In a battle between these two coffee specialists, which of these companies reigns supreme?
In the retail coffee industry, there are two different stories going on this year. Investors are excited about Dutch Bros (BROS -1.01%), whose shares are up 35% in 2024 (as of July 8). Then there's the industry heavyweight that is Starbucks (SBUX -1.23%). Its stock has been a huge disappointment for investors, falling 22% so far this year.
The two stocks are seemingly going in opposite directions at the moment. That has investors asking if this is a sign of things to come. It also raises the question: Which of these coffee stocks is the better one to buy right now?
Dutch Bros is aggressively expanding
Dutch Bros is an up-and-comer in the industry. It operates retail coffee shops primarily in the Western and Southern parts of the U.S. As of March 31, there were 876 total locations.
That is a relatively small number of stores when compared to Starbucks, but Dutch Bros' executive team has some ambitious expansion plans. Management forecasts that in the next 10 to 15 years, there will be 4,000 Dutch Bros stores open. This is a nearly fivefold expansion of the current footprint.
That growth potential is the key reason investors are interested in this stock at the moment. It's all about the prospects this growth offers. If the business hits management's goal, revenue will be astronomically higher than it is today. And the potential of that revenue growth is what is propelling the share price.
The one issue investors need to watch with Dutch Bros is that it's not consistently profitable. The company reported $16 million in net income in the first quarter, which was a marked improvement from the $9 million net loss in Q1 2023. But it's still not an enviable figure given the company's market cap. The hope is that with greater scale, the bottom line will improve significantly.
Starbucks hit a difficult stretch
As of March 31, there were 38,951 Starbucks locations around the world, making this one of the biggest restaurant chains on the planet. But it hasn't been smooth sailing for the coffee chain of late. In the fiscal 2024 second quarter, the business reported a 4% same-store sales decline due to falling traffic. And management downgraded full-year revenue guidance.
Despite weak recent trends, it's hard to deny that Starbucks is one of the strongest brands around. This allows it to resonate with consumers while giving the company pricing power, which leads to healthy profit margins.
The presence of Starbucks' brand moat, and the fact that Dutch Bros has yet to attain one, suggests that Dutch Bros will have a difficult time getting to its target of 4,000 stores. There is perhaps no industry that's as competitive as the restaurant sector, with several barriers to entry for rivals and switching costs to deal with for customers who have grown fond of perks like rewards clubs. Dutch Bros will have to executive its expansion nearly flawlessly, while also relying on some favorable macroeconomic conditions like lower interest rates and reduced inflation.
While Starbucks is already huge and has hit some headwinds lately, it still has growth plans. And yet its executive team has set a goal of having 55,000 stores open globally by 2030. Over the long term, management plans to have 20,000 stores in the U.S., up from 16,600 today. This means that Starbucks plans to open roughly as many stores in the U.S. as Dutch Bros does.
I have more confidence that Starbucks can achieve its target. That's because it has already proven itself over several decades of operating. Starbucks also has scaling advantages -- especially when it comes to technology, marketing, and product procurement -- when compared to Dutch Bros.
Starbucks trades at a forward price-to-earnings (P/E) ratio of 21, which represents a discount to the broader S&P 500. This compares very favorably to Dutch Bros' forward P/E multiple of 116, which prices in lofty future projections. If I'm choosing which stock to buy at the moment, I'd rather take the bet that Starbucks can turn things around and improve its fundamentals, particularly at its more reasonable valuation.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
