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DTEA

DAVIDsTEA NasdaqGM:DTEA Stock Report

Last Price

US$0.73

Market Cap

US$19.4m

7D

-6.4%

1Y

-71.4%

Updated

30 Sep, 2022

Data

Company Financials
DTEA fundamental analysis
Snowflake Score
Valuation3/6
Future Growth0/6
Past Performance0/6
Financial Health6/6
Dividends0/6

DTEA Stock Overview

DAVIDsTEA Inc. operates as a specialty tea retailer in Canada and the United States.

DAVIDsTEA Inc. Competitors

Price History & Performance

Summary of all time highs, changes and price drops for DAVIDsTEA
Historical stock prices
Current Share PriceUS$0.73
52 Week HighUS$4.69
52 Week LowUS$0.67
Beta2.72
1 Month Change-42.97%
3 Month Change-56.81%
1 Year Change-71.37%
3 Year Change-63.32%
5 Year Change-82.62%
Change since IPO-97.47%

Recent News & Updates

Sep 13

DAVIDs TEA Non-GAAP EPS of -C$0.13, revenue of C$15.23M

DAVIDs TEA press release (NASDAQ:DTEA): Q2 Non-GAAP EPS of -C$0.13. Revenue of C$15.23M (-18.7% Y/Y). Adjusted EBITDA amounted to a loss of C$2.1 million Cash position of C$19.0 million and new, unused C$15.0 million revolving credit facility. As at July 30, 2022, we had C$19.0 million of cash held by major Canadian financial institutions.

Sep 06

DavidsTea: A Stock Completely Written Off By The Market - Who Begs To Differ?

