DAVIDsTEA Inc. (DTEAF) Earnings Call Transcript & Summary

Welcome to DAVIDsTEA's 2024 Annual Meeting. The meeting will come to order. I am Pat De Marco, Lead Director of DAVIDsTEA. Again, this year, DAVIDsTEA asked all shareholders 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's 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 a 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 the 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 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 minutes of this meeting as a schedule.

Mr. Chairman, I, the undersigned scrutineer from TSX Trust Company, hereby report that there are at least 61 shareholders or proxy holders present at this meeting representing in personnel by proxy, 15,066,034 common shares, being 55.97% of the total 26,899,479 common shares issued in outstanding of DAVIDsTEA.

Thank you. The notice calling this meeting -- I'm sorry, 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 had 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 13, 2023, 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 auditors' report thereon. I now present to the meeting the annual report and consolidated financial statements of the company for the fiscal year ended February 3, 2024, 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? 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.

Mr. Chairman, I report that each of the 5 nominees has received a vote of at least 94.23% 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.

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.

Mr. Chairman, I'm Neil Wiener, a shareholder and proxy holder, 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. 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.

Good morning. I am Sarah Segal, CEO and Chief Brand Officer of DAVIDsTEA. Now that the formal part of the meeting is over, we will move on to our management presentation. The slides for this presentation were posted this morning on our website under Investor Relations. Before I begin, I will direct you to our customary disclaimer regarding forward-looking statements on Slide #2. Please note that the forward-looking statements in our presentation speak only as of today's date, and we undertake no obligation to update or revise any of these statements unless required by law. 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 MD&A, which has been filed with Canadian regulatory authorities and is available on sedarplus.ca as well as in Investor Relations on the company's website. As a reminder, all dollars are referred to in this presentation are in Canadian dollars unless otherwise indicated. Fiscal 2023 proves to be a challenging year as unfavorable economic conditions and the market trend away from online consumption negatively impacted our revenue. As shown on Slide #3, revenue for the year totaled $60.6 million, which was down 27% from fiscal 2022. Our gross margin reached 39.9% in 2023 and progressively improved after fulfillment operations were brought in-house. In terms of the bottom line, net loss and adjusted EBITDA amounted to $13.8 million and negative $5.4 million, respectively. Turning to our revenue mix on Slide 4. Tea and Variety Box assortment sales represented 90% of total sales in 2023, while Tea Accessory sales accounted for 10%. With the launch last week of our Cold Brew Sparkling iced tea collection for the ready-to-drink market, we are optimistic about developing a third meaningful revenue stream in the future. Moving on to operational highlights on Slide 5. We implemented several value creation initiatives during the past fiscal year that should lead to profitable growth. First, as mentioned, we successfully brought fulfillment operations in-house to own the overall brand experience for our customers and reduce the unit cost of servicing them as reflected in our financial statements. Second, we lowered our SG&A expenses by $8 million as part of our cost containment plan, excluding impairment of property and equipment, intangible assets and right-of-use assets. Third, we initiated wholesale market expansion into the Northeast U.S. to replicate the success that we have enjoyed in Canada. We have since adopted a national wholesale strategy in the U.S., but I will address this initiative later in my presentation. Fourth, we strengthened our management team with the hiring of Adriana Germilli, hello, our Vice President of Marketing; and Damon Sloane as Chief Digital Officer. Both management appointments were aimed at stimulating demand creation and accelerating our sales growth. Finally, shortly after our fiscal year-end, we secured an exclusive supplier agreement with Couche-Tard/Circle K to offer Tea-2-Go at their 1,500 convenience stores across Canada. In terms of our go-to-market strategy on Slide 6, we have shifted course in response to the global retail shopping trend witnessed in the past 18 months and validated by focus groups at DAVIDsTEA. Consumers want to touch, smell, sample, discover our premium specialty teas in store as part of our purchasing experience. Accordingly, we have secured lease agreements for the opening of 2 new stores this fall in the Montreal area, 1 downtown and the other in Mount Royal that will raise our store count to 20 across Canada. A third location plan for Quebec City has been pushed out to preserve our cash position on a short-term basis. Our stated goal is to double our store footprint within the next 3 years to drive revenue growth. We also believe a positive store experience will create a spillover effect on online sales. On the wholesale front, in 2024, we plan to expand our key assortment at 4,000-plus stores in Canada, which include Big Box wholesalers, high-end grocery stores and