DAVIDsTEA Inc. (DTEAF) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to DAVIDsTEA's Fourth Quarter and Fiscal Year 2020 Earnings Webcast. Today's webcast is being recorded and is in 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 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 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 those 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-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 Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

Thank you, operator. Hello, everyone. We are pleased with our results for the fourth quarter and full year 2020, with the third consecutive quarter of positive adjusted EBITDA and a year in which we have made significant progress towards becoming a more agile, digital-first organization with a sustainable and exciting future. Our ability to pivot successfully and the extent of our ongoing transformation is best exemplified by the growth in the proportion of our sales now derived via online. Online represented only 22% of total sales in 2019 and in 2020 represented over 80%. This reflects both the closure of the vast majority of our store network, the growth in online sales. Our retail footprint now consists of 18 strategically located mall-based stores through Canada, part of our omnichannel strategy and where we continue to reimagine the in-store consumer. In the past year, our wholesale sales channel also performed well despite many COVID-19-related restrictions impacting retailers. This sales channel increases convenience for existing customers but also enables us to attract new customers who can discover a selection of our sachet tea Blood. Presence on store shelves helps drive greater brand awareness and generates traffic to our website at our own retail stores where customers can then experience our full range of products, including loose leaf tea and package gifts. Our 3 sales channels are now well balanced and complementary within our omnichannel strategy and reflect the base for our strategic vision for the future of DAVIDsTEA. In our restructuring efforts, one of the key objectives was to create a more agile organization that can adapt and react quickly to new trends and evolving consumer preferences. Today, DAVIDsTEA is better able to align its business strategies with evolving need. For example, with restrictions in place across Canada, we quickly introduced and implemented new fulfillment capabilities, enabling our customers to have curbside pickup and buy online and pick up in store option at the very start of the pandemic. At DAVIDsTEA, we are devoted to finding new ways for our customers to explore, discover and taste the teas they love. Tea excellence, innovation and continuous product development to lead the market remain key focus areas in order to retain our loyal customers while attracting new tea consumers. As previously announced, we launched our first ever seasonal subscription box branded as the Tea Tasting Club. The box and subscription model provides tea lovers with a wide variety of seasonal newness and exclusive teas. We have received very positive feedback from our members. Some appreciated access to the teas they had never tried before, while others appreciated the wide selection of teas. All in all, consumer feedback has been very positive. The Tea Tasting Club creates a higher level of engagement with our members and builds a sense of community that we want to continue nurturing and which has been a hallmark of the DAVIDsTEA brand since its founding. We will continue to leverage our online platform and tea community to drive our innovations and connect in a more virtually social, personalized and responsive manner for our customers. With a wide range of tees from traditional garden to cup, organic wellness blends, the fruity iced tea, our new online capabilities provide the ideal venue to help our customers better navigate our expansive offering. In closing, in a very challenging environment, our team has worked incredibly hard, and I'm very proud of what we have achieved so far. That said, we remain cognizant of the ongoing challenges involved in the transformation that is underway but has not yet been completed. More work needs to be done, and I wish to sincerely thank all the members of our team for their dedication and passion for DAVIDsTEA as we continue on this journey. We remain committed to a sustainable future for our beloved brand and tea community. I will now turn the call over to Frank to discuss our financial results in more detail. Thank you.

Thank you, Sarah, and hello, everyone. Our results today reflect the significant progress against our strategy aimed at stabilizing our business from historical unfavorable trend line, doubling down on e-tailing and wholesale and taking the necessary steps to restructure DAVIDsTEA. As you know, this transformation has been undertaken in an unprecedented environment and on an accelerated time line. In the past year, we've become a much leaner organization and migrated the majority of our sales to online while focusing on delivering best-in-class customer service through our omnichannel strategy. This transformation, combined with our ongoing restructuring activities, led to a more focused business with a significantly reduced retail footprint, which complements our growing online and wholesale businesses. Turning our attention to our Q4 results. Sales decreased 45.3% year-over-year to $40.2 million as only 18 Canadian stores were in operation in the fourth quarter. Sales from e-commerce and wholesale channels increased by $17.1 million or 95.9% to $35 million. The continued conversion of sales to online drove the share of e-commerce and wholesale to 87.1% of sales in Q4 compared to 84.3% in the previous quarter and to 24.3% in the same quarter a year ago. Gross profit was $15.6 million, down 60% from the prior year due primarily to lower sales. As a percentage of sales, gross profit declined to 38.9% for the quarter from 53.1% last year. As we pursue our digital-first strategy, the cost of product delivery and distribution impacting gross profit will compare unfavorably to prior quarters that were predominantly focused on retail sales distribution. In the quarter, delivery and distribution costs increased by $1.7 million over last year. However, we expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a brick-and-mortar environment that have been historically included as part of SG&A. For the quarter, SG&A decreased by $34.5 million or by 76.5% to $10.6 million, while adjusted SG&A declined by $22.7 million. The decrease is explained by the reduction of our retail footprint down to just 18 Canadian locations, resulting in a $12.9 million reduction in wages, salaries and employee benefits, as well as a $3.5 million reduction in amortization expense due to a lower right-of-use asset value. As a percentage of sales, adjusted SG&A decreased to 28.9% from 46.7%. The solid momentum in our e-commerce and wholesale channels, combined with the benefits of our restructuring process, generated positive EBITDA for a third consecutive quarter. In Q4, adjusted EBITDA reached $5.4 million. Year-over-year, adjusted EBITDA decreased by $4.6 million due to a decline in gross profit, partially offset by the reduction in SG&A. For fiscal 2020, total sales decreased by 38.1% to $121.7 million from $196.5 million in the previous year. Sales from our e-commerce and wholesale channels increased $54.9 million or by 130% to $97.2 million from $42.3 million in the prior year as we shifted to a digital-first strategy to address evolving consumer preferences and the impact the pandemic has had on accelerating these trends. For fiscal 2020, e-commerce and wholesale sales represented 80% of total sales as opposed to 22% a year ago. Adjusted EBITDA for 2020 amounted to $9.7 million compared to $11.4 million in the prior year. We are pleased with the transition towards profitable revenue growth, notwithstanding the year-over-year total revenue decline. Adjusted EBITDA decreased $1.7 million due to the decline in gross profit, partially offset by a reduction in SG&A. As at January 30, 2021, we had a cash position of $30.2 million, down from $46.4 million a year ago. In conclusion, while much work remains to be done, we're excited about the future and look forward to returning to a path to sustainable, long-term profitability after an incredibly challenging year, which forced us to accelerate our transformation journey. Our formal restructuring process under CCAA continues to follow its course and was recently extended until the beginning of June. Negotiations and an agreement with creditors remain the critical next step for DAVIDsTEA as we will continue to update you and the market as we complete this process in the near term. This concludes our remarks. Thank you for joining us today. Have a great day.