Summary After leaving the restructuring process in 2021 with significant cash and no debt, management is now targeting low-double digits sales growth annually until the end of 2025. This rather ambitious guidance is backed by various initiatives to accelerate its omnichannel growth strategy, e.g., the US roll-out of its wholesale business is imminent. In stark contrast, investor sentiment is quite depressed right now leading to a current valuation that is at or below liquidation value. I will address all the potential macro-level and company-specific investor concerns. Based on current underlying expectations, it shouldn't take much to make DAVIDsTEA a multi-bagger from today's stock price. Investment thesis In his most recent memo "I Beg to Differ", legendary investor Howard Marks argued that investors seeking above-average returns have to invest in things that others haven't flocked to and caused to be fully valued. To put it differently: successful investors have to do something different. At first glance, this conclusion seems to be a no-brainer. He, however, opines that this fundamental recognition is less widespread among the investment community than you might think. In a world where the majority of investors is well-informed and highly computerized, ordinary efforts count for increasingly less, it calls for more perceptive thinking or what Marks calls second-level thinking. He strongly made the case for distinguishing second-level thinkers from those who operate at the first level: First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in 'The outlook for the company is favorable, meaning the stock will go up.' According to Marks, second-level thinking is deep, complex, and convoluted. The second-level thinker takes numerous things into account: What is the range of likely future outcomes? What outcome do I think will occur? What's the probability I'm right? What does the consensus think? How does my expectation differ from the consensus? How does the current price for the asset comport with the consensus view of the future, and with mine? Is the consensus psychology that's incorporated in the price too bullish or bearish? What will happen to the asset's price if the consensus turns out to be right, and what if I'm right? In this light, I have re-read the recently published Seeking Alpha article about DAVIDsTEA (DTEA) written by the well-respected and highly popular SA contributor Henrik Alex. His report paints a rather bleak picture about the company's future and was accompanied by lots of gloomy statements in the comments section, which pretty much resembles the very bearish sentiment around DAVIDsTEA. As a matter of fact, this report was arguably the primary reason for the stock to drop by around 30% in a couple of days following the publication. In an attempt to differentiate between first-level aspects and second-level thinking, I will briefly address all the concerns raised in this article affecting the sector as a whole as well as some company-specific allegations made in the comments section. In the final part, this report aims at gauging the current market sentiment around the stock and discusses some potential upside surprises not reflected in today's market cap. Let's talk business 1. Inflationary pressure Having learned about rapidly rising input costs and producer prices on an almost daily basis for more than a year now, it should be no surprise that first-level thinking would suggest that this global cost pressure should significantly squeeze the operating margins of all sorts of retailers, but especially the gross margins of a specialty tea retailer which just recently emerged from restructuring proceedings. Looking at DAVIDsTEA's gross margin below, we find an uptick in the margin (y-o-y) in two out of the last four quarters. Admittedly, the gross margins have probably also been impacted by a shift in the product portfolio (tea vs. tea accessories) and sale channel (e-commerce/wholesale vs. brick-and-mortar stores) over the last 12 months. Nevertheless, it's hard to make the case for a structurally deteriorating gross margin based on this past information. It must also be noted that DAVIDsTEA started to outsource all of its product warehousing and distribution activities to a specialized fulfillment provider in Q4 2021, having a negative effect on its gross margin (at the benefit of a reduced headcount in this area, please see below). Unfortunately, we can't dive much deeper as there is no publicly available breakdown of its cost of sales. Source: Own calculation by the author based on 10-Q & 10-K filings of DAVIDsTEA As a proxy for the company's major input source, at least in quantitative terms, I looked at the price development of bulk tea at three major tea auctions (according to World Bank's database) to get a sense of the price changes over the last year. The plotted average of these three auctions shows that purchase prices for tea have been climbing since the beginning of the year. However, despite substantially rising fuel and fertilizer prices over the last couple of months, the average tea price in 2022 is just 6.7% above its 5-year average. Presumably, some of the other ingredients going into its numerous tea blends besides tea leaves might have increased more substantially. Source: World Bank Commodities Price Data In addition, as sharply increasing ocean transport costs have negatively impacted the gross margins of some retailers over the past quarters, a closer look at global freight rates is warranted. After reaching a peak of around $20k/FEU in September 2021, the all-important container freight index for China/East Asia to North America West Coast routes (Freightos Baltic Index - FBX01) has come back significantly from its all-time highs. In the last couple of months, the freight rates have been more or less in free fall, declining from $15.3k (end of April) to $5.8k (end of August) - a staggering loss of approx. 66% in just 4 months. Source: Bloomberg - Companies See Relief in Falling Spot Rates for Transpacific Freight Going a step further, I tried to do some back-of-the-envelope calculations to get an idea of the relative importance of inbound freight cost as part of the cost of sales. The cost estimation shown below assumes a highly conservative freight rate of $10k (40-foot shipping container) and is based on some own as well as external assumptions. According to my illustrative calculations, ocean freight expense only accounts for less than 0.4% of tea sales (transport costs for tea accessories have not been examined). Thus, even elevated and volatile freight rates shouldn't have a big impact on DAVIDsTEA's gross margin. Source: Own calculation by the author So far, we just looked at the cost side of the equation. To get a better understanding of the pricing power, or more specifically, as to what extent price hikes have already been implemented (ergo, already having a positive impact on the gross margin), I have compared today's prices with the ones exactly two years ago. Based on a sample of more than 50 items, management has raised prices in Canada for most of its matcha tea blends by around 10%; however, prices for the other "non-matcha" types of tea (accounting for the vast majority of its portfolio) have predominantly kept flat over the last 2 years - approx. 