Step Aside Starbucks: Premium Tea Is the Next Hot Beverage Craze


Remember when Starbucks (SBUX) was special? Long before there were baristas making lattes at every corner, premium coffee really was an exclusive sipping experience.

It's a different world these days. You can now get a pretty darn good cup of joe from doughnut shops, smoothie stands, and even drive-through burger joints. You also don't even have to leave home anymore. Green Mountain Coffee Roasters (GMCR) championed the Keurig platform, where you're only a K-cup refill and a push of a button away from a single cup of freshly brewed exotic java.

Wouldn't it be neat if there was a ground-floor opportunity for another hot beverage on the rise? What if there were a play in premium tea, paralleling where Starbucks was more than a decade ago?

Say hello to Teavana (TEA).

Tea in the Teavana for Two

If Teavana isn't a household name it's because the company just went public a month ago. There are only 179 locations, but they're coming along quickly. Teavana expects to open 50 new stores this fiscal year.

Teavana isn't a teahouse the way that Starbucks is a coffeehouse. Teavana is a mall retailer, selling the fancy tea-making equipment and stocking more than 100 varieties of loose-leaf teas.

Teavana isn't cheap, but it's clicking with well-to-do mall shoppers. Net sales climbed 36% to $31.3 million in its latest quarter, fueled by heady expansion and an 8.7% increase in comparable-store sales. Margins widened, with earnings soaring 78% higher.

We're still early in Teavana's growth cycle. The ritzy retailer added 18 new stores during its latest quarter, targeting 50 new openings for the entire fiscal year. It also just announced a development deal to get its stores going in the Middle East under a largely risk-free franchising program.

In short, there's still plenty of upside here.

Hot beverages Are Heating Up

Consumer appetite for warm drinks has never been hotter. Dunkin' Donuts parent Dunkin' Brands (DNKN) was a scorching IPO this summer, more on the strength of its popular brews than its Bavarian cream-filled treats. However, premium coffee is already everywhere. Stroll the supermarket aisle and you'll find dozens -- if not hundreds -- of premium blends available. An appreciation for more than just traditional or green tea is just starting to percolate.

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Teavana isn't cheap. It trades for less than 60 times the $0.42 a share to $0.44 a share it's targeting to earn this year. Starbucks, on the other hand, only fetches 25 times this year's projected profitability.

Teavana also won't corner the market on premium teas. Starbucks has its Tazo line of teas. Green Mountain offers several flavors of tea that brew perfectly well in its single-cup coffee brewers. However, few will go out on the kind of limb that Teavana has in building its model entirely on the tea beverage.

I appreciate Starbucks, and I can see it at the very least keeping up with the market over the next few years. Teavana, on the other hand, is taking homerun-caliber swings -- and swigs -- in the on-deck circle.

I'll stick with Teavana.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks.

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