BMO Capital Upgrades DAVIDsTEA (DTEA) to Outperform

BMO Capital upgraded DAVIDsTEA (NYSE: DTEA) from Market Perform to Outperform with a price target of $16.00 (from $13.00).

Analyst Kelly Bania commented, "Following our recent NDRS with management in Toronto and Montreal as well as meeting with senior leaders from Intalytics (DTEA’s data analytics/real-estate consultant provider) we have increased confidence in our forecasts and a deeper understanding of the company’s positioning within the fast-growing tea/infused beverage category. We see several catalysts for the company, including: 1) the opportunity for the company to refresh stores to improve transaction efficiency in the key beverage-only category, which could help improve customer traffic trends; 2) continued strength in higher-margin online sales (already 9.4% of sales and growing ~50%) where we expect momentum could remain strong, supported by the introduction of an app in 2017 (online sales are included in DTEA comps); and 3) potential uses of cash (C$69 mm or US$53 mm on the balance sheet as of 1Q16) including the possibility of a dividend (not likely a share buyback given limited liquidity for the shares, in our view). Additionally, a more favorable COGS outlook given FX hedges that support an outlook for a flat FX impact to COGS in 1Q17 and favorable in 2Q17 (current spot rates suggest flat to slightly favorable COGS in 2H17, which we believe may also potentially be hedged in coming months)."

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