$5.00 for a cup of coffee? You must be kidding me! That was my and many others reaction when first made aware of the hyper-successful Seattle coffee chain, Starbucks (Nasdaq:SBUX).
In fact, less than two decades ago, anyone who would have even suggested that consumers would happily pay $3.00, $4.00, or even $6.00 a cup for fancy coffee based drinks would have been laughed out of the room. Well, today, those prices are common with millions of consumers thinking nothing of partaking in such high priced coffee on a daily or even several times a day basis.
These once believed to be fanciful prices have catapulted Starbucks into an over $78 billion global corporate behemoth with over 21,300 stores in 65 nations. At the core, Starbuck’s took an everyday commodity and quickly turned it into a luxury product for the masses.
Talk about an incredible success story!! Fortunes were made by early investors and the company just keeps on growing.
Wouldn’t it be great to have a time machine to be able to go back to Starbuck’s IPO and purchase a few shares?
While that is impossible, there is a newly minted beverage IPO harboring the potential catch fire just like Starbucks. In fact, this IPO soared over 40% on its first day of trading last week.
Rather than coffee, this company focuses on the second most popular beverage in the world, tea. The company is Canadian chain Davids Tea (Nasdaq:DTEA).
Prior to delving into the specifics of the opportunity, let’s take a closer look at the tea business itself.
Tea is the second most popular drink in the world, next to coffee. It is the fourth most popular beverage in the United States. Despite being just four on the retail market value list the United States, it is solidly upward trending. As you can see from this graph, the total wholesale value of the beverage grew by over 500% in the past two and a half decades.
Most interestingly is the United States remains below 10th place in retail volume based on the most recent data. This means there is tremendous upside potential in the marketplace.
In 2014 alone, the U.S. tea business grew by 4.1% to $10.8 billion. The tea market is broken down into four segments. These segments are ready-to-drink, traditional markets such as supermarket, drug stores and mass merchandisers, food service, and the specialty section.
Providing some perspective, the top three tea markets in terms of retail value are China with $9.7 billion, Russia with $4.0 billion, and Japan with $3.5 billion.
The United States Tea Association has stated that four out of five U.S. consumers drink tea. Another very bullish factor for the newly minted IPO.
The company that is about to explode the U.S. tea retail market is David’s Tea.
Launched in 2008, David’s Tea was the original firm to build a network of specialized boutiques and to bring to the market a variety of teas in an attractive contemporary and lively setting.
Today, David’s Tea operates a chain of over 125 shops in Canada and the United States—San Francisco, Boston, New York and Chicago—offering a variety of 150 teas, including exclusive blends, seasonal collections in limited series, classic traditional teas and exotic infusions sourced from the four corners of the world. The Company also offers the largest selection of organic teas and infusions in North America. David’s Tea is presently headquartered in Montreal.
In fiscal 2014, David’s bottom line was positive by just under $6.5 million. Fiscal 2013 and 2012 both resulted in losses. Revenue is rapidly growing with $142 million in 2014, $108 million in 2013, and just $73 million in 2012. Debt is at a very manageable level of $10.5 million at the last fiscal year reported at the end of January 2015.
Growth has been impressive with a 100% store opening growth rate from 2011 to 2014. Revenues have ramped up from $42 million to $142 million over the same time frame. This company expects to add 25-30 new boutiques in Canada and 10-15 in the United States annually.
As in all IPO’s, it is critical to be familiar with the key players. The IPO was underwritten by Goldman Sachs and JPMorgan Chase as lead. Bank of America Merrill Lynch, BMO Capital, and William Blair assisted with the offering.
Head management includes industry veteran, Sylvain Toutant as the President and Chief Executive Officer of the company. Toutant joined the company in May 2014 as President and CEO. Prior, he worked as Chief Operating Officer of Keurig Green Mountain Canada from December 2010-May 2014.
David Segal is the co-founder of DAVIDsTEA and works as the company’s brand ambassador. Since the company formed in 2008, Mr. Segal has worked in several different top-level management positions helping the company develop innovative tea products and building brand exposure.
The super successful IPO raised approximately $97 million via the sale of 5.1 million shares. The company’s valuation jumped to around $625 million on the IPO launch day. This new capital infusion will provide the fuel to create an initial footprint in the United States.
This year the company plans on spending the proceeds from the IPO with $16 to $19 million on CapEx. Eighty-five (85) to 90 percent of its capital budget will go toward constructing, leasing and opening 25 to 30 stores in Canada and 10 to 15 new shops across the United States. The primary working capital needs are for store inventory and operating costs such as payroll and rent.
As you may expect, Starbucks is Davids largest competitor. The monster coffee chain purchased tea merchant Teavana Holding about a year after its IPO in 2011. Teavana boasted 161 stores in the United States and 19 Mexican franchises.
Since the acquisition, Starbucks has witnessed comparable tea sales nearly double.
This raises the question, could Davids Tea be the target of Starbucks or another large company? While no one knows for certain, it remains a possibility that should be kept in the back of your mind.
Make no mistake about it, investing in newly minted IPO’s is risky. Regardless of how aggressive the first day upside, the new stock is subject to multiple headwinds moving forward. David’s Tea has the Starbucks competition to deal with, as well as being largely an unproven concept in many U.S. markets.
How To Play The IPO
The smartest way a long term investor can play the upside in Davids Tea, as well as most IPOs, is to wait for 2-3 weeks after the lock up period expires. Davids Tea’s lock up expires on December 15, 2015, so waiting for the first week of January 2016 is the wisest move right now for long term investors.
Indeed, active short-term investors can trade the IPO on break outs and pullback bounces prior to the lock-up period expiring. The main thing to keep in mind is just don’t plunge into the stock without a plan. Right now, buy on a break of $30.00 per share. The double zeros have traditionally provided psychological support for price. Therefore this level makes sense to make the initial entry. Stops are suggested at $24.98 per share, and our original target price is $40.00 per share. The stops are slightly wider than usual due to the inherent daily volatility of newly minted IPOs. Always err on the side of caution when it comes to actively trading IPO’s.