It's already up a hefty 69% just since October 2023's low, so the idea of stepping into a new position in Dutch Bros (BROS 1.54%) stock right now is more than a little intimidating. That's a big gain in a relatively short period of time, after all, establishing plenty of profit-taking potential.
If you're on the fence about buying this stock, though, err on the side of aggressive optimism. Dutch Bros shares certainly aren't immune to sizable pullbacks. But the company's growth story is panning out exactly as hoped.
Dutch Bros' distinct difference is paying off
If you're not familiar with it, Dutch Bros is a chain of 876 drive-thru coffee stands. It's often compared to Starbucks (SBUX 0.11%), but only to highlight how much it contrasts with the bigger, better-known brand of coffee houses. Whereas Starbucks is known for delivering a formal, polished experience, Dutch Bros is hyper-casual ... no dress code, and lots of localized character reflecting the personalities of the people working at a particular stand.
It's not just competing with Starbucks, of course. McDonald's (MCD 0.13%) and Dunkin' are surprisingly serious rivals too. Like Dutch Bros, all of these competitors offer premium beverages in addition to basic coffee.
Whatever it is, it works. Although Dutch Bros' informal feel may not have been a hit several years ago, younger customers appreciate -- and pay for -- authenticity. That's how the company's first-quarter revenue improved 39%, with same-store sales growing 10%.
Data source: StockAnalysis.com. Chart by author.https://stockanalysis.com/stocks/bros/forecast/
Now Dutch Bros is looking to expand on this growth by expanding its footprint ... a lot. The coffee chain's current long-term plans are to eventually build 4,000 drive-thrus, with between 150 and 165 new builds anticipated for 2024 alone. For perspective, Starbucks operates about 16,600 locales in the United States, while McDonald's operates roughly 13,600 domestic restaurants. There are also on the order of 9,000 Dunkin' locations peppered across the U.S.
The thing is, Dutch Bros' big growth plans are still completely achievable despite its staunch competition.
Dutch Bros has one huge thing working in its favor
As was already noted, Dutch Bros offers a distinctly different kind of prepared-coffee experience. The company encourages a particular stand's employees to make things personal for their customers. Participation in neighborhood fundraisers isn't unusual for any given location, for example.
It matters for one simple reason -- customers love this authenticity, and increasingly so. Content-marketing outfit Stackla reports that nearly 90% of consumers consider authenticity when making a purchasing decision, while numbers from market research house Salsify suggest 46% of consumers will pay more to buy from a brand they trust. Indeed, Salsify's data suggests "trust" is the most important factor for people who are willing to pay a premium for goods and services.
And the younger a customer is, the more likely it is that this authenticity will matter. For instance, around three-fourths of the Gen Z crowd (digitally native consumers currently between the ages of 12 and 27 who've been forced to sift through mountains of misleading marketing messages for the majority of their lives) say they prefer to buy from authentic brands, while roughly one-fourth of these young people say authenticity is the single most important factor when purchasing anything beyond the most basic of consumer goods.
Most of these convenience-minded consumers are just now entering the disposable income phase of their lives. Many of them are just now starting to drive on a regular basis, too. A handful of them are starting to have children as well, and are likely to pass their habits and preferences down to the next generation. The key driver of Dutch Bros' current and projected expansion will likely remain in place for years.
Then there's the company's not-entirely-secret weapon ... its relatively new CEO Christine Barone, who took the helm at the beginning of this year. Barone has a great deal of experience in consumer-facing enterprises, including several years in leadership positions with Dutch Bros rival Starbucks. There's little doubt she's got her finger directly on the pulse of the prepared coffee business, including how it's changing as customer preferences evolve.
The reward is worth the risk, and the volatility
If you're looking for a bargain, look elsewhere. Dutch Bros is anything but a value stock. Indeed, priced at over 100 times this year's expected per-share earnings and more than 80 times next year's projected profits, Dutch Bros stock is expensive even by growth stock standards. This steep valuation is a big reason shares are apt to remain volatile, even though they're likely to continue rising.
They are apt to continue rising well into the future, though, for investors who can stomach the volatility.
The coffee drive-thru chain is at a pivotal moment in its existence. It's spending heavily now to ensure it can capture all the potential profits that are in the cards down the road. The concept is clearly being embraced by consumers. Wider profit margins should start taking shape in the foreseeable future. Dutch Bros shares are simply starting to reflect that future success now.
