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DAVIDsTEA INC (DTEA), a Montreal-based beverage chain founded in 2008, offers consumers a wide range of loose-leaf teas, pre-packaged teas, tea sachets, and a wide variety of tea-related accessories. Located primarily in Canada and the United States, David’s Tea operates 161 retail locations. The company recently went public, debuting on the NASDAQ on June 5. With share prices starting at $19, the IPO was a roaring success and closed at $27 per share.

IPO costs to blame for income losses

While the initial trading might have been quite favorable, investors were not pleased with DTEA and its earnings report. In this first quarter earnings report, released Tuesday night, David’s Tea highlighted the costs of the IPO as a driving factor for their net income losses.

Overall, David’s Tea lost 93.2 million Canadian dollars, an equivalent of $75.7 million. The company also reported a loss of C$7.73 per diluted share. Excluding the IPO and other one-time costs, net income was reported as C$1.1 million, dropping from C$1.4 million in the first quarter of 2014.
The earnings report also pointed to the operating costs of a weaker Canadian dollar as a reason for the loss.

Earnings report and competition hurt DTEA

Concerns over the earnings report were reflected in today’s share prices, as DTEA stock opened at $24.90 after closing at $29.19 last night. Today’s low of $21.88 is the company’s lowest share price since its debut a few short days ago. The stock closed at $22 per share this afternoon, a nearly 25% loss for the newly-minted stocks.

Investors should also note that David’s Tea falls into the soft drink beverage industry, which holds a Zacks Industry Rank in the Bottom 39% so the trend hasn’t been favorable for this space as of late. Competition from larger brands like Starbucks (SBUX), which owns a similarly branded chain called Teavana, may also hurt David’s Tea as they try to expand throughout North America.

Teavana almost doubles David’s Tea storefronts, with over 300 mall-based locations. After becoming a Starbucks subsidiary in 2012, Teavana’s market expanded to the shelves of Starbucks locations nationwide. Currently, Starbucks has a Zacks Rank #3 (Hold).

Company remains optimistic

Despite the share price setback, Sylvain Toutant, President and CEO of David’s Tea, responded positively to the report, saying: “We are very pleased with our first quarter financial results. Our performance reflects the strength of our unique brand that is reinventing the tea experience, making it fun and accessible to all.”

Toutant continued, asserting the value of the brand’s innovation and design. It would appear that the company is satisfied with its first earnings report as a publicly traded company and is looking past the net losses. The expansion of the tea market in North America is part of what fuels this confidence.

Tea market heating up

Behind only water, tea is the second most popular drink on earth. However, it has just recently gained a foothold in North America. According to research from The Tea Association of the USA, via Market Realist, the United States tea market has grown from less than $2 billion in 1990 to an estimated $10 billion in 2014.

Although tea seems to be on the rise in the US, further research from the Tea Association gives DTEA investors both good and bad news. 85% of US tea consumption is iced tea, a market that David’s does not specialize in. However, hot tea sales have increased by 17% over the last 5 years.

The Tea Association estimates “strong, continuous growth” in US tea sales, forecasting sales to double over the next five years. As this market continues to expand, it will be interesting to see whether David’s Tea can cut out their own share of the space, or if investors will face more rough quarters in the months ahead.

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