Is Recent IPO Dutch Bros. (BROS) a Buy?

On September 15th, Dutch Bros Inc. (BROS) made its debut on the Nasdaq through a traditional IPO by listing 21.5 million shares at $23 a share. BROS raised $556.8 million from the IPO, which is expected to fund its general corporate expenses and repay $198.8 million in outstanding borrowings.

The stock opened at $32.50, up 41.3% above the IPO price on its first trading day, and is presently trading 38% higher, at about $45.

Headquartered in Grants Pass, Oregon, BROS is a franchise operator of drive-through coffee shops that offer hand-crafted beverages with superb service and speed. BROS menu includes a wide variety of beverages such as iced and hot coffee, tea, smoothies, lemonade, as well as other proprietary drinks. The company mostly operates in the Southern and Western parts of the United States with the majority of their location in Oregon, Arizona and California.

In today’s article, I intend to analyze Dutch Bros from a qualitative and quantitative standpoint to see whether BROS stock is still a buy after its post-IPO rally. 

Industry Outlook

According to the company’s S-1/A report, Dutch Bros sees a market share opportunity of about $311 billion, consisting of $36 billion in the coffee category, $36 billion in convenience store business, and $239 billion in the quick service restaurant (“QSR”) category. Mordor Intelligence reports that the United States coffee market is projected to expand at a CAGR of 4.8% during 2020-2025. So, the company should capitalize on this growth as the current industry trends show that people want to drink their coffee as fast as possible, which is a welcomed sign for BROS’ drive-thru business model. 

Dutch Bros’ Financial Performance  

Let’s take a look at the company’s S-1/A filing to dive deeper into BROS’ historical financial performance and growth prospects. As of six months ended June 30th, 2021, the company’s revenue was up around 51.1% on a year-over-year basis to $227.99 million.

The company collects revenue through three activities – company-operated shops sales, franchising revenues, and e-commerce sales through its website. 

During the first half of 2021, company-operated shops revenue made up 79.34% of total revenues, while franchising revenues and other revenues represented 20.66% of total revenues.

Also, the number of company-operated shops increased from 146 in 1H2020 to 207 as of 1H2021. As a result, they contributed an additional $63.1 million to the company’s total revenue figure. 

As of six months ended June 30th, 2021, Dutch Bros also delivered strong Adjusted EBITDA numbers, which stood at around $45.83 million versus its year-ago value of $35.53 million. However, the company’s EBIDTA margin decreased from 23.55% to 20.10% as of 1H2021. Dutch Bros net income margin also fell to 2.56% versus 3.50% in a year-ago period. This figure came below the sector median threshold of 6.24%. The company’s main rival, Starbucks Corporation, also has a higher net income margin TTM of 10.43%.

So, we can see that the company improved its main operating metrics but failed to deliver margin expansion, which some investors could view as a cause for concern. 

The Bottom Line

Although the company delivered strong revenue growth in the first half of 2021, it is my view the current share price is too high, especially amid profitability concerns. Typically, when it comes to IPOs, I like to sit on the sidelines and wait for the dust to settle. Oftentimes the hype on a particular IPO is the driver for a surge in price but as the lock up period ends, profit taking can begin to take place.  If insiders decide to cash out their positions, investors will be able to scoop up BROS shares at a lower price and with a higher margin of safety. I plan to closely monitor the company’s margins profile, looking for any improvements in the coming quarters.