pharmacy chains. Turning to the bottom line. We also expect to begin reaping the benefits from our Tea-2-Go offering at 1,500 Couche-Tard/Circle K stores across Canada. Since mid-March, we have been providing a curated assortment of 8 best-selling tea sachets available in a convenient sachet format to more consumers on the move at Couche-Tard and Circle K stores. In addition, we have transitioned from a regional to national strategy to address the U.S. wholesale market. If you recall, we initiated our wholesale expansion into the Northeast U.S. in the second half of 2023 at Stop & Shop and Roche Brothers supermarkets. We have since decided to extend our reach across the U.S. on the strength of new partnerships with supermarket chains and distributors. One such signed up distributor, KeHE ranks among the largest pure-play wholesale food distributors in North America with access to more than 31,000 doors. Given a massive U.S. wholesale market, combined with increased assortments at 4,000 plus locations in Canada, we anticipate revenue growth from our wholesale channel in 2024. The last leg of our go-to-market strategy consists of our digital platform. There's little doubt online sales have suffered post pandemic, but this reflects a global trend in the retail industry, not a company-specific one. As previously mentioned, we appointed a Chief Digital Officer who oversaw the launch of a mobile app, that won a bronze medal in the digital products and experiences category at the recent IDEA competition dedicated to the Quebec Communications Industry. We also intensified our focus on paid media to attract new customers and reengage with existing customers, but these initiatives will take time to produce tangible results. So turning to our corporate social responsibility efforts. Our actions and decisions have been guided by the highest ethical standards since we began operations in 2008. We are proud of the progress that we have made over the years as a member of ETP, the Ethical Tea Partnership, a global organization that supports a socially just and environmentally sustainable tea industry, but we also recognize there's always more work to be done. The 3 pillars of our sustainability strategy include ethical and sustainable tea sourcing, compostable and regenerative packaging and caring for our communities. Earlier this morning, we announced our financial results for Q1 2024. On Slide 8, we provide a summary of these results. Revenue decreased 6.1% to $13.4 million in the first quarter as unfavorable economic conditions negatively affected online and wholesale revenues, while in-store sales grew 6.2% year-over-year on higher average ticket values. Despite a lower revenue level, year-over-year gross margin improved 300 basis points to 43.3% due to lower freight, shipping and fulfillment cost per unit. Turning to the bottom line. Net loss amounted to $2.6 million in the first quarter of 2024 compared to a loss of $2 million in the first quarter of 2023. Adjusted EBITDA for the first quarter was negative $0.8 million compared to negative $0.9 million for the same period in 2023. Despite tough economic conditions in the first quarter of 2024, we are committed to turning our business around based on a number of inflection points. These inflection points, which are outlined on Slide 9, include 2 consecutive quarters of mid-single-digit growth for in-store sales which bodes well for the rest of the year with the opening of 2 additional locations. The transition to a national strategy to address the U.S. wholesale market, including a partnership with KeHE that has access to more than 31,000 doors and the recent launch of our Cold Brew Iced Tea collection for the multibillion-dollar ready-to-drink market in North America. We are optimistic this latest product launch will fuel both online and in-store sales. As shown on Slide 10, we are facing stiff headwinds on our road to profitable growth. First, top economic conditions continue to reduce overall consumer demand. The Bank of Canada recently reduced its interest rate to 4.75%, but consumers are still navigating through a high interest rate and inflationary environment. So discretionary spending on premium products remains affected. Second, there are changes in online consumer behavior. Third, DAVIDsTEA is faced with a short-term liquidity issue. At the end of the first quarter of 2024, the company had a cash position of $8.8 million and working capital of $28.7 million. Last quarter, we had outlined negotiations with a commercial lender to provide up to $12 million in the form of a revolving line of credit. At this point, we have terminated negotiations with the commercial lender without reaching an agreement. Consequently, we will be more aggressively pursuing cost reduction and working capital strategies while sustaining our growth opportunities for upcoming quarters. Finally, let's conclude with our key takeaways on Slide #11. We reported soft fiscal 2023 results due to challenging environment and a shift away from online consumption to in-store retail consumption. We successfully brought fulfillment operations in-house to improve the end-to-end customer experience and reduce costs. We lowered SG&A expenses by $8 million on an annual basis as part of our cost containment plan. We transitioned to a national strategy to address the massive U.S. wholesale market, and we launched our cold-brew iced tea to tap into the multibillion-dollar RTD market in North America. We posted encouraging Q1 2024 results with a number of inflection points on the horizon. This concludes our management presentation. On behalf of the entire DAVIDsTEA team, thank you for joining us today. Thank you all for your support and your ongoing support.

