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Teavana IPO Is Investors' Cup of Tea: Analysts

Karina Frayter, CNBC Markets Producer

America is a country of hard-core coffee drinkers, but premium tea retailer Teavana, is likely to get some love from investors when it prices its initial public offering after the close Wednesday.

Source: Teavana

The Atlanta-based company plans to raise $100 million by offering 7.1 million shares at a price range of $13 to $15. At the mid-point of the proposed range, Teavana will hold a market value of $553 million, according to Renaissance Capital.

The company goes public the same week as Dunkin Brands, the owner of one of America's big coffee favorites, Dunkin' Donuts, which priced at $19 a share, above the expected range of $16 to $18, late Tuesday.

Brian Sozzi, analyst at Wall Street Strategies, believes Teavana is exactly what retail sector investors like.

“The market is ripe for new, publicly traded blood in the retail sector, specifically those concepts that sport an attractive growth profile,” says Sozzi. “Teavana has planted a flag in the mall, selling something different that can command a premium price as a result.”

Founded in 1997, Teavana sells over 100 varieties of tea, as well as tea-related merchandise. Since 2006, it has tripled its retail outlets to 161 from 47. It also has 19 franchised stores, mainly in Mexico.

Analysts like its top- and bottom-line growth in recent years. In fiscal 2010, Teavana’s net income was $12 million, up 127 percent from fiscal 2009. Net sales increased 38 percent, while comparable-store sales grew 8.7 percent versus the same period in 2009.

Sozzi also likes Teavana’s positive operating cash flow, high double-digit percentage operating margins and sales per gross square foot of about $1,000, which he says are some of the highest in the specialty retail sector.

However, analysts are concerned about how Teavana will expand its business model.

“Starbucks sells sandwiches and assorted treats. I am not sure of the success they will have say, selling green tea muffins or biscuits,” says Sozzi. “Does the company eventually sell tea in stores like Starbucks does?”

Then there’s an issue of a struggling consumer that may be willing to pay for Teavana's high-end teas, some of which may run almost $40 for 25 ounces. In its prospectus, the company says that it believes “customers view our products as an affordable and healthy indulgence.”

Many consumer-oriented businesses, like Coca-Cola and Pepsico , are voicing concerns about the weak, and apprehensive consumer this earnings season.

Teavana acknowledges this in the prospectus. “We are vulnerable to changes in consumer preferences and in economic conditions affecting disposable income that could harm our financial results.” And Americans represent just 9 percent of the global tea marketplace.

Wall Street Strategies’ Sozzi says investors will look past the consumer spending concerns at this stage. “Retailers in their infant stages, provided they are producing robust top and bottom line growth rates, will fall into favor with investors no matter if the consumer spending environment is volatile.”

Teavana also mentions Japan, one of its suppliers, among the risk factors.

“Public concerns about potential contamination, whether or not based in fact, could result in a reduction in demand for our products sourced from Japan,” Teavana says in its prospectus. “Any of these developments could have a material adverse effect on our business, financial condition and results of operations.”

Teavana doesn’t provide the numbers on how much of its product comes from Japan.

Some IPO analysts don’t like that Teavana’s offering has a small float and that most of it is owned by the company’s founder and the financial backing fund.

But Sozzi does not see a problem and says it will likely help the stock pop on IPO day and beyond.

“The limited float suggests the founder will continue to be involved, which is important to get things correct in the next two years,” Sozzi said. “Long-term you would want to see a transition of power, but right now, knowledge is power.”

Teavana plans to list on the NYSE under the symbol TEA. BofA Merrill Lynch and Goldman Sachs are the lead underwriters on the deal.