Dutch Bros Gives Investors More Bang for the Buck than Starbucks

Key Points

• Dutch Bros is a fast growing quick service drive-through coffee chain giving Starbucks a real run for the money.
• Dutch Bros Q1 2024 EPS beat by 8 cents as revenues surged 40% YoY in contrast to Starbucks EPS miss of 12 cents and a 1.8% YoY revenue decline.
• Dutch Bros has a longer growth runway as average unit volumes (AUV) hit $2 million per location, which averages just 950 square feet.

Dutch Bros. Inc. NYSE: BROS is a growing quick-service coffee and beverage chain. The company primarily offers drive-through coffee service with limited walk-up locations. In fact, 90% of the business for this consumer staples sector company comes from the drive-thru. The model emphasizes speed, value and convenience. The average Dutch Bros Coffee location measures only 950 squeeze feet. Here’s why investors and customers are getting more bang for the buck with Dutch Bros over Starbucks Co. NASDAQ: SBUX.

Budget Friendly and Convenient

Dutch Bros beverages are considerably cheaper than Starbucks, costing $3.00 to $4.50 for a large. They also sold their brand of Rebel energy drinks and added Shine, which are swirls that can be added to any iced drink. During inflationary times, the Dutch Bros has the edge when it comes to appealing to the wallet.

The Quick and the Dead

The words quick, speedy, convenient, and Starbucks don't belong in the same sentence. Anyone who has ever ordered at Starbucks understands there is always a wait. There will always be a wait, even when ordering through the mobile app. Mornings are the most brutal wait.

Starbucks attributes the waiting period to be a problem caused by its own success. That may be one way to spin it; the other is that the inefficiency is structurally and even culturally embedded into the process, and it's starting to seriously impact the bottom line as customers opt to forgo the wait. With drive-thru and walk-up service, Dutch Bros is structurally faster than parking the car and walking into a Starbucks to pick up a mobile order.

Slow is a No Bueno, Anymore

This was evidenced in its recent quarter when Starbucks missed its Q1 2024 EPS estimates by 12 cents as comparable store sales declined 4% and transactions declined 6%. Revenues fell 1.8% YoY to $8.56 billion, missing the $9.12 billion consensus estimates. Starbuck's CEO Laxman Narasimhan pointed out the completion rate of orders through its mobile app had declined.

This means customers were starting their orders on the Starbucks app but then abandoned them due to the long wait times. The frustratingly long wait time when customers need to get into the office, avoid a parking ticket and fight traffic can almost be a sign of hubris and arrogance to many.

 Starbucks CEO Sees Long Wait Times as “Opportunity”

The morning rush is generally half of Starbucks's business. Over 60% of its morning business comes from Starbucks Rewards members who order with the Starbucks app. Starbucks CEO Laxman Narasimhan pointed out in its earnings conference call, “What's interesting though, despite strong Mobile Order & Pay sales, we saw a mid-teens percent order in completion rate within the order channel this past quarter. In other words, customers using MOP put items into their cart and sometimes chose not to complete their order, citing long wait times of product and availability, here lies opportunity.”

Hitting Up Toyota to Speed the Barista Process?

Narasimhan has been actively working on improving the process with tools like an equipment-driven siren system. For the past 6 months, they've been working with the Toyota Production System Support Center to find ways to unlock additional capacity at peak demand times. They will be rolling it out in North American stores in the coming months.

Did the market buy this? Not quite. The markets responded to the Q1 earnings miss by selling off shares by 15.88% the following morning.

Dutch Bros Shares Jump 30%

On the flipside, Dutch Bros Q1 2024 earnings resulted in an 11% gap the following morning and a 30% run-up in the following three days. Dutch Bros beat EPS by 8 cents as revenues surged 40% YoY to $275.9 million, beating $255.56 million. Additionally, Dutch Bros raised full-year 2024 revenue guidance to $1.20 to $1.214 billion, up from the $1.19 to $1.205 billion previous guidance, vs $1.2 billion consensus estimates.

Innovating New Beverages

The company also rolled out its high-protein coffee, which delivers 20 grams of milk protein per medium-sized serving. Dutch Bros also rolled out a boba beverage, which is resonating with Gen-Z-ers. Dutch Bros CEO Christine Barone commented, “Beyond driving traffic, boba boosted average ticket and drove what we believe was an increase in group buying behavior. Based on the strong customer and crew response, I am pleased to announce that we will continue to offer strawberry boba as a premium add-on to our regular menu going forward.”

Expansion in Locations and AUV

Dutch Bros plans to open 120 to 125 more stores in 2024 on its way towards 4,000 locations in the next 10 to 15 years. The company opened a record 45 shops in Q1 2024. Dutch Bros is also an asset-light business, with nearly half its stores being franchised. Its Dutch Rewards program hit 66% of all transactions through the app. Same-store sales surged in ticket and traffic. Dutch Bros hit a record average unit volume (AUV) of $2 million. The company is also looking at expansion in China.

Upside Potential Goes to Dutch Bros

Starbucks spills more coffee than Dutch Bros sells. However, it can also be argued that Starbucks has grown too large to be considered a growth stock anymore. Dutch Bros has more room to grow as a business and with its stock price. With over 700 stores on their way to 4,000 locations, this could be considered a ground-floor entry opportunity for investors looking for growth.

Double Top Breakout

BROS is attempting a double top breakout at the $36.17 resistance after accelerating from its Q1 2024 earnings gap at $30.14. The daily relative strength index (RSI) has risen to the 75-band. Pullback support levels are at $32.88, $30.14, $28.50 and $26.91. BROS has an 11.51% short float.

Dutch Bros analyst ratings and price targets are at MarketBeat.