Dutch Bros Stock Plunges. Why did the stock fall and should investors buy the dip?

Coffee chain shares Dutch Bros (BROS -1.32%) fell nearly 20 percent following its second-quarter earnings report as guidance disappointed investors. The decline pushed the stock into negative territory for the year.

Was the sale an overreaction? And should investors pick up the declining stock?

High guidance is not enough

In the second quarter, revenue rose 30% year-over-year to $324.9 million, beating analysts’ consensus by more than $7 million. Adjusted earnings per (EPS) rose 46% to $0.19 and beat analysts’ estimates. For two of the main numbers investors look at at earnings time, the company’s results beat expectations.

Meanwhile, same-store sales rose 4.1 percent, while company-operated same-store sales rose 5.2 percent.

More than anything, Dutch Bros is a growth story, and on that front, the company opened 36 new cafes in the quarter, 30 of which were company-owned. It had 912 locations at the end of Q2 (612 of them company-owned).

Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 34% year over year to $65.2 million.

The company raised its full-year revenue estimate to $1.215 billion to $1.230 billion, up from a previous forecast of $1.200 billion to $1.215 billion. Same-store sales are expected to increase by a small amount. It also raised its EBITDA guidance to between $200 million and $210 million, from the previous range of $195 million to $205 million.

However, management warned that new store openings this year would come in at the lower end of its forecast of 150 to 165. Dutch Bros is recalibrating its real estate model to ensure it develops sites with the greatest potential for average unit volume (AUV) and is rebalancing its pipeline toward more capital-efficient leases. This should result in new stores with higher AUVs and lower capital expenditures per store.

Image source: Getty Images.

Time to buy dip?

A combination of fewer store openings this year and a slowdown in same-store sales in the second half as the company sees a big price increase appear to be the biggest reasons behind the stock’s decline. The company reported same-store sales growth of 10.0% in Q1 and 4.1% in Q2, so its low single-digit guidance for the year implies decelerating growth for the rest of 2024.

Investors don’t want to see these parts of the growth story slowed. However, expansion for the sake of expansion is not good, and the decision to optimize its store opening strategy is the right move, even if it means a temporary slowdown.

Dutch Bros stores tend to be small and with just over 900 locations, the company’s long-term expansion potential remains. Meanwhile, it is still in its early stages of implementing mobile orders, which should be a good driver of growth. It also filled some markets and intentionally sought to drive sales from some stores to newer stores, so I wouldn’t be too concerned about same-store sales guidance. Demand doesn’t seem to be a problem yet.

Valuing a company like Dutch Bros can be difficult given the long path of new store growth ahead of it. Management hopes to open more than 4,000 stores over the next 10 to 15 years, however, the stock trades at just 2.2 times sales at the time of writing. Compare this with the rival Starbucksa much more mature business facing declining comps that still trades at 2.5x sales.

As for restaurant stocks, I’d be a buyer of Dutch Bros given the current weakness.