On Feb. 21 after the markets closed, coffee-shop chain Dutch Bros (NYSE:BROS) released its quarterly financial report. Nobody cared, as it was the same day that NVIDIA (NASDAQ:NVDA) published its earnings results.
Yet, opportunity-seeking investors ought to care. Dutch Bros isn’t nearly as big as Starbucks (NASDAQ:SBUX), but that’s why there’s more room for growth.
If you rely on traditional valuation metrics, you might conclude that BROS stock isn’t worth your time or your investment capital. However, Dutch Bros is expanding its presence and may provide surprisingly good value to patient shareholders in the coming years.
Dutch Bros: A local flavor
Before breaking down Dutch Bros’ financial figures, the best place to start when assessing Dutch Bros is the company’s “flavor.” What makes this coffee-shop chain different from and potentially better than Starbucks?
Maybe it’s the local, hometown feeling that Dutch Bros provides to its loyal customers. Without directly calling Starbucks an emotionless corporate entity, Dutch Bros emphasizes its “focus on serving high-QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE.”
Furthermore, Dutch Bros specializes not just in coffee but also in drive-thru shops. Thus, instead of spreading its staff thin by catering to both in-store and drive-thru customers, Dutch Bros can focus on the drive-thru customers and thereby provide faster service.
As we’ll see, Dutch Bros is rapidly increasing its store count. At the same time, the company is small enough that its customers can still feel its “community-driven, people-first culture.” Coffee enthusiasts seeking a customizable, hand-crafted beverage might prefer Dutch Bros over Starbucks.
These intangible attributes are difficult to quantify with hard data. Yet, the bull case for BROS stock isn’t entirely based on fuzzy feelings, as there are plenty of facts and figures that weigh in favor of Dutch Bros.
Looking past the ratios
If a good value consisted of nothing more than low price-to-earnings (P/E) and price-to-sales (P/S) ratios, then Dutch Bros wouldn’t pass muster. However, I encourage you to look past commonly cited valuation metrics and consider Dutch Bros’ growth story.
Ratio fanatics probably won’t like the fact that Dutch Bros has a GAAP trailing 12-month P/E ratio of 1,037. Meanwhile, Dutch Bros’ trailing 12-month P/S ratio of 1.84 isn’t outlandish-looking, but it’s also double the sector median P/S ratio of 0.92.
On the other hand, Dutch Bros appears to be on track to build its business operation. If the company can increase its shop count, and hence its revenue and income, then it could eventually right-size its P/E and P/S ratios.
Of course, that’s easier said than done, but there are encouraging signs. In particular, Dutch Bros opened 37 new shops across 10 U.S. states in the fourth quarter. Thus, Dutch Bros’ story isn’t fundamentally about valuation multiples.
As Dutch Bros President and CEO Christine Barone explained, “It is incredible that a single coffee cart in Grants Pass, Oregon has grown over the last 30+ years to over 830 shops across 16 states employing approximately 24,000 people.”
That’s pretty impressive when you really think about it. Also impressive is the fact that Dutch Bros grew its Q4 2023 revenue 25.9% year over year to $254.1 million. It’s not NVIDIA-level growth, but it’s great for a company of Dutch Bros’ size.
Appreciating the small victories
How does a company like Dutch Bros get a four-figure P/E ratio? It’s possible when the company is profitable, but those profits only amount to a few pennies per share, and the share price isn’t very small.
BROS stock isn’t a penny stock, by any means, and Dutch Bros reported Q4 2023 non-GAAP adjusted earnings of 4 cents per share. However, there’s a small victory in the fact that this result exceeded Wall Street’s call for quarterly earnings of 2 cents per share.
With that, Dutch Bros can claim three consecutive quarterly EPS beats. Going forward, I would like to see Dutch Bros implement some cost-cutting measures. That way, as long as its revenue remains steady, Dutch Bros should be able to increase its per-share earnings in future quarters.
In the meantime, investors will need to be patient. BROS stock has wobbled around and basically gone nowhere in the past six months.
Of course, Dutch Bros isn’t Starbucks and certainly isn’t NVIDIA. Yet, something tells me that Dutch Bros’ customers like the company just the way it is — small enough to brew a cup of coffee the way they like it but expansive enough that more Dutch Bros drive-thru shops may be coming to their area soon.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
