DAVIDsTEA Inc.
Q3 2021 Earnings Call Transcript

Published: 14 Dec 2021

[Operator:]

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA’s Third Quarter 2021 Earnings Webcast. 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 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 for our fiscal year ended January 30, 2021 filed both with the United States Securities and Exchange Commission and with the Autorite des marches financiers and in our quarterly report on Form 10-Q filed today with both the United States Securities and Exchange Commission and with the Autorite des marches financiers and on DAVIDsTEA’s website. The forward-looking statement in this discussion speaks only as of today’s date and we undertake no obligation to update or revise any of these 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-Q. As a reminder, all dollar amounts referred to are in Canadian dollars, unless otherwise indicated. At this point, I would like to turn the call over to Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

[Sarah Segal:]

Thank you, operator. Good afternoon everyone and thank you all for joining us. Also joining me is Frank Zitella, DAVIDsTEA’s President, Chief Operating and Financial Officer. I am pleased with our third quarter results. Although sales decreased year-over-year, they improved 18.5% compared to the second quarter, which is a better measure of our progress since we began our transformation into a digital first key merchant. Negative adjusted EBITDA reflects the implementation of our strategic plan to pursue our digital first strategy, increased engagement with new and existing customers and extend the reach of our brand to more tea lovers. Now more than ever, the DAVIDsTEA team is fully committed to growing the business and making the most of positive industry trends. If you followed our news flow, you've noted that through various and innovative initiatives, we have been working every day on scaling and expanding our digital footprint, as well as our wholesale business across North America, always with our customer in mind. Let me briefly review what we've done over the past few months. In terms of tea products, DAVIDsTEA continues to bring innovative tea blend to the market with a clear mission to promote accessible health and wellness. For example, we expanded into the superfood category with three innovative certified organic and vegan tea infused hot chocolate powders. These unique tea mixtures consisted -- consists of real powder tea rich cocoa and energizing superfoods. In the spirit of offering unique ways of discovering DAVIDsTEA and extending our reach to a new tea audience, we partnered again with the Glenlivet this year. During the holiday season, especially packs bottles of the Glenlivet 12-year-old single malt scotch whiskey are being sold with a sachet of DAVIDsTEA Pumpkin Creme Brulee, and a QR code for downloading a cocktail recipe created for this partnership. Now on the wholesale front, we recently launched our tried and true bestseller Organic Cold 911 in select Costco locations in Canada, and a selection of our most popular flavors at Walmart in Canada. We also added an assortment of loose-leaf tea flavors, and fruity matcha single-serves to Loblaw's existing assortment of tea sachets. Our products were first introduced exclusively at Loblaw in 2018, and the company has been a fantastic partner since. Our teas are available in over 1,250 Loblaw grocery and pharmacy stores across Canada. In the spring of 2021, we also launched our tea tasting club subscription program, featuring a selection of handpick teas aimed at helping tea drinkers discover new DAVIDsTEA tea flavors. The Pay-As-You-Go Subscription, customers receive tea every three months enjoy exclusive access to new and returning tea blends and the opportunity to be part of a tea community through a members only Facebook group. Given the initial success of the program and based on customer feedback, we launched three additional varieties of subscription for organic Caffeine-Free and Garden to Cup customers. In our ongoing quest to think outside the box and share our love of tea, a few weeks ago we also launched our own podcast devoted entirely to the world of tea called Steeping Together, it provides a unique opportunity to have a more direct and personal conversation with the tea community around the world. Also continuing our brand partnerships, we partnered with the BetterSleep app to strengthen the connection between tea and healthy sleep. DAVIDsTEA has always had great success with our sleep and relaxation tea. And this partnership further reinforces our commitment to health and wellness. This partnership involves pairing specific wellness tea blends with BetterSleep curated collection of guided meditation through the music playlist and bedtime stories for adults. Finally, ahead of the holiday season, we introduced new products, including our biggest holiday countdown collection ever featuring three exclusive 24 days of tea calendars and assorted holiday tea blends. We also opened six holiday themed pop-up shop at collect mall locations across Canada. These temporary locations provide us with an exceptional opportunity to reconnect with even more of our loyal customers in-person and providing easy, convenient gifting options. These initiatives illustrate how our go-to-market strategy leverages our exceptional brand across our digital first omnichannel platform. We are excited by the opportunities that lay ahead as we work hard, not only engaged and retain our loyal customer base, but continue to attract new tea consumers. In closing, at this time of the year, I would like to thank all our employees for their amazing and remarkable dedication, creativity, and passion for our brands. Recently, we were officially certified as a Great Place to Work. Given a period of unprecedented transformation and navigating through the ongoing pandemic, this recognition is a testament to our inclusive corporate culture and the commitment of our incredible team who takes pride in its work to delight tea customers daily. This recognition also made us eligible to receive the designation of 2021’s Best Workplaces Managed by Women. With close to 70% of our leadership team comprised of Women, this distinction reinforces our positioning as an equal opportunity employer that offers exciting career opportunities to individuals across the country. I want to wish everyone a most enjoyable and safe holiday periods. And I'll now turn the call over to Frank who will discuss our financial results in greater detail.

