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Edited Transcript of DTEA earnings conference call or presentation 13-Sep-18 9:00pm GMT

Q2 2018 DAVIDsTEA Inc Earnings Call

MONT-ROYAL Sep 19, 2018 (Thomson StreetEvents) -- Edited Transcript of DAVIDsTEA Inc earnings conference call or presentation Thursday, September 13, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Herschel H. Segal

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

* Howard Tafler

DAVIDsTEA Inc. - CFO

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, this is DAVIDsTEA's Second Quarter 2018 Earnings Conference Call. At the request of DAVIDsTEA, today's conference call is being recorded. (Operator Instructions) I would now like to turn the call over to Howard Tafler, Chief Financial Officer of DAVIDsTEA. Please go ahead, Mr. Tafler.

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Howard Tafler, DAVIDsTEA Inc. - CFO [2]

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Thank you. Good afternoon, everyone. With me on the call is Herschel Segal, Executive Chairman and Interim CEO.

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 appear 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 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 as supplemental information in our press release. Please note, we will not be holding a Q&A session at the end of this call.

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

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Herschel H. Segal, DAVIDsTEA Inc. - Co-Founder, Executive Chairman and Interim CEO [3]

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Good afternoon, and thank you, Howard. Thank you all for joining us. Our slate of board members were elected at the annual meeting in mid-June, halfway through the second quarter. Since that time, we have begun collaborative work to reverse the tide of recent negative quarterly results.

We know that DAVIDsTEA is a leading tea company with great products and a recognized brand. We also know that we are in a healthy industry and I believe on the right side of history. Tea remains the second most consumed beverage in the world after water.

A February 2018 Euromonitor International report states that the trend over the past decade of consumers increasingly drinking tea continues. This is because Canadians are becoming more aware of the health benefits and the huge variety of tea offerings. Euromonitor also observed 2 distinct tea markets in Canada in 2017. There is the traditional market, where products are presented mostly in teabags, that are sold primarily through supermarkets, hypermarkets and discounters. And you have on the -- another category of players, that includes DAVIDsTE,A, that distribute tea in bag or sachet format but currently focus on loose-leaf and organic teas.

As we look for our growth opportunities, we know we must capture more of the teabag market. This can only happen with better pricing and a continued mission to bring consumers a convenient tea experience that they cannot obtain in traditional markets and at the same time, offering consumers the opportunity to purchase our teabags in the traditional supermarket environment.

2 positive actions that have been taken with respect to capturing more of the teabag market: first, we are now working to buy teabags smarter and for less so that we can price our products better for our customers and attract many new ones; second, last month, we launched an excellent program with Loblaw Companies and are now in 450 stores across Canada, including Loblaws, Independent, Zehrs, Valu-Mart, Atlantic Superstore, Dominion, Provigo and Fortinos. These banners now offer a variety of our best-selling, 15-pack tea sachet flavors. This product is merchandised at eye level and the consumer response to date has been very good. This is a great way to further promote our brand.

Overall, we are a merchant operator, first and foremost, and we must deliver the right product at the right price. Therefore, our focus needs to be on improving our purchasing and delivering the brand wherever the consumer wants it. This includes in our stores, bricks and mortar, or online, through other retail channels as well as other potential growth areas such as hospitality and travel markets.

Following a thorough evaluation, we determined that we need to get back to the basics of product innovation and procurement. To make this happen, we have made adjustments at head office to change our operations and our culture. We are building a strong team and we have put more senior leaders in buying, marketing and product development. We are also paying more attention to our costs.

As well, we are ready to find a CEO who will enthusiastically adapt to the DAVIDsTEA environment, lead with a realistic optimism and bring vision that will be refined and further developed with the senior executive team and the company's board.

A great deal has been accomplished since mid-June. We are working hard to continually seek improvements, and I feel confident that we are putting in place the steps needed for the future success of DAVIDsTEA.

With that, I will turn the call over to Howard.

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Howard Tafler, DAVIDsTEA Inc. - CFO [4]

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Thank you, Herschel, and good afternoon, everyone. I'll begin my remarks with the review of our fiscal 2018 second quarter results. As a reminder, the dollar amounts referred to in reviewing our results are in Canadian dollars.

Sales decreased by 12% to $40.2 million in the second quarter of 2018 from $45.7 million for the same period in 2017. We ended the quarter with a total of 239 stores, an increase of 3 net new stores versus 236 stores at the end of Q2 2017. Second quarter comparable sales decreased by 14.8% as our product offering did not resonate with our customers. We were less promotional as we moved to reduce our dependency on discounting, and we had less products available for our semiannual sale as we were in a better seasonal inventory position compared to the prior year quarter. In addition, we have revised our merchandising strategy, which has not reflected in our second quarter assortment. This is compared to a 0.9% comp decrease in Q2 last year.

Gross profit as a percentage of sales decreased slightly to 43.2% from 44.2% year-over-year as product margin increases driven by less promotional activity and a shift in product sales mix were offset by a deleveraging of fixed costs due to the negative comparable sales.

Adjusted SG&A in the second quarter decreased to $24.6 million from $25.9 million in Q2 2017 due to lower stock-based compensation expense and depreciation and amortization expenses. As a percentage of sales, adjusted SG&A increased to 61.2% from 56.7% last year due to deleveraging of fixed costs due to the negative comparable sales.

Adjusted results from operating activities for Q2 2018 recorded as a loss of $7.3 million relative to a loss of $5.7 million in the second quarter of 2017. In Q2 2018, the company recorded an adjusted net loss of $5 million or $0.19 per fully diluted share. This is compared to an adjusted net loss of $4.2 million or $0.16 per fully diluted share a year ago. Adjusted EBITDA was negative $5.6 million in the second quarter compared to a negative adjusted EBITDA of $2.2 million in Q2 2017. At the end of the second quarter, our ending inventory was $33.7 million as compared to $28.6 million at the end of Q2 2017.

In terms of liquidity, we ended the second quarter with $39.6 million in cash. We are continuing to prudently manage our cash position and balance sheet.

With that, I'll turn the call back over to Herschel for some final remarks.

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Herschel H. Segal, DAVIDsTEA Inc. - Co-Founder, Executive Chairman and Interim CEO [5]

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Thank you, Howard. As previously announced, Howard will be leaving by the end of the month as he has accepted a position in another industry. We sincerely thank Howard for his valued contribution to DAVIDsTEA over the years and wish him every success in his new position. Joe Bongiorno, our Director of Finance, is taking over as Interim CFO while we conduct a search for a permanent replacement.

Further, the board recently named 2 independent directors recommended by our Governance Committee, Anne Darche and Susan Burkman. Anne is a well-known marketing and consumer trend specialist with a 20-year career in Montréal advertising agencies. She serves on the boards of a number of other companies. Susan Burkman has 35 years in the investment banking industry and has successfully led equity, M&A and valuation and fairness opinion transactions in Canada. We are very pleased to have them both on board.

We have now entered a new era at DAVIDsTEA. Our dynamic management team is focused on what needs to be done as we begin the road back to profitability. I am confident that our shareholders will see improved results within the next 9 months, and we will continue to share our progress with you as we move forward.

Thank you for joining us today.

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Operator [6]

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