Dutch Bros reported another solid quarter. Unlike last quarter, which was stunningly perfect, this quarter, which was wonderful, did have some hair on it–basically some margin compression. The causes for margin compression were: 1) shifting from ground leases to build to suit 2) costs of travel teams for new location openings 3) coffee bean prices 4) California payroll tax issues. In that order: 1) this a smart move for a company opening nearly 200 locations per year. It shifts the upfront construction costs to the developer 2) this is a smart move as there is no second chance to make a first impression 3) this will resolve in time 4) California–what are you gonna do? Another hair was that new unit openings sound like they are a little behind schedule–that doesn’t surprise me or bother me. Opening up multiple units in multiple localities is difficult–the main thing is to keep going. A final hair was that management did not raise earnings guidance for the fourth quarter.
Revenues are going gangbusters, and it’s not simply from opening new locations. Impressively, same store sales continue to grow, quarter after quarter…and same store sales growth is mostly from transaction growth, not price increases, which adds to the impressiveness. On top of that, while many QSRs struggled with younger demographics during the quarter, Dutch Bros did not. Management raised revenue guidance for the fourth quarter…and I would not be surprised if they end up beating their earnings guidance. We shall see!
At any rate, Dutch Bros is marching forward from a regional to a national player. It is so much more than a purveyor of coffee. In fact, approximately half of its sales are not coffee-based. Dutch Bros is the clear leader and creator in the customizable drink space. They launched “order ahead” about a year ago, and that is only capturing 13% of their sales. I expect that number to grow, as the app becomes stickier. In addition to increasing sales, app purchases also will help through-put, thereby benefiting customers and Dutch Bros!
Dutch Bros now has approximately 1,100 stores. Starbucks had about 1,000 stores in 1996 and by 2000, they had about 3,000 stores. Starbucks stock went up about 4.5 times during that period. Dutch Bros management has projected over 2000 stores in 2029. Looking at Starbucks growth, Dutch Bros growth projection appears doable and then some. I can’t wait to see where the company and the stock are in 2029!
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With Love,
P. Gustav Mueller, author of The Present