Thank you, Sarah. So we now come to the question period. I do see that there are a couple of questions that have come in through the webcast platform. Sarah, the first question will be for you. How many U.S. grocery stores are we in currently? And how many do you expect to be in by the end of the year?

I'll take that question, sorry, and provide the answer. We're currently in about 500 stores in the U.S., and we're quite excited about replicating the success that we've seen in Canada, south of the border. As Sarah mentioned in her presentation, we are talking to buyers that speak to and manage over 31,000 doors in the U.S. And so closing a fraction of those doors is going to bode well for DAVIDsTEA.

Excellent. Frank, while you're at it, I will ask you the second question. Why not ensure that existing brick-and-mortar stores are profitable before adding new stores?

That's a really good question. Sarah mentioned in her prepared remarks, we've seen 2 sequential quarters of positive growth in our brick-and-mortar. Consumers have very resoundingly said that they want the in-store experience, the ability to smell, sample, taste. And the fleet of stores that we have now are all profitable, generating free cash flow, which bodes well again for DAVIDsTEA. Sarah also mentioned that we're opening up 2 stores in the Montreal vicinity, can't wait for those to open up. And as we stated previously, we've got plans to ensure that brick-and-mortar becomes the center point of our expansion, return back to profitability as the flywheel effect drives online sales through that physical presence.

And then the last question, what caused the average order value for online revenues in Q1 to decline?

Well, as we know, we have a very seasonal business. Buying patterns tend to follow a similar cycle in terms of gifting and product selection. There's not one single thing. I can only point to some of the headwinds that we noted today that might be driving that behavior. From the DAVIDsTEA side, we have a really great assortment, and really, there's always a seasonality, especially in the gifting portion of our business. So I can only imagine that, that's where we're seeing a bit of caution, but we feel we're putting the right product there. And yes, it follows the trend. .

And one last question just came in. Frank, I'll ask you this one. Please explain what reductions will take place in SG&A in order to conserve cash?

That's a good question. When we look at our SG&A costs, it's comprised of numerous variable as well as fixed costs. And we take every opportunity now, as a result of not having a revolving line of credit available to us, to where possible, reduce discretionary spend as quickly as we possibly can. And so I think as a group, as an organization, we're looking at every dollar going out the door and seeing if we can defer it and working along, of course, with our trusted and very valued supplier network, who is very supportive of DAVIDsTEA during our slow season. So hopefully, that addresses the question.

Thank you, it does. Are there any questions from shareholders or proxy holders who are present at the meeting. Okay. So if there is no further business, I will ask Frank Zitella to present his motion.

I move the meeting be terminated.

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 this meeting is terminated. Thank you for your support of DAVIDsTEA.