September 6, 2011
INITIATION
Teavana Holdings, Inc. (TEA)
Neutral Equity Research
High-growth and high-margin, but valuation full: Initiate at Neutral
Investment view Investment Profile
Low High
We initiate coverage on Teavana (TEA) with a Neutral rating and 4%
Growth Growth
upside to our $25 12-month price target. We like TEA’s fundamentals: it is
Returns * Returns *
a high-growth industry leader with a lucrative, differentiated business
Multiple Multiple
model in a fragmented, growing market. TEA is in the early stages of its Volatility Volatility
US unit expansion trajectory, with the potential to grow through other Percentile 20th 40th 60th 80th 100th
Teavana Holdings, Inc. (TEA)
avenues over time. We expect 25%-30% EPS growth over the next 3-5
Americas Retail Peer Group Average
years, driven primarily by unit growth, as well as same-store sales gains
* Returns = Return on Capital For a complete description of the
and margin expansion. However, we see valuation as full relative to peers investment profile measures please refer to
the disclosure section of this document.
at current levels (40X 2012E EPS), and thus wait for a better entry.
Key data Current
Core drivers of growth Price ($) 23.99
We see the potential for sustained 25-30% EPS growth over 3-5 years: 12 month price target ($) 25.00
Market cap ($ mn) 918.8
Dividend yield (%) 0.0
We expect domestic unit growth at 25-30%/year. Net margin (%) 10.2
We see mid-single-digit SSS growth near-term, and 3% longer-term; Debt/total capital (%) 2.2
TEA posted only one quarterly SSS decline in the last recession.
We expect margins to grow from mix shift and fixed cost leverage. Revenue ($ mn)
12/10
124.7
12/11E
166.8
12/12E
212.1
12/13E
266.8
We see several sources of upside over time: (1) E-commerce, (2) EPS ($) 0.36 0.47 0.60 0.78
P/E (X) 66.2 51.2 40.3 30.7
International, (3) CPG, (4) More US units, and (5) Capital deployment. EV/EBITDA (X) NM 24.7 19.4 14.8
ROE (%) 68.5 50.8 40.5 35.6
Risks to the investment case 3/11 6/11E 9/11E 12/11E
EPS ($) 0.10 0.04 0.02 0.32
Upside: better than expected SSS and e-commerce growth. Downside:
earlier-than-expected US saturation, given current entry into smaller Price performance chart
markets and modest comps relative to unit growth, and macro weakness 29 1,500
28 1,450
27 1,400
Valuation 26 1,350
TEA is at 40X 2012 EPS vs. projected multi-year EPS growth of 25-30%, 25 1,300
the high end of hyper-growth, wellness-oriented retail/restaurant peers. 24 1,250
23 1,200
22 1,150
Industry context 21 1,100
The US tea market is a growing, highly fragmented industry. The industry Jun-11 Jul-11 Aug-11
is $5.6 billion in size and has grown at a 7% CAGR over the past 14 years.
Teavana Holdings, Inc. (L) S&P 500 (R)
INVESTMENT LIST MEMBERSHIP
Neutral Share price performance (%) 3 month 6 month 12 month
Absolute -- -- --
Rel. to S&P 500 -- -- --
Coverage View: Neutral Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 9/02/2011 close.
Michael Kelter Goldman Sachs does and seeks to do business with companies
(212) 934-4252 michael.kelter@gs.com Goldman Sachs & Co.
Matthew J. Fassler
covered in its research reports. As a result, investors should be
(212) 902-6740 matt.fassler@gs.com Goldman Sachs & Co. aware that the firm may have a conflict of interest that could
Chris Cerrone affect the objectivity of this report. Investors should consider
(917) 343-5320 chris.cerrone@gs.com Goldman Sachs & Co.
this report as only a single factor in making their investment
decision. For Reg AC see the end of the text. For other important
disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-
US affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
September 6, 2011 Teavana Holdings, Inc. (TEA)
Teavana Holdings, Inc.: Summary Financials
Profit model ($ mn) 12/10 12/11E 12/12E 12/13E Balance sheet ($ mn) 12/10 12/11E 12/12E 12/13E
Total revenue 124.7 166.8 212.1 266.8 Cash & equivalents 7.9 13.4 23.7 37.4
Cost of goods sold (50.6) (65.7) (74.6) (92.6) Accounts receivable 0.3 0.3 0.3 0.3
SG&A (50.6) (70.8) (99.4) (124.5) Inventory 16.9 23.9 31.9 40.9
R&D -- -- -- -- Other current assets 5.1 5.1 5.1 5.1
Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 30.2 42.7 61.0 83.7
ESO expense -- -- -- -- Net PP&E 31.0 41.3 50.8 65.4
EBITDA 27.9 36.5 45.9 59.3 Net intangibles 0.0 0.0 0.0 0.0
Depreciation & amortization (4.4) (6.2) (7.7) (9.6) Total investments 0.0 0.0 0.0 0.0
EBIT 23.5 30.3 38.1 49.7 Other long-term assets 2.9 2.9 2.9 2.9
Net interest income/(expense) (0.4) (0.3) (0.2) 0.0 Total assets 64.1 86.8 114.7 152.0
Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 Accounts payable 3.6 3.6 3.6 3.6
Pretax profits 23.1 30.1 37.9 49.7 Short-term debt 1.0 1.0 1.0 1.0
Provision for taxes (9.2) (12.1) (15.1) (19.8) Other current liabilities 11.7 11.7 11.7 11.7
Minority interest 0.0 0.0 0.0 0.0 Total current liabilities 16.3 16.3 16.3 16.3
Net income pre-preferred dividends 13.9 17.9 22.8 29.9 Long-term debt 0.0 0.0 0.0 0.0
Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 21.5 26.2 30.0 36.0
Net income (pre-exceptionals) 13.9 17.9 22.8 29.9 Total long-term liabilities 21.5 26.2 30.0 36.0
Post tax exceptionals (1.9) (0.9) 0.0 0.0 Total liabilities 37.8 42.5 46.3 52.3
Net income (post-exceptionals) 12.0 17.1 22.8 29.9
Preferred shares 0.0 0.0 0.0 0.0
EPS (basic, pre-except) ($) 0.36 0.47 0.60 0.79 Total common equity 26.3 44.3 68.4 99.7
EPS (diluted, pre-except) ($) 0.36 0.47 0.60 0.78 Minority interest 0.0 0.0 0.0 0.0
EPS (basic, post-except) ($) 0.32 0.45 0.60 0.79
EPS (diluted, post-except) ($) 0.31 0.45 0.60 0.78 Total liabilities & equity 64.1 86.8 114.7 152.0
Common dividends paid 0.0 0.0 0.0 0.0
DPS ($) 0.00 0.00 0.00 0.00
Dividend payout ratio (%) 0.0 0.0 0.0 0.0 Additional financials 12/10 12/11E 12/12E 12/13E
Net debt/equity (%) (26.2) (27.9) (33.2) (36.5)
Interest cover (X) 52.9 107.6 158.9 NM
Growth & margins (%) 12/10 12/11E 12/12E 12/13E Inventory days 102.9 113.5 136.6 143.6
Sales growth 38.2 33.8 27.2 25.7 Receivable days 0.8 0.6 0.5 0.4
EBITDA growth 77.6 31.0 25.7 29.2 BVPS ($) 0.69 1.16 1.80 2.62
EBIT growth 92.6 29.1 25.7 30.2
Net income (pre-except) growth 99.5 29.4 27.1 31.1 ROA (%) 26.2 23.8 22.6 22.4
EPS growth 99.5 29.4 27.1 31.0 CROCI (%) 57.4 51.6 48.9 46.3
Gross margin 59.4 60.6 64.8 65.3
EBITDA margin 22.3 21.9 21.6 22.2 Dupont ROE (%) 52.7 40.5 33.3 30.0
EBIT margin 18.8 18.2 18.0 18.6 Margin (%) 11.1 10.8 10.8 11.2
Turnover (X) 1.9 1.9 1.8 1.8
Cash flow statement ($ mn) 12/10 12/11E 12/12E 12/13E Leverage (X) 2.4 2.0 1.7 1.5
Net income 12.0 17.1 22.8 29.9 Free cash flow per share ($) 0.18 0.12 0.31 0.36
D&A add-back (incl. ESO) 4.4 6.2 7.7 9.6 Free cash flow yield (%) NM 0.5 1.3 1.5
Minority interest add-back 0.0 0.0 0.0 0.0
Net (inc)/dec working capital 0.7 (3.0) (3.0) (3.0) Same store sales % change -- -- -- --
Other operating cash flow 2.3 0.9 1.3 1.4 Number of stores -- -- -- --
Cash flow from operations 19.4 21.1 28.8 37.8 Sales per average store ($ mn) -- -- -- --
Square footage (000s) -- -- -- --
Capital expenditures (12.6) (16.4) (17.2) (24.2) Square footage (% change) -- -- -- --
Acquisitions 0.0 0.0 0.0 0.0 Sales per average sq. foot ($) -- -- -- --
Divestitures 0.0 0.0 0.0 0.0 Rent expense ($ mn) (11.1) (14.4) (18.1) (22.1)
