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Edited Transcript of DTEA earnings conference call or presentation 2-May-19 8:30pm GMT

Q4 2018 DAVIDsTEA Inc Earnings Call

MONT-ROYAL May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of DAVIDsTEA Inc earnings conference call or presentation Thursday, May 2, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Zitella

DAVIDsTEA Inc. - CFO, COO & Corporate Secretary

* Herschel H. Segal

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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This is DAVIDsTEA's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

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. 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-K which has been filed with the Securities and Exchange Commission and will be available at www.sec.gov and on DAVIDsTEA's website. The forward-looking statements in this discussion speak 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 presentation of the most directly comparable IFRS financial measure to this non-IFRS financial measure will be provided in our 10-K.

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 Mr. Herschel Segal, Executive Chairman and Interim CEO of DAVIDsTEA.

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

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Thank you, operator. Good afternoon, everyone, and thank you for joining us today as we review our fourth quarter and 2018 year-end results.

Today with me, I have Frank Zitella, DAVIDsTEA new Chief Operating Officer and our CFO since mid-December 2018. In a very short time, Frank has distinguished himself as a viable member of our executive management team, and his appointment today as COO underlines the potential and value add he brings to our company. In the past months, Frank has strengthened our financial procedures and demonstrated an ability to integrate in a meaningful way with the company's operations. While our search for a CEO continues, we now have a solid leadership team in place to execute our plan and to begin creating shareholder value.

Clearly, our financial results are not yet where we want them to be. However, we are making headway and experiencing positive trends in a number of areas. Overall, we are seeing encouraging results from our various initiatives, which Frank will discuss in more detail. Most importantly, we are pleased that the DAVIDsTEA brand continues to resonate strongly with customers that we are widely considered as the tea experts. I am pleased to confirm that the availability of our teas in the largest grocery chain in Canada has been hailed as a success by all measures. Since last summer, this agreement with Loblaw has extended the reach of DAVIDsTEA into 450 Loblaw grocery stores across Canada with a selection of our top-selling SKUs. This has made our teas more accessible and has served to further strengthen the DAVIDsTEA brand.

Today, we are extremely proud to announce a major expansion of our agreement with Loblaw Companies Limited. Starting in the fall of 2019, a select number of our best-selling tea SKUs will be available in an additional 1,300 locations within the vast Loblaw retail network. In addition to discovering a selection of our teas in an even greater number of Loblaw locations across the country, our customers will always have the option to shop in our own stores or online to access the full DAVIDsTEA experience; and a selection of teas, kits and accessories. This expanded agreement and the potential for others to come will provide significant growth opportunities for the company and will support the improvement of our financial results.

I believe that our brand is as strong as ever, as is our team of professionals. I thank all our employees for their continued dedication and tireless efforts. Their commitment to DAVIDsTEA is more than evident.

With that, I'll now turn the call over to Frank for a review of our various initiatives and our financial results.

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Frank Zitella, DAVIDsTEA Inc. - CFO, COO & Corporate Secretary [3]

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Thanks, Herschel, and good afternoon, everyone.

I'm thrilled to be taking on the role of Chief Operating Officer. Since joining DAVIDsTEA last December, I've had the pleasure to meet and work alongside dynamic, knowledgeable and passionate associates that are all focused on elevating the customer experience, from our store associates across North America to the team here in Montréal. I'm excited about the future and see tremendous opportunities to leverage the brand and help move it forward.

As Herschel stated earlier, our financial results are not meeting our expectations. And as a result, we're taking active measures to address the situation and to reignite consumer passion for DAVIDsTEA and make tea a part of everyone's daily life. On our previous call in December, we talked about our priorities to improve and grow the business. I'll provide an update on our progress now.

Our first priority was defining our brand so that it's relevant or ever available. This is being addressed by a number of plans over the coming months. Our brand recognition is strong, and we currently skew overwhelmingly towards a female demographic, which represents over 80% of total sales. We believe in the opportunities to increase our appeal among men, who can enjoy the richness of tea as well as its health benefits just as much as women. In the coming months, you'll see us cross-promote tea in products and events popular with the male demographic.

We're also putting in place initiatives to more directly capitalize on the wellness trend. Today's consumers are more health conscious, favoring clean labels and functional foods and beverages. Wellness teas have benefited from these trends, growing more quickly than the overall tea market. Research shows that tea possesses compounds which can enhance the immune system and contribute to a healthy lifestyle. Both of these initiatives we believe will enhance our brand, expand our addressable markets and present growth opportunities going forward.

