Dutch Bros Continues to Capture a Growing Share of Our Drinking Money

Dutch Bros (NYSE: BROS) continued to shrug off a soft economy in the first quarter as drive-thru demand held up remarkably well. Same-shop sales grew by 8.3% across the system, fueled by a 5% rise in the number of transactions. Texas was its busiest market, with the largest number of locations and comps growth of nearly 20%.

While its organic growth is impressive, it's the coffee chain's massive market opportunity that's the real draw for investors. It ended Q1 with 1,177 locations, up 16% year over year, but that leaves Dutch Bros an attractive runway for further growth in the medium term, as management has set a target of having 2,029 stores operating in 2029.

The investment story is fairly simple. Dutch Bros is a scalable concept with compelling unit economics, and it can almost triple its store count before crossing the halfway point toward its long-term target of 7,000 shops.

Image source: Getty Images.

The growth story remains intact

The company's customizable energy and coffee drinks continue to win over customers even as broader consumer spending remains weak. Its company-operated shops grew transactions by roughly 7% for the third consecutive quarter. This led to double-digit percentage growth in same-shop sales for the first time since Q1 2024.

Its Dutch Rewards loyalty program now sports a total of 15 million members, and those customers account for 74% of all transactions. The brand continues to strategically push into the eastern U.S.

In January, the company announced the acquisition of 20 Clutch Coffee locations in the Carolinas for $20 million. Dutch Bros converted seven stores during the quarter, and management indicated that their sales volumes were up threefold compared to pre-conversion levels.

The company opened 41 new locations in the quarter, and management is guiding for at least 185 store openings this year.

Rising costs weigh on the stock

In the first quarter, higher coffee and occupancy costs, along with the rollout of its hot food offerings, took a bite out of Dutch Bros' profitability. Company-operated gross margin declined by nearly 2 percentage points, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin shrank by 60 basis points.

While margin pressure is a near-term concern, new entrants into the fast-growing customized beverage market are a constant threat. Larger rival Starbucks recently entered the fray with its Energy Refreshers, which aim to replicate Dutch Bros' success.

Trading at 62 times forward earnings, Dutch Bros stock is not cheap. For the company to grow into its current market cap, it will need to continue expanding its store base while preserving its attractive unit economics. The company's drive-thru model is designed for efficiency, with average unit volumes now exceeding $2.1 million, and a build cost of around $1.3 million per shop.

Maintaining that attractive return on investment will be critical as the company pushes into new regions. However, I think the tailwinds are here to stay for Dutch Bros, making it a compelling stock to own.

Bryan White has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.