DTEA - David's Tea

[SwimmingNaked]

Thought I'd start up a discussion on this, I think this is growth at a very, very reasonable price. Getting a hot retail concept at a not so hot price.

 

Company sells all things tea, from loose-leaf teas that customers prepare at home, to tea related accessories and in-store beverages. Great unit economics + great branding (imo) + customers love the company + proven retail concept in 100+ cities and 170+ stores in US/Canada + a simple and credible runway for growth. This stock got a little crazy at the IPO as a lot of people apparently didn't read the prospectus to figure out that they were going to experience significant dilution but now all the major dilutive securities (series A preferred shares) have converted to common and eliminated from the capital structure.

 

 

Business

 

The company at end of fiscal 2014 operated 154 stores, plans on adding another ~40 stores this year and expanding its store base by ~20% annually. The company is targeting 550 stores at maturity, which to me seems like a pretty conservative number. Repeatable retail concepts with attractive economics that have proven out in different geographical areas can generate excellent returns as it becomes a matter of simply intelligently rolling out additional units. 80% of stores are in Canada and 20% in USA, over time this will move towards a 50/50 split.

 

The company will generate around 180-185 million CAD in sales this year and ~15 million in EBIT. Revenue grew 31.2% in 2014 and has grown at 30+% yoy again in both Q1 and Q2 of this year. Comparable sales have grown for 24 consecutive months, and in the most recent quarters were +6.3% (Q1) and +6.9% (Q2). The business is seasonal with 60+% of sales occurring in Q3 and Q4 (ie. Aug-Jan). Considering only Q1 and Q2 have been reported since the company went public, this may be obscuring the annual earnings power of the business to the market. Customers love this company and it shows not just in the numbers, but also when you speak to them. The company’s enthusiastic customer base was actually what initially made me take a closer look at it as a potential investment.

 

The company spends around 280-300k to build out a store, expects the payback period to be ~2 years for Canadian stores and ~3 years for US stores with a normalized per store EBITDA around 200k/year on annual revenue of ~750-780k per store. The expected cash on cash ROIC for an immature store based on these targets is 40+% for Canadian stores and 25+% for US stores, and this only gets better as stores mature. The expectations difference between the two markets is due to brand awareness being much higher across Canada which results in stronger store sales from the get go (payback period for Canadian stores now is probably more like ~1.5 years). The company has been cash flow positive and can comfortably self-fund its expansion from a 63 million cash balance achieved from IPO proceeds. Opening 40 stores a year would require ~12 million in capex. An additional 3-4 million of capex is also required for store renovations and another 2-3 million for the company to make investments to grow and optimize its infrastructure. The company doesn’t necessarily need to draw down on its cash balance too much as its cash earnings power going forward is in excess of the 18-19 million of total (current) capex requirements of the business.

 

The company also has an ecommerce channel, which accounted for 8.1% of total sales in 2014. The company thinks ecommerce can ultimately account for 15% of sales as brand awareness grows across the US. Management has stated several times that ecommerce sales are accretive to margins and carry a higher ticket price. Ecommerce sales have been growing even faster than the growth in store sales so this will be very valuable piece of the business going forward.

 

Creditability check of unit economics #1: Backing out the company’s ecommerce sales from its total 2014 sales yields average sales per store of 848k (130.5 million/154 stores). This matches up favorably with numbers provided by management. While a few stores generating much more revenue than the typical store could bring up this average, the number is actually very impressive when we take into account the high percentage of “immature” stores in the company’s portfolio (30+% of stores were under 2 years old at end of fiscal 2014). It should also be considered that 154 stores is the 2014 year end total and at least 20+ stores did not operate for the full year, so the sales/store number should be even higher if we had the opportunity to look at just the stores that operated for the entire year. To me this signals that the new store sales target of 750-780k management has guided to the street is not only credible, but on the conservative side of things.

 

Credibility check of unit economics #2: Annual sales of 750k over 350 operating days breaks down to sales of $2142/day or 15k a week. The average store is open around 75 hours a week which breaks down to sales of $200/hr. Average ticket price at retail locations is in the mid to high teens (mentioned by management) implying that for a store to hit this target it would have to serve around 11-12 customers per hour. This is not an ambitious number and again implies to me that these numbers are on the conservative side.

