If it seems like a big company is too big to challenge, there will always be a smart entrepreneur who will find an undiscovered niche and open it. That has happened with coffee chains Netherlands Bros (NYSE: BROS). Can’t compete with giants Starbucksbut instead, it finds a way to connect with customers with its own culture and set of rules, and it takes off.
Investors have high hopes for Dutch Bros when it launches in 2021 when there will be initial public offering (IPO) activity and wild investor sentiment. The bull market has sprung up, and many hot stocks have dropped into bargain territory. Here’s why you might want to add Dutch Bros stock to your buy list.
Not trying to compete
Dutch Bros. isn’t trying to be the next Starbucks. It has actually been around for 30 years as a small chain, and over that time, it has developed a distinct identity with a focus on the friendliness of “broistas” and a cool, fun atmosphere. However, at the same time, it is serious about speed and customer service, and broistas often walk through the drive-thru and take orders (with a smile). It’s also cheaper than Starbucks.
It may be the work of a small entrepreneur, but it has expanded to more than 800 stores in 17 countries. A lot of growth has happened recently, since the company decided to expand the chain and go public. The Founder-CEO has stepped down to make way for a serious executive team to move forward as it continues to grow.
And grow it. Revenue increased 39% in the first quarter of 2024. Even better, the company’s same-store sales have rebounded after being under pressure last year and rose 10% year over year in the first quarter.
Where is Dutch Bros headed? Management is aiming for 4,000 stores in the next 10 to 15 years. If it can continue to grow at its current pace, it should be able to scale efficiently and profitably. It may not be the next Starbucks, but it could be a stellar stock to own if it can get this right. That’s why restaurant stocks in this early growth stage look so good; if you go in at ground level, you might as well go up high. But there is also risk, as any early-stage stock still needs to prove its long-term value.
So far, the trajectory of Dutch Bros looks strong. I say that partly anecdotally, have said to customers who really like the company’s coffee. It’s building a brand, and there’s no reason why you can’t open new stores in new areas. A new and experienced executive team developed a plan to create new stores across the country without overspending.
It has borne fruit. Dutch Bros. opened 165 stores last year and another 45 in the first quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 120% year-over-year in the quarter with a 7-point increase in adjusted EBITDA margin, and adjusted selling, general, and administrative (SG&A) expenses to 14.7 % of revenue, or below 15% for the first time since its IPO. The scaling is strong.
Dutch Bros can be a cheap buy
Dutch Bros shares trade at 2.6 times trailing 12 month sales and 85 times forward one year. Because it is not reliable – yet – the value associated with hard income. But on a sales basis, Dutch Bros. stock looks cheap.
The stock is up 25% this year, modestly outperforming the broader market, although it fell recently on analyst expectations for restaurant sales to fall in the summer. Will it affect Dutch Bros? Maybe, but it could mean more people switching to cheaper coffee from the same shop, and that could be beneficial.
Dutch Bros has a huge growth runway, and it’s just getting started. Inspirational management of confidence that can take the company far, and can be an excellent growth candidate for the portfolio as long as you have a bit of appetite for risk.
Should you invest $1,000 in Dutch Bros right now?
Before you buy shares in Dutch Bros, consider this:
At Motley Fool Stock Advisor The team of analysts only recognized what they believed it to be 10 best stocks to buy investors now… and Dutch Bros is not one of them. 10 stocks that made the cut could produce monster returns in the coming years.
Try when Nvidia created this list on April 15, 2005… if you invest $1,000 when you recommend, you would have $722,626!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks every month. At Stock Advisor service already more than four return of the S&P 500 since 2002*.
View 10 stocks »
* The Stock Advisor returns on July 15, 2024
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has a position and recommends Starbucks. The Motley Fool has a disclosure policy.
1 Growth Stocks Down 47% to Buy Now was originally published by The Motley Fool