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Based in Atlanta, Georgia, Teavana Holdings (TEA) scheduled a $100 million IPO with a market capitalization of $532 at a price range mid-point of $14 for Thursday, July 28, 2011. TEA is our co-IPO pick of the week. The full IPO calendar for the week of July 25th includes 12 IPOs scheduled to raise $2 billion.

OBSERVATIONS -- TEA is a profitable specialty retailer that plans to expand to 500 stores by 2015, up from the current 161.

TEA”s after-tax profit margin is 9.4%, the same as Starbucks, the highest in the industry. On an annualized March quarter basis, TEA”s P/E multiple is 40, just above slower growing PEET’s which itself has a profit margin of 6.4%.

CONCLUSION -- At the price range mid-point of $14 TEA should be considered a buy, and we expect TEA to rise in the IPO aftermarket, even though most of the IPO proceeds are going back to shareholders.

COMPARATIVE ANALYSIS -- Some people are comparing TEA with Green Mountain Coffee Roasters (NASDAQ:GMCR), which operates in the specialty coffee industry in the United States and internationally. GMCR sells approximately 200 whole bean and ground coffee selections, cocoa, teas and coffees.

GMCR is not a specialty retailer with company-owned stores. GMCR markets coffee, tea, cocoa and single-cup brewers to retailers, such as department stores and club stores, and single-cup brewers to distributors, as well as to supermarkets. That’s a different business than TEA.

It is possible, however, that some of the GMCR "mania" may be transferred to TEA, so we include GMCR in our comparative analysis. GMCR’s stock is up 282% this year, from $32.86 December 31, 2010, to $92.71 on July 22. Even so, GMCR’s annualized price-to-earnings ratio is 50, which is in the same range as TEA’s 40, annualizing results for the March 2011 quarter.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Profit

Annualizing March 3 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Margin

Teavana Holdings (TEA)

$532

3.8

40

11.9

13.6

9.4%

Starbucks (NASDAQ:SBUX)

$29,860

2.7

28

6.9

7.3

9.4%

Peet's (NASDAQ:PEET)

$782

2.2

35

4.6

4.6

6.2%

Coffee Holding (NASDAQ:JVA)

$117

0.8

25

7.6

8.0

3.2%

Green Mountain Coffee Roasters (GMCR)

$13,170

5.1

50

12.6

-99.0

10.1%


TEA Valuation Metrics

BUSINESS -- TEA is a rapidly growing specialty retailer of premium loose-leaf teas, authentic artisanal teawares and other tea-related merchandise.

TEA believes it is one of the world’s largest branded, multi-channel specialty tea retailers, offering more than 100 varieties of premium loose-leaf teas, teawares such as handcrafted cast-iron, clay and ceramic teapots, and other tea-related merchandise.

With an average transaction size of $36, TEA believes customers view its products as an affordable and healthy indulgence, because they are able to purchase the best teas and teawares from around the world at relatively modest prices.

Products are offered through 146 company-owned stores in 34 states and 15 franchised stores primarily in Mexico, as well as through the company’s website, teavana.com.

MARKET OPPORTUNITY -- TEA participates in the global tea market which had $56.6 billion of sales in 2009, according to the latest available estimates from Mintel, a global provider of market intelligence. Mintel estimates the size of the tea market in the United States to be $5.2 billion with an expected 6% compound annual growth rate through 2014.

Tea consumption in the United States is much lower than the rest of the world, with the United States representing only 9% of the global tea market and ranking 22nd among other countries based on per capita loose-leaf and bagged tea consumption.

GROWTH PLAN -- TEA plans to open 50 stores in fiscal 2011 (including 15 stores opened in the first quarter), 60 stores in fiscal 2012 and to expand to 500 stores by 2015. TEA’s new and existing stores are located in high traffic areas of malls, lifestyle centers and other high-sales-volume retail venues.

TEA has increased operating margins from 7.5% in fiscal 2008 to 18.8% in fiscal 2010, and believes further opportunities exist to increase margins. A primary driver of expected margin expansion will come from the sales mix shift away from tea-related merchandise toward higher margin loose-leaf teas that TEA stores generally experience as they mature.

TEA expects additional drivers of future margin expansion to include the leveraging corporate and other fixed costs as sales grow and gross margin benefits from the growing scale with suppliers.

TEA believes that its online platform is an extension of its brand and retail stores, serving as an educational resource and complementary sales channel for customers. Since fiscal 2007 online sales have grown at a compound annual growth rate of 56.0% and in fiscal 2010 represented 7.0% of net sales. TEA believes it has the opportunity to grow e-commerce sales to at least 10.0% of sales in the future

UPWARD MOMENTUM -- In fiscal 2010, TEA stores averaged sales per gross square foot of almost $1,000, which TEA believes is higher than most specialty retail stores in the United States based upon publicly available information. TEA’s new stores have historically averaged a payback period of less than one and a half years.

TEA’s current store base is balanced across all four regions of the country, with each region producing results in line with the company average.

CAVEATS -- The sales per square foot and net sales from such new locations will likely be lower than existing stores. Average sales per comparable store is currently $862,000. The new store model projects average sales per new store of $600,000 to $700,000. Additionally, new stores generally have lower gross margins and higher operating expenses, as a percentage of sales, than more mature stores.

Further, TEA forecasts the number of stores that it opens each year to become a smaller percentage of the existing store base. TEA also expects first-year sales to be lower than historically experienced, with comparable store sales expected to grow at less than historical rates.

Therefore, TEA anticipates that future sales growth will be at less than historical levels.

COMPETITION -- Specialty retail public competitors in the tea market broadly defined include Coffee Bean & Tealeaf (private), Peet's Coffee & Tea (PEET), Starbucks (SBUX) and Coffee Holding (JVA).

Some people are comparing TEA with Green Mountain Coffee Roasters, which operates in the specialty coffee industry in the United States and internationally. GMCR sells approximately 200 whole bean and ground coffee selections, cocoa, teas and coffees.

GMCR is not a specialty retailer with company-owned stores. GMCR markets coffee, tea, cocoa and single-cup brewers to retailers, such as department stores and club stores, and single-cup brewers to distributors, as well as to supermarkets. That’s a different business than TEA.

USE OF PROCEEDS -- Shareholders intend to sell six million shares. TEA intends on selling one million shares to net $12 million to redeem $10.6 million in preferred stock and to pay debt. So this IPO is mostly a bailout for existing shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Co-IPO Pick of the Week: Teavana Holdings