 

The company has easy opportunity to expand operating margins over the next few years. SG&A as % of sales will continue to fall as the company grows because corporate overhead will not grow as fast as sales, so there is operating leverage from this line item. Like many growing companies there is room to expand margins just by leveraging the existing cost structure of the company. SG+A was 51.1% of sales in 2012, will be around 43-44% of sales this year (would be even lower if not for IPO related costs) and can very easily fall to the mid-30s% by 2017.  Management has guided towards medium term EBITDA margins in the high teens (which would work out to EBIT margins in the mid-teens), up from the 10-11% EBITDA margins (~7% EBIT) in the previous two fiscal years.

 

Gross margins have been around 55% in the past will contract by ~300 bps in 2015 primarily due to FX headwinds (most of the purchases are in USD while most of revenue is in CAD). However, overtime, FX will be less of an issue as the US store base grows providing the company with a natural hedge against CDN/USD FX movements. The company’s US expansion has been going well, management has stated that US stores have seen higher comparable sales growth than Canadian stores this year (which is expected given the lower brand awareness and more immature store base in USA). This could be an issue in 2016 because the company's hedges at 1.23 CAD will roll off at end of this year, so we could see further pressure of gross margins in 2016. Management has mentioned that it is taking initiatives to counteract this through conservative price increases and seeking cost concessions from suppliers.

 

Tea consumption in North America has been growing rapidly as it benefits from consumer trends. While forecasting consumer trends is not exactly my specialty, I think the case for growth in tea consumption is credible and reveals itself convincingly in the data. Tea consumption in USA increased at an annualized rate of 20% a year from 2000 to 2014. On a relative basis coffee consumption is falling and tea consumption is increasing. In a survey conducted by marketing research firm YouGov, millennials are the first and only generation that is equally split between coffee and tea (at 42% each) when asked to indicate their preference between the two, while those older than 65+ overwhelmingly preferred coffee to tea (70% to 21%). So, demographics and consumer trends appear to be going in a favourable direction.

 

The company’s main competitor is Teavana, which Starbucks bought out in 2012 for 620 million back when Teavana was generating roughly the same amount of sales as David’s Tea will this year (though Teavana had gross margins above 60%, presumably due to higher pricing). David’s Tea has greater brand awareness in Canada and Teavana has greater brand awareness in USA. I think the tea market is big enough and growing fast enough for both Teavana and David’s Tea to get their fair share (DTEA’s management believes the same thing and actually somewhat likes the fact that they have another major competitor introducing the American population to specialty teas), David’s Tea is more loved by the customer based on my conversations with customers who have shopped at both stores. Better customer experience was the most common reason as many reported being turned off by Teavana’s aggressive in-store selling practices (online scuttlebutt reveals the same thing). David’s Tea also sells at lower prices (though they've been raising them slightly), has a more expansive loose-leaf tea selection and is slightly different in its mix of sales.

 

There is also a bit of customer loyalty in this business as over time, customers develop their own favourite tea blends, many of which are unique to the David's Tea stores and can only be found there (because the company develops and names them). The company last year launched a loyalty program for "frequent steepers" and mentioned that it already has over a million members. Management has stated that it will reveal more details about the program numbers soon.

 

 

Valuation

 

The company trades on the NASDAQ in USD but its presentation currency is CAD, so the valuation is in CAD, therefore needs to be cut by 20-25% to arrive at a USD valuation.

 

At the current market cap of ~270 million USD, we are getting a company that is growing at 30+% a year, has a long and credible runway for growth, easy opportunities to expand margins, high rates of return on invested cash, a brand that is loved by its customers, for approximately ~8.5x conservative 2017 EBIT or ~6.5x when you back out the cash. This is a very reasonable price for the kind of growth and quality we are getting.

 

2017 valuation and key assumptions:

 

Store base: 290 (up from ~195 at this fiscal year end)

Avg sales/store: 886k (up from ~850k this year, growth of 1.5%/year ie. inflation)

Ecommerce sales: 9.1% of total sales

 

This would work out to sales growing at 24.5% annually over the ~180-185 million this year to reach 282 million in 2017. This is lower than the 30+% sales growth company has seen this year and last year, so I feel I'm being conservative here.

