DAVIDsTEA Inc. (DTEAF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA's Third Quarter Fiscal Year 2020 Earnings Webcast. Today's webcast 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 June 16, 2020, 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.

Thank you, operator. Good afternoon, everyone, and thank you all for joining us as we will review our results for the third quarter of fiscal 2020 and provide an update on the business. I am pleased with our financial results. Our digital-first strategy is resonating with consumers as we head into the busiest season and pave a path towards sustainable profitability. To support the evolution of our strategy and as part of our succession plan, Sarah Segal and Frank Zitella have been appointed CEO and President, respectively. Sarah has been involved with DAVIDsTEA since its founding and has held various roles since 2010, most recently as Chief Brand Officer. Frank joined us as CFO 2 years ago and quickly became a key member of the management team, subsequently taking on the COO responsibilities. Both have demonstrated strong leadership attributes, have the requisite experience and a capacity to quickly adapt and confidently address the headwinds we are facing as we transform the company into a leaner, more resilient organization. I want to highlight their contribution to our strategic vision and for successfully leading and executing our ongoing transformation into a digital-first organization as we adapt to evolving consumer behavior. On behalf of the Board, I congratulate them on their appointment. We are no doubt embarking on a new and very exciting chapter for DAVIDsTEA. For my part, I will remain Chairman of the Board, and as required, will continue to support Sarah and Frank as they pursue the company's transformation to the benefit of all shareholders. And so joining me today is Sarah Segal, DAVIDsTEA Chief Executive Officer and Chief Brand Officer; and Frank Zitella, President and Chief Operating Officer. I will now turn the call over to Sarah. Sarah, over to you.

Thank you, Hersch, and good afternoon, everyone. I'd like to take a moment to thank the Board for the opportunity to lead such an incredible company. I'm ready for the challenges ahead, and I believe that we have the right team in place to navigate the future. The COVID-19 pandemic has created incredible pressure on retailers worldwide to adapt. By focusing on our strength in a product that remains in demand, we were able to focus our attention to our online customers. Our plan to stabilize the company from unfavorable headwinds and double down on e-commerce and wholesale as we adapted our support organization was significantly accelerated by the pandemic. The ongoing CCAA process, a difficult but necessary avenue, has made it possible for DAVIDsTEA to execute its strategy in a matter of months, not years. I have no doubt that when we look back a few years from now, 2020 will stand as a critical turning point for DAVIDsTEA with our digital-first strategy becoming front and center. The habits of Canadian consumers have been altered by COVID-19. In-home tea consumption has become the norm, and our brand and selection of teas has provided a moment of comfort and relaxation for many in these uncertain times. As part of our digital-first strategy and to further cement our position with new and existing customers, we are making a significant push in digital-first innovation. We are pursuing our quest to enhance and personalize the online experience while finding new ways for our customers to explore, discover and taste the teas they love. Our brand was forged over the years by the individual emotional connections made with consumers. To replicate this valued and personalized DAVIDsTEA in-store experience, in August, we launched a virtual tea guide service, an online chat functionality that enables the same human connection traditionally experienced in store. Customers have the ability to talk to a passionate and acknowledgeable tea guide as they navigate our new and existing tea collections and tea accessories. This completely new experience allows our consumers to connect and interact with our tea experts to help determine the best tea blends and teas for their specific tastes. Beyond taste, many customers are now looking for specific wellness benefits from our teas. As a result of this ongoing demand, we have added many organic and innovative wellness blends with a focus on detox, sleep and relaxing benefits. Our virtual tea guides educate and help consumers explore our various wellness teas within our online educational material. We are also very pleased to launch our first-ever seasonal subscription box, providing tea lovers with a wide variety of seasonal newness and exclusive teas. We call this subscription model the tea tasting club. It's a beautiful box with up to 8 tea blends that will be delivered 4 times a year, and customers will be able to buy it or gift it. The subscription will provide access to curated educational tea content into an exclusive members-only Facebook community. The intention of these innovations, including the subscription box and the virtual tea guide, is to recreate part of the in-store discovery and interactive sampling experience DAVIDsTEA is best known for. Supported by continued innovation, we will leverage our online platforms and tea community to connect in a more human, personalized and responsive manner with our customers. In conclusion, I look forward to continuing to work closely with our talented team as we build a stronger and more focused DAVIDsTEA centered on growing both our online and wholesale channels. We are all working extremely hard to solidify our position as a digital-first, industry-leading provider of on-trend, high-quality, loose-leaf tea, tea accessories and gifts. I will now pass the call to Frank.

