Why Dutch Bros shares took a tumble this week

Actions of Dutch Bros (BROS -19.84%) fell 20% this week, according to data from S&P Global Market Intelligence. The upstart coffee chain, which is expanding rapidly across the country, posted strong revenue growth but signaled a slowdown in future cafe openings in its second-quarter earnings report. At the close on August 8, 2024, shares were down 19.2% from Friday’s close.

Here’s why Dutch Bros shares are down again this week.

Solid sales growth, weakening new store growth

Dutch Bros is a coffee chain that operates stands with unique caffeinated beverages such as its famous Rebel energy drinks. In the second quarter, the company posted a 30% increase in revenue to $325 million, driven by 36 new store openings and comparable sales growth — growth over existing locations — of 4.1 % from year to year.

Net income was just $22.2 million in the quarter. Consolidated profits look weak now, but that’s because the company is reinvesting in new stores. Store-wide profit margin was 30% in the period, which equates to about $100 million in quarterly profits.

So what was the problem with the report? I think the stock likely fell due to the company guiding on the lower end of 150 to 165 new store openings for 2024. An expanding retail concept like Dutch Bros is valued based on its expectations of growth. With growth expected to slow, investors may have been spooked by stocks.

The stock looks solid over the long term

Even though the stock is down, the Dutch Bros business looks good. Sure, units won’t grow as fast in 2024, but that’s not a big deal. It is experiencing strong comparable sales growth at existing restaurants, solid restaurant-wide margins and self-funded growth. With less than 1,000 stores in the United States, there is still plenty of room for Dutch Bros to expand in the coming years.

Right now, Dutch Bros’ price-to-earnings ratio looks high due to weak consolidated profit margins. But that shouldn’t keep people away from the stock. If you believe in the continued growth story of Dutch Bros, now is the perfect time to buy the dip and hold for the long term.