Red Flag Alert – Caffeine Jitters

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• Bonus – Latest Master List of Stocks to Avoid

From the “eyes bigger than their stomach” department...

It’s one thing to have a good concept, it’s another to be able to afford it...

Therein lies the problem with Dutch Bros. (BROS), the rapidly growing drive-through coffee chain.

The company has been showing up for months on the “unattractive debt list” published by my friends at Kailash Concepts (KCR). That’s a list that shows companies with rising debt and without enough earnings to cover it.

By virtue of being on that list, it also landed on KCR’s list of 153 “financially fragile” companies with market caps above $500 million that rank in the bottom third of those whose operating earnings can’t cover their interest rate expense.

That story is in the chart below...

Debt (blue line) over the past two years has shot higher, while free cash flow (turquoise), cash (yellow) and net earnings (red) have trended lower.

That’s not a good combo…

Especially not good for a company that has dangled an aggressive growth path in front of Wall Street since its IPO... perhaps too aggressive.

Since its 2021 IPO, when it had just 471 stores in 11 states, the company actively talked about how it believed it could balloon to 4,000 units....

It never said when that would happen.

Now it does, saying it will take somewhere between 10 and 15 years.

As we all know, those targets are meaningless... they’re steeped in little more than aspiration, almost out of whole cloth for most companies. That’s especially true for Dutch Bros, given its need to secure drive-through locations... not necessarily the easiest thing to do. (I questioned the long-term target and the drive-through risk two years ago in a piece headlined, “One Under-Appreciated Risk of the Dutch Bros Hot IPO”.)

And that was before interest rates shot higher.

Now a high-growth model is a high-stakes game in a high-interest rate market...

In a mere two years, the company’s store count has shot up by 60% to 754 stores in 14 states, and its stock has lost roughly half its value (considerably more from its highs.)

That shouldn’t be too surprising, given the company’s performance, with same-store sales not just erratic, but sputtering.

Here’s the thing...

To read the rest please click on the link in the comments below...