 

At 290 stores, 53% gross margins and SG+A spend at 37.5% of sales, the company can comfortably clear 40 million in EBIT and 50 million in EBITDA. This is a retailer that would still be growing at 20+% a year with a lot of room for penetration across USA and Canada, so an EBIT multiple of 15x is not a stretch, which implies a 2017 valuation of 600+ million CAD, which if discounted by 20-25% gives a USD valuation of 450-480 million (70+% above the current market cap). EBIT and EBITDA margins would be 15.5% and 18.7% under this scenario, which is in line with management’s conservative guidance of EBITDA margins in the high teens.

 

I feel these are conservative assumptions for several reasons:

 

- I expect total stores to exceed 290 as company now has a significant cash balance from IPO to accelerate expansion, particularly in the US market.

- I am increasing average sales/store at 1.5% a year which is basically the expected rate of inflation, in the past this metric has grown at a much higher rate even with a high number of immature stores. I feel this is an overly conservative assumption.

- I am assuming ecommerce’s contribution to total sales increases to 9.1% from the 8.1% in fiscal 2014. Management thinks they can eventually bring ecomm’s contribution to the mid teens, especially as brand awareness grows in USA. Ecommerce sales have increased faster than non-ecomm sales so a move in contribution from 8.1% to just 9.1% in three years is overly conservative.

- 53% gross margin is lower than what the company has achieved in the past. 55+% is comfortably achievable as FX issues slowly abate, price increases take hold and the ecommerce business continues to grow.

- For SGA to be 37.5% of sales, it would increase by 14 million a year over the next 2 years based on my estimated SG&A expense of 78 million this year. Absolute increases in SG&A expenses have actually been falling because a good chunk of SG+A expense does not need to be scaled up as the company’s footprint grows, but I still assume SG&A increases at 14 million/year, which was the total increase in fiscal 2014.

 

More bullish assumptions (310 stores, ecommerce increasing to 11% of total sales, sales per store growth of 3.5%, 55% gross margins, SG+A still growing at 14 million/yr) yield EBIT in excess of 70 million and EBITDA over 80 million. Under this scenario, the company’s value would be well in excess of 1 billion CAD or ~3x current levels. This is not necessarily an overly optimistic scenario as sales would need to grow at 31% per annum over the next two years which is about the rate at which sales will grow this year. This scenario therefore assumes that sales growth is simply maintained for another two years and low hanging operational efficiencies are realized.

 

Margin of safety: The company is cash flow positive (on annual basis, seasonality can result in negative CFO in first two quarters as SG+A spend is stable across the year), has ~100 million in cash + PPE and no long term debt if you’re looking for a tangible margin of safety. Yes, cash will be invested to expand the company’s store base however CFO will comfortably replenish and grow the cash balance over time as cash earnings will exceed the required capex.

 

I feel the significant net cash balance combined with the company’s proven success in the Canadian market protects us from significant downside, even if one were to be skeptical of the company’s expansion in the US market. The Canadian side of the business at the 230-240 store target would be conservatively worth more than the current value of the company. Another way to think about this investment could be that we are getting a very cheap to free option on the company’s US growth plans (potentially a 300+ store market), so the risk reward is very attractive.

 

 

Reasons why I think this opportunity exists (I'm speculating here):

 

- trades on NASDAQ, many US investors maybe not aware of this company's popularity in Canada

- tax loss selling

- strongest quarters have not been reported yet, annual earnings power not totally visible to market

 

 

Risks:

 

- wall street crushes these kind of stocks if they report underwhelming comp sales

- products are discretionary

- increased competition from Teavana

- minimum wage hikes

- FX

- sloppy execution of US expansion

[eclecticvalue]

Does David's Tea sell at grocery stores? Because I can see consumers buying majority of Tea at the grocery stores and not seeing a discernible difference between David's Tea vs other brands.

[nodnub]

Does David's Tea sell at grocery stores? Because I can see consumers buying majority of Tea at the grocery stores and not seeing a discernible difference between David's Tea vs other brands.

 

"majority of tea" may not a good measuring stick..  I think DT primarily sells medium/high quality loose teas. This kind of stuff is rarely stocked in any grocery stores. 

 

The people that buy tea bags in grocery store are paying 3c a tea bag for regular black tea.  The DavidsTea customer is choosing unique blends and flavours of loose tea and taking them home to brew. Their consumption is more analogous to the coffee afficionados that spend $15-20/lb on expensive coffee, own a burr grinder, and use an aeropress to make a home coffee.

