We're Hiking Our Price Target for This Growing Company
Management’s ICR conference presentation shed new light on some key growth and cost topics.
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We are increasing our price target for shares of Dutch Bros BROS to $65 from $50 following the company’s presentation at the ICR conference, while keeping our Two rating intact. As we discussed in today’s video, this increase is a long time coming. We may, however, need to revisit that our price target again once we’ve digested the company’s 2025 Investor Day on March 27, which will cover its growth strategy.
While management’s presentation was evolutionary to the Dutch Bros story, not one we would call revolutionary, the team said Dutch Bros will hit its 1,000th shop next month compared to the 831 it had this time last year. Moreover, the pace of new additions will remain brisk, with management targeting the addition of at least 160 shops this year. To us, the combination of an expanding geographic footprint and more folks working and benefiting from real wage growth is a powerful recipe.
During the presentation, the company discussed some insightful tidbits about the business:
-- When the company enters a new state, it plots a 10-15 year penetration map.
-- Ninety percent of company volume comes through the drive-thru and 10% comes through the walk-through window.
-- A third of the business is in the morning, a third is in midday, and a third is in the afternoon.
-- The recently launched mobile order, which is across 90% of its footprint, has generated a 5% frequency lift.
-- The company is testing the expansion of its food offering, which is currently just four items. It is looking to balance efficiency and quality as it tests eight new products. We expect to learn more about this during the company’s upcoming Investor Day.
On the topic of coffee prices, which are up considerably compared to year-ago levels, Dutch Bros said that it typically prices its coffee 12-18 months out. This means the company should see little impact when it reports its December-quarter results, but we could see some impact in 2025. However, management pointed out that coffee makes up less than 10% of its cost of goods sold (COGS) basket.
As it discussed that topic, CFO Joshua Guenser said that dairy is a key factor in its cost structure but declined to share any context relative to the COGS basket. As we can see below in the latest data published by the Food and Agriculture Organization of the United Nations, dairy prices have risen meaningfully year over year, and that is one reason we are not lifting our BROS price target as high as some others have. We will continue to monitor these two commodities and adjust our margin as well as bottom-line expectations as needed.
At the time of publication, TheStreet Pro Portfolio is long BROS.
