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Will this coffee IPO be a potential challenger for Starbucks?

In a listed coffee field that is dominated by some big names like Starbucks (NASDAQ: SBUX) and previously independent Dunkin ‘Donuts (now a privately owned subsidiary of Inspire Brands) emerges as a new player Dutch Bros. coffee is now on its IPO. The chain went from being a coffee maker at an Oregon dairy to a handcart in more than 470 current locations and filed for an initial public offering with the Securities and Exchange Commission (SEC) on September 7th. It remains to be seen whether it can convert its positive attributes into a successful publicly traded stock and perhaps challenge Starbucks for market share east of the Mississippi.

Here are three key takeaways from the IPO filing, along with history, that potential investors should consider.

1. Dutch Bros. is estimated at $ 3 billion to $ 3.3 billion

The company, which trades on the New York Stock Exchange (NYSE) under the ticker “BROS”, plans to sell approximately 21 million Class A common shares upon its IPO. However, three other classes of shares, B, C and D shares, will bring the total number of shares outstanding to approximately 165.1 million. With an expected IPO price of $ 18-20 per share, the initial valuation for the company will be between $ 2.97 billion and $ 3.3 billion, assuming all estimates are correct.

Image source: Getty Images.

Class A shares each grant one vote, while the other classes offer between 3 and 10 votes per share. While the exact details depend on whether the syndicate banks actually exercise their right to purchase additional shares, founder and executive chairman Travis Boersma will hold around 74.4% of the voting rights of the various types of shares. Investment firms that support the IPO will hold 22.2% of the voting rights, which is up to 3.4% of the total voting rights of shareholders. At this point, Boersma will still have a firm grip on the company.

2. The company is growing rapidly and has laid the foundation for future growth

In addition to the approximately 100 million US dollar IPO, the company has been growing steadily and strongly for years. Sales in the same store grew at a rate of 2% as a result of the pandemic. Other growth figures include a Average Annual Growth Rate (CAGR) of 16% in new outlet openings from 2018 to 2020. Over the same period, sales increased 33% CAGR, while the total revenue of the stores operated by the company in full year-on-year-2020 rose 61% to $ 244.5 million. Total sales including franchising increased 37.3%.

Sales in 2021 look even more positive for Dutch Bros. For the first six months, the operation generated $ 227.9 million, outperforming revenue for the first half of 2020 of $ 150.8 million by 51.1%.

Spending also soared in 2020, which reduced the company’s bottom line and resulted in net income of just $ 6.6 million in 2020, compared to $ 28.5 million the previous year. As the company points out in its prospectus, “the rise” [in expenses] was driven primarily by increased staff spending above the business to support aggressive future growth. ”The company is working to improve its loyalty program, a key element of its business, according to a letter from Travis Boersma. He also says that restricting new franchises to existing, proven franchisees is a crucial part of corporate strategy before adding, “Welcome aboard, buckle up – we’re on a missile ship and I wouldn’t want it any other way.”

3. The coffee market is predominantly, but not entirely cheap

In many ways, Dutch Bros. may have chosen a good time to go public. IPOs seem to have been popular investment targets since the late 2020 IPO craze began, when the initial effects of COVID-19 wore off. Starbucks is expected to increase sales as employees and students return to physical locations rather than remote workplaces, and the same trend is likely to change Dutch Bros.

The coffee market is growing rapidly. Overall, coffee sales could grow 5.1% CAGR from 2021 to 2028, according to a study by Growth Market Reports. This specifically includes all types of coffee, including coffee in sachets and capsules that are sold in supermarkets. Considering the direct coffee market in which Dutch Bros. operates, significantly higher global growth is expected. According to a study by Astute Analytica, direct consumption of coffee is expected to increase by 15.3% CAGR between 2020 and 2027. Dutch Bros. will be one of the companies able to capitalize on this growth, which is projected to reach 139 kilotons of coffee sold and has a $ 1.56 billion chance by 2027.

One potential warning comes from the rising raw material prices for coffee. Frost and other meteorological chaos in Brazil, as well as delivery backlogs caused by the political unrest in Colombia, pushed coffee prices to their highest level in seven years. While this might cut into Dutch Bros. ‘ Profits initially, the problems are temporary and shouldn’t affect long-term potential.

Who Brews the Most Success?

With Dutch Bros. only having 477 locations in America compared to Starbucks’ 15,000+ locations, there’s little chance the energetic newbie will make a tiny dent in Starbucks sales for the foreseeable future. Starbucks investors can rest easy knowing that competitive pressures from the upcoming IPO will not affect the price, sales, or market share of their stock for many years to come.

However, Dutch Bros. still looks like a bullish investment. For fools looking for a bold, growing underdog among restaurant stocks, this dynamic IPO seems like a potentially good choice in a fast-growing market.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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