Why Dutch Bros Stock Fell 26% in August
Key Points
Dutch Bros is growing fast, driven by new stores and high same-shop sales growth.
It plans to reach 2,029 stores by 2029.
Dutch Bros' stock is expensive and priced for perfection.
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Dutch Bros (NYSE: BROS) stock fell 26% in August, according to data provided by S&P Global Market Intelligence. Although it released a stellar earnings report, it wasn't enough to please the market.
Conquering with coffee
Dutch Bros operates a coffee shop chain that's expanding quickly across the country. It has 1,225 stores as of the end of the second quarter, and management says that it has secured 90% of the stores it needs to reach its goal of having 2,029 stores by 2029. It also has a longer-term goal of 7,000 stores.
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It's growing rapidly, both with new store count and repeat sales, both of which are driving increased sales. Total revenue increased 32% year over year in the second quarter, and same-shop sales were up 5.8%. Company-owned same-shop sales have been increasing at a faster rate than franchised-store sales, including an 8.3% increase in the second quarter, and the company is transitioning to opening only company-owned stores.
Image source: Dutch Bros.
Dutch Bros is live in 26 states as of the end of the quarter, and it entered its 26th, Mississippi, in July. The company has become a popular destination in its live states, and its first Chicago-area store recently reached a record $7 million in volume.
The chain is known for its drive-thrus, which are fast and cost-efficient, although it has varied store concepts to fit demand. It's also launching a food menu, which it has piloted successfully and has now expanded to 750 locations. The goal of the food rollout is to make stores a more important morning destination, and management says that so far, the results have exceeded expecations.
Priced for perfection
So why did Dutch Bros stock fall? It mostly boils down to valuation. Even at the lower price, Dutch Bros stock trades at a P/E ratio of 66, which is rich. Management raised guidance for full-year sales after the second quarter report, but same-shop sales growth is trending slightly down for the remainder of the year. At decelerating rates, the stock can't carry the same valuation.
Another blow is that costs have increased recently, and management is expecting coffee costs to keep rising in the coming quarters.
Finally, on the last day of the month, it announced that it would not increase its offer for 65 Salad And Go stores that it had planned to acquire, and the implication was that the deal might be off. That could put a dent in its expansion strategy and ability to reach its 2029 goals.
Dutch Bros is growing fast and impressing customers. It has a massive long-term opportunity, and if you can stomach some risk, now could be a good time to buy.
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Jennifer Saibil has positions in Dutch Bros. The Motley Fool has positions in and recommends Dutch Bros. The Motley Fool has a disclosure policy.
