Shares of Dutch Bros (NYSE: BROS) are moving sharply higher for the second straight day after the drive-thru coffee shop reported better-than-expected results on Wednesday.
The coffee stock, which is the third-largest such chain behind Starbucks and Dunkin' Brands, has been rapidly expanding, adding 38 new locations in the third quarter, or nearly as many as it opened in all of 2019.
Inflation has been a particular drag on Dutch Bros, but the coffee chain has been able to offset some of the worst effects by raising its prices. It increased them for the third time this year in the period, which helped reverse the decline it experienced in same-shop sales in the second quarter. Comps had been down 3.3% last time out, but they rose 1.7% this time.
Yet the price hikes are masking that not as many customers are visiting the stores as they once were. Management admits its traffic at its stores is negative and will likely stay negative in the fourth quarter. It's only forecasting flat comps for the full year because of its price hikes.
Dutch Bros is also experiencing what it calls "sales transfer," otherwise known as cannibalization, by opening so many new stores.
Due to its "fortressing" strategy of flooding an area with new stores, each individual store is seeing a decline in customers even as total sales for the company rise.
Dutch Bros reported adjusted profits and sales that were higher than what Wall Street expected, though full-year guidance is slightly below forecasts. Still, the coffee shop continues to grow through expansion, offsetting its own higher input costs by passing them on to consumers.
There may be limits to how often Dutch Bros can do that before damaging customer traffic too much, but the coffee company's price hikes have been less aggressive than its peers' and it may be rewarded for that.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short January 2023 $92.50 puts on Starbucks. The Motley Fool has a disclosure policy.
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