Don’t Get Burned By Dutch Bros; Starbucks Has More Potential

Key Points

• Dutch Bros.'s growth strategy will pay off over time, but the outlook is dimming. 
• Starbucks entered a new era with a new CEO and is on track to grow by double-digits. 
• Starbucks pays a safe 2.0% yield and buys back shares, while Dutch Bros. offers risk. 

Dutch Bros NYSE: BROS is an exciting growth story that may pan out over time. The problem now is that aggressive growth comes at a cost that has analysts and institutions moving to the sidelines. Compared to Starbucks NASDAQ: SBUX, which is growing at an above-consensus rate domestically and abroad, Dutch Bros is a high-risk growth story that may cost investors more than they bargained for. The Q1 results were good enough, but the fortressing strategy costs the company comp growth while increasing the debt and cutting into the outlook for share prices. 

JPMorgan Chase and TD Cowen both downgraded the stock following the news. They cut the ratings from Outperform/Overweight to Neutral equivalents with price targets of $32 and $33. Those are well below the Marketbeat.com consensus of $39, but the consensus figure is trending lower and weighing on the price action. JPMorgan analyst John Ivankoe sees the company bumping against the $500 million net debt ceiling by the end of next year and cutting back on expansion plans. 

Institutional activity does not support the price action in Dutch Bros. stock either. The institutional activity has moderated from its peak in Q4 2022 but has been net-bearish for the last 12 months, and there is no reason to expect change now. The institutions own about 37% compared to the insiders, who own about 50%.

Dutch Bros. Has Tepid Quarter, Starbucks Smashes

Dutch Bros. had a tepid quarter despite growing at a nearly 30% rate compared to Starbucks' 14.5%. The difference is that Dutch Bros. missed its expectations by 550 basis points while Starbucks, which should be having a harder time growing, beats its consensus forecast by a wide margin.

The telling factor is comp sales which fell 2.0% for Dutch Bros. but grew by 12% for Starbucks in North America. Dutch Bros can blame the decline on fortressing if they like, but the same strategy works well for Starbucks. You can’t turn around without bumping into Starbucks, a strategy that makes it too easy to re-up on a latte or cappuccino. 

The good news in the Dutch Bros. report is a significant increase in margin and a decrease in expenses and spending. The company reported a 390 basis point improvement in company-owned restaurant margin and a 640 basis point reduction in SG&A, resulting in better-than-forecast EPS. The EPS of $0.00 is doubly-good, beating the consensus despite the top-line weakness. 

The company reiterated its guidance for the year which is revenue of $950 million to $1 billion compared to the consensus of $986 million. The guidance assumes opening 150 stores in 2023, including the 45 opened in Q1. The risk is that Q1's top-line weakness will persist into the back half of the year and lead to a reduction in guidance. 

The Technical Outlook: Heading To Rock Bottom 

The price action in Dutch Bros. is down more than 8% on the news and heading to rock bottom levels. The question is if rock bottom is near critical support at the bottom of the 12-month trading or if this market will move lower. Support is likely near $28.50, but critical support won’t be broken until a move below $25.

In that scenario, this stock could fall to the low teens. Otherwise, Dutch Bros. will continue to trend sideways within its range while the business catches up to the valuation. In the meantime, Starbucks is trending higher, pays a solid 2.0% dividend and is buying back shares in meaningful ways.