Our second priority is to improve operational efficiencies and stimulate in-store traffic. While not immune to the realities of the current retail environment, we're in the process of streamlining our product portfolio to ensure it resonates better with our customers. We're also working on making the in-store experience simpler. With over 135 different varieties of teas and tea blends, selection can become an overwhelming process. At the same time, certain product categories are underperforming. As a result, we'll be significantly reducing and refining our overall product mix while still providing a compelling product selection with broad appeal. Our product mix will focus on supporting a tea lifestyle both at home and on the go with easy-to-use formats of tea sachets and travel accessories.

Regarding tea bags, we believe there is a significant market opportunity given that the majority of tea in North America is consumed in tea bags. Our offering of tea sachets has historically been limited, and so we have expanded the selection of our tea sachet SKU count to capture more of this market share. We're also leveraging this offering as we continue to develop and expand our wholesale distribution channel.

Third, our e-commerce platform is expected to fuel future growth. In Q4, e-commerce accounted for 17% of total sales compared to approximately 14% a year ago. For the same period, our penetration rate of e-commerce in the U.S. reached an impressive 32%, further underlining the potential growth of this channel beyond the boundaries of our stores and geographic network. We continue to make significant investments to elevate the overall user experience by adding features such as ratings and reviews of our teas and enhanced search and navigation capabilities that ultimately will facilitate checkout. We see e-commerce playing a crucial role in the omnichannel shopping experience that begins online and often ends in the store.

Fourth, as a leading tea company, we are continually improving our key development process to align and drive sales results with a focus on quality and price efficiency. Looking ahead, as the tea industry evolves, we are committed to being leaders in blending, sourcing and sustainability innovation.

And finally, as announced today, we are making significant progress in the expansion of our wholesale distribution capabilities. The expansion of our relationship with Loblaw into another 1,300 retail locations is a major step forward in making our tea sachets even more widely available. And we continue to actively explore additional opportunities to expand our wholesale distribution sales and capabilities. As you can see, our team is laser focused on turning around our operations and maximizing shareholder value for the long term. To this end, we will continue to seek ways to sell tea in all forms to our addressable markets.

On the cost side, we expect to benefit from lower operating expenses and procurement costs going forward. We're reducing and streamlining our range of formats. We are redesigning our packaging and changing the composition of our tea sachets, which has a dual benefit of supporting our sustainability and social responsibility initiatives and also reducing costs. As well, we're looking to improve planning visibility for third-party logistics warehouses and more efficiently manage the flow of goods to our retail stores. There will be other proactive measures we implement as we move aggressively to rebuild shareholder value.

Now turning to our fourth quarter results.

Sales decreased by 4.1% to $83.1 million from $86.7 million for the same period in 2017. We ended the quarter with a total of 237 stores, a decrease of 3 net new stores versus the prior year quarter. Comparable sales decreased by 1.6% for the period compared to a 6% comp sales decrease in Q4 last year.

Gross profit decreased by $4.9 million to $39.6 million and decreased as a percentage of sales to 47.6% from 51.3%, resulting from a shift in product sales mix and the deleveraging of fixed costed due to negative comparable sales.

Adjusted SG&A increased by $0.2 million to $31.1 million. As a percentage of sales, adjusted SG&A increased to 37.4% from 35.7% due to the deleveraging of fixed costs as a result of negative comparable sales.

Adjusted EBITDA, which excludes noncash and other items in the current and prior periods, was $10.9 million compared to $16.4 million in the fourth quarter of fiscal 2017. Net loss was $13.3 million compared to a net loss of $16.1 million in the fourth quarter of fiscal '17. Adjusted net income was $6.4 million compared to $9.7 million.

Fully diluted net loss per common share was $0.51 compared to a $0.62 loss in the fourth quarter of fiscal '17. Adjusted fully diluted income per share was $0.25 compared to $0.37 per share.

In terms of liquidity, we ended the fourth quarter with $42.1 million. Our strong cash position enables us to execute on our strategy, invest further in our e-commerce platform and in our store network to stimulate revenue growth and enhance shareholder value.

In closing. We are laser focused on improving our financial performance and we're taking concrete steps to elevate the customer experience, guided by our top priorities. I have great confidence in our store associates across North America, who enrich the lives of our customers every day; and in our leadership team, which has been carefully assembled to meet the opportunities and challenges we're facing. We're all passionate about the DAVIDsTEA brand, and we're determined to successfully execute and deliver results.

That concludes our remarks. Thank you for joining us today.

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Operator [4]

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