DavidsTea IPO: Share Price Up 41%

Davids Tea IPODavidsTea Inc. (NASDAQ/DTEA), a Canadian specialty tea retailer, went public on Friday, June 5, 2015. Its share price surged more than 42%, closing at $27.00, on its first day of trading.

DavidsTea: Rapid Expansion

DavidsTea was founded by Herschel Segal, the man who built Canadian clothing retailer Le Chateau, along with his young cousin David Segal. The company was founded in Montreal with its first store opened in 2008 in Toronto, Canada. Since then it has expanded rapidly to 136 stores in Canada and 25 in the U.S.

As of now, all DavidsTea stores are owned by the company; none are franchised.

By issuing 5.1 million shares, the initial public offering (IPO) raised around $97.0 million. Goldman Sachs Group Inc., JPMorgan Chase & Co., and Bank of America Corp. underwrote the deal.

DavidsTea began its IPO process in April of this year. Originally, it planned to float its shares between $14.00 and $16.00 apiece. Later, it raised the range from $17.00 to $18.00 a share. By late Thursday, June 4, shares of DavidsTea were priced at $19.00 a share, $1.00 above the high end of the company’s estimated range.

David and Herschel Segal, cofounders of the company, sold around two million shares in the offering.

DavidsTea said that it would use the proceeds from the IPO to repay debts to its shareholders and creditors. It would also use the proceeds for working capital and general corporate purposes.

The company has solid revenue growth. For the fiscal year ended Jan 31, 2015, revenue was $142 million, a 31% increase from last fiscal year’s $108 million. DavidsTea also turned profitable in fiscal 2014, making nearly $6.5 million in profits (or a profit of $1.52 per share). In fiscal 2013, the company had a net loss of a similar amount.

DavidsTea is aware of the risks in this business. One prominent risk is the supply and price of tea. Political, economic, and weather conditions in tea-producing countries can all affect the company’s performance. With the company expansion in the U.S., the USD/CAD exchange rate may also affect its results.