Thank you, Sarah, and good afternoon, everyone. First, the CCAA proceedings continue to follow their course. Today, the Québec Superior Court extended the stay of proceedings currently in effect until March 19, 2021. We are focused on preparing and presenting a plan of arrangement to our creditors. Our goal is to exit CCAA by the end of the first quarter of calendar 2021, and we will continue to provide updates as appropriate. We look forward to completing this process so that DAVIDsTEA can move forward with its clear vision and strategy and that we're able to focus all of our attention and energy on running the business. Looking now at our Q3 results. We are pleased to report that we made further progress in implementing our strategy, supported by solid results for the quarter. It's important to highlight that adjusted EBITDA was positive for a second consecutive quarter and reached $3.3 million. This reflects solid momentum in our e-commerce and wholesale channels, combined with the benefits of our restructuring activities. With 18 Canadian stores in operation for part of the third quarter, sales decreased 33.6% to $26.2 million from $39.5 million in the prior year quarter. For the same period, e-commerce and wholesale channels recorded impressive growth of 145.5% and represented 84.3% of our total sales compared to 22.8% last year. Our Canadian stores reopened on August 21, 2020, and accounted for $4.1 million in sales. For the quarter, gross profit was $10.8 million, down 49.3% from the prior year, primarily due to a decline in sales. As a percentage of sales, gross profit declined to 41.3% for the quarter from 54.1% last year. As we pursue our digital-first strategy, the cost of product delivery and distribution impacting the gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. Underlining this, delivery and distribution costs increased by $4.2 million over last year. However, these incremental costs are more than offset by lower selling expenses related to stores and are accounted for in our SG&A. For the quarter, SG&A decreased by $23.6 million or 76.8% to $7.1 million, while adjusted SG&A decreased by $20.1 million. The decrease is explained by the closure of all stores, except for 18 Canadian outlets, and the corresponding impact on wages, salaries and employee benefits amounting to $12.2 million as well as a $3.8 million reduction in amortization expense due to lower right-of-use asset value. As a percentage of sales, adjusted SG&A decreased to 32.7% from 72.5% due to lower selling expenses related to our store closures. Third quarter EBITDA was $15.3 million compared to a negative $4.5 million last year. Adjusted EBITDA, which excludes the impact of stock-based compensation expense, the Canadian government wage subsidy and the impairment of property and equipment and right-of-use assets, amounted to $3.3 million compared to negative $2.2 million last year. As at October 31, 2020, we had a cash position of $21.9 million. Due to historically higher Q4 sales and to mitigate any potential supply chain issues in the context of a pandemic, we are maintaining a higher-than-normal inventory level, which impacted working capital. Going forward, we are laser-focused on executing against our transformation strategy to stabilize, strengthen and restructure DAVIDsTEA in a very challenging environment on an accelerated time line. Let me take a few minutes to review our progress across these 3 pillars. Regarding our efforts to stabilize the business from unfavorable headwinds, we remain focused on improving the digital customer experience and on sales delivery excellence. Our dedicated and passionate team is focused on assuring to deliver against customer promises daily. Among other things, we built up inventory levels to ensure our customers get the teas and accessories they want when they want them. Moving on to our second pillar. We are fully committed to our digital-first strategy. We're delighted over the recent launch of our subscription offering, which will allow consumers to not only purchase for themselves, but also gift the subscription to friends and families. We've launched our virtual tea guide experience and improved the navigation and messaging of our online store. Complementing our digital-first focus, we are committed to expanding our wholesale presence and continue to strengthen DAVIDsTEA to create a more sustainable future. The pandemic has accelerated our transformation and the push towards continued innovation has become an even more important part of our DNA. Sarah touched on some of our recent and exciting innovations and there is more to come. The whole team is quite excited about this. Finally, our restructuring efforts have been focused on optimizing our real estate footprint and maintaining a select and profitable brick-and-mortar presence in support of our digital-first strategy. The performance of our recently reopened stores have been in line with expectations, and we've rightsized our organization to reflect our new strategy. And today, I am proud to say DAVIDsTEA, with its entrepreneurial culture, continues to quickly react and innovate to proactively address changing market trends and consumer behavior. In closing, we have made substantial progress to stabilize, strengthen and restructure DAVIDsTEA. We can now look to our future with confidence and optimism. This has been made possible by the exceptional dedication, commitment and hard work of our team. They fully deserve our sincere thanks and gratitude. Operator, this concludes our remarks. We want to wish everyone happy holidays, and thank you for joining us today.

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