Others 0.0 0.0 0.0 0.0 Debt/total capital (incl. leases) (%) 142.7 163.1 190.6 231.1
Cash flow from investing (12.6) (16.4) (17.2) (24.2) Debt/total capital (excl. leases) (%) 3.7 2.2 1.4 1.0
ROC (incl. capitalized ops) (%) 18.4 18.3 17.0 16.5
Dividends paid (common & pref) 0.0 0.0 0.0 0.0
Inc/(dec) in debt (0.3) 0.0 0.0 0.0
Other financing cash flows 0.0 0.8 (1.3) 0.0
Cash flow from financing (0.3) 0.8 (1.3) 0.0
Total cash flow 6.6 5.5 10.4 13.7 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
Analyst Contributors
Michael Kelter
michael.kelter@gs.com
Matthew J. Fassler
matt.fassler@gs.com
Chris Cerrone
chris.cerrone@gs.com
Goldman Sachs Global Investment Research 2
September 6, 2011 Teavana Holdings, Inc. (TEA)
Table of Contents
PM Summary: High growth, high margins, but stretched valuation 3
Tea is a growing, highly fragmented industry in the United States 4
Target for 500 units by 2015 drives 25-30% unit growth 6
Consistent same-store sales growth with upside potential 11
Highly profitable with room for additional margin expansion 13
Five upside options not currently built into our model 15
Valuation keeps us on the sidelines 17
The prices in the body of this report are based on the market close of September 2, 2011.
PM Summary: High growth, high margins, but stretched valuation
We initiate coverage on Teavana (TEA) with a Neutral rating and 4% upside to our
$25 12-month price target. We like TEA’s fundamentals: it is a high-growth industry
leader with a lucrative, differentiated business model in a fragmented, growing
market. TEA is in the early stages of its US unit expansion trajectory, with the
potential to grow through other avenues over time. We expect 25%-30% EPS growth
over the next 3-5 years driven primarily by unit growth, as well as same-store sales
gains and margin expansion off current solid levels (GM 63%, EBIT margin 19%). This
said, we see valuation as full at current levels and remain on the sidelines at this time.
Key points:
Core domestic tea market is growing – The US tea market is roughly $5.6 billion in
size and has grown at a 7% CAGR over the past 14 years. US hot tea drunk per capita
rose 40% over that time, from 115 to 160 cups per person per year. The overall market
has more than doubled since 1997, and is expected to continue growing at 6% over the
next 3-5 years.
Teavana is the only specialty tea retailer with national scale – TEA is uniquely
positioned to benefit from this industry growth as the only national retailer with an
exclusive tea focus. TEA has no competitors of scale (179 units vs. 20 for next-largest
competitor), and has used its first-mover advantage to build barriers to future potential
entrants.
Unit growth is the key revenue growth driver – We forecast TEA will grow revenue
at a 25% CAGR in 2011-2015E. The vast majority of growth is to come from unit growth,
consistent with the company’s recent historical growth algorithm. Our proprietary
survey indicates TEA has less than 20% brand awareness in every region of the
country and among all income levels, indicating the potential for a long future growth
ramp. We typically favor unit growth stories with a proven business model and much
room to ramp major metro market expansion; Teavana fits this mode.
Industry-leading gross margin – TEA has the highest GM within the high-growth
retail, restaurant peer group. All of TEA’s major product categories are highly
profitable, and loose leaf tea, its largest category, carries about 70% gross margins. We
forecast TEA will expand margins by 200-300 bp over the next several years as mix
shifts further towards loose leaf tea.
Goldman Sachs Global Investment Research 3
September 6, 2011 Teavana Holdings, Inc. (TEA)
Five upside options not in estimates – We see five potential drivers of growth that
are not currently built into our estimates: (1) e-commerce growth, (2) international
expansion, (3) an entry into consumer packaged goods, (4) unit growth above
management’s current target of 500 stores, and (5) capital deployment as the firm
generates free cash.
Valuation keeps us on the sidelines – We initiate at Neutral as the stock is already
trading at a 70% premium to the midpoint of the initial offer range, at 40X our 2012
EPS estimate. This is at the high end of the high-growth peer group, and represents full
valuation, in our view.
Summary of 2Q2011 results – TEA reported 2Q2011 same store sales growth of 6.9%
(ex e-commerce), the opening of 18 new units, revenues of $31.3 million and EPS of
$0.04. 6.9% same store sales growth was in line with the average of the last seven
years and gross margins expanded by 230 bp vs. the YAG period, exceeding our
expectation. Higher SG&A expenses (+110 bp vs. YAG) on ongoing investments and
accelerated store openings limited EPS flow-through.
Tea is a growing, highly fragmented industry in the United States
Domestic tea market is growing – The US tea market is roughly $5.6 billion in size and
has grown at a 7% CAGR over the past 14 years. The market has more than doubled since
1997, and industry experts expect it to continue growing at 6% over the next 3-5 years (see
Exhibit 1).
Hot tea sub-category consumption on the rise – The US tea market is segmented into
two sub-categories: (1) Ready-to-drink tea (e.g., Snapple iced tea), and (2) hot tea (loose
leaf tea, tea bags). Ready-to-drink tea is the larger of the two at $3.6 bn vs. $2 bn for hot tea,
but both are contributing to overall market growth. For hot tea, cups of tea consumed per
capita per year in the United States have risen to roughly 160 cups in 2010, up 41% from
115 cups in 1997 (see Exhibit 2).
A snug fit with burgeoning health and wellness theme – Tea fits well into the healthy
living theme that has been driving growth elsewhere in retail. Lululemon (yoga & exercise),
Vitamin Shoppe (nutrition), and Chipotle (healthy ingredients), among others, are riding
momentum associated with heightened consumer interest in health & wellness as baby
boomers age. Tea is considered by its fans to be a healthier alternative to sugar-based
beverages or coffee, and as such category growth should remain strong.
Goldman Sachs Global Investment Research 4
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 1: Domestic tea market is growing Exhibit 2: US cups per capita are up 41% since 1997
Market size and growth, US tea industry ($ billions) Hot tea cups per capita consumed annually
$ 8.0 180
CAGR: 170
$ 7.0
6%
Cups per capita
$ 6.0 160
$ 5.0 150
$ billions
CAGR:
140
$ 4.0 7%
130
$ 3.0
120
$ 2.0
110
$ 1.0
100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$-
1997 2010 2015E
Source: Euromonitor, Goldman Sachs Research. Source: Euromonitor, Goldman Sachs Research.
Tea is under-penetrated in the United States relative to other parts of the world –
Despite the 41% rise in the amount of tea drunk annually per capita in the United States
since 1997, American tea consumption is still low relative to the rest of the world (see
Exhibit 3). There is a significant amount of room for growth as Japanese and Europeans
still consume more than 3X the amount of tea as Americans. Tea is clearly more embedded
in the indigenous cultures of some of these countries relative to the United States, but
there is certainly room for increases.
