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DAVIDsTEA: From A Tea Cult Legend To A Digital Tea Merchant

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What started as a grim year for DAVIDsTEA (NASDAQ: $DTEA) has turned into a sigh of relief as the company executes its ambitious restructuring plan towards becoming a more agile digital-first tea merchant.

DAVIDsTEA (NASDAQ: $DTEA) is a branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related gifts, accessories, food, and beverages through 237 DavidsTea stores and online.

$DTEA is offering proprietary and exclusive tea blends as well as traditional single-origin teas and herbs. Their stores have a modern and minimalistic aesthetic that creates an inviting atmosphere standing in stark contrast to common perceptions of tea as a more traditional product.

On July 9, 2020, that had come to an end – or at least experienced a drastic trimming – as the company announced that it was sending notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States.

More than halving its total stores. This decision plays a part in a larger restructuring plan in order to position the company towards focusing on e-commerce sales.

The company hasn’t paid rent since March and has filed for creditor protection in Canada and the US.

DAVIDsTEA’s restructuring efforts are focused primarily on exiting unprofitable stores and right-sizing its brick and mortar footprint. The main change agent? COVID-19.

“DavidsTea has experienced a multi-year decline in brick and mortar sales and the post-COVID-19 retail environment creates significant challenges for our unique in-store customer experience.” – Chief Financial Officer Frank Zitella.

The stock has rallied 106% since these announcments reaching $2.00 – surpasing its 52-week high.


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$DTEA experienced a 60% fall in gross margins in early 2020, as compared to the previous year while facing several delisting notices from Nasdaq, caused by the severe pandemic.

On the other hand, the company incurred fewer operating expenses, up to a 65% decline, partly attributed to government subsidies and partly because they hadn’t paid rent, were shutting down stores, and laying off employees.

$DTEA serves its working capital and capital expenditures through cash on hand and cash generated from operating activities since the company doesn’t possess any form of debt financing.

The company has $21.9 million in cash as of Q3 quarter-end and expects to use this for its working capital needs, store renovations, and investments in infrastructure.

Rainy Day Investments, Ltd. owns 46% of common shares and is by far the largest shareholder. It has significant influence in electing directors and, a substantial say in the appointment of executive officers, management policies, and strategic direction.

Herschel Segal, 88, was appointed Chairman of the Board of Directors and Interim Chief Executive Officer of DavidsTea on June 14, 2018. 

He was recently replaced with Sarah Segal.

Since January 1969, Herschel Segal has been President and CEO of Rainy Day Investments, an investment company, Mr. Segal also happens to be a co-founder of DavidsTea.

That should calm even the biggest skeptic, that there won’t be any noteworthy conflicts of interest.

 

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DAVIDsTEA and the global tea industry


Flavored Tea Market accounted for $14.1 billion in 2017 and was projected to grow at an annual growth rate of 7.2% during the forecast period of 2018 to 2025 and reach $65.2 billion by 2024.

This growth is attributed to factors such as increasing per capita disposable income, the prevalence of tea culture, growing e-commerce, growing health awareness, the introduction of healthy ingredients in tea, and the introduction of new flavors and new varieties in tea.

The markets for tea products in Canada and the United States are highly fragmented. $DTEA competes with many relatively small independently owned tea retailers, a number of regional tea retailers, few internet suppliers, and retailers of grocery products.

The quality of their tea-blendeds and straight teas is DavidsTea’s main differentiator.

DavidsTea possesses a broad portfolio of products; their website is unique in that it presents customers with educational information to guide their exploration of tea. They are constantly creating new tea blends using high‑quality ingredients from around the world and identifying new tea products designed to match customers’ tastes as they evolve.

The company has pivoted remarkably well throughout the COVID-19 pandemic and is well on its way with its ongoing restructuring activities.

DAVIDsTEA reported in Q3 a 145.5% increase in e-commerce and wholesale sales to $22.1 million.

The company also secured a gross profit of $10.8 million. A lot of risks still remain, while the internal management and financial structures seem to call for the most caution.

Should the company succeed with its ambitious digital-first restructuring and keeps compliant with Nasdaq’s listing directives, it could then surface as the leading tea company in Northern America.

 

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Luka Marjanovic

Partner

Luka holds a Bachelor’s in International Business and a Master’s in International Management. During his undergraduate studies he worked as a research assistant in the field of Big Data; founded his own consulting firm providing services to local SME's in various sectors and invested in the capital markets; as well as working pro-bono providing education and career counselling. Prior to his business education, he studied Biology-and-Biotechnology, and served in the Danish Royal Army as Second Sergeant, leading and managing a group under extreme conditions and pressure. Luka has spent significant time abroad, living and working in seven different countries. When he's not in the office, he's chasing the next gusts windsurfing, carving the mountain snowboarding or out in the forest for a jog.

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