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Edited Transcript of DTEA earnings conference call or presentation 17-Sep-19 9:00pm GMT

Q2 2019 DAVIDsTEA Inc Earnings Call

MONT-ROYAL Sep 26, 2019 (Thomson StreetEvents) -- Edited Transcript of DAVIDsTEA Inc earnings conference call or presentation Tuesday, September 17, 2019 at 9:00:00pm 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 & Interim CEO

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA's Second Quarter Fiscal Year 2019 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 Form 10-K, which was filed with the Securities and Exchange Commission on May 2, 2019, and is 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 reconciliation to the most directly comparable IFRS financial measure will be detailed in our Form 10-Q, which was filed with the Securities and Exchange Commission earlier today. 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, Founder, Executive Chairman and Interim CEO of DAVIDsTEA.

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

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Good afternoon, everyone, and thank you for joining us as we review our results for the second quarter of fiscal 2019. With me today is Frank Zitella, DAVIDsTEA's Chief Operating Officer and CFO.

Our second quarter results highlight the very solid progress of our e-commerce and wholesale channels, which posted a combined growth of 53% over last year. Both channels have been identified as areas of future growth for DAVIDsTEA and benefited from recent initiatives led by our solid leadership team. We are also continuing to actively work on additional initiatives to improve the performance of our stores. After almost 1 year of launching our tea sachets with a major Canadian grocery chain, I'm very pleased to say that sales continue to surpass our expectations.

As we have previously announced, the availability of our tea sachets within the supermarket and drugstore networks will be expanded significantly over the upcoming months. We are also looking at wholesale opportunities south of the border. For us, our success to date in the wholesale channel clearly demonstrates that our brand and teas remain in high demand wherever available to consumers.

We recently unveiled part of DAVIDsTEA's fall 2019 collection of classic and new fall flavors, including a new and expanded wellness collection. I'm truly excited by the new collection and by others to come, leading up to the holiday season. Again, I want to emphasize the hard work and dedication of our leadership team and of all our employees. Our progress in e-commerce and within the wholesale channel, coupled with our plans going forward, provide confidence that we are on the right path to return DAVIDsTEA to profitability and growth. I also want to inform you that one of the directors -- our directors, Anne Darche, has advised us of her departure from the Board due to time constraints. We thank Anne for her service and wish her well.

And with that, I will 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. In the first half of 2019, we concentrated our efforts on delivering the best fine tea on the market across our entire distribution channel. We also streamlined our portfolio of products to improve our customers' in-store experience. The second quarter is generally our weakest due to seasonality, yet we were able to maintain a strong cash position driven by positive cash flow from operations. When compared to the second quarter last year, we generated positive cash flow from operations of $3.1 million compared to negative $12.4 million. The significant improvement was largely driven by optimized inventory levels and a reduction in selling, general and administrative expenses. While the cash position declined sequentially to $29.7 million due to normal business seasonality, the negative variance when compared to last year was notably lower due to factors just discussed.

Let me now go briefly into some of the specifics for the quarter. Sales decreased by $1 million and 2.5% to $39.2 million from $40.2 million for the same period in 2018. Sales from e-commerce and wholesale channels increased $2.8 million or 52.8%. This increase was driven primarily by greater online adoption as well as from increased demand from our grocery chain distribution across Canada. With regards to our stores, retail sales declined by $3.8 million and comparable same-store sales decreased by 9.4%. We ended the quarter with 233 stores compared to 239 last year.

When you look at our mix of the product categories, teas were up by 6.2% over the last year, while accessories remain under pressure. We're certainly hoping to change this trend, starting with our new fall collections. Last week, we announced a unique collaboration with Beau's brewery, an organic Canadian brewery. Together, we'll launch the DAVIDsTEA London Fog beer, a unique recipe concept that infuses Organic Cream of Earl Grey into a golden ale brewed with lactose and rich vanilla. The DAVIDsTEA London Fog beer will be widely available this fall at LCBO and grocery stores in Ontario as well as different areas and grocery outlets in Quebec. This is a concrete example of how we are implementing different alternatives to fully exploit the tremendous potential of our brands.

Gross profit increased by 25.7% to $21.8 million from the same period in the prior year. Excluding the impact of IFRS 16, gross profit decreased by $1.3 million to $16 million. The decline is attributable primarily to a shift in product sales mix and a deleveraging of fixed costs due to negative comparable sales. SG&A decreased by 13.1% to $27.2 million from the prior year. Excluding the impact of IFRS 16, SG&A would have amounted to $23.4 million, a decrease of 25.3%. However, adjusted SG&A decreased by $1.2 million. This decrease primarily reflects cost streamlining efforts of the past few quarters. Adjusted EBITDA for the quarter amounted to $0.4 million compared to a negative $5.6 million in the prior year quarter. Excluding the impact of IFRS 16 and stock-based compensation for the 3 months ended August 3, 2019, and the impact of stock-based compensation, executive separation costs related to salaries, impairment of property and equipment, owners' contracts, deferred rents and costs related to the strategic review and proxy contest for the 3 months ended August 4, 2018, adjusted EBITDA increased by $0.1 million.

As outlined in our 10-Q and press release, DAVIDsTEA entered into a secured loan agreement with Oink Oink Candy Inc., doing business as Squish, pursuant to which the company advanced $1.8 million as of August 3, 2019. The loan facility under this agreement is capped at $2 million. The loan bears interest at a rate of 1% over the Bank of Montreal's prime rate, payable monthly, and is secured by the company's principal shareholder with a movable hypothec in favor of the company on certain of DAVIDsTEA's shares owned by Rainy Day Investments. The loan is repayable no later than December 31, 2019.

In closing, we're excited to be significantly expanding our wholesale distribution in the coming months and with the availability of DAVIDsTEA sachets in over 2,500 stores across Canada. Furthermore, in the weeks ahead, we'll be launching several exciting tea collections, including a new and expanded wellness collection. I'm thrilled by what the leadership team has put in place and the plan for the upcoming months. While we continue to face some challenges, we're taking tangible steps to reposition DAVIDsTEA as a growth company. We remain focused on improving our financial performance, and we're taking concrete steps for the DAVIDsTEA brand to better resonate with new and existing customers.

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

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Operator [4]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.