DavidsTea with a Monster Quarter

Posted on December 16, 2020 by Florian Buschek

DavidsTea DTEA (disclosure: long) has reported results for Q3 2020 yesterday AH. I was extremely good with e-commerce and wholesale revenue up more than 145% over the prior year, consisting now of 84.3% of total sales. Operating Income and EBITDA also surprised to the upside with $2.3M and $3.3M, respectively (before restructuring adjustments and wage subsidies). The stay under CCAA was extended to March 31 of 2021 to finalise lease negotiations and establish a plan of arrangement. The last 2 quarters resulted in $4.6M EBITDA for the seasonally worst quarters under CCAA. Getting to $15M EBITDA for a full year should not be difficult to do, since Q4 is often up to double the sales volume of “bad” quarters and Q1 is also typically strong.

The current market cap is around $50M. The big question is how much the landlords will get from the nominal liability of $71M. I estimate a number of $30M to $50M, which is most likely conservative. The reason is that the landlords can only claim damages from the rejection of the leases, but many of the properties are already occupied by new tenants so that in these cases the damage to the landlords is limited. Even if the full lease liabilities of $71M had to be paid (which is extremely unlikely) the EV would be $100M and still not expensive at all.

Herschel Segal, DAVIDsTEA’s Chairman and Founder is also stepping down to make place for his daughter Sarah. This is very good news since Herschel hasn’t managed the company all too well and Sarah is clearly better equipped to lead the company from here. She has mostly initiated the transformation to ecommerce and wholesale and done a great job so far.

The company has plenty cash and is good positioned in terms of inventory and supplier prepayments and deposits to benefit from the upcoming strong Christmas period.

The stock traded wildly after hours racing up to $2.96 from the close of $2 before settling down around $2.25. Rightly so in my opinion, the stock is drastically undervalued. Good times ahead. It’s tea time!

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Scott Shuda

Outstanding call on this one Florian. And perfect timing (two weeks ago) to go public with your pick.

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