DAVIDsTEA Inc. (DTEAF) Earnings Call Transcript & Summary

Welcome to DAVIDsTEA's 2023 Annual Meeting. The meeting will come to order. I am Pat De Marco, Lead Director of DAVIDsTEA. In light of ongoing public health concerns, DAVIDsTEA asked 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 Mathias Jalali, of TSX Trust Company, to act as Scrutineer, 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 ballot 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 a voice vote. Based on proxy forms and voting information forms submitted prior to the meeting, I can report that all matters to be considered today will be adopted. I now ask the Scrutineer to present his report, and I direct that the report be annexed to the meeting -- sorry, to the minutes of this meeting as a schedule. Mathias, are you on the line? Neil, are you on the line? Mathias? We'll have to...

Want to call back then?

Yes, why don't we do that? Okay. So we seem to be having some technical difficulties. What we'll do is switch over to Sarah's presentation after -- we will come back and deal with the other portions of the meeting. Sarah?

Yes. Can everyone on the line hear me? Yes? I'm going to stand over here. I'll start on the first slide. Before I begin, I need to direct you to some customary disclaimer regarding forward-looking statements. On Slide 2, please note that the forward-looking statements in our presentation today speaks only as of today's date, and undertake no obligation to update or revise any of these statements. For the non-IFRS financial measures, it's in the presentation, a reconciliation to the most directly comparable IFRS financial measures available in our annual and first quarter MD&A available on our website. As a reminder, all dollar amounts referred to are in Canadian dollars unless otherwise indicated. As to a more fun part, our vision, become the world's most innovative tea company, inspiring greater wellness and sustainability. This is something that's been with us for a while, so nothing new. We go to our next slide, our mission, to make tea fun and accessible to all. And what I want to say is this is our daily guidepost for choosing what we focus on, what we work on and a lens to guide our efforts. DAVIDsTEA is about creating those positive connections, which we all need in our lives while making tea drinking an experience for everybody. Given that we reported our fiscal 2022 year-end results back in April, we don't spend a lot of time reflecting back on them today. And as you can see on Slide 5, our revenue for the year was $83 million, which was down 20% from fiscal 2021. Our gross margin was 34.1%, while net loss and adjusted EBITDA amounted to $14.9 million and a negative $5 million, respectively. Sales and profitability in fiscal 2022 were impacted by inflationary pressures and higher interest rates, both of which impacted consumer demand and operational delays in fulfilling orders in the fourth quarter. As I will discuss later in this presentation, we implemented a cost containment plan in early February of this year to help mitigate against the unfavorable economic conditions. And as we announced this morning, we decided to take our fulfillment back in-house to better control the brand experience. So some operational highlights for our fiscal year 2022. I'm very proud to share these. We launched a great retail refresh and these innovative tea bars across -- well, starting with Galeries de la Capitale in Quebec City, which showcases a new beverage menu and a heightened interactive shopping experience. Unveiled a new individually wrapped and fully biodegradable tea sachets with compostable overwrap for the wholesale market with a focus on organic and best-selling flavors to reach even more consumers. We accelerated our wholesale channel expansion to 3,800 doors, including 300 store-in-store setup. Our brick-and-mortar sales were up almost 4% year-on-year. And subsequent to year-end, we voluntarily moved our stock listing to the TSX Venture Exchange, which is a better fit for our prominent Canadian address. Last November, DAVIDsTEA was also recognized as a Great Place to Work by the Great Place to Work Institute. And we continue to show leadership in sustainability and won an award for Indigenous Tea Partnership, which we're very proud of. And as a committed member of the Ethical Tea Partnership, we continue to participate in a global alliance of tea growers, retailers and producers. So looking at our key value creation and brand-building initiatives. This is showing our pillars, just to kind of look at what we are pursuing with vigor, including enhancing our omnichannel strategy, while continuing to expand our wholesale footprint, a renewed focus on stores, including strengthening our flagship model and continuing to drive innovation with a focus on premium products. Our next slide is just a deeper dive on the first pillar, which is focused on digital first growth. We are continuing our transformations with omnichannel organization. We have improved the customer experience online with some -- including some new product pages. And we have the release of our mobile apps coming up. So we're very excited about that. We are constantly improving our online experience with positive feedback from customers and tea bags. Order fulfillment is key to the overall customer experience. We are taking back control of fulfilling all orders ourselves, with our dedicated team. We're proud to take fulfillment back in-house to ensure our online customers receive the same seamless experience that they've come to expect from DAVIDsTEA. We are also working to constantly refine and build our Amazon strategy, assortment, marketing and reach. The next pillar is wholesale. I would like to discuss our expanding wholesale footprint. And over the past few years, we grew the number of grocery stores, pharmacy, big box across Canada. Now we look to take our learnings from the Canadian wholesale and apply it to a large untapped U.S. market. Back in April, we signed a distribution agreement with a large U.S. wholesale distributor of health and specialty that supplies national and regional