Where will the Dutch Brothers be in five years?

Dutch Brothers (bros -1.04%) Although it has been around for about 30 years, it has only been released to the public since late 2021. At the time, it had 471 stores in 11 states. As of the end of 2023, the company operated 831 locations in 16 states. Clearly growth is the biggest story, and that is unlikely to change over the next five years. Here’s what you need to know before buying stocks.

Dutch Bros has achieved great results.

As the numbers above highlight, in less than three years since going public, the company has grown its store count to 360 locations. In percentage terms, that’s a jump of about 75%. This is a huge expansion in a very short period of time.

Image source: Getty Images.

Management was right on target. In 2018, the company set a goal of having at least 800 branches by 2023. That said, the company is well on its way to meeting these aggressive goals. In 2024, Dutch Bros plans to open an additional 150 to 165 coffee shops. So our bold growth plans are far from over.

In other words, the larger the company, the more effort it takes to grow. Dutch Bros, for example, opened 71 branches in 2020. This corresponds to a growth of almost 20%. The high end of our 2024 growth plan will result in a same-store increase of approximately 20%, but this will require more than doubling the number of new stores.

This is just a simple calculation, but opening more and more stores takes a lot of time and effort. As the number of moving parts increases, the risk of mistakes clearly increases.

Dutch Bros has big long-term plans

So, we will see material growth over the next five years. But what is the plan? The overall goal is 4,000 locations. There is no timeline associated with those numbers, so it will probably take five years or more. However, if the growth rate remains at about 20% new stores per year, within five years Dutch Bros will have up to 2,050 stores.

Considering the company currently only operates restaurants in 16 states, there’s plenty of room for them, too. As the company moves east from its West Coast home base, there are another 32 states in the continental United States.

We are also developing new formats to better serve the needs of the new markets we are entering. But now that there are more moving parts to the operation, complexity also increases.

If you’re a growth-oriented investor, Dutch Bros should probably be on your watch list. However, rapid expansion comes with increased execution risk and should be approached with some caution.

A key metric to monitor is same-store sales (comps), which measures the performance of locations that have been open for more than a year. Dutch Bros’ mix increased by 2.8% in 2023, which is respectable.

If this Compass number is negative for an extended period of time or is dropping significantly during a specific period, investors should consider whether management has been too focused on opening new stores and not paying enough attention to existing stores. Or, more worryingly, they may open a new store in a not-so-good location, which could depress the company if the new location is open for more than a year.

Don’t mistake the top line for the bottom line.

Managing a restaurant that is so obsessed with expansion is no small concern. Wall Street is filled with restaurant concepts that are trying to get too much done too quickly and effectively. The potential problem is that new stores add revenue to the top line at a rapid pace, which can make them very attractive to investors.

But profits are not profits, and even fast-growing companies must make money consistently at some point or investors will abandon their stocks. Dutch Bros appears to be on the right track, earning $0.03 per share in 2023, up from a loss of $0.09 in 2022.

But investors should not mistake growth plans for growth success. If you’re buying Dutch Bros, you’ll also want to watch Dutch Bros and its aggressive expansion efforts very carefully.