What Investors Need to Know About the DAVIDs TEA IPO

By Markets Fool.com

America is a nation fueled by coffee, but tea is catching up in terms of popularity. According to data compiled by The Tea Association of the USA, domestic sales of the latter grew by around 10% from 2012 to 2014 to total more than $10 billion.

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Hoping to capitalize on this trend is Canada-based retailer DAVIDs TEA, which plans to hold its IPO later this week. Any hot beverage purveyor is inevitably going to be compared to the sector's reigning king, Starbucks , so does this underdog tea slinger from north of the border have any chance at becoming as ubiquitous as the U.S. java joint?

Tea for me
At the moment, DAVIDs TEA is still very much a Canadian business. In fact, 136 of the company's stores are located there, although over the past few years it's crept slowly onto the American market. Twenty-five DAVIDs are located within our borders in markets such as New York City, Chicago, and San Francisco. All stores are company-owned; none are franchised.

That total of 161 is seven higher than at the end of 2014. The tally at end-2013 was 124, and in the preceding two years it was 105 and 70, respectively.

As with any notable retail chain, the firm's outlets broadly follow the same design aesthetic. The leafy products -- over 150 in every store, the company says-- are featured prominently on a wall behind the counter, with accessories and other goods located on nearby shelves and displays.

The company's logo, a white on teal design featuring clean and straightforward typography, is very appealing ... and calculated. According to the firm it's intended to "create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product."

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Mission accomplished -- the stores and their products are handsome and inviting. It seems customers approve, as DAVIDs TEA has seen big revenue gains, and recently became profitable.

In fiscal 2014, the company flipped to a positive bottom line, to the tune of nearly $6.5 million. This followed a 2013 loss of nearly the same amount, and a shortfall of $4.4 million the previous year. Revenue across that span of time grew as if powered by a well-caffeinated drink; $142 million last year, up from 2013's $108 million and 2012's $73 million.

The debt load isn't too burdensome, standing at just under $10.5 million at the end of the firm's most recent fiscal year (which ended at the close of January). This was against nearly $20 in cash carried on the company's books.

A pot full of potential
Starbucks is a more apt comparison for DAVIDs TEA than it might appear at first. That's because the famed coffee cave is also a big seller of tea, following its 2012 acquisition of Teavana.

Unfortunately, Starbucks is shy about revealing Teavana's current results, so it's hard to ascertain how that business has been doing lately. What we do know is that in that last fiscal year prior to being acquired in 2013, Teavana saw year-over-year revenue growth of 35%. Also, Starbucks bought it for $15.50 per share -- a 54% premium over the market price at the time. It obviously found the tea segment's potential good enough to pay that much extra for the asset.

I think, as a category, tea still has room to grow. Overall sales are rising, and notwithstanding Starbucks/Teavana (the latter's chain comprises 300-plus stores), the market is still generally scattered among small retailers. DAVIDs TEA has a strong, clear brand identity that should appeal to consumers. With a light footprint thus far in America, it's got a lot of room for expansion. And following the IPO it should have the financial means to get that process started.

I'm not sure the company can be the Starbucks of its chosen beverage -- that would take years, piles of capital, and deep penetration into the cultural zeitgeist. But it feels like a sensibly run, down-to-earth business with a good chance at growing its market -- perhaps significantly. So I think the stock has a decent shot at doing well for its investors.

The DAVIDs TEA IPO will take place this Friday (June 5). 5.1 million shares will be sold at $14 to $16 apiece, and the stock is to be listed on the NASDAQ under the ticker symbol DTEA.

The lead underwriters of the issue are Bank of America Merrill Lynch, Goldman Sachs and JPMorgan Chase unit J.P. Morgan.

The article What Investors Need to Know About the DAVIDs TEA IPO originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Apple, Bank of America, and Starbucks, and owns shares of Apple, Bank of America, JPMorgan Chase, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.