Why the 20% Sell-Off in Dutch Bros Stock Is a Massive Opportunity

Dutch Bros (NYSE: BROS) is arguably one of the best growth stories in the restaurant sector, but its shares collapsed nearly 20% following its second-quarter earnings report, as investors were disappointed by the coffee shop operator's outlook.

The stock is now down more than 10% on the year, and the sell-off reverses the strong momentum the stock has seen since the spring.

However, the core investment thesis for owning the stock over the long term remains intact.

Image source: The Motley Fool.

A great expansion story

Above all else, Dutch Bros is an expansion story. Its small-footprint stores, generally with two drive-thrus and no indoor seating, are relatively cheap to build. However, they generate a lot of sales, with average unit volumes nearing $2.2 million, and have quick payback periods. Meanwhile, Dutch Bros can build out its stores with the robust cash flow it generates.

The company is gradually expanding westward, and it called its recent entry into the Chicago market a big success, with record sales for an opening day in the market. It also continues to increase the number of shops in existing markets, which helps increase brand awareness and drive operational efficiencies in these markets.

On its earnings call, Dutch Bros reiterated its goal of reaching 2,029 shops by 2029. After adding 48 new locations in Q2, of which 44 were company-owned, it now has 1,225 stores, of which 888 are company-operated. It plans to open at least 185 new locations this year. Its longer-term goal is to support 7,000 shops across the U.S.

After the quarter, it acquired 31 locations in the Phoenix market from a longtime franchise for $63.5 million. It also announced that it was buying the real estate of bankrupt Salad and Go, which had 65 locations in Arizona, Nevada, Oklahoma, and Texas. It will convert them to Dutch Bros locations next year, pending the deal's close.

At the same time, Dutch Bros continues to deliver strong same-store sales. For Q2, comparable-store sales jumped by 5.8%, as transactions increased by 1.7%. Company-owned stores once again outperformed, with comparable-shop sales surging 8.3% on a 3.4% increase in transactions. The company credited its new food offerings, loyalty program, and brand marketing for the strong sales results.

Dutch Bros' overall revenue soared 32.5% to $550.9 million, while earnings per share (EPS) surged 40% to $0.28. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 27.8% to $113.7 million.

Despite the strong results, investors were disappointed by the company's outlook. While it did boost the low end of its prior same-store guidance of 4% to 6% up to a new range of 5% to 6%, that would mark a deceleration in the second half. The company noted that it faces tougher comparisons after the start of its food rollout in the third quarter of last year, and that the benefit of a price increase last year lapped in early July.

On the call, analysts asked about whether higher gas prices or competition from Starbucks were affecting the company. Dutch Bros said the same-store slowdown was largely lapping its own success. It said the gap between company-operated stores and franchised ones was largely because newer store vintages, which are primarily company-owned, have been seeing stronger same-store sales growth.

Dutch Bros also increased its full-year revenue guidance to $2.1 billion to $2.13 billion, up from a prior outlook of $2.05 billion to $2.08 billion, and its adjusted EBITDA forecast to $385 million to $390 million, up from $370 million to $380 million.

Why the stock is a buy

Same-store growth in the restaurant industry is always going to have some ups and downs based on the economy, pricing, and lapping popular new menu introductions. Despite some expected growth deceleration, this is still an area of strength for Dutch Bros. Importantly, its expansion story remains on track.

Dutch Bros stock looks very cheap in my book. It's trading at a forward price-to-sales (P/S) ratio of 3.1, which is the same multiple as the much more mature Starbucks. Dutch Bros has a much longer store growth runway, and also doesn't have the monumental task of recovering lost margins like its Seattle-based rival. Given its much higher growth potential, Dutch Bros should trade at a much higher P/S valuation than Starbucks.

Between its growth and its valuation, Dutch Bros is one of the best growth stocks in the consumer space to own long-term, in my view.

Geoffrey Seiler has positions in Dutch Bros. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.