1 Growth Stock Down 50% To Buy Right Now

Restaurant stocks have fallen recently after reports warned that people may not be spending as much as they usually do at their favorite restaurants. But how about where they get their morning caffeine fix? Coffee chain Dutch Bros (BROS -2.42%) it is down 10% in the past month and 50% from its highs.

The market didn’t love the latest update, but investors should take the long view. Here’s why Dutch Bros could be a top long-term buy.

It’s all about a great product

Dutch Bros has more than 900 stores at the end of the second quarter, including 36 it opened in the quarter. It is expanding at a steady pace, expecting up to 165 new stores this year and predicting up to 4,000 stores in the next 10 to 15 years.

Customers like his concept, which is why he has been able to successfully open many new stores. However, it is finding it harder to increase same-store sales for various reasons. There are external headwinds for the restaurant industry as people try to save money and internal pressure as new stores draw customers away from existing stores.

Investors were reassured when same-store sales accelerated to 10% in the first quarter but fell to 4% in the second quarter. Total revenue grew 30% year over year.

It also steadily increases profitability. Net income rose from $9.7 million last year to $22.2 million this year, and company-operated store contribution margin rose 0.5 points to 30.8 percent. Management raised guidance for full-year earnings and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

Something I didn’t even realize right away is that Dutch Bros recently launched mobile ordering. It went live in 38 stores in the second quarter and is already live in 200 since then. I find it impressive that it was growing quickly without a mobile feature, and that should be a strong driver of future growth.

Growing pains are normal

So what did he tick off the market? The decline in same-store sales growth is something that could be alarming to investors who expected better. Driving leads to like-for-like same-store sales growth for the full year.

Additionally, while management raised its guidance for the full year, it was still slightly below analysts’ expectations. Dutch Bros provided revised revenue guidance of $1.22 billion in the mid-point, compared to analysts’ average expectations of $1.23 billion.

Part of that is likely due to management scaling back its planned new openings this year. It said it was reevaluating some of the units it had under development based on information from its expansion and that it was abandoning some of its planned store openings that did not meet its average unit volume or capital leasing expectations.

Is there anything to worry about? Whenever a young company without a long track record makes changes like this, alarm bells start ringing.

Does it indicate a deeper flaw in the company’s model? Maybe or not. Management’s version of what is happening inspires confidence; it can improve its models and adapt accordingly by deliberately opening stores in the right places, which should lead to higher production and cost savings over time. As the market sees it, Dutch Bros is reducing its expected number of new stores for the year and may fall short of full-year revenue expectations.

There are also many changes taking place at Dutch Bros. New CEO Christine Barone has been there for about a year and has completely revamped the C-suite. The company is redeploying some of its workforce to handle mobile orders and is still in the process of designing the system for the mobile switch. There are still many unknowns in the journey of the Dutch Bros.

Zoom out and see the big picture

It’s important to keep everything in mind when making an investment decision. It doesn’t help to ignore red flags or negative information in favor of seeing rosy. However, this must be put in the context of the whole story. When you fit everything together, I see a picture with more positives than negatives.

Even with the recent decline, Dutch Bros shares are up 20% this year. This is an opportunity to buy the dip before the stock goes even higher.