• Brett Schafer

Dutch Bros: Not So Deep Dive

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Show Notes

(Ryan) What they do: 1st line of the S-1, “Dutch Bros is a high growth operator and franchisor of drive-thru shops that focus on serving high QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE.” It’s pretty much a chain of drive-thru coffee stands, but they also generate a lot of sales from their Blue Rebel brand. It’s basically just a flavored energy drink. But it’s the leading product in the afternoons.

Dutch Bros has 471 stores across 11 states (pretty much all west coast, sorry brad. So WA, OR, CA, ID, NV, AZ, CO, and then over the last year they moved into NM, UT, Texas, and OK). About 56% of the stores were franchised, and the remaining 44% were company-operated. But the company-operated store count has grown from 37 at the beginning of 2018 to 182 at the end of 2020. So they’re really focused on that. And they target 25,000 sq foot lots but their actual shops are usually less than 1,000 square feet. They lease that much room to better handle the traffic.

And ~90% of their product sales are from drinks. And they have funny names for all their drinks too like Iced Tiger’s Blood Lemonade, Golden Eagle Freeze (which is like a caramel frappuccino I think), or an Electric Berry Rebel. It’s just kind of one of their random traits.

(Ryan) History: The company was originally founded by, you guessed it, 2 dutch brothers. Travis and Dan Boersma. Dane has since passed but Travis is still the executive chairman. And it was actually started in 1992. This is all mentioned in Travis Boersma’s opening letter on the S-1. They were both 3rd generation dairy farmers that I believe grew up in Grants Pass, Oregon.

Basically, they started out by purchasing an espresso machine and selling out of their barn. They also had a stereo to go along with it. That ended up doing pretty well and they eventually bought a pushcart and moved to downtown Grants Pass, where they kept that same model. A stereo and an espresso machine. They made about $100 per day from that. They trained some people on how to operate the machine and what kind of vibes they wanted and they eventually expanded to multiple carts. Then, 2 years later, they bought a drive-thru. They kept the patio, but it allowed people in a rush to buy stuff too. After a while, one of the recurring customers wanted to try to do the same thing in a nearby town and he said he would pay to use the Dutch Bros name. That was the inception of their franchising model.

30 years have since passed, they’ve obviously grown. But in 2008 they stopped allowing new franchisees to open stores. This slowed growth. Instead, they said only people that are a part of the Dutch Bros system were allowed to open new stores. This should help maintain the culture.

(Brett) Industry/Landscape/Competition:

  • A bit tough to identify

  • The restaurant industry is $600 - $800 billion estimated in the U.S.

  • Dutch Bros is going after drinks and coffee. Coffee is $5 billion in sales, Drinks overall definitely higher

  • Starbucks has 15k stores for a reference

  • Competitors: Indy coffee stands/bikini baristas, Starbucks maybe, although it is really competing for someone’s “specialty drink” like an energy drink, soda, whatever

(Brad) Management and Ownership:

CEO and President is Joth Ricci

  • He has been with the company since January of 2019

  • He also currently serves on the racial justice council for Oregon’s Governor and on the board of directors for the Oregon Business Council

  • He also has been the president of Stumptown Coffee Roasters where he delivered a lot of profitable growth ($64 million in revenue so not tiny)

  • Former CEO of Jones Soda

  • 90% Glassdoor rating (on 32 reviews)

CFO is Charles Jemley

  • Since January of 2020

  • Was with Starbucks from 2006 to 2018 climbing from VP of China to SVP of Finance, Global Digital & Store Development

  • Former CFO of Yum China from 2003-2006

COO is Brian Maxwell

  • Been with the company since 1992 where we started as a “Broista, Manager, Mind Blower” and climbed up the ladder for nearly 3 decades

The ownership structure is pure bananas

  • 4 class of common stock with its investor TSG Consumer Partners owning 100% of the Class C and 33.3% of class A for 22% of combined voting power

  • The Boersma family owns all of the class B stock and 44.1% of class A for 74% of combined voting power

  • Ricci and Jemley own 3.3% of class A with virtually 0 voting power

  • Bummed to see Maxwell didn’t have more equity

(Brett) Valuation:

  • Market cap of $7.3 billion, ticker BROS

  • TTM P/S of 18

  • TTM P/GP of 52.5

  • TTM P/OCF of 82 (but I don’t think that conversion is sustainable and a lot is SBC)

  • 17 million shares may be granted under the 2021 equity incentive plan, so expect lots of dilution

(Ryan) Earnings:

  • TTM Revenue of $404M

  • From 2019 to 2020 revenue grew 37% YoY

  • In 2020 they had the same shop sales growth of 2%. 14 consecutive years of same shop sales growth.

