighting the clear path for Dutch Bros to grow its sales to much higher levels.
With that in mind, the stock trades at a price-to-sales (P/S) ratio of 2.5 as of this writing, compared to 2.4 for Starbucks and 2.8 for the S&P 500. With its appealing growth runway and rising profitability coming at a discount to the broad market, Dutch Bros look like a great stock to buy right now.
