Shares of coffee chain Dutch Bros(NYSE: BROS) dropped 21.5% in September, according to data provided by S&P Global Market Intelligence. The company sold shares during the month to pay off debt. And various analysts lowered their expectations for the stock price.
On Sept. 7, Dutch Bros announced that it was selling more than 11.5 million shares to raise $300 million. The good news is that the company only had $203 million outstanding on its debt, so the offering wipes this out completely. The bad news is that it dilutes shareholder value. And unfortunately the stock only sold for $26 per share, even though it was trading higher when the offering was announced.
Following this stock offering, Stifel analyst Chris O'Cull lowered his price target for Dutch Bros stock from $36 per share to $32 per share, according to The Fly. UBS analyst Dennis Geiger didn't cover Dutch Bros stock prior to September. But on Sept. 21, Geiger initiated coverage with a price target of only $28 per share -- even lower than O'Cull's price target.
Neither the stock offering nor the analyst commentary helped to boost the stock price of Dutch Bros. Moreover, the S&P 500 was down about 5%, and these adverse market conditions provided additional downward pressure.
With interest rates rising, there's a good case for Dutch Bros paying off its debt. As the chart below shows, the company's quarterly interest expenses have been going up quite a bit. Paying these off will give it more money for investing in the business.
However, selling shares is a reminder of Dutch Bros' complicated share structure. In the second quarter of 2023, the company had a diluted outstanding share count of 57.4 million. But this is technically the share count for Dutch Bros PubCo; the share count for Dutch Bros OpCo, as of June 30, is much higher -- 163.8 million units. I told you it was complicated.
Without going too much further into the weeds, we can think of this larger number as the true share count for Dutch Bros. That means that the company's market capitalization, and hence its valuation, is a lot higher than it seems at first glance -- around $4 billion.
Dutch Bros has over 750 drive-thru coffee locations, of which 438 are company-owned. Management intends for the majority of its growth to come from opening new company-owned locations, rather than franchising. This is because stores generally have good profit margins and the payback period is fairly quick.
Dutch Bros may have sold shares in September. But it's at least comforting to know that much of the money went to paying off debt, and the rest will be used to fuel growth. Both things could be good for shareholders long-term, even though the offering is diluting value now.
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