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This analysis delves into two prominent coffee chains: Starbucks (NASDAQ:SBUX) and Dutch Bros.. A detailed review reveals that while Starbucks maintains its status as the dominant player with over 38,000 stores across more than 80 markets, Dutch Bros. is rapidly gaining traction in the U.S., operating through its network of company-operated coffee shops. Dutch Bros. also has a Franchising and Other division that includes sales of beans and products to franchisees, franchise fees, royalties, and other revenue streams.
Dutch Bros. shares have declined by 2% year-to-date but have risen by 1% over the last year. In contrast, Starbucks shares have remained relatively unchanged, with a slight decrease of about 1% over both the year-to-date and 12-month periods.
Despite similar stock performances, the two companies differ significantly in valuation. The price-to-earnings (P/E) ratios of Starbucks and Dutch Bros. are compared to gauge their relative valuations and how they stack up against the broader restaurant industry, which currently trades at a P/E of 45.3x, slightly below its three-year average of 49.3x. Dutch Bros. is priced more like a growth company, while Starbucks has the valuation typical of an established firm.
Starbucks
With a P/E of 25.9x, Starbucks faces challenges due to concerns about the rising cost of living, which has led to declining same-store sales as consumers opt for cheaper coffee alternatives, often brewed at home or work. The drop in same-store sales, coupled with a cautious outlook, suggests a challenging path ahead. The latest quarter marked the second consecutive decline in same-store sales for Starbucks, which fell by 3% year-over-year, driven by a 5% decrease in transactions. Same-store sales in China dropped by 14% year-over-year, although there was a sequential improvement.
Starbucks management highlighted some positive developments, including enhancements to mobile ordering and strong sales of new products. However, the company reiterated expectations for revenue growth in the low single digits, with earnings-per-share growth expected to range from flat to low single digits.
The involvement of Elliott Management, an activist group, could potentially accelerate improvements at Starbucks. CEO Laxman Narasimhan mentioned that discussions with Elliott Management have been “constructive.” Additionally, Starbucks is exploring partnerships to drive growth in China, as noted in the company’s latest earnings report.
Dutch Bros.
Dutch Bros., (NYSE:BROS) with a P/E of 124.8x, is positioned as a growth company, but the question remains whether its growth trajectory justifies such a high valuation. The forward P/E of 73.6x suggests that the company’s valuation is gradually moving towards a more typical level. If this trend continues, it could signal increasing confidence in the company's performance.
Dutch Bros.’ rapid expansion has earned it recognition as the fourth-largest snack restaurant by QSR magazine earlier this year, trailing only Starbucks, Dunkin’, and Dairy Queen. The company’s swift growth underscores its classification as a growing player in the industry.
In 2023, Dutch Bros.’ systemwide sales approached $1 billion, surpassing this milestone over the last 12 months to reach $1.1 billion. Same-store sales have also shown strong growth, increasing by 4.1% in the latest quarter. Company-operated same-store sales grew by 5.2% year-over-year, while gross profit from company-operated shops increased from $51.1 million in the previous year to $70 million in the most recent quarter.
