Starbucks made headlines last week when it poached superstar CEO Brian Niccol from Chipotle Mexican Grill. Starbucks shares soared more than 20% after the announcement, a much-needed caffeine injection for the coffee mogul.
Investors are confident that Mr. Nicol has the ability to get Starbucks back on a growth trajectory, but it’s a bit early to tell: Mr. Nicol didn’t even start until September, and any new changes he implements will take at least a few quarters to show results.
But there’s another coffee chain that’s catching the attention of billionaire investors: upstart Dutch Brothers (NYSE: BROS). Let’s take a look at who’s buying and whether you should follow their lead.
Billionaires are betting on cheap coffee
Asset managers with more than $100 million in assets are required to file quarterly 13F forms with the Securities and Exchange Commission (SEC), detailing their transactions. Investors are constantly keeping a close eye on the activities of billionaire investors, and Warren Buffett’s latest 13F form, released last week, has been garnering attention.
However, there are plenty of other notable companies run by billionaires and other notable companies that have recently purchased shares in Dutch Brothers, including:
Larry Fink, BlackRock: Position increased 177%.
Steven A. Cohen, Point72 Asset Management: Increased position by 90%.
Paul Tudor Jones of Tudor Investments: Increased position by 82%.
Steven Schonfeld of Schonfeld Strategic Advisors has assumed his new role.
Coffee isn’t the only thing that’s hot
What’s so appealing about Dutch Bros? It’s really appealing. Don’t let the Dutch name fool you; this is a modern take on the American coffee shop, with a homegrown, down-to-earth feel, a friendly, community-oriented culture and fast, customer-centric service. In many ways it’s the polar opposite of Starbucks’ upscale, sophisticated and urban vibe, and it’s this vibe that resonates with the millions of Americans lucky enough to be near a Dutch Bros store.
The most important thing for a viable business is to have a popular product, and Dutch Brothers fits that bill. After that, you need a strong management team that can turn it into a scalable business. After achieving initial success with a founder-led team, the company hired an entirely new executive team to take it to the next level.
So far, so good. Revenues for the second quarter of 2024 increased 30% year over year, driven by new store growth and a 4.1% increase in same-store sales. Company-operated store contribution margins continue to expand, increasing 0.5 percentage points from last year to 30.8%.
The story continues
After still alternating between losses and profits last year, the company posted a second consecutive quarter of profitable net income in the second quarter, increasing from $9.7 million to $22.2 million.
Not perfect, but close
Dutch Bros. is under pressure, but it’s also operating in a volatile environment. Dutch Bros. benefits from lower prices than Starbucks, as people willing to spend more on their coffee may opt for the cheaper option. But if shoppers are generally more cautious with their spending, they may reconsider the need for customized drinks altogether.
Dutch Brothers is opening new stores at a rapid pace, giving it the advantage of being able to incorporate new stores into its earnings growth. Comparable store growth is slowing, but it’s still better than it was a year ago. Given the external headwinds, this seems like a pretty good run, but the business environment makes it hard to tell what’s coming from within and what’s coming from external factors.
Yes, I would follow the billionaires to Dutch Bros.
I often remind investors that billionaire asset managers often have billions of dollars invested in hedge funds and their trades take that into account: they need to maximize short-term profits as part of their job, so their strategies are fundamentally different from those of the average individual investor.
But Dutch Brothers also looks like a great long-term holding for everyday investors. All of these billionaires bought Dutch Brothers in the first quarter, and the stock has since plummeted on the prospect of short-term dining out spending. It wouldn’t be a surprise if many of them continued to splurge on Dutch Brothers stock recently at its new, lower price, and long-term investors with at least some risk tolerance would feel comfortable following in the footsteps of these billionaires and investing in Dutch Brothers stock.
Should I invest $1,000 in Dutch Bros right now?
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Jennifer Cybill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dutch Brothers and recommends the September 2024 $52 sell option on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Forget Starbucks: Billionaires are buying stock in this coffee chain instead. This was originally published by The Motley Fool.