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DTEA Davidstea

Participants
Sarah Segal Chief Executive Officer and Chief Brand Officer
Frank Zitella President, Chief Operating and Financial Officer
Call transcript
Operator

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA’s Second Quarter 2021 Earnings Webcast. Today’s webcast is being recorded and is in a listen-only mode.

Before we get started, I would like to remind you of the company’s Safe Harbor language. This presentation includes forward-looking statements about our expectations for the performance of our business in the coming quarter and year. Each forward-looking statement contained in this presentation is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Additional information regarding these factors appears under the heading Risk Factors in our Form 10-K for our fiscal year ended January 30, 2021 filed both with the United States Securities and Exchange Commission and with the Autorite de Maucher Financier and in our quarterly report on Form 10-Q filed today with both the United States Securities and Exchange Commission and with the Autorite de Maucher Financier and on DAVIDsTEA’s website. The forward-looking statement in this discussion speaks only as of today’s date and we undertake no obligation to update or revise any of these statements. If any non-IFRS financial measure is used on this call, a reconciliation to the most directly comparable IFRS financial measure will be detailed in our Form 10-Q.

As a reminder, all dollar amounts referred to are in Canadian dollars, unless otherwise indicated.

Now, I would like to turn the call over to Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

Sarah Segal

Thank you, operator. Good afternoon, everyone and thank you all for joining us. Also joining me is Frank Zitella, DAVIDsTEA’s President, Chief Operating and Financial Officer. I am pleased by our results for the second quarter. From a seasonality point of view, the second quarter is generally our weakest quarter.

Our results also reflect the weight of some of the key strategic investments we are making as we pursue our digital first strategy, increase engagement with customers and continue to grow the brand.

Following a year of dramatic but essential changes to our business, we are now putting in place strategies and initiatives aimed at retaining our loyal customers while attracting new audiences of two consumers. Already in the grocery and pharmacy channel in a more traditional arrangement since 2018, in March, we started a trial of a store within a store concept with exile pharmacies, a leading Canadian drugstore operator. The concept consists of a 4 foot footprint for DAVIDsTEA in each store and showcases over 25 SKUs. This includes assortments of ready to steep sachet, tins of loose-leaf and mocha, tea filters and sampler pack, our most extensive collection in partner locations to date. In the convenience of local pharmacies, customers can now meet their needs for personal consumption and gifting and have even greater access to the health and wellness benefits of amazing tea. The trial started with five stores and was rapidly expanded to 46 this past June. Based on the success within existing stores, this fall, the partnership with Rexel will be further expanded to over 110 stores. We see significant and exciting opportunities to expand this type of concept within Rexel and other North American retailers. We want to continue to be convenient to as many consumers as possible, and this new concept provides another opportunity for DAVIDsTEA to reach our community of tea lovers in new, local and accessible ways while expanding the reach of our products to new retail shelves.

On the product innovation front, we recently launched our most extensive Fall tea collection featuring unique pumpkin spice-inspired blends. Pumpkin spice has always been a strong fall tradition for many years, and we proudly celebrate with our best-selling Pumpkin Chai. This year, we introduced Pumpkin White Tea, Earl Gray, Mocha and Herbal blends to complete the season.

We also launched our biggest holiday calendar collection. 24 Days of Tea is unquestionably our most anticipated launch of the year.

We are excited to offer three iconic DAVIDsTEA holiday calendars this year, already available online and in our flagship stores.

We are proud of our unique mocha countdown and caffeine free countdown, which we created based on fan requests.

In addition, we are focused on fulfilling our mission of having a tea for everyone, with our collection ranging from our expanding single origin Garden to Cup teas to our loose-leaf crafted herbal signature blends.

We also have one of the largest and growing selections of organic loose-lead tea in the world.

Our focus and innovation on both flavor and organic ingredients drives our creativity, especially as we continue to create in the wellness space. With an increasing number of specialized blends to address sleep, cold relief, immunity and digestion, our strong brand positioning, focus on variety, creativity and quality as well as the use of functional ingredients, ensure that we can address both the tastes and needs of a wide audience of tea consumers. After a period of dramatic changes and transformation to our business over the past nearly 18 months, we are eager to connect with our customers in new ways.

We have an exceptional brand and offer a distinctive DAVIDsTEA customer experience, which we want to continue to build and continually improve as we expand our digital platform, customer service options and tea community online.

We also know that human connection still matters, and our digital-first strategy is supported by 18 flagship stores across Canada, which continues to bring the DAVIDsTEA experience to life. We want tea lovers to have as many ways to connect, and this includes the 3,300 retail partner stores in the grocery and pharmacy channel.

We are laying the foundation to scale and expand to become a truly global tea company. This is supported by steady demand for tea around the world as more people understand the benefits, traditions and wellness associated with tea and the traditions of community and sharing that place DAVIDsTEA’s unique approach, sense of offering of the most unique blends in the marketplace at the core of the growing health and wellness space. I will now turn the call over to Frank to discuss our financial results in more detail.

Frank Zitella

Thank you, Sarah and good afternoon everyone.

