This post is intended to be a brief review on the company DavidsTea (NASDAQ:DTEA).
DavidsTea is a retailer of high end speciality tea primarily in Canada and the United States with 239 operating stores as of August 4th, 2018. They have variety of product selections of various tea products, tea related accessories and gifts. More information can be found on their website at www.davidstea.com.
Analysis
As January 2nd 2019, DTEA closed at a price of $1.29 with a market cap of 35M. The 2018 high was $5.35 and the stock had an IPO price of $19. Common questions that are asked when a company experiences a major drop include:
Is this the lowest it will go? Can it possibly still go lower? Is it a good time to buy? It is oversold?
These are questions that no one can answer correctly with 100% certainty.
Here are some reasons you should have confidence to invest in Davidstea and also some reasons why you should be concerned about putting your hard earned money in this stock.
Reasons to have to confidence: With the stock fallen drastically since its IPO in 2015, here are reasons why it may be oversold, or there are reasons to believe Davidstea will be able to have a successful year in 2019.
- DavidsTea has been linked to several cannabis companies, and has been approached by several cannabis companies. There is no agreement in sight, but this could see more product introductions and higher sales in the future. If you are looking for other ways to invest in the cannabis industry, you may want to keep an eye on this development.
- An agreement was signed with Loblaws Companies in 2018 for stores under the Loblaws banner to carry DavisTea products across select stores. (2) This will provide more exposure for Davidstea in hope to gain more market share and to further establish itself as a leader in the tea industry. Over 450 Loblaws owned stores are expected to carry Davidstea products.
- Low valuation compared to sales and book value: Trading at 0.23 Price/Sales and 0.57 Price/Book Value. These valuations are much lower than the industry average.
- Ecommerce Channel is experiencing double digit growth. With the rise of ecommerce, double digit growth is not too surprising, but nevertheless it is a positive sign. DavidsTea does not have a strong presence on Amazon at the moment, and it is unclear whether establishing a stronger presence on amazon is part of their strategy.
Reasons For Concern: There are glaring concerns both operationally and financially, which is reflected in the stock price falling from its IPO price of $19 in 2015.
- Trending high inventory numbers on their balance sheet each of the prior four quarters suggests struggles to sell inventory and/or poor inventory management.
- Continued struggles to achieve profitability. With over 239 stores opened, you wonder how many of the stores are operating at a loss. Looking back, once might think that new stores were opened too quickly.
- Decreasing cash flow balance is consistent with continued struggles to achieve profitability. If this trend continues, (which seems likely in the short term), DavidsTea may face difficulties in their day to day operations, cash management and may affect pay off debt.
- Decline of same store sales in 2018 Q3 compared to 2017 Q3. This suggests that the same stores are struggling to achieve the sales they had in 2017 Q3. This could be related to a number of reasons including: consumer preferences, brand strength/recognition, pricing, product offerings, reduced dependency on discounting, weaker marketing campaigns, more appealing substitutes for consumers just to name a few.
(1) https://ca.finance.yahoo.com/quote/DTEA/
Final Thoughts
There seem to be more reasons in favor of not investing in Davidstea, but it all depends on your strategy. This is a more volatile investment than average and not recommended for anyone with a low risk tolerance. This is a high risk high reward play and more suitable as a short term hold. If you are an experienced investor you may want to keep an eye on this stock. Check our post here for more about volatility and beta. Remember to do your own research or consult your financial advisor before making any financial decisions.
Disclaimer: Wealthfinance is for general information purposes only and does not offer professional advice. You should speak to a financial advisor before making any financial decisions. Do your own research and only invest in what you understand. Wealthfinance is not responsible any decisions you make from the information provided.
