DTEA - David's Tea

[Spekulatius]

There is one store in the Roosevelt Mall in Long Island, pretty close to Teavana Store. The David's Tea store was not particularly busy, at least not as much as the Teavana. I went in, but did not know what to make of this - it certainly does not cater to tea connoisseurs imo, but also not to the average consumer. I like the Ten Rens stores in the Bay Area better. The David's Tea stores remind with of old fashioned drug stores, but with more color. I think they need to guid new consumers better (offer samples etc.) because I don't think that many consumers will know what to make of this offering.

The tea connoisseurs (which I am not ) will go elsewhere anyways, Imo.

[KCLarkin]

Another anecdote:

 

Toronto, sherway gardens mall

 

We were in the mall to see Santa. I needed to walk the baby to sleep. I walked past nearly every store in the mall. The David's Tea was probably the busiest per square foot. The store was tiny. This could make the economics attractive. You don't need much space (fixed cost) for this concept.

 

Disclosure: loyal david's tea customer but I've never been in a Teavana so I cant judge competitive advantage, especially in the US.

[feynmanresearch]

Our take on David's Tea:http://seekingalpha.com/article/3774826-davidstea-lost-investor-hype-ignores-the-growth-story

[ratiman]

SM do you have any thoughts on the recent quarter? Looks about to break out above $12.

[ratiman]

Good results, good SSS, FX comps should improve. Not my favorite Canadian food chain, that would be PizzaPizza or Harvey's, those still around? Harvey's was the burger chain before burger chains were big.

[SwimmingNaked]

SM do you have any thoughts on the recent quarter? Looks about to break out above $12.

 

Haven't done a deep look or reanalyzed the company for a while because I'm busy with a few other ideas. But for '16 I'm expecting 25-27 million in EBIT which works out to around $0.70-0.75 CAD in EPS. I expected Q4 of last year to be a bit stronger than it was (if you look at OP I expected 180-185 million in sales and 15 million in EBIT which is basically what happened, but I thought they'd get closer to 190 mill after Q3), though the holiday quarter can be a bit lumpy. Potential for margins to expand further in '17 if FX works in their favour (ie. CAD normalizes to around 80-85 cents), this will expand both margins and get better valuation (as financials are in CAD). With FX working in their favour, they could do >$1.25 CAD in EPS in '17 (that's assuming ~25% growth this year and ~19% growth next year). Keep in mind that last year's 15 million EBIT includes a truly one time expense of about 5 million relating to the IPO. I also need to reanalyze the gross margins and the SG+A line, they are coming in better than I thought they would.

 

So things are going as expected, but I am somewhat unhappy with the capital allocation of the company. They have 70 million in cash and no debt. What the hell do they need all this cash on the balance sheet for? They are not going to acquire another company, don't have debt they need to pay down, can fully meet their capex needs from CFO (though they need maintain a buffer due to timing difference of when they make capex and when they generate most of their cash), but I really see no reason why they can't buy back 10% of the company (and this should have been done when it was trading <$11/share). Balance sheet is inefficient and I wasn't really pleased with the answer I heard on the CC last night.

 

I also think they should list on the TSX. They would get much better coverage in Canada, and there's not that many great retail/consumer stocks in Canada so they would get much better valuation here.

[ratiman]

Thanks. How come your ebitda estimate is the same as the company  but your earnings estimate is 20c higher? It looks like the gross margin improvement is coming from ecommerce and selling fewer beverages/more product. It is concerning though that foot traffic is actually declining.

[SwimmingNaked]

Thanks. How come your ebitda estimate is the same as the company  but your earnings estimate is 20c higher? It looks like the gross margin improvement is coming from ecommerce and selling fewer beverages/more product. It is concerning though that foot traffic is actually declining.

26 million EBIT * .7 (tax rate) = 18.2 million. 18.2/25.9 = 70 cents/share (fully diluted). Unless their tax rate changed, their bottom line guidance seems to be too conservative. I'll do a deeper analysis probably in the next week or so and see if I need to revise anything.

[ratiman]

It's probably wrong to think of this as similar to Dunkin or Starbucks. It's really much more like Godiva or Sees Candy or Lindt chocolate (it recently hired an executive from Lindt to run the US operations). Just 10% of the revenue is from served beverages/food. Meanwhile, the online store is growing at around 35-40% and is quickly gaining on Teavana. As a company that serves tea in stores, that's not a great business. Selling a tea sampler as a gift is a great business. One of the biggest knocks against the company is that it will get crushed by Starbucks/Teavana but Starbucks is primarily about serving coffee, not selling gifts.  It looks like the Teavana brand is in decline online and Davids is catching up. Look at the demand during Christmas.

