Reading the DAVIDsTEA leaves

An interesting small cap play Wall Street Connected Profit Like The Pros Brought to you by: Dear subscriber, Our proprietary data analysis sometimes comes up with some odd results. Today is one of those days. Our editorial group agreed that none of us had heard of DAVIDsTEA (DTEA) despite a rash of recent searches by financial pros. Initially, we wanted to dismiss this stock. It’s a Canadian company with litigation issues. So why bother? But before we broke for lunch, some of us got curious about this tiny tea house. We gave it a second look and ended up going down a rabbit hole that delivered some surprising results we think you need to see. Who is DAVIDsTEA? DAVIDsTEA “offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and gifts.” More importantly, they declared bankruptcy in 2020. Covid delivered a death sentence to the tiny tea retailer, forcing them to close all 42 stores in the U.S. and 166 in Canada leaving it with just 18 operating in Canada. In June, the company reached an agreement with creditors that paid out $18 million. That leaves the company with ~$13 million and no debt. The agreement was approved in Canada and is currently awaiting approval in U.S. Bankruptcy Court. At the moment, it doesn’t appear they will have issues clearing U.S. courts. That leaves us with a company focused almost exclusively on eCommerce sales. The question is what does that look like. DAVIDsTEA 2.0 From their May filing we learned the following: The cost of sales was $12,481 for a gross profit of $10,768 and a 46.32% gross margin. If we add in the SG&A expenses and exclude restructuring charges, we get a net income of $1,574 and a net margin of 6.77%. Restructuring and merger charges impacted the final operating income. However, those will disappear as it moves past the bankruptcy proceedings. With no debt remaining, if we assume that falls directly to the bottom line, with 26 million shares outstanding, we get an EPS of $0.0605 or $0.242 annualized. Not great. But with shares trading at $3.77, that’s an EPS of $15.57. DCF Analysis Discounted cash flow can be a bit tricky here because it’s near impossible to pick the right discount rate. But let’s run a quick test for the sake of argument. We’ll approximate their cash flow from last quarter, annualize it, and use it as our starting point. We’ll test a 2% & 10% 10-year growth rate with a 2% terminal growth rate. For the WACC, we’ll do 5% and 15%. As you can see, the discount rate can dramatically change things as does the growth rate. It’s easy to make an argument that the company could double in size every year for the next 5 years or that the WACC should be 20%. That’s what makes this difficult. Technically Speaking The weekly chart gives a good picture to perform a technical analysis. There are two important points here. First, the stock is trading nicely above the 200-week simple moving average (average of the closing price over the last 200 weeks). That’s an important indicator traders use to identify bullish or bearish behavior. Second, we have a consolidation pattern. The sharp upward move identified by the purple arrow creates the ‘pole.’ From there, we connect the points that stick out furthest on the high side and low side to create trend lines as shown in blue. We want to see these lines either run parallel or converge on one another (as we have here). This signifies a consolidation where bulls are able to hold up the price while we await more information. Our Opinion - 👍 This is a speculative play. However, the company has a few things going for it. - A niche product with a decent online presence and the ability to expand. - Positive cash flows excluding bankruptcy. - The online tea market is expected to grow at 8.4% annually. Although it’s risky, it has decent prospects. Sponsored [Today is the LAST DAY]( Wall Street Connected is going away [Sign Up For The Spill]( What we’re watching [Wall Street Connected: Airbnb]( A look at Airbnb, the NASDAQ listed global property rental phenomenon. [Watch Now]( OUR RECENT POSTS [Mo Mattress Mo Fun]( How do you Sleep Number? [Read more]( [The Countertop Investor]( Caesarstone attempts a turnaround [Read more]( - The Editorial Staff # [submit to reddit]( [submit to reddit]( [submit to reddit]( To ensure delivery of all emails, [whitelist us](. Update your email preferences or unsubscribe [here](#). View our privacy policy [here](#). Copyright ©2021 InvestingChannel. 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