When it comes to investing in restaurant stocks, investors are always on the lookout for the next Chipotle Mexican Grill(NYSE: CMG) or Starbucks(NASDAQ: SBUX), two of the biggest winners in the space over the past 15 to 30 years. These two stocks would have created a lot of millionaires out of investors who bought them in their early days as public companies and held on to the stocks.
Let's look at two stocks that could follow these two iconic restaurants and be the next millionaire-making restaurant stocks.
1. Dutch Bros
Like Starbucks, Dutch Bros(NYSE: BROS) traces its roots to the Pacific Northwest, only instead of coming from Seattle, the company started in Oregon. But Dutch Bros is not trying to emulate Starbucks and its upscale coffeehouse style.
Instead, the company tends to have small locations that rely primarily on drive-thru traffic. Older legacy stores are only about 500 square feet, while newer stores are between 800 square feet and 1,000 square feet, and have multiple drive-thru lanes served by one window, plus a walk-up window. It also has a few end-cap locations that have a lobby but no seating.
Approximately half its sales come from coffee-based drinks, while a quarter come from its Blue Rebel energy drinks and the rest from other types of drinks such a smoothies and lemonade. The company is just starting to test more food options. Food is only about 2% of sales currently, so this is a big opportunity.
The company has been putting up solid results, with same-store sales rising 2.7%, and 4% for company-operated stores, last quarter, despite Dutch Bros looking to redirect some traffic from existing stores to new stores. It is looking for 4.25% same-store sales growth for the year. Dutch Bros has also just introduced mobile ordering, which should be a nice same-store-sales driver.
The big opportunity for Dutch Bros, though, is store expansion, which is what ultimately could turn the stock into a millionaire maker. The company ended last quarter with 950 stores, of which 645 were company owned, and it sees the potential to grow to more than 4,000 locations over the next 10 to 15 years. However, that's still much less than the nearly 17,000 Starbucks stores in the U.S. alone.
Importantly, Dutch Bros' small-footprint stores are not expensive to build and the company is currently generating free cash flow, which lets it follow its expansion plan without having to take on debt. And while its stores are small, with average unit volumes (AUVs) of $2 million, its stores currently generate more revenue per store than the approximately $1.5 million in AUV Starbucks gets from its U.S. locations. AUV measures the average sales each restaurant generates.
With a market cap of around $8.5 billion compared to nearly $114 billion for Starbucks, as of this writing, there is a lot of future potential for Dutch Bros stocks over the long term.
Image source: Getty Images
2. Cava Group
Investors have long been looking for the next potential Chipotle, and they may have found it in Mediterranean fast casual restaurant operator Cava Group(NYSE: CAVA).
The restaurant operator uses a similar playbook as Chipotle, offering a limited number of ingredients that can be quickly customized into numerous personalized options. This helps keep supply chain costs down and increases throughput and efficiency.
The company also compares favorably to Chipotle in several important restaurant-industry metrics such as AUV and restaurant level margin (RLM), which measures the profitability of restaurants before corporate costs. Cava's AUV of $2.8 million isn't far behind Chipotle's current $3.2 million AUV despite its larger size and huge popularity, while its RLMs of 25.6% last quarter were similar to Chipotle's 25.5%.
Similar to Chipotle in its early days, Cava has also been seeing supercharged same-store sales and traffic growth. Last quarter, its same-restaurant sales soared 18.1% with guest traffic jumping 12.9%. Impressively, this came on top of a 14.4% increase in same-restaurant sales a year ago.
But the big opportunity for Cava, just like Dutch Bros, is expansion. At the end of the last quarter, the company operated only 352 locations. And just like Dutch Bros, Cava is also generating solid free cash flow that can pay for its continued store growth.
Cava stock critics will largely point to its valuation, which comes out to about a whopping $44.5 million per location for restaurants that generate under $3 million a year in sales. However, the opportunity is the expansion ahead of the company.
By comparison, Chipotle operates more than 3,600 restaurants and is still opening more than 300 new restaurants locations a year. With similar AUVs and RLMs, it isn't out of the question that Cava could grow to the size Chipotle is today in the next 10 to 15 years. Chipotle has a market cap of $80 billion compared to $15.7 billion for Cava, so while the stock looks expensive today, the long-term upside is still quite large.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group and Dutch Bros and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
