DAVIDsTEA Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Dec 2018

[Operator:]

Good afternoon, ladies and gentlemen. This is DAVIDs TEA's Third Quarter 2018 Earnings Conference Call. At the request of DAVIDs TEA, today's conference call is being recorded. All lines are currently in a listen-only mode. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. 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 10-Q, that will be filed with the Securities and Exchange Commission subsequent to this call and will be available at www.sec.gov and on our website. The forward-looking statements in this discussion speak only as today's dates, 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 presentation of the most directly comparable IFRS financial measure to this non-IFRS financial measure will be provided as supplemental financial information in our press release. Please note, we will not be holding a Q&A session at the end of the call. Now, I'd like to turn the call over to Mr. Segal.

[Herschel Segal:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Let me begin by introducing Frank Zitella, who officially joined our team as CFO earlier this week and is on the call with me today. Frank brings solid financial and management experience to DAVIDs TEA and we are pleased to have him on board as a key member of our new executive team. I would also like to mention, the other members of our new leadership team all engaged in bringing DAVIDs TEA back to profitability. First, Dominique Choquette started with us on day one over 10 years ago. He has weathered many bumps on the road to become our VP of Information Technology, always seeking to bring us rational explanations. Then my daughter, Sarah Segal, Chief Brand Officer, who first joined us seven years ago, have had to twice step aside from continued service. She used that time wisely, successfully developing and launching an early DAVIDs TEA project on candy, building it into an exciting brand SQUISH CANDY today. I'm pleased to have her back at DAVIDs TEA. April Sabral, our VP of Sales, joined us three years ago and has done an amazing job keeping the frontline sales team and customers loyal to the essence of our brand, all in spite of quite unclear direction from head office over the years. We also welcome our new VP of Marketing and eCommerce, Nathalie Binda, who has strong brand expertise and knows that strong storytelling first demands brand and product clarity. And finally, our VP of Supply Chain, Martin Hillcoat, who will help drive the supply chain transformation that will rationalize, spend, and drive improvement and efficiencies in the planning inventory management process. Now, we are ready to engage our new CEO to lead this great team. The Board continues to oversee this process. In the meantime, it continues to be a pleasure for me to work with this dynamic team in the interim. Let's remember what brought us here. We opened our first store in 2008 and at the time I was personally very invested in the company. We had a clear vision and by 2011, we had successfully opened nearly 70 stores across Canada and had just opened two in New York City. In 2012, we joined up with U.S. partners to pursue this US expansion and that is when the company began to lose its way. That expansion did not go as planned and Canadian operations were neglected in the process. Time went by and these problems persisted. But, now, since mid-June, we are in the process of re-establishing our original brand vision. The evaluation period of what needs to be done is now over and I'm proud of the team that we now have in place that will make it happen. Turning now to our results on our ongoing projects. Same-store sales continue to decline, but we are seeing favorable trends in several areas of the business, namely our e-commerce and alternative sales channels are showing great promise. Understanding that this is an industry-wide trend and growing, we must take the following steps. One, define our brand, so that it is relevant no matter where it is available. Two, approve our efficiency and stimulate in-store traffic. Three, optimize our e-commerce channel and increased sales through this platform. Currently, it represents only 16% of our volume and we need to increase this piece of the business significantly. Four, unify our product development process to become more responsible for sale results and more demanding on quality and price efficiency. Five, radically expand sales of teabags, or tea sachets as we call them at DAVIDs TEA, the majority of tea consumed in Canada is by teabags. So, as a recognized premium tea brand, we need to capture more of this market. And, finally, we need to continue growing an alternative sales channel. The sales of the selection of our tea sachets in 450 different Loblaw banner locations across the country is going very well in addition to our presence on Air Canada flights in various hotels and in various offices. I have great confidence in our team, our brand, our growth opportunities, and our capacity to improve our financial results. I believe that our new leadership team is ready to produce more positive results and is squarely focused on restoring profitability. With that, I'll now turn the call over to Frank for a review of our financials.

[Frank Zitella:]

Thank you, Herschel; and good afternoon, everyone. I'm thrilled to be part of the team that will help reverse the tide of recent losses and steward the DAVIDs TEA brand in the years to come. In the third quarter, sales increased by 1.6% to $43.7 million from $43 million for the same period in 2017. We ended the quarter with a total of 238 stores, an increase of two net new stores versus the prior year quarter. Comparable sales decreased by 4.7% for the period, compared to a 6.8% comp sales decrease in Q3 last year. This reflects our decision to reduce our dependency on discounting, resulting in less product available for our semi-annual sale and we were in a better seasonal inventory position compared to the prior year quarter. We've also revised our merchandising strategy, which was not reflected in our third quarter assortment. Looking at comparable sales by region, comp sales in Canada were down by 8% with a lower adjusted EBITDA contribution. This is compared to a reduction of 7.6% for the same period last year. In the U.S., we saw some encouraging signs with comp sales up nearly 16%, an improvement in the adjusted EBITDA contribution, although still in negative territory. Gross profit stood at $18.4 million, the same as last year, and as a percentage of sales it decreased slightly to 42.1% from 42.7% year-over-year, resulting from a shift in product sales mix and a deleveraging of fixed costs due to negative comparable sales. Adjusted SG&A was $27 million, compared to $24.4 million in Q3 2017, mainly due to an increase in salaries, primarily attributable to increases in minimum wages, greater use of consultants, and foreign exchange translation losses. As a percentage of sales, adjusted SG&A was 61.7%, compared to 56.7% last year from deleveraging of fixed costs, due to negative comparable sales. Adjusted results from operating activities were recorded as a loss of $8.6 million, relative to a loss of $6 million in Q3 2017. In Q3 2018, the company recorded an adjusted net loss of $7.4 million or $0.28 per diluted share, compared to an adjusted net loss of $4.5 million or $0.17 per diluted share a year ago. Adjusted EBITDA was negative $6.2 million in the third quarter, compared to a negative adjusted EBITDA of $2.9 million in Q3 2017. At the end of the third quarter, our ending inventory was $44.4 million, compared to $37.3 million at the end of Q3 2017. In terms of liquidity, we ended the third quarter with $18.7 million in cash on hand. We will continue to prudently manage our cash position and balance sheet. In closing, our priorities, as outlined by Herschel, are both tangible and clear. Our focus now is on execution and on making the right decisions today for the long-term in order to restore profitability. I look forward to being part of the team that will help make that happen. That concludes our remarks. Thank you for joining us today.

[Operator:]

This concludes today's conference call. You may now disconnect.