Dutch Bros vs. Starbucks: Navigating Investment Opportunities

Economic stress often leads consumers to tighten their spending, particularly in an environment where inflation remains high, especially for food items like eggs. This ongoing pressure has affected the consumer discretionary sector, posing significant challenges for stocks in this space.

Yet, it’s important to recognize that these economic pressures will eventually ease. Long-term investors should maintain a focus on future growth prospects rather than solely on current market conditions.

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With a long-term perspective in mind, which coffee chain offers better investment potential: Dutch Bros (NYSE: BROS) or Starbucks (NASDAQ: SBUX)?

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1. Overview of Dutch Bros

Dutch Bros was founded over 30 years ago and has nearly 1,000 drive-thru locations by year-end, with plans to reach 1,000 in February. While half of its menu consists of coffee items, it also offers energy drinks, lemonade, and soft drinks. The company prioritizes speed, quality, and exceptional service.

Emphasizing community-focused initiatives and employee retention, Dutch Bros attributes its growth to product quality and corporate culture. It intends to continue opening new locations at an annual growth rate in the mid-teens percentage range.

Revenue growth can be misleading due to Dutch Bros’ new openings, so examining same-store sales (comps), which track locations open for at least 15 months, provides a clearer picture. Fourth-quarter comps rose by 6.9%, with increased customer traffic contributing to one-third of that growth. For the full year, comps increased by 5.3%, and management anticipates a 2% to 4% growth rate in comps for 2025.

Dutch Bros is also profitable, reporting diluted earnings per share of $0.34, up from $0.03 a year earlier.

Investors have recognized Dutch Bros’ success, with its stock appreciating by 166.8% by February 28. With most locations in the western U.S., there are significant expansion opportunities. However, the company’s rapid growth comes at a cost, with its stock trading at a high price-to-earnings (P/E) ratio of 233.

2. Overview of Starbucks

Starbucks has established itself as a global coffee and tea giant, boasting over 40,500 locations worldwide by the end of calendar 2024. Despite this expansive presence, the company has faced declining sales in recent quarters. During its fiscal first quarter, global comps dropped by 4%, with North American comps also down 4% and a 6% decline in China’s restaurant traffic.

Higher expenses and lower sales affected profitability, resulting in a diluted earnings per share of $0.69, a decrease of over 23% year-over-year.

Last September, Starbucks’ board appointed Brian Niccol, former CEO of Chipotle Mexican Grill, as new CEO to address these challenges. Niccol introduced the “Back to Starbucks” strategy to refocus on enhancing the customer experience and offering premium coffee products.

While management acknowledges some signs of improvement through a change in product mix, it remains to be seen whether these efforts will significantly impact Starbucks’ financial performance. Investors should monitor comp sales and operating margins closely to evaluate the effectiveness of Niccol’s initiatives.

Despite recent challenges, Starbucks shares gained over 24% in value over the past year, significantly outpacing the S&P 500’s 15.9% growth. Currently, Starbucks trades at a P/E ratio of 37, which is higher than the 24 ratio recorded last year.

Investment Decision

Considering Starbucks’ current challenges and its comparatively high valuation, Dutch Bros appears to be the superior investment option. Although its stock is not cheap, the company is effectively executing its growth strategy and increasing profitability.

For those concerned about Dutch Bros’ valuation, dollar-cost averaging could be a prudent strategy. This approach allows investors to mitigate the effects of market volatility by investing a consistent dollar amount at regular intervals.

Potential Investment Opportunities

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*Stock Advisor returns as of March 3, 2025

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dutch Bros and suggests the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.