One of the more exciting stocks in the restaurant industry these days is Dutch Bros (NYSE: BROS). The company has emerged as the No. 2 pure-play coffee chain on the stock market behind Starbucks (NASDAQ: SBUX), and it seems to be seizing the opportunity that the leader has created with its own errors and underperformance.
Dutch Bros is fresh off a stellar performance in the third quarter that led the stock to jump 28% last Thursday, Nov. 7. The company reported comparable-store sales growth (comps) of 2.7%, driving revenue up 28% to $338.2 million, which easily beat estimates at $325.1 million.
The company continued its rapid expansion, and it seems to have a lot of room to grow as its drive-thru model helps differentiate it from other chains. It added 38 new stores in the quarter and now has 950 across 18 states.
In the third-quarter earnings report, company-level gross profit fell 190 basis points to 22.5% due to increased labor and occupancy costs. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 20.3% to $63.8 million, and its adjusted earnings per share ticked up from $0.14 to $0.16, which beat the consensus analyst estimate at $0.12.
The company also said it completed the rollout of its mobile order capability, which now covers 90% of its system and 96% of company-operated stores. This puts it in a position to tap into a valuable market that has been a significant source of growth for Starbucks in recent years.
Dutch Bros management also raised its guidance for the year as it now expects revenue of $1.255 billion to $1.26 billion, up from a previous range of $1.215 billion to $1.23 billion. It also lifted its adjusted EBITDA guidance from $200 million to $210 million, to a range of $215 million to $220 million.
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Dutch Bros' growth path
In order to turn $100,000 into $1 million, Dutch Bros will have to deliver years or even decades of growth, so it's worth examining its potential.
The most important factor on that front is how many stores it can open. The good news is that the ceiling for coffee chains is high. The company has said before that it sees room in the market for 4,000 locations, and it plans to reach that number over the next 10 to 15 years.
Based on that goal, the company believes it can grow its current store count by a little more than four times. And there's likely room for that target to go higher if the company executes well. Dutch Bros could also expand internationally.
By comparison, Starbucks has more than 16,000 locations in the U.S., while there are nearly 10,000 Dunkin locations here.
Opening 4,000 locations would still put Dutch Bros a distant third behind those two chains, and perhaps other competitors that are growing faster.
Can Dutch Bros turn $100,000 into $1 million?
Growing the stock by 10x is no easy feat, and it will take time to do so. The company currently has a market cap of $7.5 billion, so growing by 10x would mean reaching a valuation of $75 billion.
That's a reasonable goal for a fast-growing restaurant stock like Dutch Bros, especially over the next decade or so. At that valuation, the company should be targeting $3 billion in net income, which is currently more than double what it has in revenue. In other words, it will need to grow its average unit volumes significantly or lift its growth ceiling beyond 4,000 stores.
At that level, the company would need average unit volumes of $5 million, translating to $20 billion in revenue, assuming most of the stores are company-operated, and it would generate $3 billion in net income with a 15% profit margin.
That's not impossible, but it will require more ambitious plans that involve opening more than 4,000 stores.
In other words, investors should be patient if they're looking for big returns, but the coffee chain has the makings of a rewarding growth stock, given its large opportunity, steady comps growth, unique model, and strong average unit volume at $2 billion.
Dutch Bros might not turn $100,000 into $1 million, but it's well positioned to outperform over the long term.
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Jeremy Bowman has positions in Starbucks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