grocery chains. We also announced that we will be launching 6 SKUs of flavorful organic and best-selling sachets at more than 400 grocery stores in the Northeastern United States this fall. And as we disclosed previously, we are taking a gradual step-by-step approach to the U.S. wholesale market. We expect it to take 2 to 3 years to penetrate the U.S. market in a significant way and realize high volume sales. Next, on stores. Our next key initiative is our focus on stores and strengthening our flagship model with the launch of new retail stores in -- new and renovated retail stores in Canada. In April, we opened our new and fully renovated store Les Galeries de la Capitale with a focus on a new tea bar offering and a heightened interactive shopping experience. Next, we'll be renovating our store at Sherway Gardens in Toronto. Our downtown Toronto Eaton Centre location just got a new tea bar and we are thrilled to continue to improve and innovate in the growing tea beverage space and will shortly expand to Ottawa, Vancouver and our other locations in Quebec. This is an overview of what we've been doing for a long time, but our loose-leaf tea innovation continue to drive sales [indiscernible], seasonal collections and garden to cup collections, we have a tea for everyone. With product lines like Cold Brew, superfood latte powders, we continue to expand what tea can be. We are proudly organic tea blenders, and we maintain our focus on constantly pushing the limits of what organic and sustainable tea can be by making tea blends organic whenever possible. Our organic assortment remains a strong driver of sales and customer satisfaction. Our organic commitment continues with expanded organic matcha line with our bestsellers transitioning to certified organic. DAVIDsTEA has always been a different kind of company, one with deep purpose and committed to making a positive impact on the world around us. Our commitment to corporate social responsibility guides our actions and decisions every day. At DAVIDsTEA, we view corporate responsibility as an ongoing journey, not a destination. The 4 pillars of our corporate social responsibility include: addressing risks at tea origins where we source tea, staying actively involved in committees to advance framework for responsible tea businesses, prioritizing water stewardship and inclusive local and global partnerships; and our committed membership to the Ethical Tea Partnership and Fair Trade Certified. Our drive for tea excellence continues in our sachets for increased convenience, accessibility and opportunities to reach more consumers with differentiated and exciting offering. Our focus at this time is to expand our reach to satisfy our existing customer base and acquire new tea drinkers by being accepted in many locations. Sachets continue to provide convenient opportunities in our channels, events, ways to access people at events and initiatives to make loose-leaf tea accessible to all. And we continue to track our record of innovation through an enhanced product offering that includes ready-to-drink beverages, TeaPop, superfood powder drinks, matcha lattes and lemonades. We believe these additions to our premium product offering will strengthen the appeal of our brand, attracting a broader segment of consumers to DAVIDsTEA while further entrenching our existing customers. Our cost containment plan, in summary, to cope with macroeconomic headwinds, we implemented several cost-cutting measures back in February, which is expected to have an annualized benefit of about $2 million. The plan will include a donation of $4 million of IT investments related to the launch of our ERP system in fiscal 2022 that will now be in maintenance mode in 2023. This, combined with tighter cash management is expected to result in total annual savings between $8 million to $10 million. And while our cost containment plan is already showing some traction, we expect it to take 12 to 18 months to realize this full benefit. Overall, our path to value creation is characterized by a strong emphasis on demand creation, product innovation, enterprise culture, operational excellence. By continually engaging customers through effective marketing strategies, introducing innovative and premium products, fostering an inclusive work culture and optimizing retail operations, we will continue to differentiate ourselves in the market and return to sustainable growth. We announced our first quarter 2023 results earlier this morning. Here we have a summary of our results. Our revenue for the quarter decreased 29.4% year-over-year to $14.3 million. Inflationary pressures and higher interest rates again impacted consumer sentiment across all channels and regions. Despite higher freight shipping and fulfillment costs, gross profit as a percentage of sales remained relatively stable at 40.3%. We are very encouraged by the strong impact of our cost containment plan on SG&A expenses in the quarter, which dropped 21.9% year-over-year. However, our adjusted EBITDA in Q1 was negative $0.9 million [indiscernible] and net loss remained flat year-over-year at $2 million. Importantly, we exited the quarter with a cash position of $19.6 million and no debt. In summary, while our recent financial results were impacted by challenging macroeconomic conditions, we have implemented a cost containment plan to reduce our operating cost base, and it is worth emphasizing that the plan is working. We are focused on executing a profitable and measured omnichannel growth strategy and look to gradually build up our U.S. wholesale penetration to reap the significant opportunity there. Finally, we have a disciplined and dedicated management team committed to delivering profitable growth. Before opening the discussion to take any questions, I wanted to take the opportunity to thank all of you. Everyone I'm looking at here, and for your hard work, your dedication, your entrepreneurial spirit, and for what you do every day. I'd like to -- we would like to thank our Board members for their guidance and support. And last, but certainly not least, I would like to thank you, our shareholders. Cheers.

