IPO Outlook: DavidsTea Comes In 150 Flavors Investors Can Enjoy

Hot IPO Brewing Up This Week with DavidsTea

Fast-growing beverage retailer DavidsTeaDTEA will deliver its hot IPO issue this Friday, June 5. The company plans to sell 5.1 million shares between $14 and $16 per share under the ticker DTEA on the NASDAQ. The offering expects to raise $75 million to fuel expansion and due to popularity within the restaurant and food IPOs, it may surpass that goal.

DavidsTea began in Montreal, Canada by Herschel and David Segal in 2008. The two brothers wanted to capitalize on the big shift of consumers’ focus on health and wellness by showcasing tea’s potential health benefit. Six years later, the company now has 161 locations with 25 in the United States. The company has a wide selection of 150 teas for customers to choose from and provides a fun and simple retail experience.

DavidsTea operates in the large and growing global tea industry which did $40 billion in retail sales in 2013 according to Euromonitor International in 2014. The company believes that due to its fast success and brand appeal, it’s in a strategic position to grow to 530 locations in North America. DavidsTea expects growth to come from the United States in cities like New York, Boston, Chicago, and San Francisco.

Reinventing the Tea Experience

The company’s mission is to make tea fun and accessible. With 150 varieties of premium and tea blends for customers to choose from on the store’s “Tea Wall’’, DavidsTea continues to deliver a fresh, stylish feel.

The company’s retail experience is led by its Tea Guides who provide customers with samples, education, and demonstration on different tea varieties and how to prepare them. DavidsTea feels this type of customer interaction gives them a competitive advantage by not only providing more value to the end user but at the same time serves to reinforce by its brand and bottom-line through repeat customers.

Another key to the company’s success is its focus on product development and innovation. DavidsTea product development and sourcing teams work constantly to improve the taste and presentation of its existing tea blends while creating 30 new offerings per year.

The company has launched over 400 teas since inception as well as retailing accessories such as tea-scented candles, gift boxes, and tea sachets. This innovation serves to not only retain existing customers but improve market share by attracting new customers to the tea company’s brand.

As tea naturally contains no sodium, fat, carbohydrates, and is nearly sugar-free, the company is able to capitalize on the growing consumer demand for healthy and organic food lifestyles. Evidence exists in stores such as Kroger, Target and even Walmart’s healthy, organic food selection, putting strain on the originator of healthy shopping, Whole Foods WFM.

DavidsTea offers one of the largest certified organic collections of tea among branded tea retailers in North America.

Financials

The company grossed $141 million in revenue for 2014, increasing 31.2 percent from $108 million in 2013. Revenue continues to increase year over year since 2011’s $42 million in sales, and $73 million in 2012.  Net income increased to $6.45 million from ($6.16) million in 2014. The bulk of the company’s revenue came from its tea offerings (68 percent) with 22 percent from its tea accessories and food and beverages offered at the stores comprise the remaining 10 percent.

DavidsTea has a strong e-commerce component with 3.5 million website visitors in 2014. In 2010, e-commerce sales only totaled 2.7 percent of revenue but that amount has grown to 7.9 percent in 2014. DavidsTea projects this number to climb to 15 percent of online related sales.

The company’s primary sources of liquidity is cash flows from operations and borrowing from its credit facilities. Its main cash needs are for cap/ex related to new stores and working capital.

During 2015, DavidsTea expects to spend about $16 to $19 million on cap/ex. 85 to 90 percent of its capital budget will go towards constructing, leasing, and opening 25 to 30 stores in Canada and 10 to 15 stores in the United States. The primary working capital needs are for store inventory and operating costs such as payroll, rent, etc.

Teavana and Starbucks Serve as Forward Indicators

A close look at tea retailer peer Teavana, sheds a positive light for DavidsTea’s future. At the time of its IPO in 2011, Teavana had 161 stores primarily in the United States and 19 franchises in Mexico.

Like DavidsTea, Teavana’s financials were solid with a loyal customer base. The company priced at $17 and closed on $27.80 on NYSE. A year later, Starbucks acquired and took private the company for $670 million. Since then, Starbucks has been happy with its acquisition, as the company has claimed on earnings calls that Teavana has been a contributor to growth and 7 percent in same store sales growth in the United States market.

Since the company was added in Starbucks stores, the coffee giant has seen comparable sales growth in tea almost double. With more than 300 Teavana stores open throughout the United States, Canada, and Mexico, Starbucks still feels that the number could grow to 1,000.

Conclusion and Pricing Info

Like the fast casual restaurant concept, the tea market continues to be a hot for North America with the health and wellness trend reaching everyone from baby-boomers to children growing up on green smoothies. DavidsTea’s solid financials, unique retail experience and focus on product innovation brews together the makings a hot IPO. Investors can expect the offer to price above its expected range someone around $17 per share.

DavidsTea estimates the net proceeds from this offering to be $37.3 million. The company intends to use the money raised to repay around $3 million in debt (Canadian currency) and for working capital to expand its stores and general corporate purposes.

The underwriters for the offerings include Goldman Sachs, BofA Merrill Lynch, and J.P. Morgan. The company will offer 5.1 million shares at a price range of $14 to $16 per share. It will list on the NASDAQ under the ticker DTEA. Pricing is expected for Thursday night.

Thursday June 4

Penntex Midstream PartnersPTXP plans to offer 11.25 million shares at a price range of $19 to $21 per share through Citigroup, Barclays, and RBC Capital Markets.

Friday June 6

DavidsTea Inc.DTEA plans to offer 5.1 million shares at a price range of $14 to $16 per share through Goldman Sachs, J.P. Morgan, BofA Merrill Lynch.

Evolent HealthEVH plans to offer 10 million shares at a price range of $14 to $16 per share through J.P. Morgan, Goldman Sachs, and Wells Fargo.

EPCM HoldingsEPCM plans to offer 6.25 million shares at a price range of $15 to $17 per share through J.P. Morgan, BofA Merrill Lynch, and William Blair.