Tea is slowly gaining ground on coffee – Hot tea represents only 7.5% of hot beverage
(coffee + hot tea) consumption in the United States. This has increased from 6.0% in 1997
as the domestic tea market has grown, but remains substantially below hot tea’s share
worldwide and in most major regions (see Exhibit 4). For the long term, we believe this
speaks to the potential under-penetration of tea in the US beverage market.
Exhibit 3: US tea consumption still trails most countries Exhibit 4: US tea consumption very low relative to coffee
Hot tea cups per capita consumed annually Hot tea as % of coffee + hot tea consumption, volume in tons
600 552 50%
44%
Tea as % of coffee + tea
512 45%
500
Cups per capita
451 40% 36%
35% 32%
400
30%
300 25% 22%
183 20%
200 163
15%
10% 7%
100
27 5% 2%
0 0%
USA
USA
America
America
Japan
World
Japan
World
Western
Western
Eastern
Eastern
Europe
Europe
Europe
Europe
Latin
Latin
Source: Euromonitor, Goldman Sachs Research. Source: Euromonitor, Goldman Sachs Research.
Teavana is the only national tea retailer – TEA is uniquely positioned to benefit from this
industry growth as the only national retailer with an exclusive focus on all aspects of tea
Goldman Sachs Global Investment Research 5
September 6, 2011 Teavana Holdings, Inc. (TEA)
consumption. TEA has no competitors of similar scale (see Exhibit 5). The concept’s retail
locations strive to create a “Heaven of Tea” experience for consumers, featuring the
highest-quality teas sourced from around the world and a highly knowledgeable staff.
Customers can buy everything from tea merchandise (teapots, kettles, brewers, etc.) to 100
different loose leaf teas and tea blends, all exclusive to Teavana. As the US tea market
becomes more sophisticated we expect TEA’s customer base will expand.
Business built around an authentic tea culture. Like many of the most potent emerging
retail and consumer businesses, Teavana was hatched by an entrepreneur pursuing both a
passion and a livelihood, rather than by a venture firm looking to monetize a business plan.
CEO Andy Mack, who opened the first Teavana store in 1997, has structured the
organization around an obsession with tea, with in-depth training, a placid ambiance (as far
as can be achieved in a mall), and detailed, informative signage citing both Eastern folklore
and pragmatic uses for each tea. On white teas, for example: “Delicious source of
antioxidants; May support healthy skin and complexion; Promotes detoxification and body
hydration”. And, on Superfruit Unity Green Tea, the company describes how an
“…alliance of ‘superfruits’ combines sea buckthorn berries, cranberries, raspberries with
rich rose blossoms, hibiscus blossoms & crisp apple in a delicious green tea marriage…”
The firm’s fastidious attention to an authentic tea culture inspires customer loyalty, and
raises barriers to entry versus firms that would seek to mimic the concept without its
organic origins.
First-mover advantage creates barrier to entry – TEA has fully capitalized on its first-
mover advantage by pursuing a national growth strategy from the start (see Exhibit 6).
TEA’s strategy has been to find the best retail locations regardless of geography, as
opposed to expanding region by region. The result is that TEA has already established
itself in the most ideal retail locations nationwide, creating a barrier to new entrants who
will be forced to compete head-to-head in these locations or settle for second-rate locations.
Exhibit 5: There are no direct competitors of scale Exhibit 6: TEA has pursued a nationwide strategy
Total US units as of 2Q11 Teavana’s percent of sales by region
200
180 West Northeast
160 24%
25%
US locations
140
120
100
80
60
40
20
0
Teavana
Argo Tea
Tealuxe
Amanzi Tea
Adagio Teas
Tea Gschwendner
Lupicia Fresh Tea
Southeast
Central 24%
26%
Source: Company data, Goldman Sachs Research. Source: Company data, Goldman Sachs Research.
Target for 500 units by 2015 drives 25-30% unit growth
Unit growth is the key revenue growth driver – We forecast TEA will grow revenue at a
25% CAGR in 2011-2015E. The vast majority of this growth is expected to come from unit
Goldman Sachs Global Investment Research 6
September 6, 2011 Teavana Holdings, Inc. (TEA)
growth (see Exhibit 7), consistent with the company’s recent historical growth algorithm.
We expect mid-single digit SSS will account for the remainder of top-line growth.
TEA is still in the early stages of domestic unit expansion – TEA has successfully grown
from 10 stores in 2003 to 179 by mid-2011. We expect the company to reach 500 units by
the end of 2015 (see Exhibit 8), implying an annual unit growth CAGR of 25-30% over that
period. From a top-down perspective, TEA currently accounts for only 2% of the domestic
tea market, and as such there appears to be room for such aggressive unit growth.
Exhibit 7: Unit growth to be primary driver of growth Exhibit 8: TEA in the early stages of unit growth
Contribution to revenue growth, SSS vs. unit growth TEA store counts
100% 600
Contribution to revenue growth
90% Forecasts
500
80%
70%
400
60%
Stores
50% 300
40%
200
30%
20% SSS 100
10% Unit growth
0% 0
2007
2008
2009
2010
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2011E
2012E
2013E
2014E
2015E
Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.
TEA is early in its “adolescence” phase – We see TEA as being early in its growth
trajectory, what we call its adolescence phase. This has generally been an ideal time to
own consumer/retail growth stocks. We see three primary phases in the typical growth
company lifecycle (see Exhibit 9):
(1) Adolescence: Domestic white space expansion – Proven concept, underpenetrated in
major markets, strong SSS growth, share gains, economies of scale, multiple in excess of
EPS growth.
(2) Middle Age: Approaching domestic saturation – End of domestic unit growth nears,
SSS normalizes, slipping ROIC, multiple contraction as EPS growth rate declines.
(3a) Fountain of Youth: Finding a second leg of growth – Domestic business now ex-unit
growth, but SSS stable and margins optimized. Company finds new areas of growth
generally in international markets or with a second concept.
(3b) Getting Old: No new avenues of growth – Domestic SSS declines cause deleverage,
units decline as unprofitable locations are closed, few new avenues for growth. Company
eventually sold or goes bankrupt.
Goldman Sachs Global Investment Research 7
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 9: Teavana is early in its “adolescence” phase, generally a good time to own growth stocks
Diagram of the consumer/retail growth stock lifecycle
2. Middle Age:
Impending
3a. Fountain of Youth: Renewed
growth in international markets
SELL
1. Adolescence:
Domestic white
space expansion
BUY
BUY SELL
BUY
3b. Getting old: Declining
domestic sales, no new
markets for growth
Source: Goldman Sachs Research.
Low brand awareness supports unit growth plans – We have done a proprietary survey
of 2,000 US consumers that indicates that TEA’s national brand awareness is only 11%
today, and is less than 20% in all regions (see Exhibit 10). We see this as further evidence
that TEA has a long runway for future unit expansion, as most potential customers have
yet to even hear of the chain. Similarly, this survey indicates that TEA has less than 20%
brand awareness even with high-end consumers, its core consumer base given current
mall locations and high average ticket (see Exhibit 11).
Exhibit 10: Low brand awareness in every region Exhibit 11: Low brand awareness even amongst its core
Brand awareness by region high customer
Brand awareness by income level
50% 50%
45% 45%
40% 40%
35% 35%
Brand awareness
Brand awareness
30% 30%
25% 25%
20% 20% 19%
16% 15%
15% 15% 13%
10% 10% 10% 10% 11%
10% 8% 10%
6%
5% 5%
0% 0%
Northwest Southeast Northeast Southwest Midwest <$30k $30-50k $50-70k $70-90k $90-120k $120+
Source: GS Brand Survey of 2,000 consumers. Source: GS Brand Survey of 2,000 consumers.
Attractive unit economics underpin growth – TEA’s store expansion is highly profitable.
Cash returns on cash invested are 70-75% and the payback period on new units is roughly
18 months on new stores (see Exhibit 12).
