Why Dutch Bros Stock Dropped 21% in September

Dutch Bros (NYSE:BROS) stock fell 21% in September, according to data provided by S&P Global Market Intelligence. The company is still feeling negative market sentiment after some disappointing earnings updates in August.

Growing pains

Dutch Bros is a relatively small coffee shop chain that has ambitious expansion plans. It owns 1,177 stores as of the end of the second quarter, and it plans to reach 2,029 stores by 2029, nearly doubling today's count.

Image source: Dutch Bros.

It consistently reports robust growth, and the second quarter was fantastic, which you probably wouldn't realize based on the market's reaction. The company is still growing fast and becoming more profitable, and it's generating consumer loyalty as it expands across the country.

Revenue increased an impressive 32.5% to $550.9 million in the quarter, and company-owned same-shop sales were up 8.3%. Company-owned same-shop transactions were up 3.4%, indicating that the increase didn't come entirely from price hikes. Systemwide metrics were somewhat lower, at 5.8% and 1.7%, respectively, and Dutch Bros is transitioning from its original franchise model to new company-owned stores only.

So what didn't the market like? There's concern about rising costs, which is why negative market sentiment persisted into September, with inflation remaining strong.

The market also didn't like management's guidance. Although it slightly raised full-year guidance for total revenue and same-store sales, it significantly raised guidance for capital expenditures (capex), from a midpoint of $280 million to a midpoint of $360 million. Management explained that average capex per new store is still $1.4 million, and the higher total reflects aggressive expansion.

After the earnings release, the company announced that a deal to acquire a small restaurant chain that would have made it easy to add 65 new stores fell through, feeding into the negativity about whether Dutch Bros would be able to expand as fast as it's aiming for.

An opportunity to buy on the dip?

Dutch Bros has short-term plans to double store count and long-term plans to reach 7,000 stores. These stores are attracting fans and sales, and it's easy to see how it could reward investors despite the short-term drop.

Dutch Bros' P/E ratio has fallen dramatically along with the price, and it trades at 54 times trailing 12-month sales. That's still expensive, and it demonstrates how much the market expects from it.

The good news is that it's the cheapest P/E ratio ever. The bad news is, it's rich enough that the stock can still fall on any missteps.

I think Dutch Bros is an excellent stock with tons of long-term potential. If you can buy now and hold for at least five years, it's a good time to buy.

Jennifer Saibil has positions in Dutch Bros. The Motley Fool has positions in and recommends Dutch Bros. The Motley Fool has a disclosure policy.