25% of the sampled tea blends in this category have also risen in price by about 10% (Aug 2020 vs. Aug 2022). In the current context of sharply rising consumer prices in the food & beverage sector, these seem to be rather modest price increases, which may strengthen DAVIDsTEA's relative value proposition leaving some room for future price hikes (only to catch up with some other players in the market). 2. Supply chain issues affecting availability of merchandise Looking at the chart above, I would not expect supply chain issues to deteriorate over the next couple of months - at least from a logistics point of view. The falling freight rates are probably a result of 1) easing Covid-19 restrictions in Asia (e.g., Shanghai lockdown) and 2) western households starting to pull back from a two-year spending spree, especially for discretionary goods, due to declining consumer confidence and persistent inflationary pressures. Both aspects, in particular the latter one, have led to a broad inventory glut, which many retailers are currently struggling with. Unlike these retailers, DAVIDsTEA is not a victim of this "bullwhip" effect as there was no extraordinary demand during the pandemics and there is comparatively little markdown risk for tea blends in general ("Regularly putting some items on sale" is a marketing strategy and should not be confused with this phenomenon). On the other hand, I also don't expect the company to struggle to replenish its stock. Management has always taken a very conservative approach when it comes to the continuous build-up of inventories. 3. Labor shortages and rising salaries Admittedly, it's difficult to judge to what extent DAVIDsTEA might be affected by a potential shortage of labor. And yes, like in many parts of the western world, a tight labor market accompanied by a still very solid economic environment have contributed to considerable wage growth rates over the last couple of months in Canada. The average hourly wages of employees were up 5.2% on a year-over-year basis in July, matching the pace of wage growth recorded in June. In contrast, DAVIDsTEA's personnel expenses only increased by 0.9% in the most recent quarter compared to the first quarter in 2021. Source: 10-Q filing of DAVIDsTEA This figure arguably understates the inflationary pressure to some degree as the company probably had a lower headcount in Q1/2022 compared to the prior year quarter. Unfortunately, there is no publicly available information with regard to its current workforce. What we do know is that DAVIDsTEA has rightsized its organization in the last fiscal year even further (after massive layoffs resulting from the restructuring proceedings ((CCAA)) in 2020). In particular, management cut back its production & distribution staff by nearly 40%, while at the same time entering into a partnership with a leading 3PL provider to outsource all of its product warehousing, distribution and shipping activities for Canada and the US. This move aimed at significantly enhancing its distribution capabilities and improving customer experience across North America, e.g., shorter delivery times, as well as making its workflows more efficient in general. Source: Own calculation by the author based on 10-K filings of DAVIDsTEA On the other hand, in order to succeed in its ambitious omnichannel growth strategy, management is selectively trying to fill vacancies across the board (e.g., wholesale specialist, store employees, or social media & digital graphic roles) with currently 12 job postings on the company website. 4. Declining Covid-19 related e-commerce tailwinds As a matter of fact, revenues from e-commerce and wholesale have sharply come down over the last three quarters compared to prior year periods, which were heavily driven by a pandemic-fueled surge in online sales. In the most recent quarter, e-commerce and wholesale revenues decreased by 21.2% y-o-y to C$15.7 million. It's indisputable that there was some sort of pull-forward effect where consumers were stocking up on tea in the midst of the pandemic. In my opinion, we should reach the bottom in Q2 or Q3 this year, from which e-commerce sales can grow again, but this time on a sustainable basis. In addition, the substantial cut back on marketing spend for most of 2020 and 2021 - as a result of the ongoing restructuring proceedings at the time - had arguably significantly contributed to the subsequent decline in e-commerce sales. However, since exiting the CCAA proceedings, DAVIDsTEA has increased its marketing budget quite considerably, for example, marketing expenses rose by more than 90% y-o-y to C$2.3 million in the most recent quarter. Besides, the strong sales development of its 18 Canadian flagship stores has probably also impacted the e-commerce side of the business. As can be seen below, the brick-and-mortar segment shows very promising quarterly growth rates between 24% and 77% y-o-y (though from a low base). Source: Own calculation by the author based on 10-Q & 10-K filings of DAVIDsTEA 5. Consumer budget constraints It's conventional wisdom that the continuing rise in food and energy prices is increasingly impacting consumer spending and investment. Based on point-of-sale data for July 2022, a recent research report (covering the whole US food retail market, including e-commerce) points out, among other things, that in some areas consumers are opting for value-oriented categories to preserve quantity and also tend to trade down to more affordable brands within a category to some extent. However, the report also highlighted that premiumization continues in select categories despite the high inflation: Mirroring behavior from the Great Recession of 2008-2009, consumers are trading down to trade up on small luxuries, such as premium and super-premium imported beer, […] refrigerated juices and drinks. All these findings shouldn't come as a big surprise and yes, with food inflation at very elevated levels and an almost unavoidable recession next year due to the current monetary tightening, shoppers are increasingly looking for value. But is there more to it than these high-level observations? In the absence of a listed direct competitor of DAVIDsTEA, I will be referring to Starbucks' (SBUX) most recent quarter in an attempt to answer this question (admittedly, not the perfect comp but it still shares some common characteristics). The company posted very strong Q3 results with record revenues of US$8.2 billion and 9% comp growth in North America. Apart from a record-breaking quarter (e.g., company-operated stores in the US delivered in the past three months 5 of the top 10 grossing sales days in its