Dutch Bros Goes On Sale, But Wait To Buy
Shares of Dutch Bros (NYSE: BROS) are down 40% following the Q1 report and at levels we think too good to pass up. The caveat is that, while the growth story is still intact, the fall in share prices is driven by a combination of factors that promises volatility if not even better entry points. Among those factors are the high short interest and the analyst's sentiment. The short interest is up over 21% and may be growing while the analyst's sentiment is souring.
At least 4 of the 10 analysts covering the stock have come out with commentary and none of it is good. Among them are 4 price target reductions and a downgrade from Buy to Hold and we think the revisions will continue to get worse before they get better. The current Marketbeat.com consensus of $52.11 is still fairly bullish and implies a 160% gain is in store for the stock. The caveat is the consensus is trending lower and the latest round of downgrades has the stock trading closer to $30 which is still a sizeable premium now that shares have their new low.
Dutch Bros Comp Growth Slows To A Standstill
Dutch Bros had a good quarter but the results are mixed relative to the analyst's expectations and the outlook is dim. As far as the Q1 period went, the company brought in $152.26 million for a gain of 54% over last year. The revenue is also 420 basis points better than expected and supported by new stores as well as volume and mix. The company opened 34 new locations during the quarter for a gain of 107 YOY or about 56% location growth with comps at existing locations up 6% from last year. The bad news is that margin took a big hit due to an astronomical rise in dairy costs. The adjusted EBITDA was cut in half because of it and drove a larger than expected loss on the bottom line. On the bottom line, the company reported -$0.10 in EPS to miss the consensus by $0.07.
“Rapid escalations in dairy costs well above historic levels drove increases in our cost of sales. Costs related to more rapid new unit growth, escalating minimum wage in select mature markets, and other factors drove increases in labor costs. The timing of certain maintenance and travel costs also contributed to increased operating and other costs.”
Looking forward, the company is expecting to continue opening new stores but is forecasting comp store growth to come in flat for the fiscal 2022 period. The worse news is that both revenue and EBITDA were guided below the analysis consensus and there is a chance for downside performance as well. It looks like inflation is not only cutting into the bottom line but also curbing comp store growth. If inflation continues to rise as we expect it to do, comps may turn negative by the end of the year.
The Technical Outlook: Dutch Bros Might Be At The Bottom
Price action in Dutch Bros fell more than 40% in the wake of the Q1 report but may already be at the bottom. The deep decline is an opportune exit point for short selling and it looks like there is some buying activity going on. Assuming this is true, we see price action moving sideways at this level until a base can form and the news improves, or not. If not, price action may continue to move lower and could keep moving lower until either the market says this is absolutely as cheap as we will let this stock get, or the shorts decide they’ve made enough profits.
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