Restaurant and food stocks experienced severe difficulties in 2024. Dutch brothers (NYSE: BROTHERS) resisted this trend. Shares of the coffee and beverage chain are up 43% over the past month after posting huge growth in the third quarter. Investors are betting big on this West Coast consumer favorite and its expansion plans throughout the rest of the United States.

Dutch Bros is entering the coffee competition and has proven once again with its recent financial results that it is a force to be reckoned with in the food and beverage sector. Let’s take a closer look at these third quarter results and see if Dutch Bros stock is a buy today.

Growth while Starbucks is in decline

In the third quarter of 2024, Dutch Bros’ revenue increased 27.9% year-over-year to $338 million. This is explained by a combination of 2.7% same-store sales growth and 28 new store openings during the quarter. The company now has 912 stores across the United States, with the majority on the West Coast.

Compared to Starbucks — one of its most formidable competitors — Dutch Bros’ results look even better. Starbucks released negative Same-store sales growth of 7% in the most recent quarter, with total transactions down 8%. Although Dutch Bros is nowhere near as big as the coffee giant, some of those declining transactions were likely due to drinkers switching to Dutch Bros.

Why do they change? It’s hard to pin down, but Dutch Bros has been innovative with its drive-thru format, enthusiastic employees and creative drink ideas that appeal to a younger audience. Don’t invest in stocks just because Dutch Bros has creative coffee drinks, but it’s a way for the company to grow its brand over the long term and find loyal customers.

Long runway for new store openings

The best part about Dutch Bros is the ability to increase its store count over the next decade. At the end of last quarter, the company had 912 locations. Management estimates it can reach 4,000 locations in the United States, more than 4 times its current store base.

Some of these stores will be franchised, meaning someone else owns the store itself but pays a fee to license the Dutch Bros brand and coffee offerings. It is the same model as McDonald’s and requires much less capital to expand, which is an advantage when looking to increase your locations. However, most of the new stores will be company owned and operated. At the end of last quarter, Dutch Bros had 300 franchised stores and 612 company-owned stores.

Company-owned stores have a contribution margin of around 30%, which is a fancy way of talking about profitability at the store level. Franchise revenue is just high-margin licensing fees. Overall, it appears Dutch Bros has rock-solid unit economics with plenty of room for profit margin expansion. Over the last 12 months, the company’s operating margin has hovered around 8%. With the mix of franchised and company-owned stores, profit margins have plenty of room to grow in the coming years as the company gains size.

BROS PE ratio data by Y Charts

Should you buy the shares?

Dutch Bros stock is up 43% this month and more than 80% over the past 12 months. The stock’s market capitalization now stands at approximately $7.5 billion, with a price-to-earnings (P/E) ratio of 168. Although this P/E may seem extremely high at first glance, Dutch Bros is today ‘today barely profitable and still has a long runway for growth ahead of it.

Let’s illustrate the company’s profits in 4,000 restaurants, a figure it hopes to reach over the next 10 to 15 years. Today, each store has annual sales of $2 million, which could grow to $2.5 million with continued growth in same-store sales. $2.5 million in average unit volumes (AUV) and 4,000 Dutch Bros locations equals $10 billion in total system-wide sales.

Now, not all of these sales will show up as revenue due to Dutch Bros’ franchise strategy, but the impact on profits will be the same. Assuming a 15% net margin on that $10 billion sales figure, that turns into $1.5 billion in annual revenue for Dutch Bros once it hits 4,000 locations. That’s a P/E of about five from its current market cap of $7.5 billion.

The stock is clearly trading at a premium valuation today. However, if you believe in the Dutch Bros brand and its expansion strategy, the stock will do well for those who hold it for the long term.

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Brett Schaefer has no position in any of the stocks mentioned. The Motley Fool posts and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.