So while the -- Sarah's presentation is fresh in everybody's mind. We'll open up the meeting for questions.

I'll read the questions and either answer them myself or ask Sarah or Frank to answer them. So we'll come back to the regulatory part of the meeting after we've gone through the question-and-answer portion. So the first question that I see is, I saw that you renovated the la Capitale store. Can you talk about your store networks going forward? Sarah, would you like to handle that?

So we have a plan to focus on flagship. We see post-pandemic that people are really interested in sensory experiences, and that's a really key part of our business is being able to smell and interact and find what you really are interested in because people are on different parts of their tea journey. We really love celebrating our tea guides who are so helpful in that process. And Les Galeries de la Capitale was a little bit of a new model for us because it allowed much more people not being behind a bar. So there is open tables where you could circulate and speak to people and an easier way to be able to bring down tins. And the shelves are really more open for discovery. So we try to integrate a lot of that feedback and things we've seen, for example, at the Apple Store, which we like how those tables help circulation. And really excitingly, we've always had a real pain point with a speed of beverage delivery. As a bulk tea provider, we sometimes had some congestion points in terms of providing tea beverages because just -- tea takes a long time to steep. But we did a lot of innovation when it came to our new tea menu that we launched at Galeries as well as a new tea bar setup. So it's something I encourage everyone to try, but it's featuring some really exciting matcha drinks, really beautiful sparkling TeaPops, which we've served in our stores for years but are back on the menu kind of in a reinvigorated way, and latte is really something that people have really come to us for. Now they're done in a faster, better, more consistent way. And also, it's just more clear where those beverages are prepared. So we're really ready to rock and roll when it comes to providing really cool tea beverages that we don't see anywhere else. So we hope to replicate that in a very easy to roll out way wherever we already have high beverage stores. That's what we're starting with. But we're excited about the feedback so far.

Thank you. So the next question is, what is happening with your ready-to-drink tea initiative. Sarah, I'll let you take that one, too.

