The $75M David’s Tea (DTEA) IPO is being offered by Goldman and JP Morgan. The market capitalization at the $15-midpoint would be $350M. Expected pricing is Thursday night for trading on Friday. If things go like they did for Teavana then a share price of $26-28 might be expected.
Basically David’s is stepping into the gap in the market left by Teavana after the acquisition by Starbucks (SBUX). SBUX has basically let the brand and strategy fade rather than invest in it. Teavana customers, employees and enthusiasts are looking for a new place to go. Investors might enjoy comparing David’s Tea IPO roadshow slides to the Teavana IPO roadshow. [The Teavana IPO Roadshow transcript and a brief Teavana note are included below too.]
US Expansion is the Key Factor
David’s has 161 shops already, mostly in Canada, and estimates that they have room for a total of about 500 outlets in North America. They have opened a few shops in the US and state that the early results make them confident in their US operations and expansion plan.
However management points out that their payback on US stores is 3 years versus 2 years in Canada. They also acknowledge that grocery has to be a major part of the strategy but we know how intense the competition is for shelf space there.
If David’s has a secret weapon in the US it seems to be the employees and customer service in the shops. The reviews for their Boston store are outstanding. To wit:
“David’s is an absolutely amazing tea shop with some of the best customer service I have ever experienced.” – mentioned in 13 reviews
“I would love to see more David’s Teas open up and overtake Teavana.” – mentioned in 8 reviews
The share may be theirs to gain since Starbucks hasn’t invested much in the Teavana brand. They do sell tea but it doesn’t seem or feel special at all versus their intense coffee culture. Customer reviews of the stand-alone Teavana stores are mixed.
We’d observe that one feature of the shifting landscape of work and the economy is that smart, capable people are not going to be found working in a soul-crushing fast food counter – at least not for long. Indifferent employees and high turnover are the death of many consumer retail franchises and an opportunity for the good ones, like Starbucks, Panera, and Shake Shack to gain share.
Valuation & Stock Considerations
DTEA had revenues of $142M last year which puts them at 2.5x sales. Investors may remember the very hot Teavana (TEA) IPO in July of 2011 which priced above the range at $17 and traded up to $28 in the aftermarket. A year later though the shares were languishing when Starbucks (SBUX) stepped in and bought the company for $620M or $15.50/share at the close of 2012.
At the time of the acquisition TEA had done $133M in revenue through their first three quarters of the year which suggests full year figures in the $170M range which means that the P/S multiple at the time of that acquisition was about 3.6x.
Looking back at TEA should remind investors just how sensitive newly-public companies are to small variations in what’s reported versus expectations. For example when TEA beat consensus revenues FQ4 2012 by just 1.3% all was good, but when they missed FQ1 2013 by a mere 1.7% they took a beating. They tried to recover momentum in FQ2 2013 but spent too much money trying to do it. So SBUX came to the rescue.
If the deal goes anything like Teavana we can expect a strong pricing and aftermarket trading. If we apply the multiple SBUX payed for TEA our current year revenue estimate of $170M we get to $615M or about $26/share.
David’s stated growth plans of 20% top-line with another few points of margin expansion on the adjusted EBITDA line from the current 15% to “high-teens” appears reasonable.
Since selling shareholder are already in evidence here on the IPO we can expect lots more stock to hit the market when lock-ups come off. So the pattern could be similar to Teavana which slumped around the six-month window and then surged again before fundamentals took over.
Many investors might speculate that the ultimately David’s may be acquired by Keurig Green Mountain (GMCR) which could pull it off with their $13B+ market capitalization.
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