1 year ago
hapabapa
Intro
While I admit nan exemplary of thrust done java Dutch Brothers (NYSE:BROS) is building, nan institution is trading beyond a “perfect execution” value erstwhile considering nan full diluted shares outstanding, leaving nary room for nan normal challenges a business deals pinch arsenic it grows from a location to nationalist player. This article will comparison Dutch Bros. 2023 guidance to nan Starbucks (SBUX) institution ala 1996/1997, astir apt nan champion twelvemonth for size comparison, giving an thought what nan marketplace weighted maturation astatine nan clip comparative to what you salary for Dutch Brothers today. The takeaway centers connected a fewer cardinal points.
Dutch Bros. wide and admin costs are excessively precocious compared to Starbucks for a fixed level of revenue Enterprise worth vs. EBITDA comparative to Starbucks astatine nan aforesaid shape of maturation is excessively high Store maturation rate is slower than Starbucks astatine aforesaid stage Enterprise worth per shop is 5x higher than Starbucks astatine nan aforesaid maturation stage
Business
Dutch Bros is simply a speedy service chiefly thrust done coffee, beverage and caffeine-based dessert style portion constitution that prides itself connected speed, customer work and price. The mean footprint of a Dutch Bros. shop is 800-975 quadrate feet connected a 25,000 quadrate ft lot, allowing immoderate parking, an outdoor walkup model and aggregate thrust done lanes. Founded successful 1992 arsenic a java cart business successful Oregon, nan institution generated half of their shop maturation done franchising, but person abandoned this exemplary successful favour of institution owned stores.
As of Sep 2022 nan institution had 641 stores, 370 institution owned and 271 franchised. They opened 30 caller stores successful nan 4th 4th of 2022, and estimate 150 caller shops for 2023. The stores person a patient business and mostly value themselves nether Starbucks. Their footprint presently is westbound seashore states expanding to southbound westbound and rocky upland states. Here is immoderate accusation from their Sep 2022 and Dec 2022 10-Q to get an thought of their growth. I person included my estimate for twelvemonth extremity 2023.
Actual Actual Estimate DUTCH BROS 2022 2022 2023 Quarter 3 Quarter 4 Growth Rate Year End Company Owned Stores 370 396 7.03% 516 Franchise Stores 271 275 1.48% 305 Figures successful thousands Revenue Company Stores 173,501 175,510 1.16% 877,200 Revenue Franchises 25,147 26,316 4.65% 107,527 Total Revenue 198,648 201,826 1.60% 984,727 Cost of Sales Company Stores 138,781 136,760 -1.46% 692,127 Cost of Sales Franchises 9,310 10,707 15.01% 43,748 Total Costs 148,091 147,467 -0.42% 735,875 General And Admin(includes Depr) 45,378 50,594 11.49% 246,852 Depreciation 11,102 13,197 18.87% 64,389 Interest Expense 5,000 6,922 38.44% 27,688 Other Expense 2,000 -5,638 4,000 EBITDA 19,281 29,522 53.11% 90,077 Fully Diluted Market Cap 6.2 billion EV/EBITDA 68.83009 EV per est. institution store(based connected institution owned stores 2023) 12,015,504
(Source: SEC 10-K and writer estimate)
A mates things to statement here. First of each I included banal compensation arsenic an disbursal successful their SG&A. I deliberation it’s fair, because they rumor a batch of it, and will beryllium issuing $40mil of it arsenic portion of business successful 2023. I besides somewhat americium supra nan midpoint for their 2023 gross estimate. The estimates usage shop information from nan caller release. But look astatine really overmuch you are paying per institution owned store!
Now I would for illustration to return a look astatine Starbucks backmost successful 1996/1997. Remember this was nan play of precocious maturation successful some shop numbers, gross and operating income. Here is nan data.
Actual Actual STARBUCKS 1996 1997 Year End Year End Growth Rate Company Owned Stores 1006 1270 26.24% Franchises/Licensed Figures successful thousands Net revenues $696,481 $966,946 38.83% Cost of income and related occupancy costs 335,800 432,190 28.70% Store operating expenses 210,693 309,133 46.72% Other operating expenses 19,787 28,116 42.09% Depreciation and amortization 35,950 52,141 45.04% General and administrative expenses 37,258 57,144 53.37% Operating income 56,993 88,222 54.79% Interest and different income 11,029 12,393 12.37% Interest expense -8,739 -7,266 -16.86% EBITDA 101,682 147,629 45.19% Fully Diluted Market Cap Dec1, 1996 and 1997 2.8 billion 3.2 billion EV/EBITDA 28 21.67596 EV per institution store 2,783,300 2,519,685
(Source: SEC 10-K)
Valuation
There is evidently a quality successful valuation betwixt nan 2 companies. If you look astatine nan maturation complaint of Starbucks successful each basal metrics astatine nan aforesaid shape successful nan maturation rhythm it is clear they were increasing faster than Dutch Bros. is increasing now, and they were overmuch cheaper than Dutch Bros. banal now.
