In light of the recent stock market crash and ongoing market uncertainties resulting from tariffs, numerous growth stocks are now available at significantly reduced prices compared to just a few months ago. One particularly attractive stock that has seen a decline of approximately 35% from its peak is Dutch Bros (BROS 1.23%). This presents a noteworthy investment opportunity for those looking to capitalize on market dips.
As a prominent provider of coffee-based beverages, Dutch Bros is not exempt from the impacts of tariffs. The U.S. primarily relies on imported coffee, as only a minimal amount of green coffee is cultivated in places like Hawaii, Puerto Rico, and a small section of California. Additionally, essential supplies such as cups and paper products are often sourced from countries like China. Consequently, it is anticipated that the prices of coffee drinks will likely rise across the board, affecting everything from local mom-and-pop coffee shops to large chains like Starbucks. As companies face rising costs, consumers may ultimately reduce their spending on these beverages.
However, Dutch Bros appears to be in a favorable position despite these challenges. Its pricing strategy offers drinks that are generally less expensive than those at Starbucks, positioning it as an appealing alternative for budget-conscious consumers. Furthermore, being larger than many local coffee shops enables Dutch Bros to better absorb the increasing costs brought about by recent tariff changes.
Historically, coffee has often been exempt from tariffs, mainly due to the impracticality of establishing large-scale coffee bean farming within the U.S. There remains a potential for tariff exemptions to be introduced if these trade barriers persist. In the meantime, if customer traffic does not significantly decline, operators within the restaurant and coffee shop sectors typically fare well, even in inflationary environments.
As prices rise, sales figures tend to increase, allowing businesses to reap the benefits of higher margins. For instance, consider a $6 beverage with an 18% gross margin, yielding a gross profit of $1.08. This is notably more profitable than a $5 beverage with a 20% gross margin, which nets only $1 in gross profit, illustrating the importance of pricing strategies in maintaining profitability.
Long-Term Growth Potential for Dutch Bros Remains Strong
While the near- to medium-term landscape remains uncertain due to tariffs, the long-term growth narrative for Dutch Bros continues to hold strong. The company could experience a boost in same-store sales as prices increase. More significantly, the introduction of additional food options and the implementation of mobile ordering capabilities are expected to contribute positively to comparable-store sales growth.
In contrast to its competitor Starbucks, Dutch Bros currently lacks a diverse selection of food offerings. The company has acknowledged that this limitation likely impacts customer traffic, particularly during breakfast hours when patrons prefer to make a single stop for both coffee and food. Dutch Bros is exploring the possibility of expanding its food menu at select locations, which, if successfully implemented across its stores, could present a substantial opportunity for revenue growth. Presently, food accounts for only 2% of Dutch Bros’ total sales, whereas it constituted 19% of Starbucks’ sales last year.
Moreover, the company has recently launched a mobile ordering feature. Although this initiative comes later than some competitors, it is a well-established method to enhance customer traffic. Given that most Dutch Bros locations are designed primarily for takeaway, with limited seating, mobile ordering is likely to facilitate increased sales and improve customer convenience.
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The most significant growth opportunity for Dutch Bros lies in its expansion strategy as it aims to transition from a regional coffee shop to a national presence. By the end of the previous year, Dutch Bros had established a footprint in 18 states with a total of 982 locations, of which 670 were company-owned. This creates substantial opportunities for the brand to penetrate new markets and to fill existing ones more effectively.
Oregon, the birthplace of Dutch Bros, represents its largest market, closely followed by neighboring California. However, it’s important to note that Dutch Bros operates only half as many locations as Starbucks in its home state and a small fraction compared to Starbucks in California. The total number of Dutch Bros locations in the U.S. pales in comparison to the more than 17,000 locations Starbucks boasts across the country.
This indicates that Dutch Bros has ample opportunity for sustained store expansion over the coming decades. If the company were to grow its store base by 15% annually for the next 20 years, it would still have fewer locations than Starbucks currently has in the U.S. Furthermore, the store format is optimized for efficiency, relying on two drive-up windows and a walk-up window, which allows for relatively low-cost construction despite robust sales performance.
Importantly, Dutch Bros generates strong free cash flow, enabling it to pursue expansion without incurring debt. The company is planning to open at least 160 new locations in 2025, translating to an impressive unit growth rate of 16%.
Given the favorable same-store sales drivers and the significant expansion potential that lies ahead, Dutch Bros presents a compelling opportunity for investors seeking long-term stock ownership.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