 

https://www.google.com/trends/explore#q=davids%20tea%2C%20teavana&cmpt=q&tz=Etc%2FGMT%2B4

[gfp]

surprised by the strength today - is there some news that I missed?

[ratiman]

David Segal is the seller who is constantly offering shares at $13.95. He resigned in March and sold 300,000 shares between January and April 27. It can't be the other big holders because they either a) added in Q2 or b) would probably have to do a secondary to sell, they have so many shares.

 

David, please listen to me: get out of the way and the stock will go up!

[ratiman]

Some semi-interesting facts:

 

-Teavana is hurting. It opened just 12 stores net last year (6 franchise) and closed 7. To put that in context, Starbucks opened 2500 locations last year.  Teavana may be hurt by its Asian aesthetic; Asia just isn't that cool these days, especially with women

 

-Teavana was purchased for $1.8M per location at $600m/337 locations. An equivalent price for Davids Tea would put the stock at about $18

 

-days to cover for 1M shares short is about 40 days

 

-Fidelity increased its position last quarter, now owns over 13%

 

-tea consumption increases throughout life, coffee consumption stays flat

 

-tea is actually pretty cheap. A DT canister costs just 30-40c per cup (25 cups per canister at $7-$10). The tea buyers are pretty price insensitive (as with any caffeine product it seems), so DT can probably continue to raise prices. Yelp reviewers say DT is cheaper than Teavana, and that's also  the case on the website. Looks like Teavana prices are about 20% higher at least

 

-comparing Davids Tea and Zoes Kitchen is interesting:

 

                    DTEA              ZOES

PPE:            $35M            $85M

EBITDA:      $25M            $28M

EV/EBITDA:  12x                20x

Rev growth:  17%              21%

 

So DTEA is much more efficient with capital and is growing at about the same rate but doesn't get nearly the same ebitda multiple.

 

 

 

[DCG]

They opened a location in my town 6 or so months ago. The majority of the time I walk past it, the only people in it are employees.

[ratiman]

It's a pretty big ticket purchase (probably over $30 on average I would guess) so there aren't going to be that many transactions per hour, somebody estimated 11 per hour above, fewer in a new store during off season. There's a Vitamin  Shoppe near me that's always empty, Vitamin Shoppe and GNC have basically the same economics as DT, in fact the stores look very similar with canisters lined up along the wall.  The stores are so cheap (no kitchen or seating) that there doesn't have to be huge turnover per store.

[ratiman]

Revenues were strong but margins were a little tight. Mgmt mentioned Alberta being weak and some management turnover in the US. If the Loonie stays level or is stronger next year there should be significant margin expansion. Also worth noting is that online is growing 35-40% and it's the highest margin channel. DT does about 10% online and Sees Candy does 65%. If DT becomes the largest brand in premium tea then the online store alone is a goldmine.

[investor1]

Why are DTEA's new store additions still weighted towards Canada? Given the much larger growth runway in the U.S., I would have assumed the U.S. would carry the bulk of the 2016 planned additions.

[ratiman]

The returns are better. That's due to the fact that everybody in Canada is familiar with Davids Tea. Canadians are very brand loyal to Canadian brands . . . Tim Hortons, Roots, the Tragically Hip. CanCon is a very durable advantage, I think. Some of the stores are in tiny little towns in northern Quebec and management has said that the returns are outpacing their expectations. The US stores don't have that built-in awareness so the returns are slower.

[ratiman]

some notes on the recent investor conference:

 

Management really emphasized that the US business is all about ecommerce.

 

 

- ecommerce ebitda margins 2-3x the normal 15% company margin, room for improvement

 

- ecommerce growing over 50% in US,  30%  of orders come from outside store territories

 

- DT might decide to do fewer US stores (than the planned 325) if ecommerce share picks up and stores become showrooms for online reordering

 

- Millenial uptake of web ordering is very high

 

- few returns from online orders because tea is consumable

 

- average store ticket is $15 and online is $60

 

- long term ebitda margins boosted up to ~20% from high teens due to increasing ecommerce mix

 

- 15% ecommerce target is very conservative (last year was 9.4)

[investor1]

DAVIDsTEA Announces Planned Departure of President and Chief Executive Officer;

 

Montreal, Canada, October 21, 2016 — DAVIDsTEA Inc. (“DAVIDsTEA” or the “Company”) (Nasdaq: DTEA) today announced that Sylvain Toutant, the Company’s President and Chief Executive Officer, will be leaving the Company to pursue other interests.  It is the intention of both the Company and Mr. Toutant that he will serve in his current role until the end of the current fiscal year. Upon the effective date of his departure, Mr. Toutant will also cease his directorship held with the Company.

