DAVIDsTEA Inc. ($DTEAF)

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's First Quarter Results Webcast for fiscal 2026. Today's webcast is being recorded and is in a listen-only mode. Before we get started, I would like to remind you of the company's safe harbor language. This webcast includes forward-looking statements about expectations for the performance of the business in the coming quarter and year. Each forward-looking statement contained in this webcast 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 and Uncertainties in the Management's Discussion and Analysis of Financial Condition and Results of Operations, the MD&A, which was filed with Canadian regulatory authorities and is available on www.sedarplus.ca. The forward-looking statements in this discussion speak only as of today's date, and the company undertakes no obligation to update or revise any of these statements. If any non-IFRS financial measure is used during this webcast, reconciliation to the most directly comparable IFRS financial measure will be detailed in the MD&A. 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.

Good morning, everyone, and thank you for joining us today. Our first quarter results demonstrate the resilience of the business model that we rebuilt over the last 2 years. Despite a soft top line affected by U.S.-Canada trade tensions and a more cautious consumer on both sides of the border, we held our gross margin at 59.7%, expanded adjusted EBITDA margin by approximately 100 basis points to 12.5% of sales and delivered a return to net income. Said differently, on a quarterly decline in sales, we expanded adjusted EBITDA margin by approximately 100 basis points and swung from a net loss to net income. That is exactly the operating leverage we built the business to deliver, and it is the same leverage that drove our return to IFRS profitability in fiscal 2025. The first quarter is seasonally lighter, but the message it sends about the durability of this cost structure is, in our view, among the important takeaways from today's presentation. Overall, DAVIDsTEA generated adjusted EBITDA of $1.6 million or 12.5% of sales on revenues of $13 million in the first quarter of 2026. Net income reached $0.1 million, a $0.3 million improvement over the prior year quarter, and we ended the quarter with $11.2 million in cash, $0.8 million higher than at the same point last year. Given current trade tensions, coupled with ongoing macroeconomic uncertainty, sales decreased 5.2% year-over-year in Q1 2026. Online sales, which declined by $0.4 million or 6% were pressured by cross-border trade frictions during a quarter in which we were actively transitioning to a new U.S. fulfillment model. Our new Chicago fulfillment partner, which came aboard in late March, is now fully operational. This brings inventory closer to our U.S. customers and is designed to restore the fast, seamless delivery experience they have always loved, bypassing the customs delays that have weighed on our cross-border shipments since the U.S. moved from de minimis to formal entry midway through last year. With the new model operational for the entirety of the second quarter, we expect this improved experience to support a recovery in U.S. sales through the balance of fiscal 2026. For their part, wholesale channel sales, which dropped by $0.3 million or 12.1% in the first quarter, were mainly impacted by the timing of replenishment orders across DAVIDsTEA's grocery partners. The underlying wholesale distribution footprint remains intact and continues to provide a meaningful platform for replenishment-driven revenue for the rest of the year. Finally, brick-and-mortar sales, which declined by $0.1 million or 1.5% year-over-year, reflected the same cautious consumer environment we saw across the rest of the business, partially offset by the contribution of the Laurier Quebec City store we opened in December 2025, which continues to perform in line with the unit economics underpinning our broader store-led growth strategy. Our store-led growth strategy is no longer a plan. It is gaining in momentum and on track. Our typical new store is approximately 750 square feet with budgeted capital of $400,000 to $475,000 and we are targeting annual sales of $1.2 million to $1.4 million per location at a 4-wall contribution margin of approximately 25%, implying a payback period of 15 to 18 months. The Laurier store is performing against that template, and we are using it as a proof point of reopening as we roll the program forward. Against this backdrop, we intend to build on our store base through revenue contributions from 4 new openings over the course of the year. Our new Oshawa Centre location will open in early June, followed shortly after by a second location at the Square One Shopping Centre in Mississauga, bringing back the DAVIDsTEA shopping experience to 2 important retail centres in the Greater Toronto area. We are equally excited about returning to Edmonton Southgate Centre and Burnaby Metropolis at Metrotown this fall. Each new store represents a high-traffic, high-profile location that will serve as both a brand billboard and a demand driver across our online and wholesale channels. By fiscal year-end, we expect that our Canadian network will reach 25 stores, and our analysis indicates that the incremental free cash flow generated by new stores will, over time, make the next phase of expansion essentially self-funding. Each new store also reinforces our omnichannel model with measurable spillover into our e-commerce and wholesale channels. Beyond fiscal 2026, the Canadian market, in our view, can support a meaningfully larger DAVIDsTEA footprint. Recall that prior to the pandemic, we operated more than 190 stores in Canada, the majority of which were profitable. And our near-term objective is to double our current store count from that base. Underpinning all this expansion is a product portfolio anchored by the broadest specialty organic matcha assortment in the Canadian specialty tea market, all sourced from premium Japanese origins. Specialty tea is the fastest-growing segment of the multibillion-dollar global tea category. And as consumers continue to shift towards health, wellness and functional beverages, we believe DAVIDsTEA is uniquely positioned to capture that tailwind. In short, the first quarter validated the cost structure we rebuilt in fiscal 2025, our store-led growth program is moving from planning into execution mode, and our U.S. fulfillment platform is now fully operational. We have the strategy, the capital and the team to execute it. That said, we are not satisfied with the early year softer-than-expected top line while we gain momentum on sales growth levers that will grow the business through the balance of the year. We are focused on comping positively in the second quarter and beyond through compelling product introductions, store openings and the use of our omnichannel presence to drive in-store conversion. With our U.S. fulfillment platform now fully operational, we are focused on recovering the lost ground. We recognize important opportunities in curating country-by-country marketing and assortment and continue to optimize the levers, including advertising to drive profitable revenue growth. I will now turn the webcast over to Frank Zitella, President, Chief Financial and Operating Officer of DAVIDsTEA.

