DAVIDsTEA Inc. (NASDAQ:DTEA) Q4 2023 Earnings Call Transcript

DAVIDsTEA Inc. (NASDAQ:DTEA) Q4 2023 Earnings Call Transcript December 12, 2023

Operator: Good morning, ladies and gentlemen. Welcome to DAVIDsTEA’s Third Quarter Earnings Webcast for fiscal 2023. 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 expectations for the performance of the 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 and Uncertainties in the Management, Discussion, and Analysis of financial condition and results of operation, the MD&A, which was filed with the Canadian regulatory authorities and is available on www.sedarplus.ca, as well as in the investor relations section of the company’s website at davidstea.com.

The forward-looking statements in this discussion speak only as of today’s date, and the company undertakes 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 the MD&A. 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.

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Sarah Segal: Thank you, operators. Good morning, everyone. The economic environment remains uncertain, particularly in Canada, but we are taking proactive steps to stimulate demand creation, drive innovation, and elevate our brand to position the company for long-term profitable growth. As expected, sales remained muted in the third quarter of 2023 due to a persistent challenging economic environment and order fulfillment issues experienced in the fourth quarter last year that contributed to lower online sales. Accordingly, total sales amounted to $12.1 million in the third quarter of 2023 compared to $16.2 million in the third quarter of 2022. As shared with you during our last webcast, we internalized fulfillment services to both Canadian and U.S. consumers during the summer months and have observed tangible improvements in the overall customer experience.

As a result, we are confident about meeting an expected increase in consumer demand during the revenue-intensive fourth quarter, including the holiday season. On the sales front, we have launched a series of go-to-market initiatives and announced key marketing hires to help drive growth. Key initiatives aligned with our growth strategies include: firstly, we started penetrating the U.S. wholesale market during the third quarter with the release of four flavors of premium tea sachets at 150 Stop and Shop supermarkets of the 400 plus locations in the northeastern United States. This regional chain of grocery stores operates through Massachusetts, Connecticut, Rhode Island, New York, and New Jersey. On a smaller scale, we introduced five tea flavors at Roche Brothers Supermarket.

This family-owned business operates in 20 locations across Massachusetts. Our strategy involves step-by-step launches along the U.S. East Coast to gauge customer pace and gradually replicate the success we have enjoyed in Canada. Secondly, we expanded our footprint in the Canadian wholesale market to more than 4,000 doors by growing our presence with existing partners and adding new accounts. DAVIDsTEA recently introduced six tea sachet flavors at 220 Staples Canada stores. The company also brought eight popular tea flavors to 47 Farm Boy grocery stores in Ontario. In Quebec, we entered the Jean Couture and Brunet Pharmacy accounts through the release of 12 holiday teas and 12 winter classic tea discovery kits. These seasonal products are available at select pharmacies during the holiday season with the potential for an expanded offering in upcoming months.

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Q&A Session

In terms of existing customers, we launched our best-selling Matcha variety packs at over 800 Shopper Drug Mart and Pharma Prelocations and introduced four additional flavors including Matcha varieties at Sobe’s stores across Canada. In addition, we increased our store-in-store count by expanding within 40 neighbourly pharmacy locations last month. We also are adding 15 store-in-store concepts within the Rexall Pharmacy Group throughout December to raise DAVIDsTEA total of similar configurations to 382 locations in Canada. Finally, we have also appointed Adriana Germilli as Vice President of Marketing and Damon Sloane as Chief Digital Officer to further elevate our brand and optimize a frictionless customer experience. Adriana is a seasoned brand marketer with over 17 years of experience in strategic communications and branding, including a distinct expertise in international brand expansion.

She will be leading new product line, go to market strategies at DAVIDsTEA as well as the amplification and build of customer centric content for loyalty members. Damon has more than 18 years of experience growing companies through digital transformation and omni-channel marketing initiatives, including retail, wholesale, and e-commerce. His focus on data-driven decision-making represents a key strategic asset for companies adopting digital-first growth strategies. Damon will be spearheading digital innovation at DAVIDsTEA, while acting as an agent of change throughout the organization to better serve our online customers. All these value creation activities are designed to accelerate revenue growth at DAVIDsTEA. In closing, we are grateful to our shareholders for their continued support on our journey to profitability.

I will now turn the webcast over to Frank Zitella, President, as well as Chief Financial and Chief Operating Officer of DAVIDsTEA.

Frank Zitella: Thank you, Sarah, and good morning, everyone. As previously mentioned, third quarter sales were negatively impacted by the current economic landscape and the ill effects of order fulfillment issues experienced last year. After an exhaustive search for capable and proven third parties to fulfill online consumer orders, in June we concluded that no other organization could match the entrepreneurial spirit and innovation required to ensure we improve the overall brand experience for our consumers and our own staff. And we internalized delivery services with the first order going out in August. We are pleased to report we have delivered Black Friday orders and we are now back to regular order processing. Turning to financial results.

Total sales decreased 24.9% year-over-year to $12.1 million in the third quarter of 2023. In Canada, which represented 87% of total revenues, sales were down $2.3 million, while US sales declined by $1.7 million compared to the same period in 2022. Online sales dropped $4.6 million in the third quarter, or 45.1% year-over-year, as we continue to observe a leveling out pandemic-driven online sales and dampened consumer demand following order fulfillment issues experienced last year. Online sales represented 46% of total revenues compared to 63% in the third quarter of 2022. Wholesale channel sales increased 56.3% to $2.5 million in the third quarter of 2023, representing 21% of total revenues compared to 10% a year ago. For their part, brick and mortar stores reported a 9.1% sales decline to $4 million in the third quarter, accounting for a 33% of total revenues compared to 27% in the same period last year.

Gross profit as a percentage of sales improved to 37.9% in the third quarter of 2023, from 35.1% in the third quarter of 2022, despite a lower revenue level and primarily due to lower cost per unit to fulfill online orders as a result of internalizing fulfillment. Selling general and administrative expenses, meanwhile, decreased by $2 million or 19.3% year-over-year to $8.3 million in the third quarter of 2023, mainly driven by an ongoing cost containment plan. Consequently, we benefited from the elimination of software implementation expenses, reduction in staff compensation costs, lower impairment of property, equipment, and right of use assets, along with reduced professional consulting fees. These factors were partially offset by costs relating to internalizing fulfillment services and ongoing IT maintenance.

Clearly, we are encouraged by the positive impact of our cost containment plan. Based on a $7 million reduction in SG&A expenses year to date, we remain on track to achieve our cost cutting target of between $8 million to $10 million for the fiscal year. Turning to the bottom line, net losses amounted to $3.7 million in Q3 of 2023 compared to $4.7 million in the third quarter of 2022. Adjusted EBITDA for the quarter was negative $2.5 million compared to negative $2 million for Q3 of last year. The decrease in adjusted EBITDA reflects the impact of lower sales and gross profit, partially offset by reduced SG&A expenses. Finally, we closed the third quarter with cash of $11.7 million, working capital of $20.1 million, and no interest-bearing debt.

As a result, we are well positioned to execute the multiple go-to-market initiatives that Sarah outlined earlier and ultimately increase revenue and profitability. This concludes our review of the third quarter. We encourage investors wishing to obtain additional color about DAVIDsTEA to contact Investor Relations, who will coordinate access to management. On behalf of the entire DAVIDsTEA team, thank you for joining us today.

End of Q&A: