Shares of dutch brothers (BROS 4.37%) are up strongly for the second day in a row after the drive-thru cafe reported better-than-expected results on Wednesday.
The Coffee Stock, which is the third such chain behind Starbucks and Dunkin’ Brands, expanded rapidly, adding 38 new locations in the third quarter, nearly as many as it opened in 2019.
Inflation has been a particular drag on Dutch Bros, but the coffee chain has been able to offset some of the worst effects by raising prices. It raised them for the third time this year during the period, which helped reverse the drop in same-store sales in the second quarter. Earnings fell 3.3% last time, but rose 1.7% this time.
Yet the price increases mask the fact that fewer customers are visiting the stores than before. Management admits its store traffic is negative and will likely remain negative in the fourth quarter. It only forecasts stable compositions for the whole year due to its price increases.
Dutch Bros is also experiencing what it calls “sales shifting”, otherwise known as cannibalization, by opening so many new stores.
Due to its “fortress” strategy of flooding an area with new stores, each individual store sees a drop in customer numbers even as the company’s total sales increase.
Dutch Bros reported adjusted earnings and sales above Wall Street expectations, although full-year forecasts came in slightly lower than expected. Yet coffee continues to grow through expansion, offsetting its own higher input costs by passing them on to consumers.
There may be limits to how often Dutch Bros can do this before doing too much damage to customer traffic, but the coffee company’s price hikes have been less aggressive than those of its peers and that can be rewarded.
Rich Duprey has no position in the stocks mentioned. The Motley Fool holds positions and recommends Starbucks. The Motley Fool recommends the following options: short January 2023 $92.50 puts on Starbucks. The Motley Fool has a disclosure policy.