The Offering

Company Overview

Grant Pass-bases Dutch Bros is a high growth operator and franchisor of drive-thru coffee shops. The company was funded in 1992 and grow through leaps and bounds from a single coffee pushcart to more than 470 stores across the West. This coffee chain is one of the fastest-growing brands in the restaurant and foodservice industry by location count in the United States. They have added close to 200 shops over the past 5-year ended on December 31, 2020, with 441 shops in 11 states, including Washington, California, Arizona, Oregon, Nevada, Colorado, Utah, Idaho and New Mexico. In October 2018, the company sold a minority stake to TSG Consumer Partners, a San Francisco private equity firm based.  The capita raised from TSG Consumer Partners has been instrumental in helping Dutch Bros. Coffee expansion.

Source: Company S-1 Filing 

Key Highlights

• The Offering: The US-based Coffee Shop chain would sell approximately 21 million shares between priced band of $18 and $20. At the midpoint of that range ($19), the company would raise $400 million and would be worth $3.1 billion post IPO. Also, if this IPO get priced at the top of the price band and the underwriters exercise their rights to buy additional shares, the fundraise could top $484 million.  
• Multiple Class Shares: Dutch Bros will have Class A, B, C, and D stock. Class A has one vote per share, Class B and C have three votes per share, and Class D has 10 votes per share.
• Major Shareholders: TSG Consumer Partners will hold all Class C shares while the Co-founder Travis Boersma will hold all Class B shares. A host of other investors will hold Class D shares. In total, the Co-founder Boersma will hold ~74% stake in the company while TSG Consumer Partners LP will own roughly 22%.
• Use of Proceeds: The company said it intends to use the net proceeds from the IPO to purchase shares from existing investors, pay off outstanding borrowings of $198.8 million, and donate 1% to charitable causes over the next ten years.
• Large Presence: In the past five and a half years, the chain has grown from 254 stores in 7 states to 471 locations in 11 states as of June 30. Of that total, 207 were company owned and 264 were franchised.
• Entered Texas and Oklahoma: In the first half of 2021, the company entered Texas and Oklahoma and achieved record-breaking sales.
• Dividend Payment Plan: The company has no current plans to pay dividends on the Class A or Class D common stock. Holders of Class B and Class C common stock do not have any right to receive dividends.
• Strong Balance Sheet: The company has a strong balance sheet with total pro forma assets of $419 million at the end of the June 30, 2021, whereas total pro forma liabilities is $223.23 million. Pro Forma Cash and Cash Equivalent stood at $ 50.57 million.

Source: Company S-1 Filing, Analysis by Kalkine Group

• Solid Financial Performance: Dutch Bros topline has grew from $186.0 million in 2018 to $327.4 million in 2020, representing a CAGR of 33%, Adjusted EBITDA grew from $39.6 million in 2018 to $69.8 million in 2020. However, Net income decreased to $5.7 million in 2020 from $21.2 million in 2018. This was because of the recognition of $35.1 million in non-cash equity-related expenses that were first expensed beginning in the fiscal year 2019.

Source: Company S-1/A

• A Unique Culture: The employees of Dutch Bros are known as “broistas.” They are trained by the other experienced broistas who are known as “The Mob”. “Dutch Mafia” is the name assigned to the most loyal customers.
• Business Model Strength: Dutch Bros drive-thru model, dedicated to beverages, generates substantial throughput as evidenced by its consistent and strong shop-level contribution margin, high return on investment & outstanding sales volumes. In 2020, despite the challenges of COVID-19 and wildfires, the company’s AUVs were approximately $1.7 million, which was believed to be one of the highest for a beverage-focused concept, with an average check of approximately $7.50.

Key Performance Indicators

Source: Company S-1 Filing, Analysis by Kalkine Group

Key Management Highlights

Financial Highlights: H1FY21

Source: Company S-1 Filing, Analysis by Kalkine Group

• During the first half of 2021, the company’s topline grew by 51% to $227.99 million, mainly driven by 66% growth in company-operated shops revenue.
• Cost of sales as percentage to revenue also grew by 200bps to 65 %, despite that Gross profit expanded by 42% to $79.14 million.
• However, Gross Margin slightly declined to 35% from 37% a year before.
• Company-operated shops gross margin surged by ~70% in the first half 2021.
• Driven by higher topline growth, the Net Income increased by 11% to $5.27 million.
  

Risk Associated (Moderate to High)

Investment in “BROS” IPO are exposed to variety of risks ranging from:

a) Change in the consumer taste and preferences could have a negative impact on the Dutch Bros financials as the company’s continued success depends upon the ability of the company to attract customers and retain them.

b) Lack of new product acceptability by the customers.

c) Price war & Intense competition.

d) Growth is largely synched to opening of new shops in existing as well as new markets.

e) Resurgence in the COVID-19 cases, travel restrictions and a new wave of lockdown could have a weigh on the group’s financials and its stock prices as well.

Conclusion

The solid performance of Dutch Bros through the pandemic indicates the strength of the business model. The Coffee Shop chain is in its early stages with significant growth potential. The company forecasts that there is long-term potential for at least 4,000 Dutch Bros locations in the United States. They currently have a strong new shop pipeline with approximately 250 new sites identified. This is well above the company’s plan of 136 new company-operated stores to be opened in 2022 and 2023. Further, the company has reported 14 consecutive years of same store sales growth. Hence the IPO of Dutch Bros is looking ‘Attractive’ at the current price band.

However, investment in Dutch Bros is exposed to variety of risks, as company’s business model is exposed to intense competition and price war. Entry barriers into this industry are quite negligible so any new entrants can come and replicate the same business model and disrupt the market of others. Also, the company’s margin is exposed to the volatility in Coffee prices. Hence the risk associated with this IPO ranges from Moderate to High Risk.

 

*The IPO price would be fixed on the 14^th of September 2021

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