Thank you, Sarah, and good morning, everyone. Sales for the first quarter of fiscal 2026 decreased by $0.7 million or 5.2% to $13 million compared to the prior year quarter. Sales in Canada of $11.7 million, representing 89.6% of total revenue, decreased by $0.2 million or 1.6% compared to the same quarter last year. The modest decline reflects the more cautious Canadian consumer in light of macroeconomic uncertainty, partially offset by the contribution of our new store in Quebec City, which opened in December of 2025. Canadian results in the quarter remained consistent with the broader consumer backdrop and provide a constructive base from which to layer the impact of 4 new store openings scheduled for the balance of fiscal 2026. U.S. sales of $1.4 million decreased by $0.5 million or 27.7% compared to the prior year quarter, driven primarily by U.S.-Canada trade tensions and tariff-related headwinds on our cross-border e-commerce channel. In response and in light of the elimination of the U.S. de minimis import rule, the company commenced fulfillment of U.S. orders from a third-party logistics partner in Chicago on March 26, 2026, with just over 5 weeks remaining in the 13-week quarter. The first quarter, therefore, reflects the partial transition period during which a portion of U.S. demand continued to be fulfilled under the legacy cross-border model and remain exposed to border delays and the de minimis related friction. With the new fulfillment model now operational, shipping from within the United States is expected to meaningfully improve the customer experience and support a sequential recovery in the U.S. through the balance of fiscal 2026. Turning to gross profit, gross profit decreased 4.8% to $7.8 million in the first quarter of 2026, but improved as a percentage of sales to 59.7% from 59.5% in Q1 of 2025. Holding gross margin substantially flat in a quarter that included the U.S. fulfillment transition and a softer top line is a direct reflection of the durability of gross margin gains from fiscal 2025 and the continued benefit of our internalized fulfillment model. Selling, general and administrative expenses decreased by $0.7 million or 10.7% year-over-year to $6.3 million in Q1 of 2026. The reduction was primarily driven by a $0.6 million decrease in marketing expenses, reflecting a more disciplined and targeted approach to consumer acquisition, and a $0.2 million reduction in other SG&A expenses. These savings were partially offset by a $0.2 million increase in wages, salaries and employee benefits to support our expanded retail footprint. As a percentage of sales, SG&A expenses dropped to -- sorry, 48.2% in the first quarter of 2026 from 51.2% in the same period of 2025, reflecting the operating leverage in our rebuild cost base. In terms of profitability, net income improved by $0.3 million to $0.1 million in Q1 of 2026 compared to a net loss of $0.2 million for the same period last year. EBITDA totaled $1.5 million, up $0.4 million or 31.6% year-over-year. Adjusted EBITDA remained stable year-over-year at $1.6 million, representing 12.5% of sales versus 11.5% in the prior year quarter, approximately 100 basis points of margin expansion on a smaller revenue base. Before turning to my summary, I want to highlight one operational milestone in the near-term horizon. As we previously disclosed, the lease on our separate production and assembly facility expires on June 30. And effective July 1, all of our operations, administration, storage and production will be consolidated under a single modernized roof at our Mont-Royal facility in a fully upgraded environment. The transition is timed to be completed ahead of our peak inventory build season, and we have a detailed execution plan in place to maintain continuity production throughout the move. We expect this consolidation to further support our operational efficiency as we execute on the fiscal 2026 store opening program. In summary, our first quarter results demonstrate the resilience of the business model we have built. To recap the key points, on a 5.2% decline in sales, we expanded adjusted EBITDA margin by approximately 100 basis points and reported net income. The operating leverage in this rebuilt cost base is real and beneficial. Gross margin held at 59.7% through a quarter that included a mid-period U.S. fulfillment transition and SG&A declined by $0.7 million or 10.7%. We exited the quarter with $11.2 million in cash, working capital of $18 million, up 42% year-over-year and the revenue linked financing balance reduced to $0.4 million. Our Chicago fulfillment platform is now fully operational and is expected to support a sequential recovery in U.S. sales through the balance of the year. And finally, we are on track to open 4 new stores across Canada in fiscal 2026, raising our store count to 25 with unit economics validated by the Laurier store opening and a financial framework that we believe becomes increasingly self-financing as the portfolio scales. We operate in a large and growing addressable market with specialty tea benefiting from secular wellness trends. We have a distinctive in-store experience that consumers across Canada have been asking us to bring back to their communities. We have proven store economics with a clear path to becoming self-funding. We have demonstrated through fiscal '25 and again this quarter that this management team can execute against the plan that we have laid out. We believe all of this makes DAVIDsTEA a compelling investment story today. With that, we encourage investors wishing to learn more about DAVIDsTEA to contact Investor Relations, who will be pleased to coordinate access to management. On behalf of the entire DAVIDsTEA team, thank you for joining us today.