DAVIDsTEA Inc. (DTEAF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our Annual General Meeting. We'll begin the formal part of the session. Please keep your phones on silent. And I'll now turn it over to Pat De Marco.

Welcome to the DAVIDsTEA's 2022 Annual Meeting. The meeting will come to order. I am Pat De Marco, Lead Director of DAVIDsTEA. In light of public health concerns, DAVIDsTEA asks all shareholders to stay home and to vote by proxy prior to the meeting, which many of you have done, and to participate in this meeting by audio webcast. I know DAVIDsTEA shareholders appreciate why we are doing things this way, and we thank you for your understanding. We will now start the meeting. With the consent of the meeting, I will act as Chairman. Also with the consent of the meeting, I will ask Neil Wiener of Fasken to act as secretary of the meeting; and [ Philip Santos ] and Mathias Jalali of TSX Trust Company to active scrutineers to report on the shareholders present in person and the number of shares represented in person or by proxy at this meeting to compute the votes on any ballots taken at this meeting and to report thereon to me as Chairman. We will first conduct the official business of this meeting, after which Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA, will provide an update on the company. There are several routine matters to be dealt with at this meeting. To expedite matters, I have arranged for certain persons to make and second the various motions. The election of directors will be by ballot. Unless a ballot is requested by a registered shareholder or proxy holder, all other votes at this meeting will be conducted by voice vote. Based on proxy forms and voting information form submitted prior to the meeting, I can report that all matters to be considered today will be adopted. I now ask scrutineers to present their report, and I direct that the report be annexed to the meetings -- sorry, excuse me, to the minutes of this meeting as scheduled.

Good morning, Mr. Chairman. We, the undersigned scrutineers from TSX Trust Company, hereby report that there are at least 68 shareholders and/or proxy holders present at this meeting, representing in person or by proxy, 16,101,783 common shares, being 60.89% of the total 26,444,744 common shares issued and outstanding of DAVIDsTEA.

Thank you. The scrutineers' report shows a quorum to be present. I declare the meeting to be regularly constituted. The notice calling this meeting, together with the proxy form, management information circular and related documents, have been mailed or made available to the company's shareholders and mailed to the company's auditor. With the consent of the meeting, we will dispense with the reading of the notice and with the reading of the minutes of the last meeting of shareholders held on June 17, 2021, and I direct that the minutes be taken as read and approved and that they be signed as being correct. The first item of business is the presentation of the annual report and financial statements and the auditor's report thereon. I now present to the meeting the annual report and consolidated financial statements of the company for the fiscal year ended January 29, 2022, and the auditor's report. Copies of such documents have been made available to shareholders. We will now proceed with the election of directors. I declare the meeting open for nominations and ask Frank Zitella to present his nominations.

I nominate Jane Segal, Sarah Segal, Susan Burkman, Pat De Marco and Peter Robinson as directors of the company to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed.

Are there any further nominations? I declare the nominations closed. As DAVIDsTEA has a majority voting policy for the election of directors, we will vote by ballot in order for the votes to be accurately compiled. Jane Silverstone Segal has already signed and submitted a ballot in her capacity as proxy holder as did other proxy holders. As all ballots have been submitted and tabulated, I now call upon the scrutineers to present the results of the vote on the election of directors.

Mr. Chairman, we report that each of the 5 nominees has received a vote of at least 94.21% of all shares voted or withheld from voting.

Thank you. Based on those results, I declare that the 5 nominees have been elected as directors of DAVIDsTEA Inc. to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed. DAVIDsTEA will issue a press release announcing the results and file a detailed report of voting results on SEDAR shortly after this meeting. The next item of business is the appointment of an auditor. I ask Frank Zitella to present his motion.

Be it resolved that Ernst & Young, Chartered Professional Accountants, be and they are hereby appointed auditor of the company to hold office until the next Annual Meeting of Shareholders at such remuneration as may be fixed by the directors, and the directors be and they are hereby authorized to fix such remuneration.

Chairman, I'm Neil Wiener, a proxy holder. I second the motion.

All those in favor, please say aye.

Aye.

Aye.