Consistent economics across geographies and formats – The company has indicated
that every store ever built, across 35 states and in every region has been profitable with
Goldman Sachs Global Investment Research 8
September 6, 2011 Teavana Holdings, Inc. (TEA)
positive 4 wall contribution margins – including those in “secondary” mall locations. We
believe this highlights the flexibility of the concept and gives us confidence that the
concept can sustain margins and returns as it ventures into the next batch of malls.
Exhibit 12: New store economics are highly attractive
Unit economics of a new store in year one
Average store size (sq. ft) 900 - 1000
Annual sales $ 600,000 - 700,000 Cash on Cash Return 70-75%
4-Wall contribution 25% Sales to investment ratio 2.5-3x
Net cash investment $ 200,000 - 250,000 Payback period 12-18 months
Source: Company data, Goldman Sachs Research estimates.
High returns on capital – Cash return on capital invested is particularly strong as the
company replicates this highly profitable economic model rolling out new units. TEA’s
return on capital ranks second only to LULU among high growth retail peers (see Exhibit
13). We see this as evidence that the capital being deployed to new unit growth is capital
well invested.
Exhibit 13: TEA has best-in-class cash returns
2010 cash return on cash invested
25%
20%
2010 CROCI
15%
10%
5%
0%
TEA
UA
SBUX
RUE
CMG
TFM
VSI
URBN
PEET
ZUMZ
LULU
GMCR
Source: Company data, Goldman Sachs Research estimates.
Earlier-than-expected saturation is the biggest risk – We believe TEA can reach its
target of 500 units by 2015 given the immense amount of white space, and the strength
and flexibility of TEA’s unit economics mentioned above. That said, TEA’s strategy of
building in the best possible locations anywhere in the country first means that many of
their most productive units have already been built. As the concept continues to grow we
expect the company will exhaust “tier 1” retail locations and will be forced to expand in
secondary and possibly tertiary locations. As this would represent unchartered territory,
there is a risk the company could reach saturation earlier than expected, which would be a
problem given the importance of unit growth to TEA’s top-line growth.
We expect lower productivity but also lower costs in secondary markets – As the
concept grows into secondary and tertiary retail locations we expect new store volumes to
Goldman Sachs Global Investment Research 9
September 6, 2011 Teavana Holdings, Inc. (TEA)
decline, and lower the system average down as well (see Exhibit 14). Importantly, however,
we expect the company will maintain unit economics by pairing back fixed costs and
upfront investment associated with these locations.
Exhibit 14: Evolution of unit economics as TEA enters secondary, tertiary markets
Average unit growth, sales/store, sales/new store and new unit productivity
2007 2008 2009 2010 2011E 2012E 2013E
Average unit growth 26% 44% 27% 31% 36% 28% 29%
New store productivity 123% 73% 127% 96% 79% 77% 76%
Sales per store ($mil) 0.891 0.887 0.935 0.982 0.976 0.939 0.917
Sales/store % chg 0% 5% 5% -1% -4% -2%
Sales per new store ($mil) 1.096 0.650 1.191 0.944 0.769 0.723 0.697
Sales/ new store % chg -41% 83% -21% -19% -6% -4%
Source: Company data, Goldman Sachs Research estimates.
Concept needs to move from niche towards mass market to achieve 500 units – We
believe TEA must begin to transcend above niche retailer status in order to achieve its 500
unit target. Using other retailers as a benchmark, TEA’s system would need to reach a
similar size to Express, Banana Republic, Hollister and Loft (see Exhibit 15).
Goldman Sachs Global Investment Research 10
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 15: TEA will have to move from niche towards mass market to achieve 500 units
US units by concept
Concept Units
Gap 1,152
Office Depot 1,147
Mass market
Bed Bath and Beyond 1,139
JC Penney 1,106
Kohls 1,089
Ross Stores 1,055
Old Navy 1,039
Victoria Secret 1028
Aeropostale 906
Hybrid Niche/Mass
Children's Place 876
Chico's 597
Gymboree 593
Express 591
Banana Republic 576
Hollister 540
LOFT 502
Teavana (2015 Target) 500
Abercrombie & Fitch 325
Whole Foods 299
Ann Taylor 266
Godiva 265
Niche market
Williams‐Sonoma 260
Jcrew 228
Pottery Barn 193
Crate & Barrel 180
L'Occitane 166
Teavana (Today) 161
Nordstrom (full‐line) 115
The Fresh Market 100
Tiffany's 84
Lululemon 78
Saks (full‐line) 47
Source: Company data, Goldman Sachs Research.
Consistent same-store sales growth with upside potential
Same-store sales have been consistent – We are modeling for 5.5% SSS in 2011 and 4%
in 2012, versus 6.4% year-to-date an average 6-7% SSS since 2004 (see Exhibit 16). These
forecasts exclude the impact of ecommerce, which is embedded in our non-comp sales
numbers. We see the potential for this forecast to ultimately prove conservative if the
company is able to maintain historical trends. TEA has established a track record of
consistent SSS growth driven by primarily by higher average check as customers graduate
to more sophisticated tea over time.
SSS held up during the recession – TEA SSS held strong through the recession, going
negative only once in 4Q08 when market turbulence was at its worst (see Exhibit 17). Prior
to 4Q2008 results were very robust, averaging 7.4% from 1Q2007 to 3Q2008 when the
economy was in recession. After 4Q2008, results recovered quickly and have maintained
healthy levels up through the present.
Goldman Sachs Global Investment Research 11
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 16: SSS have been very consistent Exhibit 17: Only one quarter of negative SSS in recession
TEA same-store sales, annual TEA same-store sales quarterly (recession shaded)
20%
12% Recession
18%
SSS
10% 16%
Same‐store sales
14%
8% LT average:
Same-store sales
Conservative 12%
6.8% assumption?
10%
6% 8%
6%
4%
4%
2% 2%
0%
0% -2%
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
-4%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
Source: Company data, Goldman Sachs Research estimates. Source: Company data.
Peak in US consumer discretionary cash flow a risk to SSS – Goldman Sachs forecasts
a derivative shift in savings-rate-adjusted discretionary cash flow in 2H11 and 2012 (the
amount US households have left to spend after adjusting for both spending on necessities,
including gas and food as well as their projected savings rate). It increasingly appears that
1Q11’s 5.4% discretionary cash flow growth rate may have been a near-term peak (see
Exhibit 18). This is particularly important given a strong historical tie between this metric
and retail SSS across several consumer sectors.
But TEA appears to be less tied to the macro than others – TEA SSS are less correlated
to macro-economic factors than many of its specialty retail peers (see Exhibit 19). We
found an R2 of 0.31 between TEA SSS and savings adjusted discretionary cash flow since
1Q2007 when the US economy began to slow. This is notably below competitors such as
LTD, ANN and GPS, and well below fellow high-growth retailer LULU.
Exhibit 18: US discretionary cash flow peaked in 1Q11 Exhibit 19: TEA has lower correlation to declining
Savings adjusted discretionary cash flow % change discretionary cash flow than other specialty retailers
R2 of SSS and savings adj discr. cash flow, 1Q2007-present
12% 90%
10%
80%
R-squared with disc. cash flow
8%
70%
6%
4% 60%
2%
50%
0%
-2% 40%
-4%
30%
-6%
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12E
20%
TEA
ANN
AEO
GPS
CHS
LTD
ANF
TLB
EXPR
LULU
Source: Goldman Sachs Research. Source: Company data, Goldman Sachs Research.
Low visibility on guest count growth another risk – Historically, TEA’s guest count
growth has not meaningfully contributed to SSS, and has even gone negative in recent
Goldman Sachs Global Investment Research 12
September 6, 2011 Teavana Holdings, Inc. (TEA)
quarters as the company has deemphasized drinking tea in its stores. Traffic was up 1.8%
in 2Q ex-beverages, but down -3.7% inclusive of beverage transactions in 2Q11 (drinkable
tea is less than 5% of sales but 10-20% of visits). We see this as a concern, as traffic growth
is a key fundamental metric by which to judge the health of any concept. However, we see
the potential for TEA to improve upon this trend by bulking up an almost non-existent
marketing department to drive future traffic. The firm is just building out its CRM capacity,
and best customer metrics and the potential for a loyalty program should enhance its
ability to drive sales growth.
