DTEA - David's Tea

[KJP]

Well that was a real mess -- everything from not being able to send e-mail properly for months to potentially negative comps during the most important selling season. 

 

If my math is right, I think the outlook calls for ~51% gross margins and "adjusted" SGA around 43-44% of sales. 

 

 

[TBW]

Looks like to me that they have 1 good biz which is the Cad retail.  One terrible biz US stores and it's unclear to me how profitable the online store is.

 

Whats worse it looks like Cad stores are getting less profitable.  Last year they earned ~126k per cad store and -123k US.  This year from their guidance its ~90k Cad and -100k US.  I have looked at unit economics (and came very similar to the rough numbers above) but this time just allocating SG&A on a proportional store basis.

 

I looked very closely at this a couple months ago (as I am a customer and really like their product), but I really didn't like management talking about 4yr payback for US stores.  There was 1 line in the S1 where they admitted that was the target and had never been achieved.  What backs me up here is they have 10mil in US NOLs not including this last q where I couldn't find the updated number. 

 

My question is given the good biz/bad biz at what px does this make sense?  Cad stores look to earn about 15mil, US lose 5mil at low end of guidance pre-tax.  I think Cad consumer is slowing so wouldn't want to pay more than 10x for that (I am being v conservative here I know as even at these levels new store ROE ~20%).  The new interim CEO has US retailing experience, but it seems to me they have to close stores and hopefully use their NOLs on remaining profitable ones.  They have though locked themselves into opening at least 10 new stores in US next year.  How costly is that restructuring going to be?  So Cad stores worth 113mil USD or 170mil (at 15x Cad store pre-tax), US stores could be considered a net loss and I don't give any benefit to the cash on balance sheet as some of that needs to go to next year capex.  So this could see further downside from here.

 

On a separate note, it really seems to me that the mkt tends to forget earnings are in Cad... 

 

On a positive note management change can only be positive here and I think the brand/market is a good one to be in.  Interested to hear any thoughts.

[KJP]

 

Whats worse it looks like Cad stores are getting less profitable.  Last year they earned ~126k per cad store and -123k US.  This year from their guidance its ~90k Cad and -100k US.  I have looked at unit economics (and came very similar to the rough numbers above) but this time just allocating SG&A on a proportional store basis.

 

 

I have very similar numbers to you.  If I distribute SGA on a pro rata basis per store, I get 2015 EBIT/CAD store of CAD$129,000 and EBIT/US Store of -CAD$107,000.  And, as you mention, 2016 profitability in Canada appears to be declining.  In addition, management has long been saying that they project a total of 225 Canadian stores, so the company is pretty close to completing its Canadian expansion. 

 

Given the very poor US economics to date, it's hard to see why you'd want to pay more than 8x the Canadian standalone EBIT.  Even giving them credit for 225 stores at $130,000 CAD/year, that's about $29 million in EBIT.  At 8x, that's CAD$232 million, or about US$175 million, which is essentially the current market cap. 

 

I think there's about CAD$50 million in cash once you account for seasonally high inventory, but, as you note, the company still has to fund significant US losses for several years.  (I think operating cash flow is more than enough to enough to fund the remaining Canadian build out.)  So, even after the recent decline, I don't see this as significantly undervalued.  To think otherwise, you have to believe that the US business will become significantly profitable.

 

If anyone has a contrary view, I'd love to hear it. 

[kab60]

The only thing missing, which I think one can't quantify but is nonetheless important, is the profitability in the US on a unit by unit basis. Perhaps it works some places and not so much at other places? That's what they imply, but without numbers it's just talk. Anyway, if it get's a bit cheaper perhaps one could get the Canadian biz below fair value and the US+ecommerce as free options.

[ccplz]

Why are the U.S. stores doing so badly?

[KJP]

Why are the U.S. stores doing so badly?

 

The trivial answer is that the US stores don't generate enough revenue.  DTEA records rent expense in COGS, so insufficient revenue should show up in lower gross margin, along with an inability to cover SGA.  That's exactly what's happening.  In 2015, US gross margin was 1000 bps lower than Canadian gross margin (2016 year-to-date is similar), with Canadian stores generating on average about CAD$590,000 in gross profit, while US stores generated on average about CAD$350,000 in gross profit.  At CAD$460,000 in SGA per store, you get profitable Canadian operations and unprofitable US operations.  (Note that the revenue numbers above include e-commerce sales.)

 

Why US stores are generating less revenue is probably not knowable for outsiders, and I question whether insiders have a handle on that.  I suspect that US stores suffer from much lower brand recognition in the US and much lower store density, which prevents any economies of scale in advertising/marketing. 

[KCLarkin]

Jerome Hass discusses David's Tea on BNN:

http://www.bnn.ca/investing/video/jerome-hass-discusses-davidstea~1025575

 

[scorpioncapital]

I can buy a pretty wild selection of quality teas, maybe $2.50 US, organic, about 20 bags. If I go half and half I can use it for two days or roughly 40 days and 40 nights of tea. This is so cheap that tea has got to be the biggest bargain on the planet. Not sure if this is so great for David's Tea's profitability though.