history), management was also very upbeat in the earnings call: While we are sensitive to the impact inflation and economic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power and the premium nature of our beverage and food offerings. In this analyst call, the Starbucks brand was also pictured as an "affordable luxury" that consumers are not willing to give up. Now, what is the customer universe DAVIDsTEA is catering to? On a macro level, it can't be denied that functional and healthy beverages are on the rise with a strong demand for fruit/herbal and loose-leaf black tea blends among the younger demographic, as consumers are increasingly seeking healthier alternatives to their fruit juices and soft drinks. According to the company and recent web statistics, the average customer of DAVIDsTEA is female (representing c. 80% of total sales in 2019) and highly skewed towards younger age groups. Source: Similarweb Basically, the company is targeting individuals with a health-conscious lifestyle who can afford and are willing to pay a somewhat higher price for a purpose-driven brand. Apart from pure taste, those targeted customers often also appreciate the origin of their tea blends (e.g., organic and fair trade-certified tea based on an ethical sourcing policy) and DAVIDsTEA's ambition to make a positive impact on the tea community in general. This all comes with a price not everyone is willing and able to pay, even in good economic times. Source: Investor presentation (AGM, June 2022) In my opinion, the company's core customer base is less susceptible to economic downturns and views DAVIDsTEA not only as a superb product and great experience but values all the things that ladder up to the equity of the brand and the quality of the tea. Finally, it's worth noting that the decrease in sales from C$213 million in 2018 to C$104 million in 2021 was not the result of constrained consumer budgets or a deteriorating value proposition of its premium product offering, but was mainly caused by substantially less exposure to potential customers following the deliberate downsizing of its retail store network. 6. Related party transactions Famous claim on Seeking Alpha: "DAVIDsTEA engages in transactions which favor the Segal family at the expense of the company" In fact, during the second quarter of 2019, the company entered into a secured loan agreement of C$2.0 million with Oink Oink Candy Inc. ("Squish"), a company which is controlled by Sarah Segal. However, it should also be mentioned that Rainy Day Investments - the investment vehicle of the major shareholder Herschel Segal - guaranteed all of Squish's obligations through its ownership in the company. During the first quarter of 2020, the loan plus accrued interest of C$45 thousand was fully repaid (as shown in the graph below). Quite frankly, in a zero interest rate environment back then, investing a small portion of its cash balance at an annualized interest rate of around 3% (without incurring any risk) must be viewed as beneficial for DAVIDsTEA's shareholders (though it was not a meaningful amount). Source: 10-K filing of DAVIDsTEA As shown in the most recent 10-Q filing, there are neither any financial arrangements outstanding as of now nor did DAVIDsTEA engage in any relevant related party transaction in the last quarter. 7. Segal family vs. outside shareholders Claim: "Segal family is exploiting the company at the expense of outside shareholders" To briefly recap: The around 90-year-old Herschel Segal, co-founder and still the major shareholder of the company, stepped down from his interim CEO position in December 2020 and also resigned from his function as executive chairman of the board in the second half of 2021. He was succeeded by his daughter Sarah Segal as CEO of the company and by his wife on the board of directors. Admittedly, such decisions can definitely not be viewed as good corporate governance for a public company, but on the other hand, he still owns more than 45% of DAVIDsTEA. In this section, it's not my goal to judge Sarah's competency or her accomplishments to date, but just to debunk the frequently-voiced allegation above. First, as shown below, base salaries for the company's management team and board of directors decreased by around 20% over the last three years. The increase in stock-based compensation is a combination of a higher share price during 2021 and one-time stock awards (options) for Sarah and Frank Zitella (CFO/COO) as a result of job promotions and the associated higher responsibilities. If granted in a reasonable fashion, I personally endorse a high relative proportion of stock options (awards) as it further aligns the interests of management and shareholders. Source: 10-K filing of DAVIDsTEA Secondly, on a more general level, it just doesn't make any sense to pull money out of the company with high salaries and similar actions when the family owns around 50% of the company (Herschel and Sarah Segal including stock options). Assuming an EBITDA multiple of 10x, a reduction of C$0.5 million in salary expenses would increase the value of the company by C$5 million (from which the Segal family would benefit the most). Finally, it should be noted that Sarah and Frank have received almost the same total compensation in 2021 (as shown in the footnotes of the most recent 10-K filing). 8. Cash flow development Claim: "DAVIDsTEA is burning substantial amounts of cash even after exiting the restructuring proceedings" As a matter of fact, these allegations are just not true. As shown in the graph below, DAVIDsTEA generated a positive operating cash flow - before changes in working capital - of C$4.1 million in the last financial year ending January 29, 2022. In my opinion, it is only reasonable to exclude annual fluctuations in the working capital balance as these items can easily be manipulated by management and thus can distort year-over-year comparisons. Particularly in FY21, DAVIDsTEA's working capital balance had been significantly impacted by the settlement of the company's creditors' claims through a one-time payment of C$17.6 million. Just to be clear, this payment as well as professional fees in connection with the CCAA proceedings of approx. C$2.0 million weighed on DAVIDsTEA's cash flow as well. Even after deducting lease payments (part of financing activities) and CapEx, the company was still able to generate a positive free cash flow of C$3.3 million in its transition year 2021. In this context, it should be highlighted that its new business model is not subject to any meaningful capital expenditure, e.g., CapEx in FY21 amounted to only C$52 thousand. Source: 10-K filing of DAVIDsTEA Despite the admittedly disappointing sales development over the last 12 months (as discussed above), DAVIDsTEA still managed to produce a positive operating cash flow (excl. changes in working capital) of C$1.3 million (as per April 30, 2022). 9. Potential buyout Claim: "The Segal family will never sell the company"