We have also just celebrated DAVIDsTEA’s 13th anniversary. After a year of turnaround and transformation, we can be proud of continuing our original mission of making tea fun and accessible to all. I’m so proud that we have created one of the most recognized and trusted brands in Canada. I’m continually amazed that the original drive for creativity and tea excellence continues today and is as strong as ever. There would be no DAVIDsTEA without the belief in that mission by our Co-founder and principal shareholder, Herschel Segal, whose contribution over the last 13 years have been invaluable to the building of this Company. On behalf of the whole team and the Board of Directors, I want to acknowledge that contribution and give a heartfelt thanks to Herschel for helping to build, guide the growth and the steadfast belief in the power of tea to change the world. He has earned his retirement from the Board and we are pleased to be able to continue to count on his support as a strategic adviser. And to fill the Board vacancy, the Board has appointed Jane Silverstone Segal as director and Chair, effective immediately. Jane brings her leadership, knowledge of DAVIDsTEA and deep experience in the retail industry to the Board and will help guide DAVIDsTEA as we fulfill our ambition of becoming a global tea company.

Our transformational journey continues and it’s truly been a team effort.

Our associates share a common passion, love and knowledge of team. We thank each and every one of them, our team members for their commitment to DAVIDsTEA, and we all believe that the best is yet to come.

With the CCAA process now behind us, the management team can fully dedicate its time and energy towards unleashing the full value and potential of the DAVIDsTEA brand.

Looking to the future and to support our digital first strategy, we’re making strategic investments in our technology stack and in our distribution capabilities. We want to be able to provide our customers with an engaging, personalized and ultimately, a frictionless customer experience, both from a product and service excellence perspective, creating a more meaningful and personal connection with consumers and improving the speed and accuracy of purchase fulfillment are key factors that will further distinguish us and continue to delight our loyal customers in addition to helping us acquiring new tea lovers. The decline in second quarter sales reflects last year’s pandemic-fueled surge of online sales and a transition back to omni-channel sales this year, which includes the contribution of our 18 flagship stores in Canada.

Our results were also impacted by necessary investments in our operations to accelerate our transformation to a digital-first company.

Now, looking at our Q2 results in more detail, sales decreased 18.6% to $18.7 million from $23 million in the prior year quarter. Brick-and-mortar sales for the quarter compared favorably to the prior year quarter by $3.1 million since no stores were opened last year. Sales from e-commerce and wholesale channels decreased by $7.4 million or 32.2% to $15.6 million, the closure of all stores last year created an initial pent-up demand on the e-commerce side of the business. E-commerce and wholesale sales represented 83.4% of sales compared to 100% of sales in the prior year quarter.

For the quarter, gross profit was $8 million, down 4.1% or $0.3 million from the prior year due primarily to lower sales, which was substantially offset by lower delivery and distribution costs and lower lease expenses compared to the previous year quarter.

As a percentage of sales, gross profit increased to 42.7% for the quarter compared to 36.2% last year. And for the quarter, SG&A increased by $1.7 million or 22.6% to $9.1 million, while adjusted SG&A was up $1.5 million and results from an increase in online marketing expense, software costs and staffing as we continue to pursue our digital-first strategy.

As a percentage of sales, adjusted SG&A increased to 53.5% from 37.2% in the prior year quarter. In Q2, we recognized a non-cash gain of $75.6 million from the settlement of our liability subject to compromise and is included in EBITDA, which was $75.5 million, up by $70.1 million from $5.4 million in Q2 of last year. Adjusted EBITDA for the quarter, which excludes the impact of restructuring plan activities, stock-based compensation expense, impairment of property and equipment and right-of-use assets, wage subsidies received from the Canadian government under the COVID-19 economic response plan and software implementation costs, was negative $0.6 million compared to $1.4 million in Q2 of 2020. The decrease in adjusted EBITDA of $2 million reflects the decline in sales from the last year’s pandemic-fueled surge of online sales, planned increases in online marketing and staffing costs, partially offset by an improved delivery and distribution cost structure. With a large, addressable and growing market, we are confident in our continuing transformation efforts to realign the business model to primarily an e-commerce and wholesale distributor of the finest tea and accessories.

As at July 31, 2021, we had a cash position of $12.1 million and working capital of $43 million.

With the completion of all matters in connection with CCAA proceedings, we have a healthy cash position to support continuing innovation, meet our working capital needs and make the right strategic investments to grow our business as we drive towards sustained profitable growth. In conclusion, our vision is to become the world’s most innovative tea company, inspiring greater wellness and sustainability.

Our past success was supported by the pillars of an exceptional brand and innovative blends of high-quality teas, combined with a unique and exceptional in-store experience.

Our goal is to replicate that success in the digital world and through the right partnerships with other retailers, supported by best-in-class technology and customer engagement.

As indicated before, 2021 will be a year of rebuilding. We look forward to becoming a leaner, more agile and more responsive DAVIDsTEA that is market-driven and focused on growing revenue.

Our drive towards sustained profitable growth is directed by making the right strategic investments that create demand for our products in establishing world-class fulfillment and by continuing to surprise our customers through quality innovations that we bring to the marketplace. In short, we are thrilled about the future of DAVIDsTEA. This concludes our remarks, and thank you for joining us today. Have a wonderful day. [No Q&A session for this event]