All those against, please say no. I declare the motion carried and that Ernst & Young, Chartered Professional Accountants, have been duly appointed auditor of the company. We've reached the end of the official business. We'll now turn to an update from Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

Thank you. Now that the formal part of the annual meeting is over, let's move on to our management presentation. If you're following along, the presentation was posted this morning on our website under Investor Relations. Please be advised that the customary safe harbor language related to forward-looking statements applies today. This presentation includes forward-looking statements about our expectations for the future performance of our business. 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 on file with the Securities and Exchange Commission with the Autorité des marchés financiers and on Investor Relations section of DAVIDsTEA's website. The forward-looking statements in this discussion speak only as of today's date, and we undergo -- and we undertake no obligation to update or revise any of these statements. If any non-IFRS financial measure is used in this presentation, a reconciliation to the most directly comparable IFRS financial measure will be detailed in our Form 10-K and Form 10-Q. As a reminder, all dollar amounts referred to are in Canadian dollars, unless otherwise indicated. All right. Let's turn to Slide 3 of the presentation. [Foreign Language] Welcome. As we look -- as we reflect back on our year that was and standing here today, we are very well positioned to achieve our mission of making teas fun and accessible to all, and in doing so, create shareholder value for all. The company emerged from a formal restructuring process, a smaller, more focused and more invigorated organization with a renewed sense of purpose and confidence as we continue building a high-performing, future-ready winning culture driven by purpose. We were founded on a spirit of innovation, embracing unconventional ideas with a desire to create a North American experience around tea. We removed the boundaries that kept tea in the covers of only those in the know. We experimented and took risks, attracted passionate employees. And as customers became friends, we embrace our brand purpose, a desire to share positivity with all and use our platform to do good for business and for the lives of everyone we interact with. Our actions are driven by the desire to be the world's most innovative tea company, one that inspires greater wellness, sustainability through ethical and sustainable tea sourcing, compostable and regenerative packaging and caring for our communities. Our digital-first strategy is built to respond to consumer demand, meeting consumers where they are and driving loyalty with the ability to scale the business without borders. We are focused on building this winning culture that is fueled by delighting consumers and driven to overcome challenging operational and market conditions. Culture needs to evolve. And we are proud that we continue to be focused on revenue growth, attaining profitability, positive cash flow with an unwavering sense of passion, purpose and commitment to our customers and all our stakeholders. Since our inception in 2008, our vision has always been to become the world's most innovative tea company, inspiring wellness and sustainability. We believe we have achieved key milestones with our signature blends, innovative accessories and new ways of sharing information. However, in a changing world, it's clear -- it's a clear signal that we want to continue to reinvigorate the tea industry with new ways to connect, share knowledge and come up with the best products across all categories. Our mission to make fun and tea accessible to all helps create those positive connections we need in our lives, especially today, making tea culture one of life's enjoyable and acceptable pleasures. Our aim is to make tea drinking a fun experience for everybody and a way to improve connecting, socializing and sharing a nonalcoholic option for those seeking it. Now let's review our fiscal 2021 results on Slide #5. In 2021, we made significant progress against our value creation initiatives. We adapted to a change in consumer habits related to the COVID-19 pandemic by focusing on our digital platform and growing our other sales channels. We emerged from a formal restructuring process as a more efficient and more invigorated organization. And we managed through surging inflationary pressure, supply chain disruptions and labor constraints by developing workaround plans. Given this challenging environment, we still delivered revenue of $104.1 million and adjusted EBITDA of $5.3 million. Fiscal 2021 marked our second consecutive year of positive adjusted EBITDA. Our intent is to accelerate our profitable and sustainable growth strategy, which we'll address later in this presentation. Turning to our key achievements in 2021 on Slide 6. First, we exited CCAA in a far better position both structurally and financially. At the end of fiscal 2021, we had a healthy cash position of $25.1 million and working capital of $43.4 million to support our growth strategy. Second, we accelerated our transition towards becoming a digital-first omnichannel tea supplier by making critical investments to our front-end technology infrastructure. Technology is essential to our transformation. However, it is not sufficient. We're focused on and continue our journey of being a people-first company. Transformations like ours don't happen without a deep understanding and appreciation of the impact culture plays in the overall ability to execute positive changes. We continue