Dutch brothers (NYSE: BROS) got off to a scorching start in its first week in public markets. After initially announcing its IPO price at $ 23 per share, the stock jumped to over $ 50 in just five trading days.
Now, with a week of public trading under the company’s belt, let’s see why investors are so keen to get their hands on stocks in this drive-thru chain – and if you should, too.
What does Dutch Bros do?
Dutch Bros is an operator and franchisor of drive-thru stores that serve a variety of foods and beverages, primarily coffee and energy drinks.
Based in Grants Pass, Oregon, Dutch Bros. debuted in 1992 and has since grown to 471 locations in 11 states. While the company offers many traditional types of coffee, it also sells a number of cold energy drinks under the exclusive Dutch Bros. ‘Blue Rebel’ brand. These drink specials help Dutch Bros generate additional traffic and maintain sales beyond the morning hours and throughout the afternoon.
In terms of locations, the actual store size is typically less than 1,000 square feet. However, the company tries to lease land over 25,000 square feet so that there is enough room to add more drive-thru lanes. Most sites also contain a window and patio without an elevator as well as a fast exit lane to reduce congestion and improve customer volume.
A unique model
As anyone who has ever visited an actual Dutch Bros location will probably know, there are some features that set the Dutch Bros experience apart from a regular coffee stand.
Driven by the values and culture first instilled by the company’s founding brothers, Dane and Travis Boersma, Dutch Bros. today offers an extremely friendly and dynamic environment that helps build customer loyalty. From the initial welcome with the “Runners” taking the controls to the dancing “Broistas” to the explosive music in the vehicle window, there is a positive uniqueness with every visit. The company even said in its registration dossier that “every visit to a Dutch brother should feel like a party”.
Highlighting the customer loyalty that Dutch Bros was able to generate, the company attracted 1.6 million members to its mobile app in the first two weeks of its launch. By comparison, the titan of coffee Starbucks (NASDAQ: SBUX) had 19.3 million Rewards members in the United States at the end of 2020, despite 31 times more stores.
The power of the company’s branding also shone during COVID-19, as Dutch Bros. was able to record its 14th consecutive year of same-store sales growth in 2020, while Starbucks saw its same-store sales decline by 14 % compared to the previous year.
To help maintain this culture, Executive Chairman Travis Boersma even decided in 2008 to stop selling franchise licenses to anyone who was not already part of the Dutch Bros. ecosystem. While this may have slowed growth in the short term, it has helped preserve the positive atmosphere that is now synonymous with the Dutch Bros. name.
Additionally, this strategy helped retain existing employees and encouraged them to join the Dutch Bros Leadership Pathway program and learn their own store operating model.
The Dutch brothers in figures
In 2020, Dutch Bros. generated $ 327 million in revenue, or just under $ 700,000 per store on average. While the company has proven its ability to generate positive cash flow in the past, some one-time pandemic-related expenses have bogged down profit margins in 2020.
Store growth has continued at a steady pace, with the number of locations operated by the company increasing from 37 to 182 since the start of 2018. Management has identified 250 new locations for store openings and estimates that there is long-term potential for 4,000 stores in the United States.
While there is certainly a lot to like about the business, investors shouldn’t be willing to pay just any price. After being made public, the company’s market cap, according to my estimates, is currently around $ 8.8 billion, which is 22 times its revenue in the past 12 months.
That’s a significant multiple – and while Dutch Bros. may well hit that valuation, the current price investors would pay leaves very little margin of safety. For this reason, I will look aside for now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.