 

[kab60]

Very interesting writeup, thanks! What are your thoughts on management? Incentives aligned, owner-operated, compensation?

[siddharth18]

Thanks for the writeup. Seems interesting - here's the company intro video -

 

Here's a short case that was posted on SeekingAlpha - but seems a bit specious and myopic IMO - http://seekingalpha.com/article/3672616-davids-tea-a-toxic-brew-of-sweet-promises-overpowered-by-bitter-reality ... and as with most things on SeekingAlpha - the comments are more illuminating than the article!

[cmlber]

SwimmingNaked, thanks for the post.  This sounds pretty interesting.  I just opened up the 10Q and EBIT was -$4m first half of the year.  Is it really so seasonal that they'll do $15m for the year but -$4m for the first half?  Or are you making some adjustments to the first half?

 

Also, have you noticed Bloomberg shows it as having $19.8m in cash and $33.1m in debt?  10Q shows $63m in cash and no debt...

[snowball82]

@cmlber Thanks to add the idea here. What is you valuation if only 10 % growth and gross margin at 48-50 % during next 5 years ?

[SwimmingNaked]

Does David's Tea sell at grocery stores? Because I can see consumers buying majority of Tea at the grocery stores and not seeing a discernible difference between David's Tea vs other brands.

 

The avg David's Tea customer wouldn't touch the teas you get at grocery stores with a ten foot pole. Grocery stores cannot offer the same quality or carry as many SKUs because of limited shelf space + lack of economic viability. The customer experience is also completely different.

 

 

On the left hand side of this picture you will see the "tea wall" which are all the different loose leafs customers can purchase in-store. Compare that selection to what you get at grocery stores...

 

Very interesting writeup, thanks! What are your thoughts on management? Incentives aligned, owner-operated, compensation?

 

Insiders own most of this company. Lock up period expired Dec 3, there might have been some shorting going on because of that, but management would be pretty silly to sell stock at these prices unless they needed the money for personal reasons. Doesn't appear there has been insider selling as stock has moved up a bit since lockup period expired.

 

SwimmingNaked, thanks for the post.  This sounds pretty interesting.  I just opened up the 10Q and EBIT was -$4m first half of the year.  Is it really so seasonal that they'll do $15m for the year but -$4m for the first half?  Or are you making some adjustments to the first half?

 

Also, have you noticed Bloomberg shows it as having $19.8m in cash and $33.1m in debt?  10Q shows $63m in cash and no debt...

 

Well, in 2014 Q1 and Q2 comprised 37.1% of total sales (141.8 million sales total, 52.7 million was in first half and 89.1 million in second half). Part of this is because company opens up stores throughout the year so there are more stores open in second half of year than in first half, but a major part of it is the seasonality associated with tea consumption as well as seasonal boost from holidays. I mean just pro-formaing this out to first half of 2015 numbers (sales of 68625/.371) suggests ~185 million in sales. They also had one time IPO related costs of about 4-5 million so first half SG+A is somewhat elevated over last year. In first half of '14 they did 1.3 million in operating income and this year they were -4 million, this is due to a) IPO related costs and b) 270 bps contraction in gross margins for reasons mentioned in OP. Because of this seasonality, SG+A as % of sales in first half is much higher than it is in second half so this ends up masking the company's full year profitability.

 

Management has guided for sales of 173-176 million (which is ridiculously conservative, company should easily do 180+ million, 174.5 million in sales implies yoy sales growth of 23% when the company has already done 30+% yoy in first half), and adj net income of 9-10 million for this fiscal year. I assume 182.5 million in sales this year (28.6% sales growth though 30+% appears to be in the bag), 51.2% gross margins, 78 million in SG+A spend and that gets me to a little over 15 million in operating income. The stock is priced like 20 million in EBIT is the company's true normalized earnings power, which is silly given the sales growth and margin expansion opportunity for this company. Even if one is skeptical of how US expansion will go, the hurdle the company needs to meet to support current valuation is not very high.

 

Bloomberg appears to be living in 2014 land as that was the balance sheet position at end of fiscal 2014, before the company received proceeds from IPO (net IPO proceeds were ~68.5 million). It used these proceeds to pay off all the debt which was financed by Rainy Day Investments (Herchel Segal's finance/investment company, he is the co-founder along with David Segal).

