DAVIDsTEA Inc.
Q4 2021 Earnings Call Transcript

Published: 30 Apr 2022

[Operator:]

Welcome to DAVIDsTEA's Fourth Quarter and Full Year Fiscal 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 on this that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears heading risk factors in our Form 10-K, which was filed with the Securities and Exchange Commission this morning and is available at www.sec.gov with the Autorite des Marches Financiers and on DAVIDsTEA's website. The forward-looking statements in this discussion speak 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 the call, a reconciliation to the most directly comparable IFRS measure will be detailed in our Form 10-K. 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:]

Hello, everyone, and thank you for joining us. With me today is Frank Zitella, DAVIDsTEA's President, Chief Operating and Financial Officer. Fiscal 2021 reflected that we stayed the course on our long-term growth strategy. We adapted to a change in consumer habits related to the COVID-19 pandemic by focusing on our digital platform as well as supporting and growing our other 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 delivered annual sales of $104 million and a second consecutive year of positive adjusted EBITDA in 2021, while accelerating our transformation into a digital-first omnichannel leader in specialty tea. Leger's Marketing WOW Digital Index confirmed DAVIDsTEA's enhanced digital presence in 2021 by ranking the company's growth overall for best online customer experience in Canada. We're continuing to provide key levers with the same high-quality products and service, but through more cost-efficient and scalable distribution channels. As a result, we're looking to the future with optimism tempered by a short-term macroeconomic headwinds. Our actions are driven by a vision to become the world's most innovative and purpose-driven tea company, one that inspires greater wellness and sustainability. All our actions based upon our digital-first strategy are designed to respond to growing demand, meeting consumers wherever they are and building loyalty with the ability to scale the business without borders. We are focused on creating a winning culture that is fueled by connecting with consumers and driven to overcome challenging operational and market conditions. Our vision is centered on sustainable and profitable revenue growth with an unwavering sense of passion, purpose and commitment. More specifically, in my role as Chief Brand Officer, I am focused on product innovation and key excellence to drive revenue growth. During the past year, we innovated on several fronts, including launching our most extensive quality collection, featuring unique Pumpkin Spice inspired blend. We introduced Pumpkin White Tea, Pumpkin Earl Grey and Pumpkin Matcha to complement our best-selling Pumpkin chai. We also released our biggest holiday countdown calendar collection with 24 days of tea. We offered 3 DAVIDsTEA holiday calendars in 2021, including a matcha countdown and a caffeine-free countdown. These iconic calendars were major contributors to increasing our gifting assortment sales, 30% year-over-year to almost $19 million in the fourth quarter. We continued our partnership by marketing with brands such as The Glenlivet. During the holidays, specialty packaged bottles of The Glenlivet 12-year-old were sold with a sachet of DAVIDsTEA Pumpkin Crème Brulée, one double-walled glass and a QR code for downloading the cocktail recipe. In addition, we partnered with the better sleep app to strengthen the connection between tea and healthy sleep. This partnership involves pairing specific wellness tea blends with better sleep curated collection of guided meditations soothing music and bedtime stories for cuddle. On the health and wellness side, we expanded our powdered tea mixes to include a super food, tea-infused hot chocolate powder, with three organically certified vegan-friendly flavors. These unique tea mixtures consist of powdered tea, rich cocoa and energizing super foods like lucuma and reishi Mushroom. We increased our assortment in the Garden to cup collection, demonstrating excellence in tea sourcing and a desire to work with creative gardens around the world. Focusing on traditional unflavored teas allows us to balance our assortment of flavorful and creative blends to attract customers and give our existing customers new teas to explore and discover. We further innovated in 2021 by expanding the DAVIDsTEA experience beyond our stores through a virtual community. We continued building our virtual subscription-based community called the Tea Tasting Club. We also launched our own podcast called Steeping Together, which is entirely dedicated to the world of tea. It provides tea lovers with the opportunity to have a more direct and personal conversation with a global tea community. As a leading tea merchant with a strong brand, we seek to share our passion and love for by implementing excellence in innovation across the tea space from iced tea, matcha, powders to traditional and specialty loose-leaf tea. Accordingly, the unmatched breadth, depth and originality of our loose-leaf tea assortments provides us with a marked competitive advantage in the growing specialty tea market. In closing, I would like to thank our team members for their dedication and resiliency during the past fiscal year. I have full confidence the entire DAVIDsTEA team is up to the challenge for 2022 and beyond. Despite inflationary pressure and supply chain constraints, we are ready to face new challenges and opportunities with an ongoing desire to be leaders and creators in the exciting growth market dedicated to tea consumers. At this point, I will now turn the call over to Frank, who will discuss our financial results in greater detail.

[Frank Zitella:]

Thank you, Sarah, and hello, everyone. We're pleased with our sales performance in the seasonally strong fourth quarter with revenue of $39.9 million. Our gifting assortment delivered strong results with sales increasing $4.3 million year-over-year or 30%. Sales from our e-commerce and wholesale channels decreased by $4.4 million or 14.3% as we transition from the previous year's pandemic fuel surge of online sales to serving customers through our omnichannel capabilities. Brick-and-mortar sales in Q4 2021 improved by $4 million from the prior year's fourth quarter due to an increase in same-store sales and introduction of pop-up shops in strategic locations during the holiday season. Altogether, sales from e-commerce and wholesale represented 77% of total sales in the fourth quarter of 2021, while brick-and-mortar sales accounted for 23%. In Q4 2021, gross profit totaled $15.8 million, up 1.1% from last year's fourth quarter. The increase in gross profit can be attributed to improved product margins and lower delivery and distribution costs. These items were partially offset by higher retail lease expenses year-over-year. And as a percentage of sales, gross profit reached 39.7% in the fourth quarter of 2021 compared to 38.9% for the same period in 2020. In the fourth quarter of 2021, SG&A expenses increased $3.8 million year-over-year to $14.1 million, while adjusted SG&A expenses were up $2.3 million to $13.9 million during the same period. These higher SG&A expenses are mainly due to increases in online marketing expenses additional staff to support our flagship retail stores as well as incremental professional and recurring software . As a percentage of sales, adjusted SG&A amounted to 34.8% in the fourth quarter of 2021 compared to 28.9% in the fourth quarter of 2020. In the fourth quarter of 2021, adjusted EBITDA, which excludes the impact of stock-based compensation, impairment of property and equipment and right-of-use assets, restructuring plan activities, wage and rent subsidies from the Canadian government and nonrecurring software implementation costs, reached $3.7 million compared to $5.4 million in Q4 of 2020. The decrease in adjusted EBITDA in the fourth quarter of 2021 reflects higher adjusted SG&A expenses of $2.0 million to accelerate the transition of our business to primarily an e-commerce and wholesale distribution model. This increase in SG&A costs was partially offset by improved gross profit. As of January 29, 2022, we had a healthy cash position of $25.1 million and working capital of $43.4 million to support our growth strategy. As we look ahead, some of our value creation initiatives include

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