Shares of coffee chain Dutch Bros (NYSE: BROS) sank nearly 20% following its second-quarter earnings report as guidance disappointed investors. The decline pushed the stock into negative territory for the year.
Was the sell-off an overreaction? And should investors scoop up the stock on the dip?
Raised guidance not enough
In the second quarter, revenue climbed 30% year over year to $324.9 million, which topped the analyst consensus by over $7 million. Adjusted earnings per (EPS) soared 46% to $0.19 and also came in ahead of the analysts' estimate. For two of the headline numbers investors look at come earnings time, the company's results exceeded expectations.
Same-store sales, meanwhile, rose 4.1%, while company-operated same-store sales were up 5.2%.
More than anything, Dutch Bros is a growth story, and on that front, the company opened 36 new coffee shops in the quarter, of which 30 were company owned. It had 912 locations as of the end of Q2 (612 of them company owned).
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), climbed 34% year over year to $65.2 million.
The company raised its full-year revenue guidance to between $1.215 billion and $1.230 billion, up from a previous outlook of $1.200 billion to $1.215 billion. It expects same-store sales to increase in the low-single digits. It also raised its EBITDA guidance to between $200 million and $210 million, up from the prior range of $195 million to $205 million.
However, management warned that new store openings this year will come in at the lower end of its 150 to 165 forecast. Dutch Bros is recalibrating its real estate model to ensure it's developing sites with the highest average unit volume (AUV) potential and rebalancing its pipeline back toward more capital-efficient lease arrangements. This should result in new shops with higher AUVs and lower capital expenditures per shop.
Is it time to buy the dip?
The combination of fewer store openings this year plus slowing same-store sales in the second half as the company laps a large price increase appear to be the biggest reasons behind the stock's plunge. The company reported a 10.0% increase in same-store sales in Q1 and 4.1% in Q2, so its low-single-digit guidance for the year implies decelerating growth for the remainder of 2024.
Investors do not want to see these parts of the growth story slow down. However, expansion for the sake of expansion is not good, and the decision to optimize its store opening strategy is the right move, even if it means a temporary slowdown.
Dutch Bros shops tend to be on the small side and with just over 900 locations, the company's long-term potential for expansion remains. Meanwhile, it's still in its early days of implementing mobile orders, which should be a nice growth driver. It's also been infilling some markets and purposely looking to direct sales away from some shops to newer shops, so I wouldn't be too concerned with the same-store sales guidance. Demand doesn't appear to be an issue yet.
Valuing a company like Dutch Bros can be difficult given the long runway of new store growth in front of it. Management hopes to open over 4,000 shops in the next 10 to 15 years, yet the stock trades at just 2.2 times sales as of this writing. Compare that to rival Starbucks, a much more mature business that's grappling with declining comps, which still trades at 2.5 times sales.
As far as restaurant stocks go, I would be a buyer of Dutch Bros given its current weakness.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
Dutch Bros Stock Plunges. Why the Stock Fell and Should Investors Buy the Dip? was originally published by The Motley Fool