Could Dutch Brothers become the next Starbucks?

It hasn’t been a good time Dutch Brothers (bros 1.85%) Shareholder. Since peaking in November 2021, the stock has plunged 62% as it struggles to rebound. Perhaps the initial excitement surrounding this growth stock has calmed down somewhat.

But that price-performance ratio hasn’t stopped Dutch Bros’ most prolific. optimistic supporters Hoping it could be next Starbucks. Is this a possible outcome? Let’s take a closer look.

Invigorated by rapid growth

Dutch Bros just reported its 2023 financial results, and naturally, growth took center stage. Sales increased by 31% compared to 2022. In addition, 160 net new stores were opened over 12 months, securing a total of 831 stores. The company’s strong presence in the western and southern regions of the United States has helped it gain customers. From personalized beverage offerings to accessible store formats.

Management sees tremendous potential in the years ahead. They are optimistic that Dutch Bros will be able to open 4,000 stores a day. This is an almost five-fold expansion of our current footprint. Clearly, at this level of scale, returns will be astronomically higher.

It’s natural for a company like this in full expansion mode to invest aggressively in growth opportunities, but investors have something to be encouraged about. Dutch Bros reported that it was adjusted. net profit It will reach $50 million in 2023, a significant improvement compared to $25 million the previous year.

Wall Street analysts expect earnings to improve. The consensus is that adjusted earnings per share are expected to grow at a CAGR of 21% over the next three years.

The stock currently trades at a price-to-sales (P/S) multiple of 1.9. It has decreased significantly compared to a few years ago. This represents a discount to Starbucks’ P/S ratio of 2.9. If Dutch Bros successfully executes its plans, its valuation is likely to rise even higher.

Don’t mess with the leader

Starbucks, which has 38,587 stores worldwide, reported $36 billion in sales for fiscal 2023 (ending Oct. 1). In the U.S. alone, the business has 16,466 locations and generated $6.6 billion in sales last fiscal quarter. It is a dominant leader in the retail industry. coffee industry.

As a result, I’m not sure Dutch Bros will ever become a Starbucks. To achieve this, sales and number of stores must increase by more than 26 times and 20 times, respectively. It’s a monumental task.

Protecting Starbucks’ competitive position is its incredibly strong brand. economic moat. According to Interbrand, this intangible asset is worth $15 billion, making it one of the most valuable assets in the world. This allows Starbucks to charge a premium price for its products while increasing customer loyalty and encouraging repeat purchases.

Despite its massive size, Starbucks is not sitting still as it has expansion plans of its own. Management hopes to open 20,000 stores in the United States in the long term. This includes the introduction of additional what executives call “purpose-defined stores,” including drive-throughs and delivery-only outfits.

And that means that in its pursuit of growth, Dutch Bros will have to compete more directly with Starbucks for undoubtedly lucrative real estate. This may seem like a daunting task, given that Starbucks has outstanding financial resources, marketing capabilities, and a strong digital presence.

Dutch Bros is receiving a lot of attention due to its rapid growth. But investors should seriously temper their expectations if they think small coffeehouse chains could one day reach Starbucks levels.