A Montreal-based tea company’s recent quarterly report shows that its cost of sales increased by about one third compared to last year, but they’re still making some money, despite the higher cost of doing business.
The specialty tea company, DAVIDsTea, made around $44 million in sales during its third quarter of 2016. This is about a 21 per cent increase from its third quarter sales in 2015.
The company’s cost of sales, however, increased by 29 per cent to $23 million from $18 million in 2015.
Christopher Lackey is an analyst, investor and founder of Moneybear.ca. He believes that the company’s problems lie in the U.S. According to Lackey, the brand has not caught on the same way it has in Canada, especially due to its “niche” market nature.
Lackey says the U.S. expansion is costing the company money without making much back. He also says the tea store has more competition in the U.S. with the already established presence of Starbucks-owned Teavana stores.
“It’s not like Tim Hortons or McDonalds where you can put one anywhere,” said Lackey as he noted the inconvenience of having to spend time in a retail store to purchase a cup of tea.
In a Globe and Mail article, DAVIDsTEA’s recently departed CEO Sylvain Toutant is quoted saying that “[they] have found that [their] U.S. customers prefer to shop quickly and efficiently,” sparking the opening of a prototype store with a self-serve model in Boston.
The company’s third quarter analysis states plans to grow sales numbers by adding new stores and achieving more sales on the DAVIDsTEA website.
The company has plans to construct, lease and open 25 new stores in Canada and 15 new stores in the U.S. as well as renovate several stores. Additionally, management hopes more sales will come from places such as hotels, restaurants, and offices and workplace locations.
The problem is that in order to achieve these higher sales numbers, the company has to spend more, according to Lackey.
“They have not been able to turn a profit which is why you can buy the stock now for about a quarter of what it was when they first went public,” said Lackey.
As of the end of October, DAVIDsTea opened 42 new stores in the span of one year. The company’s reported net loss in its third quarter increased to $4.96 million from $871,000 in 2015.
AN UNKNOWN FUTURE
The recent resignation of DAVIDsTEA’s CEO Sylvain Toutant also puts the company in unsteady waters as it enters a new fiscal year, according to Lackey. David Segal—the company’s co-founder, former CEO, namesake and brand ambassador—resigned in 2016 as well.
An interim CEO, Christine Bullen, has taken charge as Toutant departed on January 28. When asked about where the company might be headed, a spokesperson replied through e-mail stating that it is in a “quiet period” until fourth quarter results are released and therefore cannot comment or answer any questions.
Lackey believes Bullen is an “unknown quantity” who could take the company in either direction. He said that the company’s handling has been quite amateurish up until now but if Bullen knows what she’s doing, she may be able to turn things around.
If you’re willing to take a risk, however, it may be a good time to invest.
“There’s maximum pessimism and no hope right now,” said Lackey. “It’s high risk and high reward.”
Back in the spring, the company was turning profit and stocks were up. If the company manages to get back to those numbers, it could be rewarding, according to Lackey.
DAVIDsTea might be able to turn things around just yet.