Where Will Dutch Bros Be in 5 Years?

Dutch Bros is a rapidly expanding coffee chain. There’s material growth ahead, but investors need to make sure it doesn’t move too quickly.

Dutch Bros (BROS -1.04%) has been around for about 30 years, but it has only been public since late 2021. At that time, it had 471 stores in 11 states. At the end of 2023, the company operated 831 locations in 16 states. Clearly, growth is the big story, and that isn’t likely to change over the next five years. Here’s what you need to know before you buy the stock.

Dutch Bros has achieved big things

As the numbers above highlight, since going public less than three years ago, it has increased its store count by 360 locations. On a percentage basis, that’s a roughly 75% jump. That’s a massive expansion in a very short time.

An image of a rocket ship jumping up stairs.

Image source: Getty Images.

Management was right on target. In 2018, the company set a goal of having at least 800 locations by 2023. In other words, the company executed well on this aggressive goal. In 2024, Dutch Bros is looking to open another 150 to 165 coffee shops. So the audacious growth plans are nowhere near over.

That said, it takes more effort to grow as a company increases in size. For example, Dutch Bros opened 71 locations in 2020. That equated to growth of nearly 20%. The high end of the growth plan for 2024 will lead to roughly the same store-count growth of nearly 20%, but it will require more than twice the number of new locations.

While this is just simple math, opening up more and more stores requires a lot of time and effort. The risk of mistakes clearly increases as the number of moving parts expands.

Dutch Bros has big long-term plans

So the next five years are going to see material growth. But what’s the plan? The overall target is 4,000 locations. There’s no timeline associated with that figure, so it will probably take more than five years. But if the growth rate remains at around 20% new stores annually, in five years Dutch Bros could have as many as 2,050 locations.

There’s plenty of room for them, too, given that the company operates restaurants in only 16 states today. There are another 32 states in the continental U.S. to go as the company pushes east from its West Coast home.

It is also developing new formats to better fit the needs of the new markets it enters. That, however, also further increases complexity since there are now even more moving parts to its operations.

If you are a growth-minded investor, Dutch Bros should probably be on your watch list. But you need to go in with a bit of caution, because rapid expansion comes with heightened execution risks.

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

If this comps figure is negative for a long period, or falls deeply in any given period, investors need to start considering whether or not management is focusing so much on opening new stores that it has failed to properly attend to older stores. Or, more worryingly, it might be opening new stores in locations that aren’t that great, which would depress comps once those new locations were open for more than a year.

Don’t mistake the top line for the bottom line

Management of a restaurant leaning too hard into its expansion is not a small concern. Wall Street is littered with restaurant concepts that tried to do too much too quickly and effectively blew themselves up. The potential problem is that new stores add revenue to the top line at a rapid clip, which can look very attractive to investors.

But revenue isn’t profit, and at some point, even a fast-growing company needs to consistently earn money, or investors will abandon the stock. Dutch Bros earned $0.03 per share in 2023, up from a loss of $0.09 in 2022, so it looks like it is on the right path.

But investors shouldn’t mistake growth plans for growth success — you still need to watch Dutch Bros and its aggressive expansion efforts very carefully if you buy it.

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