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Hey everybody,

Here are my notes from today’s call in regard to the Starbucks/Teavana deal. For those who haven’t seen yet, Starbucks is buying Teavana in a $620 million all-cash deal.

CEO Howard Schultz acknowledged that probably many are surprised by this announcement, however it’s a market that they’ve been studying closely now for about 18 months. They see the macro-tea market as a $40 billion market opportunity that is growing at double-digits, hence they feel there is a tremendous opportunity in front of them.

This is a deal with global potential and two qualities that drew them to Teavana immediately are its brand and its sourcing capabilities. At present Teavana consists of 300 company-owned stores and most are located in high-traffic malls.

Schultz stated that Teavana’s unit economics are some of the best of small box retailers they’ve seen. Average annual sales on a per store basis are clocking in at around $1 million now and average ticket size is about $40.

Currently Teavana does not sell beverages, this can and will change. Further management is certain that they can significantly grow the current footprint of Teavana’s store base as stand-alone stores. It’s important to note that these are not stores located in conjunction with Starbucks stores (necessarily) as it has its own market. The current growth strategy for Teavana at the time of this deal is to reach about 500 stores through 2015.

Certainly Starbucks management is feeling very confident these days and for good reason. The numbers are good and their global footprint is spreading seemingly like wildfire. Schultz and team believe that this deal comes at a great time for Starbucks. They will focus heavily on social and digital media as with Starbucks stores and growing brand loyalty developing a whole new base of loyalty card holders. This approach creates awareness, as well as important incremental business which will add to the 70 million customers that come into Starbucks stores every week.

Schultz stated simply that they will do for tea what they’ve done for coffee around the world. They have a strong belief in the market opportunity and will develop a unique tea bar that serves hot and cold drinks that we’ve never even heard of before. They will create a product and experience that (much like what they’ve done with coffee) will make people come back for more.

It’s a good question to ask what is the intended scope of this deal? To be sure it will have long-term international implications. In fact Starbucks JV partners in China, India and the Middle East are already excited about the prospects of what this can do, and for good reason; tea is the beverage of choice in these regions.

As it stands Teavana does not have a CPG (consumer packaged goods) presence. This will however develop over time as well. Tazo Tea for example is primarily a CPG business for Starbucks. Teavana at present is a mall retailer with an ecommerce business which is also performing well. We can expect over time for Teavana to become a substantial CPG contributor.

Management stated they have never been more enthused about their core business and that they feel this Teavana deal is in the strength and wheelhouse of their core capabilities. Again, they will do for tea what they’ve done for coffee around the world.

The deal, as mentioned before, is $620 million all cash and has the approval of at least 70% of shareholders. Results should fold over into the 2nd fiscal quarter and add a penny to earnings. We’ll get more context on capital expenditures associated with this deal in an investor presentation they’ll hold in the near future. It’s worth noting however that part of the attraction of the deal is that Starbucks will be able to utilize much of their existing infrastructure already in place in order to roll this out in a timely fashion.

Some little other snippets: Starbucks coffee will not be sold in Teavana stores. Also management could not confirm at this time whether or not Teavana products will be sold in Starbucks stores. They do see this deal as another move into the health and wellness space.

I’m not terribly surprised by this deal. I think I mentioned in the Stock Advisor BBN video last month when I picked Starbucks that I had spoken with Leslie Patton at Bloomberg about Starbucks acquisitions and that Teavana was one that they could pull off very easily. And here you go. I think the long-term implications are good all the way around and trust this management team will pull it off nicely. That’s all to say I’m OK with it.

Foolish best,


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