 

Maurice Tousson, Chairman of the Company’s Board of Directors, stated, “Sylvain has been instrumental in expanding the DAVIDsTEA brand and executing against our key priorities as well as navigating our transition from private to public ownership.  He has assembled a talented and capable team across all functional areas of the organization.  We would like to thank him for his many contributions and wish him the best in his future endeavors. We will be conducting a North America-wide search for a successor.”

 

Sylvain Toutant added, “This decision to move on has not been an easy one to make, but it is the right one from a personal standpoint and for my family.  DAVIDsTEA is fortunate to have a bench of talent across the company and a team that is so passionate about its purpose and mantra.  It has been a privilege to work with each and every one of them to drive growth and awareness of this unique and special brand.”

 

Any read-through on this? Doesn't appear to be for business reasons. Severance is pretty generous:

 

In connection with Mr. Toutant’s coming departure, the Company and Mr. Toutant entered into on October 20, 2016 a letter agreement describing the terms of his separation (the “Letter Agreement”).  Pursuant to the Letter Agreement, and in exchange for certain covenants from Mr. Toutant, including a release of claims, Mr. Toutant will continue to receive his current salary for a period of 18 months following his separation as well as a cash performance bonus for fiscal 2016 at the level determined by the human resources and compensation committee according to previously approved performance targets and to be paid in one payment.  In addition, all of the unvested options currently held by Mr. Toutant shall accelerate effective upon the date of his separation.  The  awards of options will remain exercisable for a period of 180 days following the date of his separation.  The Company agreed to reimburse out of pocket legal expenses up to CDN $10,000  incurred by Mr. Toutant in connection with the Letter Agreement.

[kab60]

I hate hate hate severance packages like that. Sure, reward people when they create value; not when they leave to spend more time with family (if anyone believes that). That statement is BS. If they have a quality bench, and things are well, why are they going to search for a new guy all over NA. If he was fired due to dismal results, say so.

[ratiman]

Severance was about 6c. Most of his stock was already vested. I like the fact that Herschal Segal is willing to fire for underperformance, if that's what happened. Whoever is brought in, including David, will probably be an improvement. 

[ratiman]

DTEA acquired by JAB before the end of the year. JAB has acquired Caribou, Stumptown, GMCR, Krispy Kreme, and Peets, and DavidsTea fits in perfectly with the beverage portfolio. It's also shown an interest in tea via Caribou. JAB also ridiculously overpays for everything. None of the Segal's (85 yo Herschel or David) want to run the business and would probably rather get the cash out now. Herschel needs the money as his firm La Chateau is trading for 20c and he is financing the inventory.

 

This tea deal was three weeks ago and Argo is a far inferior brand to Davids. There's no reason JAB has to own one tea brand (it owns 5 coffee brands).

 

http://www.bloomberg.com/news/articles/2016-10-05/caribou-said-to-invest-in-argo-tea-as-jab-builds-beverage-empire

[ratiman]

The firing of Toutant only makes sense as a clearing of the decks before an acquisition. Here are the alternatives:

 

a) Toutant resigned to pursue other interests. Probability: 2%

b) Toutant fired for underperformance but left in place for three months to nurse his grudge and create mischief. Probability: 4%

c) Toutant fired ahead of acquisition so DTEA/JAB would not have to pay him change of control bonus. Probability: 74%

d) Who knows, could be anything Probability: 20%

[Liberty]

Was thinking of ordering some sencha, either from Harney & Sons or David's Tea. I have a gift card for DT.. But David's Tea website has been down since this morning. Seems like their technology isn't very good. Anecdotal, but still... Which online retailer has a "scheduled maintenance" for hours in the middle of the day.

[investor1]

Interesting new 5.5% holder, TDM Asset Management (http://www.tdmam.com/). I've never heard of them, but this article (http://www.afr.com/business/banking-and-finance/hedge-funds/tdm-asset-management-reveals-the-importance-of-culture-for-investing-20151215-glnq1f) does a decent job describing their long-term, management-focused approach.

 

Not sure about the best way to track DTEA's holiday season progress, but Google Trends showing strong ramp up and good US YoY search growth.

 

At $10.20, DTEA is now trading at ~9x 2016E EBITDA (growing at 30% YoY)