Highly profitable with room for additional margin expansion
Industry-leading gross margins – TEA has the highest gross margins within its high-
growth retail/restaurant peer group (see Exhibit 20). This is due to the fact that all three of
TEA’s major product categories are highly profitable. We estimate profitability to be: tea
blends (72% GM), merchandise (51% GM) and beverages (66% GM) (see Exhibit 21). There
are no “loss leaders” in Teavana’s business model.
Exhibit 20: Industry leading gross margins Exhibit 21: All products are highly profitable
Gross margins, CY2010 Estimated gross margin by product category
70% 80%
60%
Estimated gross margins
70%
50%
Average: 42.7%
60%
40%
30% 50%
20%
TEA
SBUX
UA
RUE
TFM
VSI
URBN
PEET
LULU
ZUMZ
GMCR
40%
Loose leaf tea Beverages Merchandise
Source: Company data, Goldman Sachs Research. Source: Goldman Sachs Research estimates.
Gross margins should improve as stores mature – On a store level basis, gross margins
improve naturally as the product mix in new stores evolve. Lower-margin merchandise
accounts for a larger portion of sales early after a new store opens. As the customer base
migrates from upfront hardware purchases to recurring tea refills mix gradually shifts in
favor of higher-margin tea, which lifts total gross margins (see Exhibit 22).
Maturing store base alone could drive 200 bp of expansion by 2015 – We expect this
mix shift to drive TEA’s gross margins up 200 bp by 2015 as the system as a whole
becomes more mature. Since 2006, tea has increased from 43% to 56% of sales by 2010,
contributing to the 10% improvement in gross margins over that time. While we do not
expect margins to improve at the same rate going forward, we do forecast continued
margin expansion as tea grows to 65% of sales by 2015 (see Exhibits 23-24).
Goldman Sachs Global Investment Research 13
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 22: Gross margins will rise Exhibit 23: Product mix shifting to tea as system matures
Gross margins vs. % of sales from tea Composition of sales by product
70% 70% 100%
Gross margin
90%
% loose leaf tea
65% 80%
Composition of revenues
60% 51% GM
70%
Tea as % of sales
Gross margins
60% 60%
50% 50%
55% 40%
30%
Beverages
40%
50% 20% 72% GM Merchandise
10% Loose leaf tea
45% 30% 0%
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.
Exhibit 24: We estimate loose leaf tea will increase to 65% of sales by 2015
Sales mix %
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Mix by segment
Loose leaf tea 43% 48% 51% 54% 56% 58% 59% 61% 63% 65%
Merchandise 51% 47% 44% 42% 40% 38% 37% 35% 33% 31%
Beverages 6% 6% 5% 4% 4% 4% 4% 4% 4% 4%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Company data, Goldman Sachs Research estimates.
Modest fixed cost leverage in out-years – We expect limited margin leverage in 2011 and
2012 as gross margin expansion is offset by various investments to support growth, such
as a new store support center and expansion of the company’s distribution center. As TEA
moves beyond these investments we expect operating margins to expand to 19.3% by 2014
(see Exhibit 25). This modest leverage is explained in part by our conservative out-year
SSS estimates (see Exhibit 26). There is upside potential to margins if SSS come in better
than expected and thus generates leverage on fixed costs.
Goldman Sachs Global Investment Research 14
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 25: SG&A leverage will stall near-term as the Exhibit 26: We expect limited SG&A leverage in out-years
company invests for future growth given our modest 3% SSS assumption
Operating margins, 2007-2015E SSS vs. Change in SG&A as a % of sales (bps)
25.0% 400 10%
Modest leverage Chg SG&A %
9%
in out years of sales (bps)
Flat margins from
Change SG&A % of sales (bp)
300 SSS 8%
20.0% investment spending
7%
Same-store sales
200 6%
15.0% 5%
Fixed cost
leverage 100 4%
3%
10.0%
0 2%
1%
-100 0%
5.0%
-1%
-200 -2%
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
0.0%
2007 2008 2009 2010 2011E 2012E 2013E 2014E
Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.
Five upside options not currently built into our model
Five upside options not in estimates – We see five potential upside options that may
meaningfully impact TEA’s financial performance in the future, but that are not currently
built into our estimates:
(1) E-commerce growth – We see e-commerce as a natural extension of TEA’s retail store
model. A robust online presence could increase brand awareness and extend reach to
customers living far from retail stores. E-commerce is also complementary to TEA’s retail
stores as TEA’s online auto-replenish service sends tea refills in pre-set time increments.
This saves the customer a trip to the retail store, and is less expensive for TEA to fulfill.
TEA generated 7% of total sales through its e-commerce business in 2010, +46% from 2009.
E-commerce has grown at a 56% CAGR since 2007 and TEA is targeting it to represent 10%
of sales by 2015 (see Exhibit 27). As e-commerce sales are not reflected in the comp figure,
for TEA this would show up in the form of new store productivity.
Goldman Sachs Global Investment Research 15
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 27: E-commerce could account for $35-40 mn by 2015
E-commerce sales by year
$45
10.0%
of sales
$40
$35
$30
$25
$20
$15
7.0% of
sales
$10 5.8% of
sales
$5
$0
2008 2010 2015E
Source: Company data, Goldman Sachs Research estimates.
(2) International expansion – TEA has 17 franchised stores in Mexico, and the company
just announced a partner to drive growth in the Middle East. We see the potential for more
international expansion in the future, either company-owned or through franchise
agreements. As discussed previously, US tea consumption is low on a per-capita basis
relative to other countries/regions such as Japan, Europe and Canada. It is not hard to
imagine TEA achieving some level of success in these more robust tea markets, though we
have not factored this into our unit growth assumptions as we believe the company is
likely to focus on US growth in the near term.
(3) Expansion into consumer packaged goods – TEA could leverage its increasing brand
awareness and high-end positioning to expand into consumer packaged goods. Starbucks
has provided a precedent for such a move, eventually selling its premium offerings
through the grocery channel with a high level of success. We expect TEA to continue
selling its products exclusively in its stores and online in the mid-term, but see the
potential for CPG further down the road.
(4) More than 500 units in the United States – Our current model assumes that TEA can
build 500 units in the United States before reaching saturation. We believe the company
may ultimately have potential for more than 500 if the concept has broader appeal than
currently assumed. As discussed above, TEA will need to transcend niche category status
to achieve its 500 unit target. Once a mass market brand, however, it is possible for the
brand to far exceed 500 units.
(5) Capital deployment – Teavana is highly cash-generative, and as such we expect TEA
to generate more cash than it will use for new store expansion. From 2011-2015 we expect
TEA to generate roughly $200 million in cash from operations versus capital expenditures
of only $120 million. As a result, we project TEA’s cash balance will grow to $80-90 million
by 2015, up from $8 million in 2010 (see Exhibit 28). There are a number of possible uses
for this cash that would create additional shareholder value, such as buybacks, dividends
or acquisitions, none of which are currently assumed in our model.
Goldman Sachs Global Investment Research 16
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 28: Currently modeling for TEA to accumulate cash on its balance sheet
Cash at end of period, $ millions
Cash balance growing
$ 100
$ 80
Cash at end of period
$ 60
$ 40
$ 20
$0
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: Company data, Goldman Sachs Research estimates.
Valuation keeps us on the sidelines
Valuation keeps us on the sidelines
We believe TEA has the potential to grow into a best-in-class retailer with a significant
runway for growth. This said, we initiate at Neutral due to our belief that valuation is full at
these levels. The initial range for the company’s public offering was $13-15, the transaction
was executed at $17 and the stock currently trades at $24 – a full 70% above the midpoint
of the initial range. TEA shares currently at 40X our 2012 EPS estimate, putting TEA at the
high end relative to other hyper-growth, wellness-oriented retail and restaurant peers (see
Exhibits 29-30).
