DAVIDsTEA Inc.
Q4 2017 Earnings Call Transcript

Published: 20 Apr 2018

[Operator:]

Good afternoon. My name is Silvy and I will be your conference operator today. At this time, I would like to welcome everyone to the DAVIDsTEA's Fourth Quarter 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to turn the call over to Howard Tafler, Chief Financial Officer of DAVIDsTEA.

[Howard Tafler:]

Thank you. Good afternoon, everyone. With me on the call is Joel Silver, President and Chief Executive Officer. Before we get started, I would like to remain you of the Safe Harbor language which I'm assure you are 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 contains in this presentation is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statement. Additional information regarding these factors appear under the heading risk factors in our 10-K, that will be filed with 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 be 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 presentation of the most directly comparable IFRS financial measure to this non-IFRS financial measure will be provided as a supplemental financial information in our press release. As previously announced, a special committee of the board continues to review strategic alternatives to maximize the company's value. The strategic alternative that the Board of Directors may consider include but are not limited to

[Joel Silver:]

Thank you, Howard. Good afternoon, everyone, and thank you for joining us today. First, before I address the results, I would like to indicate that despite some of the ongoing discussions at the board level and between shareholders, our leadership team is committed to improving the performance of our Canadian and U.S. network of stores, realizing the value in our brand and charting a best path forward for all our DAVIDsTEA stakeholders. In the fourth quarter fiscal 2017, DAVIDsTEA adjusted EBITDA reached 16.4 million. While the results for 9% lower than the previous year, the quarter demonstrate a small rate of decline when compared to previous quarters. For the same period, sales increased 0.4% to 86.7 million and comp sales decreased by 8.1%. On the positive side during the quarter, our core tea business continue to grow and online sales continue to register double-digit growth. For the year, our e-commerce sales penetration increased to 12.2% of total sales compared to 10.6% in fiscal 2016. However, we continue to face challenges in the sale of tea accessories and gifts during the holiday season as we continue to optimize and improve our assortment mix. As indicated before, the decisions for the design and assortment of accessories for the holiday seasons were made up to12 months in advance. While we had a weaker financial performance in 2017 driven by our non-tea business, we are focused on creating positive business momentum through several key initiatives. As mentioned in our last quarterly call, we took substantial cost reduction measures and we reinvested the savings into new IT systems particularly the new e-commerce platform, as well as in merchandising and marketing staff. As a result, we anticipate that our total SG&A were made relatively stable on year-over-year basis. From the comparative point of view, Teavana completed the closure of its U.S. stores in the first quarter of 2018, the Canadian stores were closure in September and October of 2017. In most of the shopping mall where we're co-located with Teavana, we have observed a positive impact on sales compared to the remainder of the network. Last week, we did a launch of our new e-commerce website, which I'm happy to state now our core part of DAVIDsTEA's ambitious plans to grow on-line sales. The new site is fantastic and subsequent enhancements represent a multi-million dollar investment in a best-in-class e-commerce platform. The new platform will be built to held significantly more traffic, provide a better mobile experience and alleviate some of our past challenges concerns of mean the high demand your holiday season. Since the launch, we have already seen major improvements in terms of load speed, translating into improved revenue and conversion. Throughout 2018, we will be launching ongoing essence [ph] which will allow us to provide additional marketing features, further improving the mobile experience and provide a solid platform to start selling on Amazon, which we anticipate will happen before holiday of 2018. We're now in a solid position to push and support our ambitious e-commerce sales goals over the next few years. We are pleased with some of the initiatives related to our new concept stores which have evolved into a new store format for renovating stores. We refer to this new store format as DAVIDsTEA 2.0. In fact, our first 2.0 store format with that square one mall outside of Toronto. This store had seen close to a 10% improvement in sales following the renovation. The emphasis of the new DAVIDsTEA 2.0 store format is on improving our service model in into a customer experience. The signature tea while remains the customer consult shop and buy prepackaged teas, thereby accelerating service levels .While our customers, service and the professionalism of employees are often praised, the waiting time required to make a purchase has been an ongoing issue. Consequently, our new store format could become the blueprint of our future store innovation program. Furthermore, we believe that these changes at our stores will help drive better comps going forward. The second phase of testing for the DAVIDsTEA 2.0 store format will begin in the fall of this year with five additional stores. Looking ahead, we believe that strategic alternative implant across the business will begin to translate into improved top and bottom line performance in the back half of fiscal 2018 as the new leadership team which is fully complete is able to implement their plans. We remain in a solid financial position with a cash balance of 63.5 million at the end of fiscal 2017. Considering lower anticipated CapEx for fiscal 2018 and projected free cash flow, our cash position should remain at similar levels throughout the remainder of fiscal 2018 as compared to fiscal 2017. We anticipate the first half of fiscal 2018 to remain somewhat challenging followed by stronger second half as some of our initiatives most notably improve product offering and merchandising gain full traction. I'll now turn the call over to Howard for more detailed review of our fourth quarter and year-end financial results.

