Shares of the coffee chain Dutch brothers (BROTHER -1.32%) fell nearly 20% after the release of second-quarter results as forecasts disappointed investors. The decline pushed the stock into negative territory for the full year.

Was the sell-off an overreaction? And should investors buy the stock if the price falls?

Increased guidelines are not enough

In the second quarter, revenue rose 30% year over year to $324.9 million, beating the analyst consensus by over $7 million. Adjusted earnings per share (EPS) rose 46% to $0.19, also beating analysts’ estimates. The company’s results beat expectations on two of the key numbers investors look for when it releases earnings.

Sales in stores increased by 4.1%, while sales in company-owned stores increased by 5.2%.

Dutch Bros is, first and foremost, a growth story, and in that regard, the company opened 36 new cafes in the quarter, 30 of which were company-owned. At the end of the second quarter, there were 912 locations (612 of which were company-owned).

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 34% year-on-year to $65.2 million.

The company raised its full-year revenue guidance to $1.215 billion to $1.230 billion, up from a previous guidance of $1.200 billion to $1.215 billion. It expects store sales to grow in the low single digits. It also raised its EBITDA guidance to $200 million to $210 million, up from the previous range of $195 million to $205 million.

However, management cautioned that the number of new store openings this year will be at the low end of its 150-165 guidance range. Dutch Bros is recalibrating its real estate model to ensure it develops locations with the highest average sales volume (AUV) potential and refocusing its pipeline on more capital-efficient leases. This should result in new stores with higher AUVs and lower capital expenditures per store.

Image source: Getty Images.

Is it time to buy the dip?

The combination of fewer store openings this year and falling in-store sales in the second half as the company faces a big price increase appear to be the main reasons for the share price drop. The company reported a 10.0% increase in store sales in the first quarter and a 4.1% increase in the second quarter, so the low-single-digit forecast for the year implies slower growth for the rest of 2024.

Investors don’t want these growth phases to slow down. However, expansion for the sake of expansion is not good, and deciding to optimize the strategy for opening new stores is the right move, even if it means a temporary slowdown.

Dutch Bros’ stores are on the small side, and with just over 900 locations, there is still long-term expansion potential for the company. At the same time, it is still in the early stages of adopting mobile ordering, which should be a good growth driver. The company has also entered some markets and is intentionally trying to redirect sales from some stores to newer stores, so I wouldn’t be too worried about the same-store sales forecast. Demand doesn’t seem to be an issue yet.

Valuing a company like Dutch Bros can be difficult because there is still a long growth phase ahead for new stores. Management hopes to open over 4,000 stores in the next 10 to 15 years, yet the stock trades at just 2.2 times sales at the time of writing. Compare that to its competitor Starbucksa much more mature company struggling with declining revenues and still trading at 2.5x sales.

As for restaurant stocks, I would buy Dutch Bros given the current weakness.