Description

This is going to be pretty quick and dirty.  I put off posting this not wanting to answer questions about the Canadian reorg process and that bit me in the rear a bit as it relates to the entry price, apologies.  

David's Tea (DTEA) is a retail Covid casualty that used the pandemic, and the Canadian reorg process, to opportunistically to shed nearly all its retail footprint and transition its business from physical retail to an online B2C and wholesale business.  

DTEA filed for reorg in Canada, it is a Ch 15 in the US.  There is a plan of reorg that is appoved.  The main focal point of that plan is a $18m CAD payment to satisfy lease terminations.  DTEA will have shrunk to 18 units in Canada from roughly 200 or so in the US/CA pre-pandemic.  DTEA will also have moved to have roughly 80% of its business online and wholesale, my understanding is that wholesale is mostly CA there is not material US wholesale.  

As of last report, the co had about $30m of CAD.  $18m is going to creditors, but presumably due to the reorg process there's a massive working capital imbalance with inventory and receivables and pre-paids high against no payables, a decline in payables of about $14m yoy.  

Figuring out what's here is an excercise of reading the tea leaves (pun intended).  The business did 5.3m of adj ebitda in Q4, seasonally strongest, and a little more than 3m in Q3 (q2/q3 are the seasonally weakest).  I think its probably fair to assume that Q1 came in somewhere between Q4 and Q3 and assuming Q2 is about as good as Q3 gets me to north of >$15m of EBITDA on about $120m of CAD sales.  

DTEA was growing its online/wholesale mid teens/low 20's pre pandemic, while the pandemic and closures helped accelerate that in 2020, there is not a reason to think that mid teens/low 20's is not achievable.  For this kind of business incremental ebitda margins are probably closer to gross margin %'s so that growth should generate a lot of operating leverage lift.  

This, today, is not a capex intensive business, there's no debt (but for 18 CA leases they chose to keep) and there are tax losses so DTEA won't be a cash taxpayer in the near future.  Given the working capital imbalance I highlighted above, ebitda minus maintainance capex is reasonable proxy for cash flow here for while.  

DTEA has a good brand, selling tea has good gross margins (40%>), and this has moved to a low capital requirement operation.  We can quibble about whether this is 8 or 9x cash flow due to the working capital shakeout, but that strikes me as cheap for a pretty good business with decent organic growth prospects.  I'd also expect this to be much cheaper on forward numbers. They're announcing results Tuesday, I've seen some interesting web traffic data that has pretty good correlation to DTC sales and its pretty good.  So I expect the online transition to continue and the future to look better than the past.  My understanding is that they do not have a US wholesale business and I think that provides an additional lever.  

I wonder if it'll take all that long for this to re-rate.  And that's due to what I'll just call "meme stock optionality"tm.  This is a low float name (the Segal family owns 49%), with an options market (surprising to me).  I think they're set up to put out some pretty nice cleaner numbers in the coming Q's.  They've announced intentions to pursue something related to CBD in the past and that's been like a dog whistle.  My channel checks are that tea is a good way to deliver CBD and CBN (something I admittedly have never heard of).  Put it all together and it wouldn't be hard to see the self-identifying "autists" on Reddit grabbing hold of it.  

Catalyst

Exiting reorg

Posting good results

Announcing something in CBD