Shares of quick-service coffee and beverage chain Dutch Bros (BROS -0.81%) have spiked more than 26% since May 7th, when the company blew away first-quarter estimates. Despite this rise, TD Cowen analyst Andrew Charles believes Dutch Bros stock offers 28% upside over the next year and increased their price target on the company from $33 to $46.
Citing the company's improving unit economics and rising earnings before interest, taxes, amortization, and depreciation (EBITDA) margins, Charles suggested that Dutch Bros could double over the next three years. As lofty as these projections may sound, I can't help but agree that this outcome is well within the company's range of outcomes -- and looking decades ahead, the future might be even brighter.
Why Dutch Bros' improving cash generation is critical
In addition to growing its same-store sales by 10% in Q1, Dutch Bros saw its cash from operations (CFO) margin rise to 14% compared to negative 3% last year, even after removing stock-based compensation. This newfound cash-generating prowess is of paramount importance to Dutch Bros as it will enable the company to begin funding its growth ambitions with CFO rather than stock offerings that dilute shareholders' value.
Over the last year, Dutch Bros generated $178 million in CFO but spent a whopping $243 million on capital expenditures to fund its 22% store count growth. As the company continues to narrow this gap between CFO and capex, it will be less reliant upon stock offerings that have caused Dutch Bros' total shares outstanding to double since its 2021 initial public offering.
The potential for Dutch Bros to fund future growth out of its own pockets could prove to be a game changer for its stock and investors alike, considering management's intentions to more than quadruple its store count from today's levels.