[eclecticvalue]

Thank you for replying. My thoughts now lie whether David's can attract new customers and switch coffee drinkers to Tea drinkers. Because that is the battle and there isn't something visible like keurig/ coffee maker that's analogous to Tea. A system that's similar to keurig could help users switch. There isn't a trademarked system out there. I have thought about inventing one.

[cmlber]

Thank you for replying. My thoughts now lie whether David's can attract new customers and switch coffee drinkers to Tea drinkers. Because that is the battle and there isn't something visible like keurig/ coffee maker that's analogous to Tea. A system that's similar to keurig could help users switch. There isn't a trademarked system out there. I have thought about inventing one.

 

Pretty sure a Keurig can make tea...

 

I also don't think "Can David's switch coffee drinkers to tea?" matters.  If they are getting 2-3 year payback on new stores, that's all that matters.  Converting more coffee drinkers to tea drinkers in the long run will just make the economics even more attractive. 

 

I do wonder though if those unit economics deteriorate as competition enters...

[intothebreach]

SwimmingNaked: Thanks for starting this thread, and for the very detailed first post. I want very much to like this opportunity as it is based in my own back yard (Montreal), I believe the long-term trend in tea consumption and I even like the look of their stores. And I would like nothing better than hitch a ride on a good growth story at a decent price.

 

Earlier today I was in a shopping center which has both a David's Tea and a Teavana and I went to check both. At first impression, David's Tea looks much better and the focus is primarily on teas, where Teavana looks like a retailed of tea accessories ("teaware") that also happens to be selling tea. Both had tea tasting in place, but the person at Teavana was much more agressive in pushing the hard sale (too much in my opinion). There again, David's Tea came out ahead. If only I could say the same for the investment opportunity.

 

Unfortunately I just can't get there. I personally think that for a change the SeekingAlpha article mentioned earlier raises valid concerns related to the capacity of the management team and the role of price increases in the story so far. Expiration of the lock-up period is also something to keep an eye on to see what insiders will do.

 

There may be a trading opportunity on account of the information available on Bloomberg and similar being off, but I don't think we have the right management in place to adequately manage a longer-term growth story, nor the board.

 

Maybe I'm wrong but for what it's worth, I believe the CEO's track record raises significant questions. Under his tenure at the provincially-owned SAQ, the wine and alcohol quasi-monopoly of the province of Quebec got into trouble for suggesting that suppliers raise the price paid by the SAQ (which would have increased profits at the expenses of consumers, who are in fact the real owners here). This was apparently not the CEO's initiative, but he still got blamed for the lack of governance that allowed it (it was stopped prior to implementation after a supplier contacted a newspaper and the story was made public). There was another less-than-glorious performance at San Francisco, a clothing retailer past its former glory. Although to be fair, all of these are quite dated, and he does have related experience. The majority owner's main qualification was building what once was a very successful clothing retailer that has now been in turnaround mode for a number of years and as the SeekingAlpha article pointed out, that earlier failed to enter the US market, which may be considered a positive here as I'm sure some lessons were learned, but does not inspire much confidence either.

 

Also, competing with Starbucks-owned Teavana seems like a very tall order to me. Not only will Teavana have access to the purchasing power, management and real estate expertise of Starbucks, but they will also have access to its deep wallet. As attractive as the US retail market appears to Canadian retailers (at approx. 10 times the size), there is a long list of Canadian retailers that had to learn the hard way that bigger opportunities also breeds better competition.

 

Just for fun (yeah right...) I compared US selling prices on both David's Tea's and Teavana's websites, and for each major tea categories (black, white, green, oolong), Teavana always had both a lower selling price (by a few pennies), and also a wider price range (strangely enough though, some Teavana's teas were listing in the hundreds of dollars, but that seems to be an error as the price was corrected to around $15 for 2 oz on that specific tea's page). So the better margins of Teavana may come more from its sourcing than its pricing.

 

For me to invest, the price would have to get ridiculously cheaper to compensate for the management, or the management team would have to be improved significantly. More than 50% of the shares being owned by a single individual probably limits to appeal to an activist, although it stil could get sold to a better operator. In the meantime, I'll keep an eye on it to see if insider dumping push it into "stupidly-priced" territory.

[eclecticvalue]

Creating a "Tea culture" in the United States would be a big for David's and if there is a way to do so. Then I see this company doing well when it comes to runaway growth.