[Frank Zitella:]

Thank you, Sarah and good afternoon everyone. Sales decreased 15.3% to $22.2 million in the third quarter of 2021 from $26.2 million in the prior year quarter. The decrease in year-over-year sales is largely due to the pandemic-fueled surge in online sales for our tea blends and accessories during the better part of fiscal 2020. Progress achieved in transforming DAVIDsTEA can better be measured by the 18.5% sales increase on a sequential basis. Retail stores in Q3 2021 compared favorably to the prior year quarter by $1 million, since our stores were not open for two of the three months in Q3, 2020 due to the pandemic. Sales from e-commerce and wholesale channels decreased by $5.1 million year-over-year or 22.9% to $17.1 million in the third quarter of 2021. Again, the transition from last year's pandemic-fueled surge of online sales to serving customers through our omnichannel capabilities is largely responsible for the year-over-year decrease. E-commerce and wholesale sales represented 77.1% of sales in Q3 2021 compared to 84.3% of sales in the prior year quarter. For the third quarter of 2021, gross profit totaled $8.6 million down 20.4% or $2.2 million from the prior year quarter. The decline in gross profit is primarily due to lower sales year-over-year, higher retail lease expenses and a lower gross margin on tea. These earnings were partially offset by lower delivery and distribution costs. As a percentage of sales, gross profit reached 38.7% in the third quarter of 2021 compared to 41.3% for the same period in 2020. In the third quarter of 2021 SG&A expenses increased by $3.1 million year-over-year or 43.9% to $10.2 million, while adjusted SG&A expenses were up $1.8 million during the same period. These higher expenses are mainly due to increases in ongoing software related costs, staffing and online marketing expenses as we continue our transition to building a digital first organization. As a percentage of sales, adjusted SG&A amounted to 46.7% in the third quarter of 2021 compared to 32.7% in the third quarter of 2020. In the third quarter of 2021 adjusted EBITDA, which excludes the impact of stock-based compensation, restructuring plan activities, wage and rent subsidies from the Canadian government under the COVID-19 economic response plan and software implementation costs, was negative $0.3 million compared to $3.3 million in Q3 of 2020. The decrease in adjusted EBITDA in the third quarter of 2021 reflects lower sales year-over-year and planned investments in online marketing and staffing, which were partially offset by an improved delivery and distribution cost structure. As at October 30th, 2021, we had a cash position of $13.4 million and working capital of $42.3 million. Looking at our inventory levels, we've strategically built up inventory in anticipation of the holiday period and to mitigate the ongoing global supply chain issues while maintaining a healthy financial position. This decision aligns well with our sales momentum and customer traction in the first seven weeks of the fourth quarter underway on a sequential basis and highlighted by robust Black Friday sales. Turning to distribution. Key building block in our transformation is our investment in increased and more flexible fulfillment capacity to support our stores and process online orders, ultimately aimed at improving the customer experience. Our new 3PL has sufficient capacity to accommodate the growth as we fully transition to a digital first organization, using the full capabilities we've installed in fiscal 2021 to grow our customer base and introduce consumers to the wonderful benefits of team. Our transitioned to WIPTEC's world-class facility began in October, and we're making good progress in this meta transition. This strategic investment will significantly improve our ability to serve customers in a timely and frictionless manner. In closing, we continue to make significant progress transforming DAVIDsTEA into a digital first omnichannel provider of high-quality teas and accessories. As we continue to bring new innovations to the marketplace and delight customers with an assortment of high-quality tea blends, our growth strategy rests on expanding our online presence and our fulfillment capabilities, expanding relationships with wholesale partners and leveraging the store-in-store concept. This concludes our remarks and I thank you all for joining us today. I would also like to thank and wish everyone all the best for the holiday season. We look forward to speaking with you following the release of our fourth quarter results in 2022. Have a great day.

[End of Q&A:]