One of the hardest areas to invest in is consumer discretionary goods. Consumer shopping patterns and preferences can change frequently. Macroeconomic factors can also affect demand.
Right now, there are two completely different narratives being written among leading coffee chain companies, Starbucks (NASDAQ: SBUX) and Dutch Bros (NYSE: BROS).
While Starbucks grapples with decelerating growth, its smaller rival is thriving.
Let's dig into why Dutch Bros is the more compelling investment opportunity and explore why now is the time to scoop up some shares.
Full steam ahead
One of the most important operating metrics for restaurant and retail businesses is same-store sales, which helps investors understand a company's growth outside of new store openings. By including only established locations (usually in operation for at least one year), same-store sales capture core demand and traffic trends.
The table below breaks down same-store sales for Starbucks over the last several quarters.
| Metric | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|---|---|
| Same-store sales growth | 11% | 10% | 8% | 5% | (4%) | (3%) |
Data source: Starbucks Investor Relations.
Not only have same-store sales been consistently decelerating over the past year, but they've now officially declined for two straight quarters.
Meanwhile, the figures below for Dutch Bros depict a stark contrast in the company's latest results.
Image source: Dutch Bros.
Same-store sales have accelerated for Dutch Bros, culminating in 10% growth the first quarter -- its best result in two years.
Clearly, Dutch Bros has found ways to resonate with consumers despite a challenging environment for many restaurant companies that are still fighting off lingering inflation.
Opportunities for expansion
While same-store sales are important to analyze, this metric is only one piece of the puzzle.
Data by YCharts.
With growing sales per location, Dutch Bros can achieve more efficient unit economics. Investors can see in the chart above that profitability is improving with operating income and earnings before interest, taxes, depreciation, and amortization (EBITDA) rising. These metrics were negative just a few years ago.
Moreover, the company is now also profitable on a generally accepted accounting principles (GAAP) basis.
As rising sales continue to help generate margin expansion for the company, Dutch Bros has a compelling opportunity to expand its store base.
Image source: Getty Images.
Keep an eye on valuation
The valuation analysis below benchmarks Dutch Bros against a peer set of fast-casual restaurant chains and competitors in the coffee space on a price-to-sales (P/S) basis.
Data by YCharts.
With a P/S of 2.5 as of this writing, Dutch Bros is the second-cheapest stock in this cohort, essentially in line with Starbucks.
But Starbucks is a much larger company than Dutch Bros. Therefore, its growth prospects are quite different, and the stock's valuation will reflect that. So while it might look like Dutch Bros and Starbucks are valued comparably, keep in mind Dutch Bros is a growth stock, and its valuation multiples can move with much more volatility than Starbucks' will.
Still, Dutch Bros is the more compelling opportunity because the company is actually growing consistently. On a deeper level, I like Dutch Bros compared to some other opportunities among fast-casual food and beverage stocks. Unlike Cava and Sweetgreen, Dutch Bros hasn't witnessed wild valuation expansion over the last year.
Considering profitability is still relatively new for Dutch Bros, the company's next phase of growth is what really makes the stock a tempting buy right now.
Should you invest $1,000 in Dutch Bros right now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group and Sweetgreen. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
