Teavana: The Little Tea Company That Could Deserve Its Above-Range Pricing

| About: Starbucks Corporation (SBUX)
Teavana Holdings, Inc. (TEA) priced their 7.14 million share IPO at $17.00, well above the indicated range of $13-15. Of the shares offered, 1.07 million are primary or company shares, while the remaining 6.07 million are primarily being offered by executive officers and directors. The proceeds to the company will be used to redeem all outstanding shares of their Series A redeemable preferred stock, to pay offering-related expenses, and to repay all outstanding indebtedness under their amended revolving credit facility. At the $17 price, the market capitalization is approximately $646M. The lead underwriters for the offering are BofA Merrill Lynch and Goldman Sachs.
Teavana is a specialty retailer that offers over 100 varieties of premium loose leaf teas, and other tea related merchandise, including artisan teawares. They have 161 company owned stores in 36 states, located in leading malls and lifestyle centers, as well as 19 franchised stores primarily in Mexico. The company describes themselves as “a little bit of Starbucks (NASDAQ:SBUX) and a lot of William-Sonoma (NYSE:WSM)”. The distinction comes primarily from the fact that only 4% of their 2010 sales came from prepared beverage category, while 56% came from the sale of premium loose leaf teas, and 40% come from other tea-related merchandise. We think the more appropriate description may be “a little bit of Peet’s, and a lot of William Sonoma,” just due to the tea presence in the Peet’s (NASDAQ:PEET) culture.
Tea is the second most consumed beverage in the world, behind only water. However the penetration in the U.S. is lower than that of the rest of the world. The U.S. ranks 22nd among countries in per capita consumption of tea, with U.S. tea sales representing approximately $5.2 billion, as compared to approximately $51.4 billion for the rest of the world. Teavana is positioned to take advantage of the projected strong growth in the U.S. of an estimated more than 6% per year sales growth through 2014 to $6.6 billion. They have grown from 47 stores in 2006 to 161 stores today. The company believes they have the opportunity to grow past 500 stores in the U.S. by 2015, and they have identified the next 350 locations.
Revenue has also grown rapidly along with store growth, with revenue growing at a 39% CAGR from 2006 to 2010 (from $34 million to $125 million.). From 2008 to 2010, gross margins have increased from 57.4% to 62.9%, and operating margins have improved from 7.5% to 18.8% over the same period. For the first quarter 2011, sales were up 35% over the same period in 2010, gross margin improved to 64%, operating margin was 18% and net margin was 10%. The company states that they have had 13 years of positive comp store sales.
Teavana represents an attractive mix of solid opportunity for store growth, margin expansion, and strong comp store sales. Based on our forward EPs estimates, TEA appears to be coming at a forward P/E that is toward the higher end of the peer group, but we believe it is reasonable based on its growth and have our forward PEG ratio at less than 1x. The offering has been described as being multiple times oversubscribed since the beginning of the week, as the aggressive pricing confirms, and we expect this little tea company to heat things up on their day one debut.

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