[Patmo]

Thank you for replying. My thoughts now lie whether David's can attract new customers and switch coffee drinkers to Tea drinkers. Because that is the battle and there isn't something visible like keurig/ coffee maker that's analogous to Tea. A system that's similar to keurig could help users switch. There isn't a trademarked system out there. I have thought about inventing one.

 

Coffee and tea are not mutually exclusive, I drink plenty of both personally. David's teas are a great blend between quality teas for purists and fruity-type stuff that appeals to the masses. They've got a flavor for everybody.

 

I have no opinion on this company as a business or investment, but as a relatively enthusiastic tea drinker I'm pretty impressed with David's. Also, whenever I talk about tea to any random person, it seems that everybody will bring up David's Tea into the conversation at some point, without fail.

[SwimmingNaked]

Great quarter.

 

Sales +32.5% yoy

Comp sales +6.3% yoy

Added 18 new stores over the quarter (putting that IPO cash to use)

Gross margins continue to be depressed due to FX

 

Looks like sales will be somewhere between 185-190 million CAD for the year and they'll get ~15 million in EBIT out of that (which would be closer to 20 million excluding IPO related expenses). I think this gets to $15/share pretty quickly, the short interest had been steadily rising because you had these moron shorts playing the "lock up expiry" card, not realizing there is zero reason for insiders to sell at this valuation given the prospects of the business.

 

I think they'll get 30+% growth again in 2016 as there's so much white space for expansion and they are still not in a lot of obvious markets. But assuming 27.5% growth, 50% gross margins, SG+A at 39% of sales, the company can do ~26 million CAD in EBIT next year. This means we are getting a company that is growing at 30+% a year and getting 30+% returns on the cash it invests, that has an easy opportunity to expand operating margins (and is in an environment where gross margins are depressed from more normalized levels) for ~13.5x '16 EBIT and ~7.5x '17 EBIT (that's without backing out the net cash so EV/EBIT is even lower + assuming sales growth drops to 22.5% in '17). Usually you have to pay an outrageous multiple to get this kind of growth and quality, but not here. I feel like I'm being pretty conservative with my sales and margin estimates as well. There's a great shot for this to become a billion dollar company in 2-3 years. I'm betting on it happening, the company would need to have a bit over 300 stores to get there.

 

I'll try to address the awful seeking alpha article that some of you have referenced when I get some time this weekend (though it would be best left ignored).

[LC]

look at the people in that photo: young, white, female. notoriously a customer demographic with rapidly changing tastes. very difficult to sell to on a consistent basis. david's tea might be able to do just that given the reasons mentioned already in this thread, but i'm not sure it's a 1-ft hurdle.

[Palantir]

Holy growth. This is an interesting idea. Apparently regarded as a dried fruit vendor that sells tea among the hardcore tea crowd.

[ccplz]

Will check out one of their stores tomorrow and report back.

 

Thanks for an interesting idea.

[Jurgis]

I started writing that I'd like to see one of their shops opened somewhere close to me. And then I went to their website and they pointed to Wegman's as the closest location to me. Hah, I did not know that the tea section in Wegman's was David's Tea. I saw it there and planned to buy some tea there, but did not yet. Sometime. :)

 

Investment wise, this is tough. I see how people want this to be next Starbucks or at least next Teavana. And I think it has a chance to be next Teavana (I don't think it's the next Starbucks). But the risks are there too.

 

Anecdotally, I don't see that many people who care about the tea quality to buy Teavana or David's. Most people just use crappy teabags. I do too mostly - I am not a connoisseur. Even among British and Indian crowds, I see mostly teabags. British buy their British teabags, Indians buy tea in Indian stores (might be looseleaf, not teabags, but not Teavana). I've seen looseleaf tea mostly amongst Chinese. But they buy it in Chinese stores or H-mart or online. Eastern Europeans: teabags or looseleaf tea from Russian stores.

 

If anyone cares, my tea purchases are really eclectic: some teabags from various places (Russian stores, supermarkets, online, TJ Maxx), some looseleaf tea (Chinese stores, Russian stores, Teavana, TJ Maxx, H-mart). I tried presumably quality Pu-erh that I bought through Ebay, but I did not particularly like it. My current best in teabags is http://smile.amazon.com/gp/product/B003MQTVHC , looseleaf: one of Teavana's blends.