working on our entrepreneurial culture every day as we believe it is a significant differentiator in our ability to execute against our value creation plan. Third, [indiscernible] Marketing's WOW Digital Index highlighted DAVIDsTEA's enhanced digital presence in 2021 by ranking the company's fourth overall for best online consumer experience in Canada. We're providing tea levers with the same high-quality products and service but through more cost-efficient and scalable distribution channels. And we are never satisfied. We are continually striving, improving and innovating the digital experience in a fast-changing e-commerce environment. Fourth, we consolidated our fulfillment operations into one world-class distribution center. And along with our 3PL partner, we're making the necessary investments to delight consumers with the best delivery experience. We expect this new facility will be fully commissioned in 2022. And along with SQF certification and becoming an Amazon certified facility in Canada, we will significantly improve our ability to serve all consumers and businesses in a timely and frictionless manner. Finally, we were officially recognized as a great place to work after a thorough independent analysis conducted by the Great Place to Work Institute. We were also awarded a great place to work run by women. Given our transformative journey and the ill effects of the pandemic, this certification is a testament to the incredible team who takes part in their work much to the delight of tea customers everywhere. In addition, we introduced the Diversity and Inclusion Committee in 2021 to ensure that employees can thrive in a work environment regardless of gender, ethnicity, religion or sexual orientation. Following many internal initiatives that already distinguished DAVIDsTEA as an employer for all, we have continued to invest in our employees, believing that their health and well-being are directly linked to the company's value system and vital to delivering superior service to our customers. Moving on to our Board of Directors on Slide 7. I'd like to outline the strides that DAVIDsTEA has taken to elevate the role of corporate governance such that it helps differentiate our ability to overcome the challenges ahead. Our company's significant shareholder, Rainy Day Investments, represented by the Segal family with representation on our Board provides our strategic vision as founders with a mastery of brand management, consumer retail supported by our independent directors. Our directors have significant experience in consumer retail and governance. They have the necessary prerequisites to help navigate the future of the company and build shareholder value for all. In addition, 60% of our Board members are women and 40% are deemed financial experts. As a result, we believe that shareholders' interests are well served at DAVIDsTEA and aligned with those of executive management. Next, I'd like to highlight the transformative initiatives that we implemented in the past couple of years to transition from a fast growth business model, mitigate the COVID-19 pandemic and lay the foundation for sustainable and ambitious future growth. First, we focus on significant and necessary investments in technology. The objective is to recreate a sensory experience for consumers in digital environment via artificial intelligence, or AI, as well as improved UX across all platforms and touch points. Early progress has been encouraging with e-commerce and wholesale sales, reaching 80% of total sales in 2021 compared to 22% during prepandemic times in 2019. Obviously, total sales decreased from 2 years ago, but we have 18 flagship stores today versus 230 in 2019. We need time to gradually and sustainably convert existing customers onto our digital platform and penetrate new markets and customer segments. Second, we expanded our wholesale footprint in Canada to 3,500 locations with big-box stores, grocery chains and pharmacies. We supplemented this initiative with store-in-store concepts on more than 300 doors, creating a model that can be scaled in different geographies. Third, as previously mentioned, we leveraged a 3PL partner to enable frictionless customer service and improve profitability. As a result, we're offering the same great products, quality and service to customers but through different distribution channels. So on Slide 9, turning to our path towards value creation. This represents our organizational blueprint for delivering sustained long-term profitable growth. We intend to build a path towards value creation by focusing on demand creation, product innovation, supported by a winning entrepreneurial culture and operational excellence. In tandem with value creation, key growth initiatives for 2022 are listed on Slide 10. They include entering the U.S. wholesale market by year-end to support our existing online sales, beating big-box demand in Canada, increasing Amazon assortment, marketing and geographic reach, fine-tuning messaging to acquire new digital customers. Medium-term growth initiatives consist of introducing our ready-to-drink offering, expanding internationally and entering the white label packaging market. And directly linked to these growth initiatives, we have established sales and profitability goals by which our progress can be measured. We're targeting low double-digit sales growth annually until the end of 2025. Our adjusted EBITDA margin, meanwhile, should expand to approximately 10% during this period. It should be noted these are conservative targets, which could be raised in upcoming years depending on customer traction and the macroeconomic environment. On the next slide -- moving on to our premium product offering on Slide 