Price target
We introduce a P/E-based 12-month price target of $25, which applies a 1.4X PEG, in line
with its hyper-growth comps, to our 2011-2013 average EPS growth rate of 30%.
This yields a 42X target multiple that, when applied to our 2012 EPS estimate of $0.60,
yields a $25 price target.
Goldman Sachs Global Investment Research 17
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 29: TEA trading at high end of peer group Exhibit 30: PEG ratio modestly above comp average
P/E multiple, 2012E P/E relative to growth, 2012
45 x 1.8 x
P/E relative to growth (2012)
40 x
1.6 x
P/E multiple (2012)
35 x
30 x
1.4 x
25 x
20 x 1.2 x
15 x
1.0 x
10 x
VSI
LULU
TEA
Avg ex-
CMG
TFM
VSI
TEA
LULU
CMG
TFM
ex-TEA
TEA
Avg
Source: Factset, Goldman Sachs Research estimates. Source: Factset, Goldman Sachs Research estimates.
Risks to our price target and view
Upside
Higher-than-expected same-store sales are the primary upside risk. Higher SSS would both
boost top-line results and generate additional leverage throughout TEA’s P&L. In addition,
any of the upside options described above could result in upside surprises as we do not
currently build any of them into our model.
Downside
The primary downside risk is earlier-than-expected saturation in the United States as unit
growth is the primary driver of TEA’s revenue growth. We currently expect TEA can
achieve 500 domestic units by 2015 before reaching saturation. However, TEA’s strategy of
building in the best locations nationwide from the start and its high average ticket ($46
excluding beverages) may make it difficult to expand into lower tier, less ideal locations.
Goldman Sachs Global Investment Research 18
September 6, 2011
Goldman Sachs Global Investment Research
Exhibit 31: TEA annual income statement
All figures in millions (except per-share data)
% Change CAGR
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2010-15E
SSS Growth 3.7% 8.4% 3.0% 6.9% 8.7% 5.5% 4.0% 3.0% 3.0% 4.7 -5.4 3.9 1.8 -3.2 -1.5 -1.0 0.0
Unit Growth 74.1% 25.5% 44.1% 27.1% 30.6% 35.8% 28.3% 29.0% 25.5%
Segment Revenues
Tea 14.5 22.7 32.6 48.7 69.8 96.8 125.2 162.7 206.5 56% 44% 50% 43% 39% 29% 30% 27% 30%
Merchandise 17.2 21.9 28.1 37.9 49.9 63.4 78.5 93.4 108.2 27% 28% 35% 32% 27% 24% 19% 16% 20%
Beverage 2.0 2.6 3.2 3.6 5.0 6.7 8.5 10.7 13.1 28% 23% 13% 38% 34% 27% 26% 23% 26%
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Net sales 33.8 47.2 63.9 90.3 124.7 166.8 212.1 266.8 327.8 40% 35% 41% 38% 34% 27% 26% 23% 26%
Cost of sales -15.9 -20.0 -27.2 -36.4 -46.3 -59.6 -74.6 -92.6 -112.1 25% 36% 34% 27% 29% 25% 24% 21% 24%
Gross profit 17.8 27.2 36.7 53.8 78.4 107.3 137.5 174.2 215.7 53% 35% 47% 46% 37% 28% 27% 24% 27%
SG&A -16.5 -22.2 -29.2 -38.1 -50.6 -70.5 -91.7 -114.9 -140.6 35% 32% 30% 33% 39% 30% 25% 22% 27%
D&A -1.5 -2.0 -2.7 -3.5 -4.4 -6.2 -7.7 -9.6 -11.6 34% 32% 31% 25% 41% 25% 24% 21% 26%
EBIT -0.2 3.0 4.8 12.2 23.5 30.6 38.1 49.7 63.4 60% 156% 93% 30% 25% 30% 28% 28%
Interest -0.2 -0.3 -0.6 -0.6 -0.4 -0.28 -0.24 0.00 0.00 48% 68% 13% -31% -36% -15% -100%
Pre-tax income -0.4 2.6 4.2 11.6 23.1 30.3 37.9 49.7 63.4 -744% 59% 176% 100% 32% 25% 31% 28% 28%
Income taxes 0.2 -1.1 -1.7 -4.6 -9.2 -12.2 -15.1 -19.8 -25.2 -744% 59% 176% 100% 33% 24% 31% 28% 28%
Net income -0.2 1.6 2.5 7.0 13.9 18.1 22.8 29.9 38.2 -744% 59% 176% 100% 30% 26% 31% 28% 28%
Shares - Diluted 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.4 0% 0% 0% 0% 0% 0% 0% 0% 0%
EPS - Diluted -0.01 0.04 0.07 0.18 0.36 0.47 0.60 0.78 1.00 -744% 59% 176% 100% 30% 26% 31% 28% 28%
One-time items -0.03 -0.03 -0.03 -0.04 -0.05 -0.02
Reported EPS -0.04 0.01 0.03 0.14 0.31 0.45 0.60 0.78 1.00 -128% 216% 341% 127% 44% 32% 31% 28%
Tax rate 39.8% 39.8% 39.8% 39.8% 39.8% 40.3% 39.8% 39.8% 39.8% 0.0 0.0 0.0 0.0 0.5 -0.5 0.0 0.0
Margins
Gross margin 52.8% 57.7% 57.4% 59.6% 62.9% 64.3% 64.8% 65.3% 65.8% 4.9 -0.3 2.2 3.3 1.4 0.5 0.5 0.5
SG&A % of sales -48.9% -47.1% -45.8% -42.3% -40.6% -42.3% -43.2% -43.1% -42.9% 1.8 1.3 3.5 1.7 -1.7 -0.9 0.1 0.2
D&A % of sales -4.5% -4.3% -4.2% -3.9% -3.5% -3.7% -3.6% -3.6% -3.5% 0.2 0.1 0.3 0.4 -0.2 0.1 0.0 0.0
Operating margin -0.5% 6.3% 7.5% 13.5% 18.8% 18.3% 18.0% 18.6% 19.3% 6.8 1.1 6.1 5.3 -0.5 -0.4 0.6 0.7
Net income margin -0.7% 3.4% 3.9% 7.7% 11.1% 10.9% 10.8% 11.2% 11.6% 4.1 0.6 3.8 3.4 -0.3 -0.1 0.5 0.4
Capex % of sales -15.7% -7.5% -13.8% -7.4% -10.1% -9.6% -8.1% -9.1% -8.7% 8.2 -6.3 6.4 -2.7 0.5 1.5 -0.9 0.4
Calcs
EBITDA 1.3 5.0 7.4 15.7 27.9 36.8 45.9 59.3 75.0 276% 49% 111% 78% 32% 25% 29% 27% 27%
EBITDA margin 3.9% 10.6% 11.6% 17.4% 22.3% 22.0% 21.6% 22.2% 22.9% 6.7 1.0 5.7 5.0 -0.3 -0.4 0.6 0.7
Free cash flow -2.9 0.2 -3.8 4.4 6.8 8.0 15.6 18.2 24.8 -108% -1703% -215% 54% 17% 95% 16% 36% 37%
Teavana Holdings, Inc. (TEA)
Free cash flow per share -0.08 0.01 -0.10 0.12 0.18 0.21 0.41 0.47 0.65 -108% -1703% -215% 54% 17% 95% 16% 36% 37%
FCF conversion 1179% 15% -153% 64% 49% 44% 68% 61% 65% -1163.9 -167.6 216.2 -14.4 -5.1 24.3 -7.7 4.2
Source: Company data, Goldman Sachs Research estimates.
