U.S. Markets open in 7 hrs 8 mins

Edited Transcript of DTEA earnings conference call or presentation 13-Dec-18 10:00pm GMT

Q3 2018 DAVIDsTEA Inc Earnings Call

MONT-ROYAL Jan 2, 2019 (Thomson StreetEvents) -- Edited Transcript of DAVIDsTEA Inc earnings conference call or presentation Thursday, December 13, 2018 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Frank Zitella

DAVIDsTEA Inc. - CFO

* Herschel H. Segal

DAVIDsTEA Inc. - Co-Founder, Executive Chairman and Interim CEO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. This is DAVIDsTEA's Third Quarter 2018 Earnings Conference Call. At the request of DAVIDsTEA, today's conference call is being recorded.

(Operator Instructions) Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. 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 10-Q, that will be filed with the Securities and Exchange Commission subsequent to this call and will be available at www.sec.gov and on our website.

The forward-looking statements in this discussion speak only as today's dates, 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 presentation of the most directly comparable IFRS financial measure to this non-IFRS financial measure will be provided as supplemental financial information in our press release. Please note, we will not be holding a Q&A session at the end of the call.

Now I would like to turn the call over to Mr. Segal.

--------------------------------------------------------------------------------

Herschel H. Segal, DAVIDsTEA Inc. - Co-Founder, Executive Chairman and Interim CEO [2]

--------------------------------------------------------------------------------

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Let me begin by introducing Frank Zitella, who officially joined our team as CFO earlier this week and is on the call with me today.

Frank brings solid financial and management experience to DAVIDsTEA, and we are pleased to have him on board as a key member of our new executive team.

I would also like to mention the other members of our new leadership team, all engaged in bringing DAVIDsTEA back to profitability.

First, Dominique Choquette started with us on day 1 over 10 years ago. He has weathered many bumps on the road to become our VP of Information Technology, always seeking to bring us rational explanations. Then my daughter, Sarah Segal, Chief Brand Officer, who first joined us 7 years ago, has had to twice step aside from continued service. She used that time wisely, successfully developing and launching an early DAVIDsTEA project on candy, building it into an exciting brand, Squish Candy today. I'm pleased to have her back at DAVIDsTEA.

April Sabral, our VP of Sales, joined us 3 years ago and has done an amazing job, keeping the front line sales team and customers loyal to the essence of our brand. All in spite of quite unclear direction from Head Office over the years.

We also welcome our new VP of Marketing and E-commerce, Nathalie Binda, that has strong brand expertise and knows that strong storytelling first demands brand and product clarity.

And finally, our VP of Supply Chain, Martin Hillcoat that will help drive the supply chain transformation that will rationalize spend and drive improvement and efficiencies in the planning inventory management process.

Now we are ready to engage our new CEO to lead this great team. The board continues to oversee this process. In the meantime, it continues to be a pleasure for me to work with this dynamic team in the interim.

Let's remember what brought us here. We opened our first store in 2008, and at the time, I was personally very invested in the company. We had a clear vision. And by 2011, we had successfully opened nearly 70 stores across Canada, and I'd just opened 2 in New York City.

In 2012, we joined up with U.S. partners to pursue this U.S. expansion and that is when the company began to lose its way. That expansion did not go as planned, and Canadian operations were neglected in the process. Time went by and these problems persisted. But now, since mid-June, we are in the process of reestablishing our original brand vision.

The evolution period of -- the evaluation period of what needs to be done is now over. And I'm proud of the team that we now have in place that will make it happen.

Turning now to our results on our ongoing projects. Same-store sales continue to decline, but we are seeing favorable trends in several areas of the business, namely our e-commerce and alternative sales channels are showing great promise.

Understanding this is an industry-wide trend and growing, we must take the following steps: one, define our brand so that it's relevant no matter where it is available; two, approve our efficiency and simulate in-store traffic; three, optimize our e-commerce channel and increase sales through this platform. Currently, it represents only 16% of our volume, and we need to increase this piece of the business significantly; four, unify our product-development process to become more responsible for sales results and more demanding on quality and price efficiency; five, radically expand sales of teabags, or tea sachets, as we call them at DAVIDsTEA, the majority of tea consumed in Canada is by teabags. So as a recognized premium tea brand, we need to capture more of this market.

And finally, we need to continue growing an alternative sales channel, the sales of a selection of our tea sachets in 450 different Loblaw banner locations across the country is growing very well, in addition to our presence on Air Canada flights in various hotels and in various offices.

I have great confidence in our team, our brand, our growth opportunities and our capacity to improve our financial results.

I believe that our new leadership team is ready to produce more positive results, and it's squarely focused on restoring profitability.

With that, I'll now turn the call over to Frank for a review of our financials.

--------------------------------------------------------------------------------

Frank Zitella, DAVIDsTEA Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Herschel, and good afternoon, everyone. I'm thrilled to be part of the team that will help reverse the tide of recent losses and steward the DAVIDsTEA brand in the years to come.

In the third quarter, sales increased by 1.6% to $43.7 million from $43 million for the same period in 2017. We ended the quarter with a total of 238 stores, an increase of 2 net new stores versus the prior year quarter.

Comparable sales decreased by 4.7% for the period compared to a 6.8% comp sales decrease in Q3 last year. This reflects our decision to reduce our dependency on discounting, resulting in less product available for our semi-annual sales, and we were at a better seasonal inventory position compared to the prior year quarter. We've also revised our merchandising strategy, which was not reflected in our third quarter assortment.

Looking at comparable sales by region. Comp sales in Canada were down by 8%, with a lower adjusted EBITDA contribution. This is compared to reduction of 7.6% for the same period last year. In the U.S., we saw some encouraging signs with comp sales up nearly 16%, an improvement in the adjusted EBITDA contribution, although still in negative territory. Gross profit stood at $18.4 million, the same as last year. As a percentage of sales, it decreased slightly to 42.1% from 42.7% year-over-year, resulting from a shift in product sales mix and a deleveraging of fixed cost due to negative comparable sales.

Adjusted SG&A was $27 million compared to $24.4 million in Q3 2017, mainly due to an increase in salaries, primarily attributable to increases in minimum wages, greater use of consultants and foreign exchange translation losses. As a percentage of sales, adjusted SG&A was 61.7% compared to 56.7% last year from deleveraging of fixed costs due to negative comparable sales.

Adjusted results from operating activities were recorded as a loss of $8.6 million relative to a loss of $6 million in Q3 2017.

In Q3 2018, the company recorded an adjusted net loss of $7.4 million or $0.28 per diluted share compared to an adjusted net loss of $4.5 million or $0.17 per diluted share a year ago.

Adjusted EBITDA was negative $6.2 million in the third quarter compared to a negative adjusted EBITDA of $2.9 million in Q3 2017. At the end of the third quarter, our ending inventory was $44.4 million compared to $37.3 million at the end of Q3 2017.

In terms of liquidity, we ended the third quarter with $18.7 million in cash on hand. We will continue to prudently manage our cash position and balance sheet.

In closing, our priorities, as outlined by Herschel, are both tangible and clear. Our focus now is on execution and on making the right decisions today for the long term in order to restore profitability.

I look forward to being part of the team that will help make that happen. That concludes our remarks. Thank you for joining us today.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.