[investor1]

Looks like some folks are jumping ship:

 

Effective February 18, 2017, Marc Macdonald resigned from his position as Chief HR Officer of the Company to pursue another professional opportunity.

 

Effective January 19, 2017, Isabelle Grisé, Chief Marketing and Merchandising Officer, ceased to work for the Company.

 

I spoke with their (outsourced) IR person. She further explained the U.S. push towards "lower profile, higher return" locations was a move to B+ malls rather than A malls. Don't love that answer given general foot traffic trends. She did say that the online business has recovered nicely from the email blowup.

 

Appears Herschel Segal selling down his ownership now too (now 48% versus 50% at Sep 30).

 

If Q4 posts poorly, stock might get below tangible book value and be interesting, but there is a lot to fix here, and the ultimate product might just be a gift business that's past its prime.

[KJP]

More bad news:  http://ir.davidstea.com/phoenix.zhtml?c=253953&p=irol-newsArticle&ID=2261691

 

The 10-K isn't out yet, so I don't know whether the really bad results are limited to the US or whether there's been continued deterioration in Canada.  The commentary on Q1 is also terrible.

[KJP]

Apparently Herschel Segal now wants to take the company private:  https://www.sec.gov/Archives/edgar/data/1627606/000110465918015899/a18-7864_1ex99d1.htm#Exhibit99_1_055340

[TBW]

This story is incredible: former board member Herschel, uncle to the original David, and owner of 46% of the shares put up his slate of board members to 'fix' this company.  The irony being that the failed US expansion strategy I would blame largely on him.

 

He wins, despite getting very few votes that weren't his.  He appoints himself CEO at the age of 87, his last retailing company Le Chateau stock is down 93% in last 5 years.  The previous CEO, CFO, and head of supply chain resign.  He hires his daughter as VP of Product development...

 

Within a month and a half, two of his 6 board nominees (that weren't him) resigned.  One of those board members was the former CEO of Tim Horton's, who seemed like the ideal board member, and he was responsible for finding a permanent CEO!

 

Shares are now at $2.35 from a high of $27 in 2015.  They are left with a US biz that has only ever lost money and needs to be shut down asap.  Their Canadian biz was really strong, now with sss down 12% this year, it may be breakeven at best.

 

Shares look sort of cheapish, if you only look at the numbers and cash balance.  But this feels uninvestable to me.  Very good chance the remaining value is destroyed.  If there was a strong board and good management, and they could return Canadian operations back to average of last couple of years, you could make a conservative case for $5.  And with their expansion into Loblaws, a better e-commerce strategy, this could do quite well. 

 

However, that is not the case and under status quo the shares don't appear to offer enough upside to compensate an investor.

 

Just goes to show how a cash generating biz, their Canadian ops, can be wasted, and the business can be ruined by bad governance.

[peterHK]

They make shit tea. There I said it.  It's weak; half the "innovative" flavors are god awful (popcorn flavored tea anyone?).

 

For people who actually drink a lot of tea (I drink 2-4 cups a day), I think DTEA isn't the first place a lot of them go.

 

 

[BG2008]

Man, retail is just such a tough place to allocate capital to.  I don't think I have had a win in retail. 

[Jurgis]

I still haven't tried (bought) any of their tea. I should do it before they close/disappear. I think some store(s) that I saw before already closed.  :-\ I just have way too much tea already...  ::) Just brought back some tea that I bought in Lithuania that was made (packaged?) in UK that was grown in ??? Good stuff too. The joys of globalism.  8)

 

I won't buy popcorn flavor though.

 

OT: Retail wins: TJX, wife's URBN (though I freely admit I have no clue when to sell this, so it could round-trip; we also did not buy at bottom even though we talked about it.)

[KCLarkin]

They make shit tea. There I said it.  It's weak; half the "innovative" flavors are god awful (popcorn flavored tea anyone?).

 

For people who actually drink a lot of tea (I drink 2-4 cups a day), I think DTEA isn't the first place a lot of them go.

 

Actually, the popcorn flavored "tea" is really good. (I dislike many of their "teas" -- but popcorn isn't one of them).

 

But it's important to remember, many of these aren't really teas -- they are more like fruit infusions.

[merkhet]

Sad to hear. My wife and I really liked their stores. Hopefully, they’ll keep some retail in NYC for when we can visit again. At least we can still get their tea online.

 

https://montreal.ctvnews.ca/davidstea-files-for-creditor-protection-plans-to-close-most-locations-to-prioritize-online-sales-1.5015468

[Jurgis]

Sorry to hear.

 

OTOH - sorry merkhet - I think their teas are overpriced.

 

Funny story. We went to Boston the last weekend before lockdown in March. And we went to David's Tea shop and bought two cans of tea and a collection of their teabags. I did not like either of their looseleaf teas that we bought. My wife kinda liked the teabags, but thought they were just OK, nothing special. I looked at the teas they sell online and the prices are IMO too high for me.

[merkhet]

Sorry to hear.

