Company-owned stores have a contribution margin of about 30%, which is a fancy way of saying store-level profitability. Franchise revenue is just a high-margin licensing fee. Overall, it appears that Dutch Bros has a rock-solid unit economy with plenty of room to expand profit margins. Over the past twelve months, the company’s operating margin has hovered around 8%. The combination of franchise stores and company-owned stores means profit margins have a lot of room to expand in the coming years as the company gains scale.

Dutch Bros shares are up 43% this month and more than 80% in the past twelve months. The stock’s market capitalization now stands at approximately $7.5 billion, with a price-to-earnings (P/E) ratio of 168. While this P/E may seem extremely high at first glance, Dutch Bros is barely profitable today and has still long life. growth path lies ahead.

Let’s illustrate the company’s profits across 4,000 restaurant locations, which the company expects to grow to over the next 10 to 15 years. Today, each store generates annual sales of $2 million, which could grow to $2.5 million through consistent comparable sales growth. $2.5 million in average unit volumes (AUV) and 4,000 Dutch Bros locations equal $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 profit impact will be the same. Assuming a 15% net income margin on that $10 billion revenue figure turns into $1.5 billion in annual revenue for Dutch Bros once it reaches 4,000 locations. That’s a price-to-earnings ratio of about five compared to the 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.

Consider the following before purchasing shares in Dutch Bros:

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool on. The Motley Fool has a disclosure policy.

Huge News for Dutch Bros Stock was originally published by The Motley Fool