Jul 05

DavidsTea: Key Metrics Continue To Move In The Wrong Direction - Sell

Aspired transformation into a "digital first tea merchant" hasn't played out as expected so far as the restructured company struggles with post-COVID customer buying patterns. Both sales and profitability metrics have trended in the wrong direction for four quarters in a row now. At the same time, SG&A expenses have increased. With the company facing a multitude of industry-specific and macro-related headwinds, a reversal of recent trends looks illusive at this point. Going forward, management will be challenged to achieve its stated long-term goals of low double-digit sales growth and doubling the company's Adjusted EBITDA margin to 10%. With an outright sale still unlikely, investors should avoid the shares or even consider selling existing positions. Two years ago, COVID-19 forced leading Canada-based tea retailer and merchant DavidsTea (DTEA) to commence restructuring proceedings under the Canadian Companies’ Creditors Arrangement Act ("CCAA"), the Canadian equivalent of Chapter 11. Subsequently, DavidsTea terminated the vast majority of its brick-and-mortar store leases to focus on its e-commerce and wholesale operations. While the transformation appeared to shape up well initially, results have deteriorated quite meaningfully in recent quarters as the company struggles with post-COVID customer buying patterns. For me, the appointment of co-founder and controlling shareholder Herschel Segal's daughter as CEO in December 2020 was a major red flag due to her obvious lack of qualification. In addition, the move made quite clear that the Segal family wasn't considering to put the company on the auction block anytime soon. In FY2021, sales declined by approximately 15% year-over-year while Adjusted EBITDA was almost cut in half to a paltry C$5.3 million. Cash declined by C$5.1 million to C$25.1 million. Q1/FY2022 was more of the same with sales declining and SG&A expenses increasing on a year-over-year basis for the fourth quarter in a row. Company Press Releases While the company intends to "continue investing in initiatives that stimulate demand", a turnaround of recent sales trends looks illusive at this point, particularly given the magnitude of challenges the company is currently facing: inflationary pressures supply-chain disruptions labour shortages and rising salaries COVID-19 related e-commerce tailwinds anticipated to subside even further a looming recession Given these headwinds, management's long-term goals of low double-digit sales growth and 10% Adjusted EBITDA margin (up from 5% in FY2021) will be difficult to achieve: Company Presentation

Shareholder Returns

DTEAUS Specialty RetailUS Market
7D-6.4%-2.2%-2.5%
1Y-71.4%-36.6%-23.2%

Return vs Industry: DTEA underperformed the US Specialty Retail industry which returned -36.3% over the past year.

Return vs Market: DTEA underperformed the US Market which returned -21.5% over the past year.

Price Volatility

Is DTEA's price volatile compared to industry and market?
DTEA volatility
DTEA Average Weekly Movement14.4%
Specialty Retail Industry Average Movement8.0%
Market Average Movement6.9%
10% most volatile stocks in US Market15.6%
10% least volatile stocks in US Market2.8%

Stable Share Price: DTEA is more volatile than 75% of US stocks over the past 3 months, typically moving +/- 14% a week.

Volatility Over Time: DTEA's weekly volatility (14%) has been stable over the past year, but is still higher than 75% of US stocks.

About the Company

FoundedEmployeesCEOWebsite
2008343Sarah Segalhttps://www.davidstea.com

DAVIDsTEA Inc. operates as a specialty tea retailer in Canada and the United States. It offers loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts; tea accessories, including tea mugs, travel mugs, teacup sets, teapots, tea makers, kettles, infusers, filters, frothers, tins, and spoons; and food and beverages. As of April 29, 2022, it operated through 18 company-owned stores.

DAVIDsTEA Inc. Fundamentals Summary

How do DAVIDsTEA's earnings and revenue compare to its market cap?
DTEA fundamental statistics
Market CapUS$19.39m
Earnings (TTM)-US$5.38m
Revenue (TTM)US$71.19m

0.3x

P/S Ratio

-3.6x

P/E Ratio

Earnings & Revenue

Key profitability statistics from the latest earnings report
DTEA income statement (TTM)
RevenueCA$97.74m
Cost of RevenueCA$57.86m
Gross ProfitCA$39.88m
Other ExpensesCA$47.26m
Earnings-CA$7.38m

Last Reported Earnings

Jul 30, 2022

Next Earnings Date

n/a

Earnings per share (EPS)-0.28
Gross Margin40.80%
Net Profit Margin-7.55%
Debt/Equity Ratio0%

How did DTEA perform over the long term?

See historical performance and comparison