 

OTOH - sorry merkhet - I think their teas are overpriced.

 

Funny story. We went to Boston the last weekend before lockdown in March. And we went to David's Tea shop and bought two cans of tea and a collection of their teabags. I did not like either of their looseleaf teas that we bought. My wife kinda liked the teabags, but thought they were just OK, nothing special. I looked at the teas they sell online and the prices are IMO too high for me.

 

I’m sure we could find cheaper teas, but the wife and I like them. ¯\_(ツ)_/¯

[Jurgis]

Sorry to hear.

 

OTOH - sorry merkhet - I think their teas are overpriced.

 

Funny story. We went to Boston the last weekend before lockdown in March. And we went to David's Tea shop and bought two cans of tea and a collection of their teabags. I did not like either of their looseleaf teas that we bought. My wife kinda liked the teabags, but thought they were just OK, nothing special. I looked at the teas they sell online and the prices are IMO too high for me.

 

I’m sure we could find cheaper teas, but the wife and I like them. ¯\_(ツ)_/¯

 

If I liked their teas a lot, I'd possibly pay the prices. But the ones I bought I did not like and the prices are too high to keep experimenting. I have a bunch of looseleaf teas from various places that I like way better than the ones we got from David's. And most of them are at quite cheaper prices.

 

But definitely, if you like them, keep buying.  8)

[merkhet]

Wait, are any of these places online? My wife loves tea and would be happy to find new places.

[Jurgis]

Wait, are any of these places online? My wife loves tea and would be happy to find new places.

 

What kind of teas are you interested in? Black? Black flavored? Green? Green flavored? White/flavored? Herbal?

 

I definitely can post what I buy/where in the categories you're interested in. With usual caveats that tastes vary, I'm not a tea gourmet, etc.  8)

[merkhet]

Wait, are any of these places online? My wife loves tea and would be happy to find new places.

 

What kind of teas are you interested in? Black? Black flavored? Green? Green flavored? White/flavored? Herbal?

 

I definitely can post what I buy/where in the categories you're interested in. With usual caveats that tastes vary, I'm not a tea gourmet, etc.  8)

 

Wife likes pretty much anything. I’m generally a green tea guy.

[Jurgis]

Wait, are any of these places online? My wife loves tea and would be happy to find new places.

 

What kind of teas are you interested in? Black? Black flavored? Green? Green flavored? White/flavored? Herbal?

 

I definitely can post what I buy/where in the categories you're interested in. With usual caveats that tastes vary, I'm not a tea gourmet, etc.  8)

 

Wife likes pretty much anything. I’m generally a green tea guy.

 

You're killing me.  8)

 

Black tea, not flavored: I bought this, and I like it: https://smile.amazon.com/gp/product/B003H7KV8Y/ref=ppx_yo_dt_b_search_asin_title?ie=UTF8&psc=1

Black tea flavored: https://smile.amazon.com/Tea-Czar-Nikolas-Premium-Black/dp/B00N4Z5TI6/ref=sr_1_3?dchild=1&keywords=nicholas+tea&qid=1594306300&sr=8-3 ( I only tried the black package. There are packages with other colors with different flavoring, which I have not tried )

Earl Grey: I buy this, but it's OK, not supergreat: https://smile.amazon.com/Akbar-Tea-Earl-Gray-Metal/dp/B003LRWCR8/ref=sr_1_5?crid=3F3VACKMCTPEJ&dchild=1&keywords=akbar+earl+grey+tea&qid=1594306396&sprefix=akbar+earl+g%2Caps%2C159&sr=8-5 ( note that there were reports that 3rd parties send smaller boxes for the price. I buy this in the store, but it is available on Amazon ). I might be interested in any great Earl Grey's that people like.

Green tea not flavored: I don't have a favorite that's accessible online. I buy a bunch of green teas in Lithuania ( Lithuania is the tea capital of the world.  :P ). Including some flavored green teas. These are not available online.

Jasmine green tea: this is bags, but I thought it was great: https://smile.amazon.com/gp/product/B003MQTVHC/ref=ppx_yo_dt_b_search_asin_title?ie=UTF8&psc=1

White tea flavored: I liked Youthberry from Teavana ( https://www.amazon.com/Teavana-Youthberry-Loose-Leaf-White-Tea/dp/B007G92C6I#:~:text=Teavana%20Youthberry%20Loose-Leaf%20White%20Tea%2C%202oz.%201%20The,in%20recommended%20tea%20amount%20per%208%20ounces.%20 ). I might buy it again, since I ran out. But OMFG the price.... they are kidding, no?  :'(

Herbal teas: I have recently discovered that I don't like the over-hibiscussed herbal teas, which is most of them.  :'( So I don't have favorite herbal teas right now.

 

What are the teas you like either from David's or from other places?

[bizaro86]

My favorite tea (by far!) is Jasmine Silver Needle from Jing. Truly excellent. I quite caffeine a few years ago, and found it improved my sleep so much that I've never gone back. I'd love to find something comparable that is de-caffeinated. After a few years, this specific tea is the only caffeinated beverage I miss having.