Why Is Everyone Talking About This Hot Restaurant IPO Stock?

Oregon-based coffee chain Dutch Bros (BROS) went public less than a month ago, but everyone’s already talking about this upstart in the restaurant space. As of this writing, the stock is up…

roughly 100% from its IPO price of $23 per share.

Of course, for investors who have yet to add it to their portfolios, it doesn’t matter what Dutch Bros stock has already done. What matters is what it’s going to do from here.

Meet Dutch Bros

With eye-catching drink names like “Annihilator,” “Double Torture,” and “Golden Eagle,” I think it’s fair to say Dutch Bros is in the specialty coffee business, and that distinction may be significant. According to ResearchAndMarkets.com, the global coffee industry is expected to grow at a mere 4.28% compound annual rate between now and 2026. By contrast, according to Technavio, the specialty coffee market segment is expected to grow at a compound annual rate of 8% through 2024.

So Dutch Bros is positioned as a player in the faster-growing segment of the coffee industry. And the company has big growth plans of its own. As of its IPO, the company had 471 locations — just over half are franchised while the rest are company-owned. However, it believes there’s room in the U.S. market for over 4,000 Dutch Bros locations in the long term.

Of course, Starbucks — with over 18,000 locations in North America alone — is the dominant player in the domestic market. But these two chains might not be direct competitors to the degree that you’d expect. Dutch Bros is a takeout coffee chain, optimized for drive-through speeds. By contrast, Starbucks’ mission is for its cafes to be community hubs (although that’s not as much of a factor in its business as the pandemic drags on).

Granted, there’s certainly overlap between Starbucks and Dutch Bros as beverage sellers, but there’s differentiation between them, too. That may allow Dutch Bros to quietly expand in Starbucks’ shadow for now.

Can Dutch Bros beat the market?

Let’s consider three components that could make Dutch Bros a winning business — and a winning stock — over the long term: expansion, operating leverage, and profitability.

First, regarding expansion, Dutch Bros said it’s going to primarily expand by opening company-owned locations. Since the end of 2019, it has only added a net of 12 franchise locations, whereas it has nearly doubled its company-owned store count. And given the unit economics, it makes sense to keep as many of its stores company-owned as possible.

Here’s what unit economics look like for Dutch Bros: For the first six months of 2021, the company had average unit volumes (AUV) of almost $1.8 million — an all-time high. Because sales volume is high, locations are profitable, and had a 29% contribution margin in 2020. The contribution margin only takes store-level expenses into account. Therefore, this differs from Dutch Bros’ final profit margin, since the company has corporate expenses too. But a 29% contribution margin is a good start.

Next, regarding operating leverage, restaurants can achieve…

 

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