What Will Teavana Brew Up for Starbucks?

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While The Wall Street Journal reported last month that Starbucks (NASDAQ:SBUX) could “do better” than Teavana and analysts believed the deal would fall through after problems with the company’s tea quality emerged, the $620 million deal officially closed on Wednesday.

What will Teavana contribute to Starbucks’ widening portfolio of beverage brands?

With Starbucks’ purchase of Teavana, which has styled itself as the “Heaven of Tea,” the coffee chain has made the company a wholly-owned subsidiary that will complement its diversifying business of beverage and food brands. The company plans to expand upon Teavana’s 300, mostly shopping mall-based locations, by designing stand-alone shops modeled after its own.

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“Teavana’s 5,000 partners (employees) are passionate and knowledgeable about the ritual and enjoyment of tea, and are expert ambassadors that help guide and educate new tea enthusiasts and tea connoisseurs alike, wrote Jeff Hansberry, the president of Starbucks’ Channel Development and Emerging Brands, on the company’s website. “We are excited by the opportunity to bring their expertise to even more customers, while learning from them ourselves.”

Starbucks expects the acquisition to be accretive to earnings by approximately $0.01 per share in fiscal year 2013, based upon the previously-announced earnings targets.

CHEAT SHEET Analysis: Will the Teavana acquisition be a positive catalyst for Starbucks’ stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. While Starbucks’ purchase of Teavana pushed its stock price up slightly more than 10 percent, analysts have begun to wonder whether the coffee chain can effectively manage the complex operations and make a profit running a coffee and tea business side by side. Starbucks Chief Executive Howard Schultz has said that the two businesses will help send customers to one another by “uniting their customer loyalty programs, social-media efforts and mobile applications,” according to The Wall Street Journal. “Teavana has more stores than any other company we’ve identified, with economics that are second to none,” he said to the publication.

Although analysts do not doubt that the $40 billion global tea market holds opportunities for Starbucks, several question whether Teavana was the right company to increase its presence. After all, the tea company receives only 4 to 6 percent of its revenue from brewed beverages, with the majority of its profits deriving from sales of its loose-leaf tea for home consumption.

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