Here is immoderate further information regarding what Dutch Bros. believes nan worth of their institution owned stores should be. In nan caller 3rd 4th merchandise Dutch Bros. informed shareholders it purchased 5 stores from a franchisee for a full information of 6 cardinal dollars. In nan 2022 Sept 10-Q it sounds arsenic follows.
In thousands Acquisition consideration: Purchase value consideration 6,051 Equipment and fixtures 197 Building and leasehold improvements 1,470 Inventories 67 Other assets 6 Operating lease right-of-use assets 2,327 Reacquired franchise rights 1,735 Other liabilities -88 Gift paper liability -250 Operating lease obligations -2327 Net assets acquired 3,137 Goodwill 2,914
(Source: SEC 10-Q)
Further successful nan 10-Q, they mention that these 5 stores had 6.7 cardinal successful gross for 9 months ended Sept 2022 aliases annualized astatine astir 9 million. These 5 shops were listed pinch nett income of 1.2 cardinal for nan 9 months ended Sept 2022. The institution purchased these 5 shops astatine 3.75x net aliases .68x gross aliases 1.2 cardinal a store. They are successful California, and I’m guessing they are premium locations. If we presume guidance thought they were getting a deal, and nan franchisee was a sucker trading astatine that level and we presume they are worthy 40% much aliases 1x revenue, being generous valuing each their owned stores astatine this level would springiness a 928 cardinal dollar valuation for their 2023 estimated institution owned stores(516 stores).
In summation to these institution stores, they of people person nan franchised ones which look astatine this shape tin make 70 cardinal a twelvemonth successful rate flow. If we tally nan franchised stores connected a 12 aggregate we get 840 cardinal dollars of valuation.
Looking astatine nan comparison betwixt 1997 Starbucks and 2023 Dutch Bros, it appears nan marketplace is valuing Dutch Bros institution owned stores importantly higher than Starbucks stores were weighted astatine astir nan aforesaid constituent successful nan maturation cycle. One awesome logic for nan disconnect, nan stock people structure.
Share Class Structure Issues
Currently, location are 4 classes of Dutch Bros. equity. Class A and D person economical liking successful nan operating company, but some people B and C tin beryllium converted 1 for 1 into people A. The full shares outstanding are astir 165mil, but nan float is smaller owed to nan people structure. The existent float is really only astir 55 mil shares. Because of this nan mostly of nan institution is tightly held by ‘continuing members’ who were portion of nan operating partnership.
These members person excess voting rights, but cannot entree nan nationalist marketplace unless they person to A people mean shares. As they person to monetize their holdings aliases if Dutch Bros. sells communal equity to raise superior for maturation nan float will summation which should present much unit connected nan A people communal share. This whitethorn beryllium nan main logic affecting nan expertise of nan equity to waste and acquisition person to what I judge adjacent worth is.
Risks
The awesome consequence to nan short script is location is simply a ample short liking comparative to nan float already exists. Currently location are astir 10mil shares short retired of 165mil shares outstanding, but only a 55 mil stock float. This could consequence successful a compression if nan institution delivers an exceptional capacity during 1 quarter. The different risks see commodity value drops, faster than expected shop rotation retired and larger increases successful aforesaid shop income comparative to expected. I deliberation galore of these things are mitigated by nan ample premium baked into nan value currently.
Borrow costs are high, nevertheless nan options marketplace provides reasonable liquidity and station net location should beryllium a volatility drop.
The institution is priced to execute perfectly arsenic they rotation retired astir nan country. If location is simply a slip-up pinch staffing, locations, commodity inputs aliases user request this sanction could easy beryllium 30% little and still beryllium trading astatine a premium. This is simply a six-month trade. I deliberation it is reasonable to spot much monetization of nan different people shares complete nan adjacent mates of quarters pinch an system that appears to beryllium slowing down for this year. At nan least, support this connected nan radar for immoderate value spike, because it won't last.
This article was written by
Self Employed erstwhile organization proprietary trader pinch 20 years investing experience. Managed multi-strat equity and derivative book. CFA charter holder. Interests successful energy, infrastructure, wellness care.
Disclosure: I/we person a beneficial short position successful nan shares of BROS either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.
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