dutch brothers (BROS 5.82%) launched its IPO last September amid rapid expansion. The beverage company benefited from a successful IPO that closed at nearly $37 per share on the first day of trading, 60% above its initial IPO price of $23 per share.
However, since peaking at more than $81 a share in November, the coffee stock has erased all of its gains and inflation has raised growth concerns. Given these challenges and the reduced share price, should investors consider Dutch Bros ahead of its August 10 earnings report?
The Dutch Bros Growth Story
Consumers seem to have embraced the company’s craft beverages. Although it started with espresso drinks, it also sells drinks such as teas, lemonades, smoothies and sodas.
Moreover, unlike its main competitor, Starbucks, it does not offer indoor seating. Thus, it does not offer the Americanized version of the Italian cafe experience like Starbucks, which makes the quality of its drinks all the more critical.
At first glance, one might want to buy Dutch Bros stock just for growth. At the end of the first quarter of 2022, it operated 572 stores, which is 26% more stores than at the end of the first quarter of 2021. Given that it intends to grow to 4,000 stores over the next 10 to Next 15 years, the Dutch Bros stock attracted considerable interest. .
The Emerging Challenges of the Dutch Bros
Unfortunately for Dutch Bros, he operates a consumer-based business at a time of additional hardship for the average American. With more money spent on basic necessities, consumers have less disposable income to spend on beverages.
This slowed the economy as the government announced two consecutive quarters of negative economic growth. Such conditions bode ill for Dutch Bros. As a result, the stock price has fallen almost 55% since last October, even though it continues to outperform both Starbucks and the S&P500.
The company said in its latest earnings report that it plans to add 30 stores in the second quarter. Given this performance, investors will likely be watching future earnings reports to see if they match that number and if they plan to change their growth trajectory.
Despite its challenges, this coffee stock continues to grow. Analysts expect the company to generate $182 million in revenue in the second quarter, a 20% increase from the first quarter.
Additionally, Dutch Bros continues to add stores and still projects between $700 million and $715 million in revenue in 2022. This means a 42% increase in mid-term revenue if the forecast holds. Nonetheless, it missed its first-quarter profits as the effects of rising labor costs and rapid inflation in the cost of goods were felt.
Other projections point to possible valuation challenges. Analysts forecast earnings of $0.25 per share for 2022, up from $0.30 in 2021. This comes despite higher store counts and a sizable increase in revenue.
At current prices, this would also imply a forward P/E ratio of around 150. Investors often forgive such multiples in a bull market, but given negative economic sentiment, they might balk at such a valuation.
Should I consider Dutch Bros before winnings?
Investors should think twice about buying Dutch Bros at current levels, at least ahead of earnings. Granted, it has outperformed both Starbucks and the S&P 500 since its IPO, and it will likely continue to add new stores. This gives it a strong chance of outperforming longer-term indices.
However, he faces higher costs and slower customer growth at a time when the market is still valuing his stock at a higher valuation. While it’s likely worth another look when conditions improve, investors should look forward to better stock performance.
Will Healy has no position in the stocks mentioned. The Motley Fool holds positions and recommends Starbucks. The Motley Fool recommends the following options: $85 short calls in July 2022 on Starbucks. The Motley Fool has a disclosure policy.