Why Dutch Bros shares fell 19% in August

Dutch Bros (BROS 1.72%) Shares fell 19 percent in August, according to data from S&P Global Market Intelligence. It provided some guidance in its second-quarter earnings report that the market didn’t like, and was hurt by news that the restaurant industry may be facing some problems.

The new hot name in coffee

Dutch Bros is a coffee shop chain that recently developed a nationwide expansion strategy along with an initial public offering (IPO). It is based in Oregon and has most of its stores on the West Coast, but has opened new stores at a rapid pace and generated growing revenue.

It opened 165 new stores last year and plans to open up to 4,000 over the next 10 to 15 years. It quickly made its way across the country and now has 912 stores in 18 states.

There are a lot of coffee shops and chains in the US today, so something stands out about Dutch Bros that attracts shoppers and their dollars. I would say that this formula has two parts. One is the culture it has developed. It’s focused on customer service and speed, with innovative, fun and down-to-earth drinks. He perfected this concept over the past 30 years in the few locations he had before realizing he could take it national. It’s proven to resonate with customers everywhere, and the future looks bright.

The other part is the model that he distilled to be replicated in new stores, including franchises. Just as important as the model itself is the ability to successfully recreate it in new environments, which Dutch Bros. does. This results in customer satisfaction and growth.

Sales rose 30% year-over-year in the second quarter of 2024. Comparable sales rose 4.1%, which isn’t very impressive, but is accelerating from lows and declines. It also does so in a challenging, inflationary climate while expanding margins and generating higher profits.

Short-term pressure scares the market

The story is not as fairy tale as it seems so far. Dutch Bros is still a young company and comes with the growing pains of fast growing young companies. It recently reshuffled its entire C-suite and is opening a large new resource center to help with its expansion. That comes with large capital expenditures, as do new stores. Since the company is still new, there is some risk as to how things will play out.

For example, based on changes to store development, management said its new store openings this year would be low, around 150. That sent the stock down. It was also hurt by a general decline in restaurant inventories after analysts warned of weak summer spending.

At the current price, Dutch Bros looks like a bargain for investors who can handle some risk.