It might be hard to forget a coffee chain as ubiquitous as Starbucks (SBUX +0.94%) -- which seemingly sits on every third corner you pass -- but there are some good reasons to look into its smaller competitors, too.
One up-and-comer now is Dutch Bros (NYSE: BROS). The Oregon-based drive-thru coffee chain aims to stand out with its blend of customer friendliness, distinctive drinks, and fast growth.
After sliding from its initial public offering price in 2021, the stock has staged a partial rebound. Can Dutch Bros keep up its recent momentum?
NYSE: BROS
Key Data Points
Brewing growth with a personal touch
Dutch Bros continues sprinting ahead with 39 new stores in just the third quarter of 2023, boosting its overall presence to 794 locations. Revenue jumped to $265 million, marking a 33% year-over-year increase and showcasing how Dutch Bros is winning hearts. With a 4% uptick in same-shop sales, the company keeps blending expansion with an unwavering commitment to its unique vibe and customer connection.
Dutch Bros' Broistas, the drive-thru employees who take orders and serve drinks, won second place on Forbes' first-ever best customer service list for the quality of their people, defined by Forbes as "employees who interact with customers." The company placed 10th overall for best customer service this year. "Amazing" and "friendly" were some of the terms used to describe the workers, who give out monthly stickers to drive engagement and create word-of-mouth.
Cultivating connections in the community
Dutch Bros President Christine Barone, a former Starbucks executive, notes in the most recent earnings call that the company continues "doing all kinds of things to really further invest in the communities, make sure that people know that we're there, thinking through how we can partner with the local high schools and make sure that we have some visibility."
Dutch Bros' giving-back initiatives include Dutch Luv day, which raised over $900,000 in funds for feeding local communities last year, Drink One for Dane, delivering over $2.5 million in funds raised for ALS treatment and research, and Buck for Kids, raising $960,000 for nonprofits focused on mentoring and supporting youth in local communities.
For the company, that visibility is paramount. With bigger, more established players already having a footprint in most areas where Dutch Bros seeks to expand, the company has to work even harder to build name recognition that can drive sales.
Serving up some solid financial results
With a robust 31% company-operated shop contribution margin and a notable increase in average unit volumes (AUVs) by almost 20% since 2019, Dutch Bros demonstrates that focusing on people doesn't just build a loyal fan base -- it drives impressive financial results.
AUV gives you an idea of how much revenue each store is bringing in, on average. A rising AUV indicates that individual stores are becoming more profitable. The increase in AUVs suggests that each of its coffee shops keeps generating significantly more revenue now than a few years ago.
As Dutch Bros steams ahead with its ambitious goal of 4,000 total shops, the challenge will be to scale without losing the essence that makes it special. After all, that's still only around 10% of the total Starbucks locations worldwide. The company's recent equity offering and credit facility upgrade, unlocking almost $500 million in liquidity, should help support this growth.
However, the true test may be in maintaining the culture and community feel that set Dutch Bros apart from other top growth choices.
Dutch Bros vs. Starbucks on the financial front
Starbucks, with its staggering 38,038 stores worldwide and a recent 8% uptick in global comparable-store sales, certainly sets a high bar. Yet Dutch Bros continues carving out its own success story. With an impressive 23.9% surge in shop count year over year and a leap in net income to $13.4 million for the third quarter of 2023 from a modest $1.6 million the previous year, Dutch Bros makes a formidable contender.
Dutch Bros still remains a relatively recent entry in the stock market, having only launched its IPO in September, 2021, at a price of $23. Share prices quickly rose to highs above $60 before falling back to a more recent range near $30.
Competition is one of the biggest challenges the company faces, along with a hefty debt incurred as part of its growth processes. Interest on this debt came out to more than $9 million in the most recent quarter, putting a damper on net income and adding a further challenge to reaching its expansion goals.
Signs point to a flavorful future ahead
Yes, Starbucks is an unforgettable icon, but in the swirl of coffee choices, Dutch Bros offers a distinct and inviting flavor. This is a story woven with community threads, vibrant culture, and award-winning Broistas. So, while Starbucks isn't going anywhere, Dutch Bros is proving to be more than just a footnote in the coffee saga. It's a chapter that could deliver excellent returns for savvy investors as it moves toward lasting profits.