12 and 13. It is essentially that we have an assortment of over 100 world-class signature blends, caustic and organic tea accessories as well as beverages and food sold at our retail stores. As you would expect, 87% of our sales come from signature blends of loose-leaf teas, novelty tea gifts and packaged teas in 2021. Another 13% originated from tea accessories like infusers and mugs. This sales breakdown could potentially change a little bit as the pandemic recedes and as customer traffic increases at our brick-and-mortar stores, especially for beverages. In terms of our go-to-market strategy, I don't want to repeat what I previously said, but I had said I want to highlight a few important items. The plan is to leverage our growing customer base and expand our borderless purchasing environment by recreating a sensory store experience online, fully complemented by virtual tea bags. We're also relying on our broad brand name recognition to support our digital shift while building awareness through new channels and activation. On the wholesale front, we intend to replicate our success story in Canada with the rollout in the U.S. by the end of 2022. It will be a gradual implementation with a focus on quality of execution. This represents a high-volume play for DAVIDsTEA, so we must be prepared to meet big-box demand. Finally, we intend to strengthen our 18 flagship stores in Canada, a positive store experience after all creates a spillover effect on online sales and allows a different way to explore our teas. We will also supplement our stores with seasonal pop-up booths in strategic locations to heighten the visibility of our brand. Turning to the specialty tea market on Slide 15. The North American segment that we address is estimated to be at $4.5 billion and growing roughly 5% year-over-year. We're witnessing strong demand for herbal and loose-leaf black tea blends among younger demographic group as consumers increasingly seek healthier alternatives to fruit juices and soft drinks. It should also be noted that specialty tea market is highly fragmented with plenty of headroom for market share gains. So it's a matter of executing our strategy and serving this market. Moving on to the competitive advantages we see. DAVIDsTEA differentiates itself through its innovative offerings designed by tea experts for tea lovers. Generic tea bags and blends are widely available within the industry, but the high-quality, loose-leaf black tea, green tea, matcha and herbal [ true blend ] prepared by DAVIDsTEA are what sets us apart. The breadth and depth of our premium tea blends remains unchanged and unmatched, and our brand has a broad demographic appeal. So there are critical advantages playing in our favor. Last but not least, we offer a distinct retail experience both online and in-store that is focused on delighting our customers and facilitating access to a wide range of teas so consumers can find what they're looking for. Obviously, DAVIDsTEA is not immune to global headwinds impacting the tea industry. Inflationary pressure is compelling us to focus on the areas of the business that we can control, while supply chain issues may affect the availability and timing of our products. Labor shortages and rising salaries are also placing a further strain on the industry. But the good news is that the pandemic is expected to subside in 2022, and our inventory has helped us bridge the gap during this time. Turning to our Q1 2022 financial results, which were released yesterday. We reported revenue of $20.4 million, down 12.1% year-over-year. Sales from e-commerce and wholesale channels, which account for the majority of our revenue, decreased from last year's pandemic-fueled surge of online sales to serving consumers through our omnichannel capabilities. Brick-and-mortar sales, meanwhile, were up year-over-year. And looking at profitability in the first quarter of 2022, IFRS net loss and adjusted EBITDA totaled minus $2 million and $0.1 million, respectively. Despite industry-wide headwinds in the first quarter, we firmly believe that we're on the right path to value creation with our digital-first growth strategy. We encourage you to evaluate our progress at year-end, not after a single quarter marked by short-term industry-wide challenges in which many adjustments had to be implemented for long-term gains. Finally, let's conclude with our key takeaways. We reported solid fiscal 2021 results with a plan to deliver sustained profitable growth. We're accelerating our transition towards becoming a digital-first omnichannel tea supplier supported by wholesale partners and flagship retail stores. We outlined a clear path to value creation for the upcoming years driven by demand creation, product innovation, enterprise culture and operational excellence. We're preparing wholesale expansion into the U.S. by replicating our success in Canada. To validate our growth strategy, we're targeting low double-digit sales growth annually until the end of 2025, while our adjusted EBITDA margin should expand to 10% during the same period. And we have a disciplined management -- disciplined and talented management team committed to delivering profitable growth. This concludes our management presentation at the Annual Meeting of Shareholders. On behalf of the entire DAVIDsTEA team, thank you for joining us today and for your ongoing support and collaboration. Cheers.

All right. We'll ask Frank Zitella to present his motion.

I move the meeting be terminated.

Mr. Chairman, I second the motion.

All those in favor, please say aye.

Aye.

Aye.

All those against, please say no. I declare the motions carried and that this meeting is terminated. Thank you for your support of DAVIDsTEA.