Ready-to-drink is a great extension of what we already do. To be honest, it's a way to bring tea to more people in an easier-to-consume format. Not everyone is able to brew loose-leaf tea at all times of the day. So we wanted to create a product that we -- that really brings that innovation and the essence of what we already do to market. So more to come on ready-to-drink, but we are really excited about the different potentials in ready-to-drink. It's such a wide market. And yes, it's a very healthy and good way to make tea accessible.

Okay. Here's another question. Please discuss when you expect online sales to stabilize?

Well, we're hoping that our ability to ship ourselves is going to be a really big factor in driving some of our more exciting offers and campaigns. We want to be able to execute on online sales. So we were very much in a stabilization phase for a little while after what happened in Q4, and we wanted to make sure that we didn't disappoint anyone. So we've been -- we have a lot of ideas on how to do more online, but we're also working behind the scenes to make sure that it's a seamless experience. So yes, we balance those 2 things. We're very much ready for the holiday season is what I would say to that answer.

Thank you. Next question. Please discuss the size of the U.S. wholesale opportunity. Frank, do you want to take that one?

Sure, Pat. The U.S. marketplace is 10x the Canadian marketplace. And what we're trying to do from a business perspective is to recreate what we've launched in Canada and done so well in the Canadian marketplace in the United States. If you look back a few years ago, we had 0 grocery stores, pharmacy stores in Canada. I think we began the journey back in 2018, we went from 0 stores to now over 3,800 stores in the Canadian marketplace. We're pretty much in every single grocery store that sells premiums, advanced products. And we've done that quite well in Canada. The U.S. marketplace is one of those where we wanted to ensure that we're doing it properly. And so it's massive, 10x the size of the Canadian marketplace, and we want to use a crawl, walk, run approach. So we're testing in this fall with a large Northeast grocery chain that has about 400 outlets. And so we've got some amazing products. We're going to test in the marketplace. We're going to read what happens. And at that point then, through the national distributor that we've also signed an arrangement with, expand thereafter. So I'm quite excited about the opportunities in the U.S. marketplace, but we wanted to do it right. I think we've worked behind the scenes from a logistics perspective to ensure that supply was going to be there once the demand is created. And so quite excited about the opportunities. Stay tuned. We look forward to giving you an update at further calls.

Thank you, Frank. I'm not seeing any further questions. Are there any questions from the room? Okay. No questions from the room. So we're going to end the question-and-answer period. And I'll go back to the regulatory part of the meeting starting with the Scrutineers report. So I now ask the Scrutineer to present his report, and I direct that the report be annexed to the minutes of this meeting as a schedule. Mathias?

Good morning, Mr. Chairman. We, the undersigned scrutineers from TSX Trust Company, hereby reports that there are at least 61 shareholders or proxy holders present at this meeting representing in person by proxy, 15,415,911 common shares, being 57.9% of the common shares issued and outstanding of DAVIDsTEA. Signed by myself, Mathias Jalali from TSX Trust.

Thank you. 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 15, 2022, and I direct that the minutes be taken as read and approved and that they be signed as being correct. 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 28, 2023, 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 Silverstone 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? Okay. I declare the nominations closed. 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 Scrutineer to present the results of the vote on the election of directors. Mathias?

Mr. Chairman, I report that each of the 5 nominees has received a vote of at least 97.6% of all shares voted.

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 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 LLP, 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.

Mr. Chairman, I second the motion.

All those in favor, please say aye.

Aye.

All those against, please say no. I declare the motion carried and that Ernst & Young LLP, Chartered Professional Accountants, have been duly appointed auditor of the company. So we've now reached the end of the presentations. Sarah having already done hers and the question-and-answer period having already occurred. So I would like to thank everybody. And if there is no further business, I will ask Frank Zitella to present his motion.

I move the meeting be terminated.

I second the motion.

All those in favor, please say aye.

Aye.

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