Chipotle Mexican Grill (NYSE: CMG) has long been an investor favorite, and for good reason. It has delivered fabulous gains for shareholders who’ve stayed with it through thick and thin. Its opportunity is far from over, but it already has 3,500 restaurants, and growth investors might be on the lookout for some fresher picks.
It’s not easy to successfully grow a restaurant chain, but Dutch Bros (NYSE: BROS) looks like it’s on its way, and growth investors should take a look.
The Path to New Stores and Higher Growth
Chipotle still plans to double its store count in North America, and it’s starting to get more serious about international expansion.
How does Dutch Bros’ store expansion plan measure up to Chipotle’s? The Mexican fast-casual chain sees room in the restaurant market for another 3,500 or so of its locations in the U.S. alone, while Dutch Bros envisions expanding to a total of about 4,000 stores over the next 10 to 15 years from 912 today. In absolute terms, they both plan to add a similar number of stores. But in percentage terms, Dutch Bros looks to have a much greater growth opportunity.
So far, it has been crushing it in revenue growth, and most of that has come from new stores. In the second quarter, revenue increased 30% year over year with a 4.1% increase in comparable sales (comps). If it can quadruple its store count, expect the stock price to rise accordingly.
Chipotle is a master at generating comps growth. But that often comes with an established brand presence, something Dutch Bros is still working on building. It’s carefully spreading its footprint across the country, and has locations in 18 states so far. Higher comps growth is likely to happen as more people get to know and like its beverages, something that’s already happening in the regions where it has been operating for a while.
Defining the Brand and the Process
One of the reasons Chipotle has been so successful is that it has a well-defined lifestyle brand, strong digital channels, and a precise process. These are the reasons Starbucks just poached Chipotle’s (now) former CEO, Brian Niccol. In some ways, Dutch Bros has a head start on leader Starbucks because it’s so young. It’s working on these three pillars from the ground up instead of trying to redefine itself and make changes in a vast enterprise.
It also got a new CEO and a revamped executive team last year, and they’re making changes to roll out new stores with the proper branding and process. Customers love its fun, down-to-earth atmosphere that often includes music in the dining areas, and it has its signature “broistas” who walk through the drive-thru lanes taking orders with point-of-sale devices.
Dutch Bros is also laying the groundwork for further expansion by opening a new resource center and moving to a larger headquarters next year. And it’s building many new locations with two drive-thrus plus an “escape route” for cars that get their orders before they reach the window.
Something that has been missing from the Dutch Bros playbook is a digital ordering option, but that’s going to change now. It has been piloting its mobile ordering option at about 40 shops, and management expects mobile ordering through its app to be available from most shops by the end of the year. That intersects well with the company’s strong loyalty program — Dutch Rewards members accounted for 67% of sales in the second quarter.
Is Dutch Bros a Bargain?
Chipotle has been an incredible stock to own over the past few years, but its premium valuation has probably scared some investors away from buying it recently. The stock has declined since Chipotle announced Brian Niccol’s departure, but it still isn’t cheap.
CMG PE Ratio (Forward 1y) data by YCharts.
The price-to-earnings ratio is the most commonly used valuation metric for a business, but it’s not the only way to gauge a company’s worth. In this case, it’s less useful because Dutch Bros has only been profitable for a short time, and it was still posting losses in some quarters last year. However, on a price-to-sales and price-to-cash-from-operations basis, it’s a lot cheaper than Chipotle.
I’m not saying Chipotle isn’t a good buy right now. But if you’re looking for a great stock that’s just getting started and you have some time to hold onto your investments and let them grow, Dutch Bros looks like a no-brainer buy.
Should you invest $1,000 in Dutch Bros right now?
Before you buy stock in Dutch Bros, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Dutch Bros wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $662,392!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 9, 2024