With the recent stock-market crash and remaining uncertainty in the market due to tariffs, a number of growth stocks can now be bought at much lower prices than just a couple of months ago. One attractive name that is down about 35% off its highs as of this writing is Dutch Bros (BROS 1.23%).
As a purveyor of coffee-based drinks, the company is not immune from tariffs. Since only a small amount of green coffee is grown in Hawaii, Puerto Rico, and to a tiny extent California, the U.S. must import nearly all its coffee. Meanwhile, supplies like cups and paper products generally come from countries like China. That means the price of coffee drinks will likely increase across the board, from little mom-and-pop shops to a giant chain like Starbucks. With companies likely needing to raise prices, this could eventually lead to consumers cutting back on their drinks.
However, Dutch Bros is not necessarily in a bad spot. Its drinks are already cheaper than those at Starbucks, making it a good alternative. It’s also bigger than local coffee shops, meaning it can absorb more of the rising costs induced by the recent tariffs.
Historically, coffee has tended to be exempt from tariffs, especially since there’s no real feasible way to bring mass farming of coffee beans to the U.S. There’s still a possibility that an exemption could eventually be carved out if the tariffs continue. Meanwhile, if there isn’t a big decline in traffic, restaurant and coffee-shop operators tend to perform well in inflationary environments.
Sales figures rise with higher prices, and if chains can set prices so they don’t lose a lot of gross margin, they can benefit. For example, a $6 drink with an 18% gross margin ($1.08 gross profit) is 8% more profitable than a $5 drink with a 20% gross margin ($1 gross profit).
The long term remains intact
Despite the near- to medium-term uncertainty with tariffs, the long-term story with Dutch Bros remains intact. The company could see a same-store boost with rising prices. More importantly, the introduction of more food options and mobile ordering should also drive growth in comparable-store sales.
Unlike rival Starbucks, Dutch Bros doesn’t have a large assortment of food options. The company has admitted that this likely affects its traffic, particularly around breakfast time when consumers don’t want to make two stops — one for coffee and another for something to eat. Dutch Bros is testing out offering more food items at select stores, which when rolled out to more of its locations could be a big opportunity. It currently only gets 2% of its sales from food, while food accounted for 19% of Starbucks’ sales last year.
In addition, the company recently rolled out mobile ordering. This is a bit late in the game, but it’s a proven way to help drive traffic. With Dutch Bros locations generally lacking seating and being a takeaway business, this should also help drive sales.
Image source: Getty Images
The biggest opportunity for the company, though, is still expansion, as it tries to grow from a regional to a national coffee-shop operator. At the end of last year, Dutch Bros only operated in 18 states with 982 locations, of which 670 were company-owned. It has opportunities to expand into new markets, as well as infilling existing markets.
Its largest markets are Oregon, where it was founded, and neighboring California. However, it has only half as many locations as Starbucks in its home state and a fraction of the number compared to its larger rival in California. And its total number of U.S. locations is dwarfed by the more than 17,000 locations Starbucks has in the U.S. alone.
So Dutch Bros has a large, sustained store expansion opportunity that could last decades. If it grew its store base by 15% a year for the next 20 years, it would still have fewer locations than Starbucks now has in the U.S. Meanwhile, its stores have a small format that relies on two drive-up windows and a walk-up window, meaning locations are pretty inexpensive to build, despite their strong sales.
Dutch Bros generates solid free cash flow that allows it to expand without having to take on any debt. It plans to open at least 160 new locations in 2025, for unit growth of 16%.
Given the same-store drivers and expansion opportunity ahead, Dutch Bros looks like a solid stock for investors to own over the long term.
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.