  • From 2019 to 2020 they grew store count by 19%

  • The company stated that its 2020 contribution margin was 29% (profitability on a per-shop basis, so that excludes corporate expenses)

  • LTM Adj. EBITDA margin was 20%

  • In 2019, Dutch Bros had OCF margins of 24%.

  • But keep in mind, GAAP FCF accounting is actually pretty useful for a business like this. So OCF - purchases of property and equipment is actually pretty indicative of the company’s FCF.

  • So in 2019 for example, FCF margin was only 7%. Now as the growth rate of store count starts to decline, we should start to see more of OCF convert to FCF. (i imagine there’s always going to be some maintenance expenses on the buildings tho)

A few interesting figures I saw from the S-1,

  • 91% of shops open more than 15 months generated shop-level contribution margin above 20%.

  • Within the first 2 months of launching a mobile app, Dutch Bros had 1.6 million-member activations. (Launched this during COVID. Now have 2.3 million active members)

(Brad) Balance sheet and liquidity:

  • Raised $400 - $140 = $260 million from the IPO but used a lot to pay back some credit facilities and to buy back some stock add to its $19.5 million cash pile cash right around $50 million.

  • It has $24 million in credit revolvers, $6.3 million in debt due this year, and another $191.7 million in long term debt with about a 5% interest rate

  • It is net income positive so liquidity is not a real concern here


Anecdotal Evidence:

  • (Ryan) Been there several times. Pretty packed every time I’ve gone. And their S-1 isn’t lying, they do a great job of making every visit feel fun.

  • (Brett) My life goal is to become a broista. Also, why is the S-1 yelling at me?

  • (Brad) Never been but I am a big coffee drinker

Future growth opportunities:

  • (Ryan) Not really a change of pace at all, but new store expansion. It’s a replicable model and I think it could work anywhere in the US except maybe New York (congestion). Management said they think they can get to 4,000 locations in the US. “We currently have a strong new shop pipeline with approximately 250 new sites identified which is well in excess of our planned new company-operated stores to be opened in 2022 and 2023”

  • (Brett) Locking in core customers with the app. Launched very recently and had 2.3 million rewards members in the first five months after launch

  • (Brad) It did not look like international expansion was being considered at this point in time but China is a rapidly growing coffee market that could be a lucrative second market to pursue a few years down the road

Highlights and lowlights:

  • (Ryan) Highlights: Cult-like following at least where I’m from. Loyalty app metrics trounce Starbucks’ on a per-store basis. Showed their resilience during the pandemic with the 14th straight year of comp-store sales. The employees seem happy and the culture totally checks out. Lowlights: The reorganization transaction seemed overly complicated. It actually threw off the market cap for every major financial site and they weren’t super direct about the shares outstanding either. (had to ask the IR team but they did give it to me)

  • (Brett) Highlights: Everything checks out with the business operations. Unit economics, reinvestment runway, and a great brand. Lowlights: The founder’s nephew being the Chief Culture Officer tells me I should not trust him. I would be nervous about expansion into certain markets, and few food brands have been able to get nationwide adoption.

  • (Brad) I love the make-up of the team. That combination of a CFO with significant relevant experience with the COO being with the company for nearly 30 years is comforting to me. Lowlight has to be the 4 different types of shares. Please keep it to 2 share classes going forward please and thank you

Bull Case:

  • (Ryan) The model works everywhere. Within the next 10 years they get to 4k stores, recent infrastructure investments they made add a few percentage points to the company’s operating margin. If that happens (keep in mind there’s no guarantee it works everywhere), you could be looking at an ok investment.

  • (Brett) (glass half full) At 4k stores, $1.7 million AUV, 29% contribution margin that is $2 billion in annual contribution profit

  • (Brad) The bull case is that this gains traction across the United States and store openings continue to be met with more enthusiasm.

Bear Case:

  • (Ryan) In 2008 the founder made the decision to only let people in the existing Dutch Bros system open new stores. That plan should help maintain the culture but getting to 4k stores will take longer than a traditional licensing model because employees have to go through the leadership pathway program which takes time. It trades at 21x sales, this isn’t how you make money.

  • (Brett) (glass half empty) At 4k stores, $1.7 million AUV, 29% contribution margin that is $2 billion in annual contribution profit

  • (Brad) This is sort of unique to the west coast (like in-and-out burger) for whatever reason and fails to build off of its success to date.

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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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