Investments In Expansion And Customer Programs Will Strengthen Future Prospects

Key Takeaways

• Expanding new shops and enhancing advertising efficiency are key strategies expected to drive revenue and boost brand awareness.
  
• Improvements in mobile ordering, customer reward programs, and infrastructure investments aim to enhance transaction volumes and profitability.
  
• Elevated coffee seed costs and execution risks from new shop openings could pressure margins and revenue, while increased marketing spend may not yield anticipated returns.

Catalysts

Operates and franchises drive-thru shops in the United States.

• Dutch Bros anticipates leveraging its strong pipeline of new shops in 2025, with plans to open at least 160 new locations, which is expected to drive revenue growth.
  
• The company plans to increase efficiency in advertising, particularly in new and mature markets, to enhance brand awareness, which can potentially boost sales and transaction volumes, impacting revenue positively.
  
• Adoption of mobile ordering is expected to rise, along with the Dutch Rewards program, potentially increasing customer frequency and transaction volumes, which will positively impact revenue growth.
  
• Investments in people, culture, and infrastructure aim to lower shop turnover and maintain strong service levels, potentially improving operational efficiencies and net margins.
  
• Dutch Bros is exploring the expansion of a focused food program, which could increase the average transaction size and further revenue streams, positively impacting profitability.

Dutch Bros Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dutch Bros's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $131.2 million (and earnings per share of $1.03) by about March 2028, up from $35.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 175.5x on those 2028 earnings, down from 210.5x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Dutch Bros Future Earnings Per Share Growth

Risks

• Elevated coffee seed prices are expected to exert significant pressure on cost of goods sold in 2025, potentially reducing net margins due to increased costs that might not be fully offset by pricing adjustments.
  
• The company's significant reliance on new shop openings for revenue growth could lead to execution risks, especially if there are construction delays or raw material cost impacts, potentially affecting revenue targets.
  
• With marketing spend increasing, there is a risk that the expected returns on these investments in both new and mature markets may not materialize, potentially impacting revenue growth and net earnings.
  
• The anticipated shift towards capital-efficient lease arrangements could have longer-term implications on shop-level margins due to increased occupancy costs, thus affecting overall profitability.
  
• A modest increase in system same-shop sales growth guidance, amid a competitive market, suggests potential difficulty in achieving higher organic sales growth without further deep promotional or pricing efforts, which could impact earnings.

Valuation

• The analysts have a consensus price target of $84.25 for Dutch Bros based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $54.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $131.2 million, and it would be trading on a PE ratio of 175.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $63.86, the analyst price target of $84.25 is 24.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.