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Starbucks Rival, IPO Breakout Dutch Bros In Buy Zone

Top growth stocks to watch on Tuesday include new IPO issue Dutch Bros. (BROS). This IBD 50 stock gained as much as 14% in Tuesday trading as shares broke out from an IPO base.


Growth Stocks: Dutch Bros.

Dutch Bros., a drive-thru coffee chain headquartered in Oregon, operates 471 locations across 11 states. While Dutch Bros. is no doubt a Starbucks (SBUX) competitor, the firm manages to differentiate itself from the Seattle-based coffee chain.

Dutch Bros. is primarily a drive-through operation that focuses on getting people through that line as fast as possible while serving a variety of quality coffee drinks. The shops also serve smoothies, lemonade and other non-coffee drinks. In 2020, 82% of its beverages were served cold.

According to its 424b prospectus filed with the Securities & Exchange Commission (SEC), Dutch Bros. added 200 shops over the past five years. The new shop prototype goes for 865 to 900 square feet and favors sites that are at least 25,000 square feet.

“Almost all our shops deploy either a single or double drive-through window, some including multiple lanes for more efficient ordering and escape lanes to prevent unnecessary congestion,” the firm wrote in its SEC filing.

The drive-through chain went public on Sept. 14 at $23 per share. Shares have since formed an IPO base with a 62.10 buy point. Clearly, it didn’t take long for the stock almost triple in price from its opening day.

On Tuesday, shares traded up over 13% and broke out from the proper entry. The growth stock is still fairly volatile and reached a low of 41.32 on Oct. 6 during the market correction period. Dutch Bro’s RS line extended to a new high alongside the breakout, which is a positive sign.

Despite its young history on the NYSE, the stock already holds a 97 Relative Strength Rating, plenty high for growth stocks. This indicates the growth stock is outpacing 97% of stocks in IBD’s database. But the stock’s 85 Composite Rating has been hindered by a low 37 EPS Rating. The rating reflects the fact Dutch Bros. is not yet consistently profitable, a reason to be cautious when dealing with the stock.

Dutch Bros. Stays Competitive During Covid

Dutch Bros. maintains a very friendly, fast-paced environment that helps build customer loyalty. In the recent June-ended quarter, that loyalty showed as Dutch Bros.’ sales rose 53% year over year to $129 million. Bottom line growth rose 250% to 7 cents a share, according to IBD data.

Despite the pandemic forcing many stores to shut down in 2020, Dutch Bros. was able to produce its 14th straight year of same store sales growth. Same-store sales finished 2020 with a 2% rise year-over-year, according to the company prospectus. Meanwhile, rivals like Starbucks saw year-over-year declines of 14% for 2020. The drive-through model is presumably more resilient in an era of social distancing.

Dutch Bros. also made great use of its loyal customer base by attracting over 2.3 million members to its mobile app. The app, which launched Feb. 2 of this year, offers a rewards program similar to the Starbucks app. To compare, Starbuck’s rewards app had roughly 19 million members at the end of 2020, with more than 15,000 U.S. locations and well over 30,000 stores globally.

Dutch Bros. reported quarterly losses of 4 cents a share in the fourth quarter of 2020 and 4 cents in the period ended in March 2021. But the outlook for earnings and sales growth remains strong for the future. Analysts expect Dutch Bros. to report third-quarter EPS of 6 cents a share, a year-over-year increase of 50%. Meanwhile, sales are anticipated to rise 44% to $125 million.

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