 

Oh, and my wife bought 2 kilos of Yerba Mate and that has displaced a lot of tea from my future. :)

 

So anyway, the fact that David's is in Wegman's helps: more people will see it and perhaps buy it. OTOH, almost no one will know that it's David's and they won't be hand-held by staff.

[DavidVY]

^^^Jurgis speaks truth.

 

It can easily go one way or another. The chinese drink a lot of loose-leaf tea but most pick it up from Chinese stores.

 

Loose-leaf is gaining popularity w/the cross-fit/yoga/soccer-mom crowd but whats stopping them from picking it up at amazon or tea-vana or some other niche store. I just don't see the "moat".

 

Good thing about tea is that its a semi-perishable.

 

Won't spoil like fruits or diary, but the way David's Tea is storing it is a big negative because tea is sensitive to light and heat (just like medical MMJ).

 

Tea should be stored in a dark, cool area.

 

Its definite no 1-ft hurdle but it could have potential

[DCG]

They apparently just opened a location in my town. I had assumed they were a basically a tea house/cafe (like a Starbucks, but focused on tea), but they're actually a retailer (just like Teavana).

 

 

I'll check them out, but don't usually buy loose leaf tea very often. Teavana is always super expensive. Is David's cheaper?

[eclecticvalue]

They apparently just opened a location in my town. I had assumed they were a basically a tea house/cafe (like a Starbucks, but focused on tea), but they're actually a retailer (just like Teavana).

 

 

I'll check them out, but don't usually buy loose leaf tea very often. Teavana is always super expensive. Is David's cheaper?

 

I think moving into a "Teahouse" concept is a very good idea.

[DCG]

Agreed.

[ccplz]

1) Seems like SSS growth has been negative or flat for the last 3 quarters. The company has been raising prices to compensate for decreasing/flat traffic growth... not exactly a sustainable strategy. It's a bit concerning to see a company having to resort to this when they are still supposedly in their rapid growth phase.

 

2) Gross margins have been decompressing rapidly, from around 52.4% a year ago to 49.6% for the most recent quarter. Prices are up but margins are down.

 

Maybe the business is not as strong as you think?

[Guest bksimon]

I've been going to a David's in New York City recently since it is near my current office. On first seeing the store I thought it was a connoisseur's shop but no longer see it this way. Their teas seem good-quality, but they emphasize flavors so that their products are more accessible to a non-specialist. They offer blends that smell convincingly like blueberries, chocolate or (inevitably) pumpkin spice. The chocolate tea has actual chocolate in it. The canisters are designed with a separate compartment on the top so that you can sniff the tea -- clever. Some are on the countertop.

 

I asked a staff member what tea the blueberry blend contained. She said "black tea." Which black tea? I asked. She didn't know and it didn't seem to say so on the canister. I don't frequent tea shops, but I imagine a high-end tea shop might focus more on the variety (e.g. Ceylon vs. Assam), the estate it's from, first flush, second flush, that sort of thing. Although I'm sure the company thinks a lot about sourcing of its teas, it's interesting that the customer experience does not use the connoisseur's language.

 

Back to the store. On the opposite wall is tea paraphernalia such as pots, mugs, strainers, teabags and so forth. My office has some of this stuff and it is very nice quality, well designed. Custom-made for 'tea life.'

 

On the outside they have a chalkboard sign that features clever, timely messages involving tea (sorry I can't remember any examples). Inside they always ask me if I have a 'frequent steeper card' which I think is cute. Two islands of merchandise clog traffic in the rather narrow store.

 

I tried a 'butterfly jasmine' green tea that had a subtle aroma and refined taste. I loved it. When I asked to buy a canister (about 5" tall x 2" wide) it came to over $50. I doubt this is a representative price, it was an expensive variety. I declined to buy it and instead bought a smaller portion of an everyday green tea that came to under $20. I have enjoyed many cups of this tea.

 

The company seem to be giving a lot of thought to the customer experience, and I've found it a coherent and consistent experience that conveys the sense of tea as a way of life. As I mentioned, it does so in an accessible way, as in 'more blueberries and chocolate!' rather than requiring one to be a connoisseur. If they pull this off, it means they can charge a premium price while appealing to a much broader swath of customers.

[Guest bksimon]

If Yelp star ratings are any guide, customers are liking the stores in NYC. See attached.