Dutch Bros's (NYSE:BROS) Q3 Sales Top Estimates, Full-Year Sales Guidance Is Optimistic

Full Report / November 07, 2023

Coffee chain Dutch Bros (NYSE:BROS) reported results ahead of analysts' expectations in Q3 FY2023, with revenue up 33.2% year on year to $264.5 million. Its full-year revenue guidance of $975 million at the midpoint came in 1.9% above analysts' estimates. Turning to EPS, Dutch Bros made a GAAP profit of $0.07 per share, improving from its profit of $0.03 per share in the same quarter last year.

Dutch Bros (BROS) Q3 FY2023 Highlights:

  • Revenue: $264.5 million vs analyst estimates of $258.4 million (2.4% beat)
  • EPS: $0.07 vs analyst estimates of $0.01 ($0.06 beat)
  • The company reconfirmed its revenue guidance for the full year of $975 million at the midpoint
  • Free Cash Flow of $49.1 million, up 14.7% from the previous quarter
  • Gross Margin (GAAP): 28.4%, up from 25.5% in the same quarter last year
  • Same-Store Sales were up 4% year on year (beat vs. expectations of just under 2% year on year growth)
  • Store Locations: 794 at quarter end, increasing by 153 over the last 12 months

Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE:BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.

Since day one, the Dane brothers, founders of the Oregon-based company, set out to create not just any coffee shop but a community-driven brand that’d be known for its vibrant energy. This is seen in its distinctive blue stands, which are staffed by enthusiastic baristas known as "broistas”.

Combined with the upbeat atmosphere stirred up by the broistas, the company leverages a unique model to serve its customers. For Dutch Bros, the drive-thru is the main mode of coffee delivery as the average stand is around 950 square feet, roughly the size of a studio apartment, and only has outdoor seating. This approach reduces wait times and enables the company to serve a high volume of customers.

Dutch Bros has over 700 locations across the United States and offers a wide range of beverages at its stands, from traditional lattes and mochas to innovative creations like the Dutch Freeze.

Given its focus on the customer experience, Dutch Bros has also built a digital presence. Vintage photos featuring Chicago landmarks, celebrities, or pop culture line the walls to remind everyone of the restaurant’s roots. Customers can sign up for the company’s mobile app to order ahead and earn rewards. Dutch Bros is also active on social media platforms like TikTok, further bolstering their reputation as the “fun” brand.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Some competitors that sell caffeinated beverages include private company Dunkin’ as well as public companies McDonald’s (NYSE:MCD), Starbucks (NASDAQ:SBUX), and Tim Hortons (owned by Restaurant Brands, NYSE:QSR).

Sales Growth

Dutch Bros is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the other hand, Dutch Bros can still achieve high growth rates because its revenue base is not yet monstrous.

As you can see below, the company's annualized revenue growth rate of 44.2% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was incredible as it added more dining locations and increased sales at existing, established restaurants.

Dutch Bros Total Revenue

This quarter, Dutch Bros reported wonderful year-on-year revenue growth of 33.2% and its $264.5 million of revenue exceeded Wall Street's estimates by 2.4%. Looking ahead, the analysts covering the company expect sales to grow 25.1% over the next 12 months.

Number of Stores

A restaurant chain's total number of dining locations often determines how much revenue it can generate.

When a chain like Dutch Bros is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Since last year, Dutch Bros's restaurant count increased by 153, or 23.9%, to 794 locations in the most recently reported quarter.

Dutch Bros Operating Retail Locations

Over the last two years, Dutch Bros has rapidly opened new restaurants, averaging 25.2% annual increases in new locations. This growth is among the fastest in the restaurant sector and gives Dutch Bros an opportunity to become a large company over time. Analyzing a restaurant's location growth is important because expansion means Dutch Bros has more opportunities to feed customers and generate sales.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.

Dutch Bros's demand within its existing restaurants has been relatively stable over the last eight quarters but fallen behind the broader sector. On average, the company's same-store sales have grown by 2.5% year on year. With positive same-store sales growth amid an increasing number of restaurants, Dutch Bros is reaching more diners and growing sales.

Dutch Bros Year On Year Same Store Sales Growth

In the latest quarter, Dutch Bros's same-store sales rose 4% year on year. This growth was an acceleration from the 1.7% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Gross Margin & Pricing Power

Dutch Bros's unit economics are higher than the typical restaurant company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 25.2% gross margin over the last eight quarters. This means the company makes $0.25 for every $1 in revenue before accounting for its operating expenses. Dutch Bros Gross Margin (GAAP)

Dutch Bros's gross profit margin came in at 28.4% this quarter, marking a 3 percentage point increase from 25.5% in the same quarter last year. One quarter's performance doesn't paint the whole picture of a company's quality, but Dutch Bros's margin expansion is a good sign in the near term. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more stable input costs (such as ingredients and transportation expenses). We'll continue watching to assess this momentum's sustainability.

Operating Margin

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Dutch Bros generated an operating profit margin of 9.3%, up 6.7 percentage points year on year. This increase was encouraging, and we can infer Dutch Bros was more disciplined with its expenses or gained leverage on its fixed costs as its operating margin expanded more than its gross margin.

Dutch Bros Operating Margin (GAAP)

Zooming out, Dutch Bros was profitable over the last eight quarters but held back by its large expense base. Its average operating margin of 1.4% has been among the worst in the restaurant sector. However, Dutch Bros's margin has improved, on average, by 7.9 percentage points each year, an encouraging sign for shareholders. The tide could be turning.


Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q3, Dutch Bros reported EPS at $0.07, up from $0.03 in the same quarter a year ago. This print beat Wall Street's estimates with ease and shareholders should be delighted with the results.

Dutch Bros EPS (GAAP)

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Dutch Bros's free cash flow came in at $49.1 million in Q3, up 88.3% year on year. This result represents a 18.5% margin, 5.4 percentage points higher than its free cash flow margin in the same period last year.

Dutch Bros Free Cash Flow Margin

Over the last two years, Dutch Bros has shown strong cash profitability, giving it an edge over its competitors and the option to invest organically, acquire other restaurant chains, reduce its debt load, or return capital to shareholders via share buybacks or dividends while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 9.2%, quite impressive for a restaurant business. Furthermore, its margin has averaged year-on-year increases of 4.5 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

Dutch Bros has a decent track record of investing in profitable projects and has the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average return on invested capital (ROIC) is 9.1%, slightly better than the broader restaurant sector.

We argue ROIC is one of the most important indicators of quality because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.

Key Takeaways from Dutch Bros's Q3 Results

Sporting a market capitalization of $1.9 billion, Dutch Bros is among smaller companies, but its more than $149.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We were impressed that Dutch Bros beat on same store sales, revenue, adjusted EBITDA, and EPS. While same store sales and revenue guidance for the full year were maintained, adjusted EBITDA guidance was increased. Overall, we think this was a solid quarter that should please many shareholders. The stock is up 1.3% after reporting and currently trades at $26.93 per share.

Is Now The Time?

Dutch Bros may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Dutch Bros is a good business. First off, its revenue growth has been exceptional over the last three years. And while its operating margins reveal poor profitability compared to other restaurants, the good news is its new restaurant openings have increased its brand equity. On top of that, its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion.

Dutch Bros's price-to-earnings ratio based on the next 12 months is 94.4x. There are definitely things to like about Dutch Bros and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the consumer landscape, it seems there's a lot of optimism already priced in. We wonder whether there might be better opportunities elsewhere right now.

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