Hot Stock & Two Smoking Barrels…Of Tea: DavidsTea Has Gone Public
Montreal-based DAVIDsTEA Inc. made its debut on the NASDAQ today at $19 per share and has been steadily increasing its value throughout the day, closing out the day at the $27/share level. This marks a nearly 43% increase from the IPO price putting DTEA off to a great start.
The tea market is very interesting as an investment as tea is not nearly as popular in the hyper-caffeinated, double espresso shot coffee based societies of North America. However, according to data from The Tea Association of the USA via the Motley Fool, domestic sales of tea grew roughly 10% from 2012 to 2014 with generated profits of more than $10 billion, so there is definitely growth to be had in the space.
Claiming that the tea market is going to overtake the coffee market in Canada and the United States would be folly. Providing more detail on an intriguing IPO though, is something worth examining, especially for potential investors.
About DAVIDsTEA IPO
Per the documents filed with the Securities and Exchange Commission, DAVIDsTEA offered 2.99 million common shares selling shareholders offered the rest of the 2.1 million shares, and the company’s underwriters, Bank of America (NYSE:BAC), Merrill Lynch, Goldman Sachs (NYSE:GS), and JPMorgan Chase (NYSE:JPM), have the option to purchase an additional 765,000 shares.
Reuters.com reported the tea company’s initial public offering of 5.1 million shares raised about $96.9 million at the $19 per share price point. Furthermore, Lisa Beilfuss of The Wall Street Journal notes that “at the midpoint of David’s pricing guidance, the company would have a market capitalization of approximately $400 million.”
What Exactly is DAVIDsTEA?
The tea company was founded in Montreal, Canada in 2008. Since its initial founding, DAVIDsTEA has 161 locations with 136 in Canada and 25 in the United States as of May 2, 2015, and has had over 3.5 million unique visitors to its website in 2014. None of the stores are franchised; all company owned. During the company’s 2014 fiscal year, approximately 68% of its revenue from loose-leaf tea and tea-related gifts sales, 22% from tea accessories, and 10% from in-store food and beverage preparations.
Figure 1via DAVIDsTEA INC. filing
Currently, DAVIDsTEA has over 150 varieties of tea and a selection of tea-centric accessories. Its most successful markets, both in Canada and the United States, are primarily in highly populated urban centers: Montreal, Toronto, Vancouver, New York, San Francisco, Boston, and Chicago. The company’s mission is to “make tea fun and accessible.” They believe their brand’s “passion for tea and breadth of offering” its large quantity of teas in their stores will “cause customers to see tea as fresh and stylish.”
At each of its retail stores, DAVIDsTEA provides “Tea Guides,” where they “share our knowledge of tea with our customers through sampling, education and by showing customers that tea is easy to prepare, comes in a variety of great flavors and is suitable for multiple occasions.” This theme of freshness and tastefulness the company promotes with its products is reinforced with the stores' layout, especially the ‘Tea Wall.” This is the vocal point of the store, displaying approximately all of its 150 varieties of loose-leaf teas and tea blends.
The price of the loose-leaf tea is somewhat expensive, relative to the price of more mainstream tea brands like Lipton, where one can purchase 312 tea bags (24.9oz) for $9.98. The cheapest green tea DAVIDsTEA sells is its Genmaicha, 1.76oz for $6.50.
Seeping With Potential
Despite being more expensive than the mass produced tea options, DAVIDsTEA only has to share the upscale tea market with one notable competitor, Starbucks (NASDAQ:SBUX). Starbucks expanded its caffeinated empire by acquiring the Atlanta-based tea company Teavana back in 2012.
According to the Motley Fool, Starbucks has been reluctant to disclose Teavana’s financial figures, making it difficult to compare to the most recent DAVIDsTEA figures. What is known about the tea company is that before it was purchased by Starbucks, Teavana had year-to-year growth of 35%. The Motley Fool article also notes that “Starbucks bought it for $15.50 per share -- a 54% premium over the market price at the time,” suggesting that investing into the tea market may be worth the investment.
This specialize tea market has much room to go. Sales from both DAVIDsTEA and Teavana (from the figures before Starbucks) indicate rising profits. Between the two companies, there are a total of roughly 500 stores spread throughout the United States, Canada, and Mexico (Teavana has over 300 locations in North America); there just are not many specialized tea stores compared to coffee shops.
Regarding DAVIDsTEA, their clear and “fresh” branding and marketing should absolutely appeal to consumers looking for higher quality tea not sold at a supermarket. The company’s growth throughout these past four years without heavy expansion into the U.S. market is promising. With the capital generated from this IPO, DAVIDsTEA should have the cash to begin further expansion into other American urban centers such as Los Angeles and Washington DC.
Proclaiming DAVIDsTEA as the tea equivalent as Starbucks would be ill-advised as of right now. It took Starbucks decades to become the coffee juggernaut it is today. However, it may be worth it to investors to do some further investigation of DAVIDsTEA and see if this upstart can become the Starbucks of the quickly growing tea world.