19
Exhibit 32: TEA quarterly income statement
September 6, 2011
Goldman Sachs Global Investment Research
All figures in $ millions, except EPS
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2009 2010 % chg 2011 % chg 2012 % chg 2009 2010 % chg 2011 % chg 2012 % chg 2009 2010 % chg 2011 % chg 2012 % chg 2009 2010 % chg 2011 % chg 2012 % chg
Same-store sales 1.4% 15.7% 14.3 6.0% -9.7 4.0% -2.0 5.5% 6.9% 1.4 6.9% 0.0 4.0% -2.9 10.7% 5.9% -4.8 5.0% -0.9 4.0% -1.0 8.7% 7.5% -1.2 4.0% -3.5 4.0% 0.0
Net sales 18.0 25.8 43% 34.9 36% 45.5 30% 17.3 23.0 33% 31.3 36% 39.4 26% 18.7 24.8 32% 33.5 35% 41.7 25% 36.3 51.2 41% 67.1 31% 85.6 28%
Cost of sales -7.6 -10.0 32% -12.5 24% -16.0 28% -7.4 -9.5 27% -12.2 29% -15.1 24% -8.0 -10.2 27% -13.1 28% -16.2 23% -13.4 -16.6 24% -21.8 32% -27.4 26%
Gross profit 10.4 15.8 51% 22.5 43% 29.5 31% 9.8 13.5 38% 19.1 41% 24.2 27% 10.7 14.5 36% 20.3 40% 25.6 26% 22.9 34.6 51% 45.3 31% 58.2 29%
SG&A -8.6 -10.8 26% -14.8 37% -20.5 39% -8.6 -10.8 26% -15.4 42% -20.1 31% -9.1 -12.1 33% -17.4 43% -21.7 25% -11.9 -16.8 41% -23.0 37% -29.4 28%
D&A -0.8 -1.0 21% -1.3 35% -1.7 28% -0.9 -1.1 22% -1.4 35% -1.8 24% -0.9 -1.1 22% -1.6 45% -2.0 23% -0.9 -1.2 34% -1.8 49% -2.3 25%
Income from operations 1.1 4.0 275% 6.4 61% 7.3 14% 0.4 1.7 334% 2.3 41% 2.4 1% 0.6 1.3 100% 1.4 8% 1.9 40% 10.1 16.6 64% 20.5 23% 26.5 30%
Interest -0.14 -0.08 -43% -0.1 -25% -0.1 0% -0.2 -0.1 -31% -0.1 2% -0.1 -46% -0.2 -0.2 -29% -0.1 -67% -0.1 20% -0.1 -0.1 -31% -0.1 -33% -0.1 0%
Pre-tax income 0.9 3.9 324% 6.36 63% 7.3 14% 0.2 1.5 600% 2.2 44% 2.3 3% 0.4 1.1 163% 1.3 18% 1.9 41% 10.0 16.5 65% 20.4 24% 26.5 30%
Income taxes -0.4 -1.6 324% -2.5 63% -2.9 14% -0.1 -0.6 600% -0.8 32% -0.9 13% -0.2 -0.4 163% -0.5 21% -0.7 37% -4.0 -6.6 65% -8.3 27% -10.5 27%
Net income 0.6 2.3 324% 3.83 63% 4.4 14% 0.1 0.9 600% 1.4 52% 1.4 -2% 0.3 0.7 163% 0.8 16% 1.1 43% 6.0 9.9 65% 12.1 22% 15.9 32%
Shares - Basic 39.5 39.5 0% 39.5 0% 36.8 -7% 39.5 39.5 0% 36.8 -7% 36.8 0% 39.5 39.5 0% 36.8 -7% 36.8 0% 39.5 39.5 0% 36.8 -7% 36.8 0%
Shares - Diluted 39.5 39.5 0% 39.5 0% 37.8 -4% 39.5 39.5 0% 37.8 -4% 37.8 0% 39.5 39.5 0% 37.8 -4% 37.8 0% 39.5 39.5 0% 37.8 -4% 37.8 0%
EPS - Basic 0.01 0.06 324% 0.10 63% 0.12 22% 0.00 0.02 600% 0.04 63% 0.04 -2% 0.01 0.02 163% 0.02 24% 0.03 43% 0.15 0.25 65% 0.33 31% 0.43 32%
EPS - Diluted 0.01 0.06 324% 0.10 63% 0.12 19% 0.00 0.02 600% 0.04 59% 0.04 -2% 0.01 0.02 163% 0.02 21% 0.03 43% 0.15 0.25 65% 0.32 27% 0.42 32%
One-time items -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.02 -0.02
Reported EPS 0.01 0.05 672% 0.08 72% 0.12 37% 0.00 0.01 -575% 0.03 89% 0.04 34% 0.00 0.01 -3500% 0.02 142% 0.03 43% 0.13 0.23 77% 0.32 38% 0.42 32%
Tax rate 40% 40% 0.0 40% 0.0 40% 0.0 40% 40% 0.0 37% -3.3 40% 3.3 40% 40% 0.0 41% 1.0 40% -1.0 40% 40% 0.0 41% 1.0 40% -1.0
Margins
Gross profit 58% 61% 3.2 64% 3.2 65% 0.5 57% 59% 1.9 61% 2.2 62% 0.5 57% 59% 1.6 61% 2.2 61% 0.5 63% 68% 4.5 68% -0.2 68% 0.5
SG&A % of sales -48% -42% 5.7 -42% -0.3 -45% -2.8 -50% -47% 2.6 -49% -2.0 -51% -2.0 -49% -49% -0.3 -52% -2.9 -52% -0.1 -33% -33% -0.1 -34% -1.4 -34% 0.0
D&A % of sales -4% -4% 0.7 -4% 0.0 -4% 0.1 -5% -5% 0.4 -5% 0.1 -5% 0.1 -5% -4% 0.4 -5% -0.3 -5% 0.1 -3% -2% 0.1 -3% -0.3 -3% 0.1
Operating profit 6% 15% 9.6 18% 2.9 16% -2.3 2% 7% 5.0 7% 0.3 6% -1.5 3% 5% 1.7 4% -1.0 5% 0.5 28% 32% 4.5 30% -1.9 31% 0.5
Net income margin 3% 9% 6.0 11% 1.8 10% -1.3 1% 4% 3.3 4% 0.5 4% -1.0 1% 3% 1.4 2% -0.4 3% 0.3 17% 19% 2.8 18% -1.4 19% 0.6
EBITDA 1.86 4.95 166% 7.73 56% 9.00 16% 1.25 2.71 117% 3.76 39% 4.13 10% 1.55 2.39 54% 2.99 25% 3.91 31% 11.03 17.80 61% 22.27 25% 28.81 29%
EBITDA margin 10.3% 19.2% 8.9 22.1% 2.9 19.8% -2.3 7.2% 11.8% 4.6 12.0% 0.2 10.5% -1.5 8.3% 9.7% 1.4 8.9% -0.7 9.4% 0.4 30.4% 34.8% 4.4 33.2% -1.6 33.7% 0.5
Source: Company data, Goldman Sachs Research estimates.
