Is Tea the New Coffee?

Hot tea was iced down as recent IPO Teavana (NYSE: TEA  ) posted its quarterly report on Friday.

The fast-growing chain selling loose-leaf teas and artisanal tea-making gear posted strong numbers, but it disappointed investors holding out for more in its guidance for the seasonally potent holiday quarter. The end result is that Teavana has the sorry distinction of being one of the few stocks to post double-digit percentage declines during the most bullish weekly Wall Street run in years.

Teavana's quarter was tight. Net sales climbed 35% to $33.4 million. Brisk expansion and an 8.5% spike in comps helped fuel the 196-unit chain's top-line growth. Net income tripled to $0.02 a share.

Unfortunately, the company's outlook for all of fiscal 2011 calls for a profit of $0.43 a share to $0.45 a share on $162 million to $166 million in net sales. Analysts were slurping away at the high end of those ranges, and that's apparently not good enough for a fresh stock with a lofty valuation.

There's clearly a market for premium hot beverages. Where would Starbucks (Nasdaq: SBUX  ) and Keurig parent Green Mountain Coffee Roasters (Nasdaq: GMCR  ) be if folks were settling cheap bean brews in stale pots?

If tea can get the same kind of makeover as java, Teavana will be ahead of the curve with its aromatic stores stocking more than 100 varieties of high-end teas.

Before Teavana's summertime IPO, there really wasn't a pure tea play on the market. Celestial Seasonings parent Hain Celestial (Nasdaq: HAIN  ) and Lipton's Unilever (NYSE: UL  ) aren't constructed as companies where teas move the needle. Starbucks has Tazo, of course. Keurig machines whip up a mean single serving of tea. However, if the same upscale relaxation trend that continues to drive yoga outfitter lululemon athletica (Nasdaq: LULU  ) is for real, how can Teavana not bounce back?

I'll make this interesting. As part of our CAPScall initiative for accountability, I'm initiating a bullish call for Teavana on Motley Fool CAPS. I like my timing. The stock closed below its $17 IPO price on Friday for the first time in its brief publicly traded life.

The opportunity to get in at a better price than this summer's first public investors is too tempting to ignore.

Add Teavana Holdings to My Watchlist to see if Rick is right. If you want to track the other sultans of tea and coffee, add Unilever, Starbucks, The Hain Celestial Group, or Green Mountain to My Watchlist.

The Motley Fool owns shares of lululemon athletica and Starbucks. Motley Fool newsletter services have recommended buying shares of Unilever, lululemon athletica, Starbucks, and Green Mountain Coffee Roasters. Motley Fool newsletter services have also recommended creating a lurking gator position in Green Mountain Coffee Roasters. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Green Mountain. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2011, at 2:24 PM, naandrews wrote:

    I'd say tea is not the new coffee because coffee is addictive (because of the caffeine), whereas tea is not (or at least it is not as addictive, with lower caffeine levels).

    On the other hand, I could still see, maybe, tea becoming a big thing, in which case it'd be nice to get into that space early (Rick, maybe this would make a good Rule Breakers pick)???

    Rick, is Tealuxe (a tea place I have been to here in Boston) a competitor? Is the tea space fragmented? If so, would Teavana be an acquirer?

    Neil (no position)

  • Report this Comment On December 05, 2011, at 2:39 PM, baselineace wrote:

    You didn't address the fact that they only have $36,000 in cash on their balance sheet?

  • Report this Comment On December 05, 2011, at 3:48 PM, baselineace wrote:

    I should also mention that I love the Teavana concept and stores that I've visited in New York and D.C. have been very busy.

  • Report this Comment On December 05, 2011, at 5:54 PM, teawriter wrote:

    First, to NAAndrews, Tealuxe is not a Teavana competitor. Tealuxe has just two remaining stores (Cambridge and Providence) compared to Teavana's 180+ and they are styled as a sit-down tea cafe. Tealuxe is a mall chain that sells loose leaf tea and teaware and does not offer tea or food service in store.

    I don't think Teavana is going to be the tea shop that is going to change things. True tea enthusiasts are not so fond of the company in general, especially after they cannibalized SpecialTeas which had a very popular following. They are seen as overpriced for their tea and they are known to hard sell their teaware. Reports I have from smaller scale tea purveyors is that Teavana is good at introducing a segment of the population to tea but then those buyers tend to turn to local sellers who offer better quality at lower prices and are often more knowledgeable than the counter staff at the mall.

    I'm a very serious tea fan and I believe we are on the cusp of a big tea movement here. I think it might come at the hands of Starbucks though who is now making serious moves to improve their Tazo line.

  • Report this Comment On December 06, 2011, at 10:43 AM, victea wrote:

    One of the major problems facing any tea shop be it sit down or counter sales is volume. Starbucks has an advantage in that they have dual products (Tea & Coffee) to help support the store overheads. Having a stand alone tea shop is very difficult to support. I can understand why Teavana uses a hard sell for their tea ware. Also, if you are consentrating on only the hot tea business, you are only looking at 15% of the tea consumed in the USA. Iced tea which represents 85% of tea consumed is also more profitable per serving.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1736187, ~/Articles/ArticleHandler.aspx, 8/31/2014 4:31:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement