Just about this time last year, almost every investor thought Teavana Holdings (TEA) was the tea version of Starbucks (SBUX). The IPO was hyped and the stock started strong. Fast forward to today, and the stock is falling to new all-time lows more than 50% below the initial closing price.
Wednesday alone, Teavana crashed 17% on news that Q1 2012 revenues came in slightly below expectations, though 27% higher than last year. Earnings were in line, so clearly investors expected the numbers to beat to punish the stock this much.
Company versus Stock
This stock is a perfect example of the difference between corporate results and the action of the stock. While Teavana the company has performed mostly in line with analyst expectations, the stock has been crushed as a lofty post-IPO valuation left investors expecting estimates to easily exceed.
The problem with such momentum stocks is that once broken, no valuation becomes practical. Investors seemingly dump at will, regardless that the company guided to over 30% earnings growth and now only trades at 17x next year's earnings.
The market is littered with such recent IPO busts, where the growth rate remains high, but investor expectations were higher. Eventually, the stocks will settle down and the ones where the companies continue growing at fast clips will be huge steals at these reduced prices.
Currently, Starbucks trades for 24x next year's earnings. Incredible, considering the company has a nearly $42B market cap compared to the only $550M value of Teavana. Investors though scrutinize every minute detail of the smaller companies these days.
Frank Voisin had a good article on Teavana a few months ago, highlighting some of the market disconnects. Apparently nothing has changed other than the stock price dropping further.
Below are the highlights from the Q1 2012 earnings report:
- Net sales increased by 27% to $44.3 million, from $34.9 million in the first quarter of fiscal 2011.
- The company opened 23 new stores compared to 15 new stores opened in the first quarter of fiscal 2011. The company ended the quarter with 223 company-owned stores.
- Comparable sales increased by 1.7%. Comparable sales include e-commerce.
- Adjusted income from operations decreased by 5% to $6.2 million, from $6.5 million in the first quarter of fiscal 2011. Adjusted income from operations excludes the Teaopia transaction and integration planning expenses of $0.3 million.
- Adjusted net income increased by 12% to $3.7 million, or $0.10 per diluted share, from $3.3 million, or $0.09 per diluted share in the first quarter of fiscal 2011. Adjusted net income excludes Teaopia transaction and integration planning expenses of $0.2 million after tax.
Most concerning was the small 1.7% increase in comp sales. Could this be a sign of over building stores and market saturation for tea products? Or just another sign of the lumpy nature of retails sales that undoubtedly even the great Starbucks encountered from time to time?
The company still expects adjusted net income to grow in the range of 30% to 35%. On the basis of 60 new store openings or a roughly 20% increase in store count, revenue is expected to reach over $208M.
While the earnings number remains solidly in line with expectations, revenues were guided below analyst numbers. Evidently, the company isn't having problems with pricing or margins, so possibly estimates were slightly aggressive.
This stock falls squarely into the issue with the current stock market. Growth doesn't matter if it doesn't meet analyst estimates. With growth remaining strong, the stock should remain on an investors' radars to see if management can finally under promise and over deliver. Until then, the stock likely remains ranged bound for the summer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Please consult your financial advisor before making any investment decisions.