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Teavana: One Lump or Two?

Teavana (NYSE: TEA  ) is one of the most interesting consumer-facing IPOs of the last year. Whether investors should actually invest in the future of this tea purveyor -- and the idea that it could become something akin to the Starbucks (Nasdaq: SBUX  ) of tea -- is quite another story, and I'm willing to make a bearish CAPScall on this one.

Is Teavana that heavenly?
This retailer, which seeks to create a "Heaven of Tea" consumer experience, brings high-end, specially blended loose-leaf tea and tea-centric merchandise to your local mall. As of its initial public offering, there were about 161 company-owned Teavana stores in 35 states, and 19 franchised stores, mostly located in Mexico.

Granted, Teavana has brewed up some considerable growth. Over the five years prior to its IPO, it clocked a 38.6% compound annual growth rate in sales. In fiscal 2010, Teavana reported a year-over-year increase in net income of 126.9%, or a $12 million profit.

Part of the investment thesis here is that premium tea is an underserved market here in the U.S.; one of the ways Starbucks built its caffeinated empire was by introducing Americans to the concept of high-end, gourmet coffee as opposed to their prior habit of swilling cheaper java.

In its IPO prospectus, Teavana cited the global market for tea, which represented $56.6 billion in sales in 2009, and pointed out that the U.S. represents only 9% of that market. Granted, there could be money to be made in convincing more Americans that tea is a sophisticated thirst quencher and should get credit for being more than coffee's weaker caffeinated cousin.

One lump or two?
Still, investing in Teavana shares could be a pricey undertaking; investors might end up taking a couple of lumps instead of sweetening their portfolios. Teavana trades at 31 times forward earnings, so it's more expensive than Starbucks (which, incidentally, owns the Tazo brand of premium teas). Although Teavana's PEG ratio of 1.28 sounds like a good value, in this case, it all depends on Teavana being able to keep up heady growth over the next five years, and I question its ability to do that.

Is there that much room in America for high-end, mall-based tea retailers? Teavana disclosed that the average transaction size at its stores is $36, and I have to wonder how many people are willing to shell out that kind of money for tea and tea-related merchandise; that could be a very limited market. Although Starbucks managed to convince consumers that they wanted to pay up for coffee, Starbucks also offers the "third place" experience in its cafes.

Plus, plenty of Americans are probably perfectly happy with their Lipton, and the truth is, there is plenty of competition for fancy, aspirational, yet utterly convenient blends of tea.

Take Hain Celestial's (Nasdaq: HAIN  ) classic Celestial Seasonings line, Numi's organic and Fair Trade teas, and The Republic of Tea brands, just to name a few, all of which are available at select supermarkets instead of requiring a trip to the mall.

And speaking of the tea gracing supermarket shelves, Unilever's (NYSE: UL  ) super-classic Lipton may sound like an old bag, but it's a well-known brand that touts its social responsibility and certification through the Rainforest Alliance, giving it an extra kick of goodwill.

A pricy pour
Personally, I think Teavana's a fascinating company, and I do love tea, but it's an expensive stock I'd think twice about before buying. So I'm putting a red thumb on Teavana in Motley Fool CAPS; you can track my record at reading the tea leaves here. What do you think? Make your own CAPScall.

While I may be thumbs-down on this retail chain, there is another emerging-market retailer we're very bullish on here at The Fool. We're so enthusiastic about this stock that we've named it "The Motley Fool's Top Stock for 2012." This Latin American retailer is making serious inroads in the emerging world, and we think they've got what it takes to become "The Costco of the Latin America." You can uncover this pick by clicking here. The report is free, but it won't be available forever, so grab a copy while you still can.

Alyce Lomax owns shares of Starbucks. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Unilever. 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.

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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 March 05, 2012, at 10:45 AM, prginww wrote:

    Alice - so glad to see that an esteemed rising star fool sees what I see on Teavana. I could go on all day, but i think these two points are enough to put an end to TEA's fast paced sales growth and make the investment still too expensive.

    1. the starbucks comparison is dangerous. For one, it's an invalid comparison: starbucks serves wake-up in a cup, teavana sells 5 more minutes in your morning routine and an intimidating new process for preparing a hot drink. Yes, they serve some drinks at the store, but loose tea is simply not conduscive to QUALITY quick/mass brewing. What makes the comparison dangerous is that it's easy to come up with. Everyone invested in TEA believes in it. It's the premise behind TEAs rebound from the recent low. Take it away, and where is the price support?

    2. The stuff is expensive! We're not talking the I-worked-hard-today $4 latte. Yea, you can gt a $4 tea latte if you want to pick from the middle-quality teas, but to take some home you're going to spend in the double digits, at least. Unless you're banking on a serious rebound of the middle class consumer, I can't see a reason to believe TEAs rapid sales growth can persist.

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