Once upon a time, if you wanted a coffee stock you could rely on, that stock would be Starbucks. Starbucks has embarked on a journey back to its roots, and it still offers value for shareholders. But lately, if you’ve been looking for a high-octane coffee chain stock, Dutch Bros (BROS 4.15%) has been the go-to brand. Its all-American (despite its name), down-to-earth story is just getting started.
Here are three reasons to buy it now and one thing investors should watch carefully.
1. Customers keep coming back
One of the most important factors in the long-term success of a restaurant is whether it generates higher same-store sales. Higher same-store sales imply that customers are enjoying the experience and coming back for more and that the brand is building a presence as more customers in a certain region decide to try it out. It also boosts profitability since fixed costs per unit are spread out over higher sales.
Despite consistently robust revenue growth, Dutch Bros has been struggling with same-store sales growth in the inflationary environment. That can sound like an excuse, but it’s also perfectly reasonable under current circumstances. There are other restaurant chains that are demonstrating more resilience and higher same-store sales despite the environment, but for the most part, they offer full menus and target an affluent clientele, like Cava Group.
Coffee is a luxury for many consumers, even the lower-priced Dutch Bros. The only way to confirm that it’s more external than internal is to wait it out and see, and Dutch Bros is now demonstrating that it can attract loyal customers who keep coming back. Same-store sales increased 6.9% year over year in the fourth quarter, with transactions up 2.3%. That indicates customers are coming in more, not just buying more or buying expensive items.
The business also been helped by the expansion of the company’s membership program to include mobile ordering, which was only rolled out toward the end of last year. That should continue to boost loyalty and sales. Management is guiding for about 3% same-store sales growth in 2025.
2. Store openings are accelerating
The company has said several times over the past few years that it envisions the opportunity to reach about 4,000 stores over the next 10 to 15 years. However, at current opening rates, it would need to accelerate to reach that goal.
It took a step back last year when it updated investors that it would come in on the bottom end of its full-year guidance of 150 to 165 store openings, and it attributed that to restructuring its real estate plans as it gets more data. While that could appear like an internal problem it could also be reasonable for a young growth company. In a positive light, it implies that the company is willing to be disciplined in favor of getting better deals and investing for the long run.
The number did come in on the lower end, with 151 new stores for the year, and management is upping that to 160 stores for 2025. Despite fewer store openings than the market would have liked, Dutch Bros still demonstrated a huge increase in revenue for full-year 2024 at 32.6%, which was higher than in 2023. Management is guiding for revenue to increase 22% in 2025.
3. Profitability is soaring
2024 was the second year of annual positive net income for Dutch Bros, and profitability is dramatically increasing. Net income rose from $3.8 million to $6.4 billion year over year in the fourth quarter and from $10 million to $66.5 million for the full year. Company-operated store contribution improved by 2.9 percentage points to 28.9% in the fourth quarter and 1.5 percentage points to 29.7% for the full year.
Management didn’t provide net income guidance for 2025, but it’s guiding for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to reach about $270 million, or a 17% year-over-year increase.
What to be cautious about
Dutch Bros stock trades at a P/E ratio of 246, which is extremely expensive and warrants caution. I frequently recommend buying Dutch Bros stock, and it’s on my list of 10 stocks to buy in 2025. However, investors need to tread very carefully, given the growth built into this valuation. The stock trades at a PEG ratio of 0.2, which implies that the stock could still carry more growth at the current price since earnings are expected to increase at a high rate.
There could be some lumpiness over the next few years as growth catches up to the stock price, and any negative update could send it back down. But Dutch Bros has a massive long-term opportunity. If you can hold for at least five years, it could still make sense to buy at this price or use a dollar-cost averaging strategy to build your position.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Cava Group and Dutch Bros. The Motley Fool has a disclosure policy.