Teavana Holdings, Inc. (TEA)
20
September 6, 2011 Teavana Holdings, Inc. (TEA)
Exhibit 33: TEA annual cash flow and balance sheet
All figures in millions
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Statement of Cash Flows
OPERATING ACTIVITIES
Net income 1.2 5.3 12.0 17.1 22.8 29.9 38.2 47.9
Depreciation & amortization 2.7 3.5 4.4 6.2 7.7 9.6 11.6 13.8
Financing cost amortization 0.2 0.1 0.1
Accretion of Series A preferred stock 1.5 1.8 2.1
Share based compensation 0.2 0.2 0.2 0.9 1.3 1.4 1.4 1.5
Deferred income taxes -0.6 0.5 -0.3
Loss on disposal of property and equipment 0.0 0.0 0.1
Working capital -0.2 -0.3 0.7 -3.0 -3.0 -3.0 -3.0 -3.0
Accounts receivable 0.2 -0.1 0.0
Inventory -1.8 -3.6 -5.3 -7.0 -8.0 -9.0 -10.0 -11.0
Prepaid expenses and other assets -0.7 0.2 -1.1
Prepaid rent -0.2 -0.3 -0.3
Accounts payable 0.9 -1.6 0.7
Accrued compensation and payroll taxes 0.2 0.5 0.4
Taxes payable -0.2 2.8 0.8
Deferred franchise income -0.1 0.0 -0.1
Deferred revenue 0.2 0.3 0.3
Deferred rent 1.1 1.1 3.7 4.0 5.0 6.0 7.0 8.0
Other accrued liabilities 0.3 0.4 1.7
Cash from operations 2.4 3.8 5.0 11.1 19.4 21.1 28.8 37.8 48.2 60.2
INVESTING ACTIVITIES
New stores -10.9 -11.3 -13.5 -15.8 -18.0 -20.3
Existing stores -0.5 -1.0 -2.0 -2.5 -3.0 -3.5
Info tech -0.3 -1.4 -1.9 -2.4 -2.9 -3.4
Distribution center -0.1 -0.5 -1.5 -2.0 -2.5 -3.0
Store support center -1.1 -0.3 -1.0 -1.5 -2.0 -2.5
Other -0.1 -2.0 2.7 0.0 0.0 0.0
Purchase of property & equipment -5.3 -3.5 -8.8 -6.6 -12.6 -16.4 -17.2 -24.2 -28.4 -32.7
Cash from investing -5.3 -3.5 -8.8 -6.6 -12.6 -16.4 -17.2 -24.2 -28.4 -32.7
FINANCING ACTIVITIES
Proceeds from revolving credit facility 50.9 94.0 132.2
Payments on revolving credit facility -45.7 -98.3 -132.2
Payment on vendor loan 0.0 0.0 -0.3
Payments on term loan -0.6 0.0 0.0
Cash paid for financing costs -0.4 0.0 0.0
Stock issuance 0.0 0.0 0.0
Share buybacks 0.0 0.0 0.0
Dividends 0.0 0.0 0.0
Paying off preferred stock & other 0.0 0.0 0.0 0.8 -1.3
Cash from financing 0.9 0.6 4.3 -4.3 -0.3 0.8 -1.3 0.0 0.0 0.0
Net change in cash & cash equivalents -2.0 0.8 0.4 0.1 6.6 5.5 10.4 13.7 19.8 27.5
Cash, beginning 2.0 0.0 0.8 1.2 1.3 7.9 13.4 23.7 37.4 57.2
Cash, ending 0.0 0.8 1.2 1.3 7.9 13.4 23.7 37.4 57.2 84.8
Balance Sheet: 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Assets
Cash & cash equivalents 1.1 0.8 1.2 1.3 7.9 13.4 23.7 37.4 57.2 84.8
Accounts receivable 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Prepaid expenses & other assets 1.0 2.0 2.0 2.0 2.0 2.0 2.0
Prepaid rent 1.1 1.4 1.4 1.4 1.4 1.4 1.4
Inventory 4.9 6.2 8.0 11.6 16.9 23.9 31.9 40.9 50.9 61.9
Deferred tax asset, current 0.8 1.6 1.6 1.6 1.6 1.6 1.6
Total Current Assets 5.9 6.9 9.1 16.0 30.2 42.7 61.0 83.7 113.5 152.0
Capitalized financing costs, net 0.2 0.1 0.1 0.1 0.1 0.1 0.1
Other assets 5.3 5.4 6.8 0.4 0.4 0.4 0.4 0.4 0.4 0.4
Property & equipment, net 11.0 13.2 19.4 22.5 31.0 41.3 50.8 65.4 82.1 101.0
Other intangible assets, net 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill 2.4 2.4 2.4 2.4 2.4 2.4 2.4
Deferred tax asset, non-current 0.2 0.0 0.0 0.0 0.0 0.0 0.0
Total Assets 22.2 25.5 35.4 41.8 64.1 86.8 114.7 152.0 198.6 255.9
Liabilities & Shareholder Equity
Accounts payable 2.6 3.6 3.6 3.6 3.6 3.6 3.6
Accrued compensation & payroll taxes 1.8 2.2 2.2 2.2 2.2 2.2 2.2
Income taxes payable 4.0 4.8 4.8 4.8 4.8 4.8 4.8
Deferred revenue 1.1 1.3 1.3 1.3 1.3 1.3 1.3
Note payable 0.3 0.0 0.0 0.0 0.0 0.0 0.0
Current portion of LT debt 0.0 1.0 1.0 1.0 1.0 1.0 1.0
Other accrued liabilities 1.6 3.3 3.3 3.3 3.3 3.3 3.3
Total Current Liabilities 0.0 0.0 0.0 11.3 16.3 16.3 16.3 16.3 16.3 16.3
Deferred franchise income 0.6 0.5 0.5 0.5 0.5 0.5 0.5
Deferred tax liability, non-current and other 7.7 9.8 12.0 0.0 0.4 0.4 0.4 0.4 0.4 0.4
Deferred rent 3.9 7.5 11.5 16.5 22.5 29.5 37.5
Long-term debt 1.4 0.9 5.5 1.0 0.0 0.0 0.0 0.0 0.0 0.0
Series A preferred stock 6.3 7.6 9.1 10.8 13.0 13.7 12.5 12.5 12.5 12.5
Total long-term liabilities 15.4 18.2 26.6 16.3 21.5 26.2 30.0 36.0 43.0 51.0
Total Liabilities 15.4 18.2 26.6 27.6 37.8 42.5 46.3 52.3 59.3 67.3
Common stock 10.1 12.2 15.8 21.9 81.4 81.4 81.4 81.4 81.4 81.4
Stockholders deficit 0.0 0.0 17.1 39.9 69.8 108.0 155.8
Additional paid-in capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Accumulated deficit -3.3 -4.8 -7.1 -7.7 -55.1 -54.2 -52.9 -51.5 -50.1 -48.6
Total stockholders deficit 6.8 7.3 8.7 14.2 26.3 44.3 68.4 99.7 139.3 188.7
Total Liabilities & shareholder equity 22.2 25.5 35.35 41.8 64.1 86.8 114.7 152.0 198.6 255.9
Source: Company data, Goldman Sachs Research estimates.
Goldman Sachs Global Investment Research 21
September 6, 2011 Teavana Holdings, Inc. (TEA)
Reg AC
We, Michael Kelter, Matthew J. Fassler and Chris Cerrone, hereby certify that all of the views expressed in this report accurately reflect our personal
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Disclosure Appendix
Coverage group(s) of stocks by primary analyst(s)
Michael Kelter: America-Restaurants, America-Toys. Matthew J. Fassler: America-Retail: Specialty Hardlines.
America-Restaurants: Chipotle Mexican Grill, Inc., Dunkin' Brands Group, Inc., McDonald's Corp., Panera Bread Co., Starbucks Corp., Teavana
Holdings, Inc., The Wendy's Company, Tim Hortons Inc., Tim Hortons Inc., Yum! Brands, Inc..
America-Retail: Specialty Hardlines: Advance Auto Parts Inc., AutoZone Inc., Barnes and Noble, Inc., Bed Bath & Beyond, Inc., Best Buy Company,
Inc., CarMax Inc., Copart Inc., CVS Caremark Corp., Dick's Sporting Goods, Ethan Allen Interiors, Inc., GameStop Corp., Genuine Parts Co., GNC
Holdings, Inc., The Home Depot, Inc., KAR Auction Services, Inc., Lowe's Companies, Inc., Lumber Liquidators Holdings, Inc., O'Reilly Automotive,
Inc., Office Depot, OfficeMax Inc., PETsMART, Inc., RadioShack Corp., Rite Aid Corp., Staples, Inc., Tractor Supply Company, Walgreen Company,
Williams-Sonoma, Inc..
America-Toys: Hasbro, Inc., Mattel, Inc..
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covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs has received compensation for investment banking services in the past 12 months: Teavana Holdings, Inc. ($23.99)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Teavana Holdings, Inc.
($23.99)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Teavana Holdings, Inc. ($23.99)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Teavana Holdings, Inc. ($23.99)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Goldman Sachs Global Investment Research 22
September 6, 2011 Teavana Holdings, Inc. (TEA)
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 52% 41% 37%
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Goldman Sachs Global Investment Research 23
September 6, 2011 Teavana Holdings, Inc. (TEA)
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Goldman Sachs Global Investment Research 24