[Howard Tafler:]

Thank you, Joel. I'll begin my remarks with the review of the fiscal 2017 fourth quarter results. As a reminder the dollar amounts referred to in reviewing our results are in Canadian dollars. Sales increase by 0.4% to C$86.7 million in the fourth quarter from C$86.3 million a year ago. We enter the quarter with 240 stores, an increase of 9 net new stores versus 231 stores last year. During the quarter, there were four new store openings in Canada. Fourth quarter comparable sales decreased by 8.1% versus a 0.4% comp increase last year as we continue to face challenges with our accessory and gift product assortment. Gross profit decreased 0.7% to C$44.5 million from C$44.8 million last year. Gross profit as a percent of sales decreased to 51.3% from 51.9% a year ago. The decrease in gross profit as a percent of sales was primarily due to the deleveraging of fixed costs due to the negative 8.1% comp sales this quarter. Our fourth quarter results also include an impairment charge of C$10.1 million and the impact for owner's contracts of C$13.5 million due to underperforming stores opened in prior years. Adjusted SG&A in the fourth quarter increased 3.3% to C$30.9 million from C$29.9 million a year ago, due primarily to the hiring of additional staff to support the growth of the company including new stores, and higher store operating expenses considering 9 net additional stores. As a percent of sales, adjusted SG&A increased to 35.6% from 34.6% last year attributed to deleveraging of fixed cost [ph] before. Adjusted results from operating activities for the fourth quarter decreased to C$13.6 million from C$15.0 million last year. As a result, adjusted net income was C$9.7 million or C$0.37 per fully diluted share as compared to C$10.6 million or C$0.41 per fully diluted share a year ago. Adjusted EBITDA was C$16.4 million compared to C$18.1 million. As of quarter end, ending inventory was C$24.5 million as compared to C$31.3 million for the same period last year. On a per store basis, inventory decreased by 24% as the planned seasonal clearance which mainly occurred in Q2 and Q3 and were focused buying enable us to return to more normal level with inventory including carryover. In terms of liquidity, we ended the quarter with C$63.5 million in cash on a net cash position of C$2.45 on a per share basis with no debt and availability of C$20 million under our revolving credit facility. We are prudently managing our cash position and balance sheet. With that, I'll turn the call back over to Joel for some final remarks before we open the call to your questions.

[Joel Silver:]

Thank you, Howard. We began fiscal 2018 with a strong focus managed team, a more stable business and a clear go forward plan focused on our store network, reinvestment and merchandizing and marketing, advance in e-commerce and expanding distribution channel. In conclusion, DAVIDsTEA management is focused on improving the business and maximizing the potential of our strong brand. On behalf of management, I thank our shareholders for patience and certainly our employees for their great work and dedication during the past year. I will now ask the operator to open the lines for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Kelly Bania of BMO Capital Markets. Your line is open.

[David Lans:]

Hi. This is David Lans on for Kelly Bania. Thanks for taking the question.

[Joel Silver:]

Hi, how are you?

[David Lans:]

Good. I was wondering, could you breakout the difference between accessory comps and core tea comps for us?

[Howard Tafler:]

We don't breakup the numbers, but we deliver cost with - in our tea business and the accessory business which includes the hard good as well as our holiday gifts was where we had most trouble in holiday quarter and really for the balance of the year as well too. But that's really where our weakness is. The tea business is healthy and compact.

[David Lans:]

Great, okay. And then on the CapEx side, what is the plan CapEx for 2018 and are any renovations part of that plan?

[Howard Tafler:]

Yeah, we do have part of our CapEx was due to we have renovation plans as we sort of indicated and as well as some new stores and some investment in IT infrastructure.

[David Lans:]

Okay, great, thank you very much. And then just another follow-up. What's the probability of selling on Amazon compared to the company's own e-commerce website?

[Joel Silver:]

I think right now it's too early, we haven't really figured out our final pieces, but there is multiple ways for us to sell through Amazon, so all that's been figured out now as the size now focused our next way of implementations. So I'll have better answer for that new quarter.

[David Lans:]

Okay, great. And then just one last question e-commerce, obviously still strong this quarter growing in double-digits and reaching 12.6 - excuse me 12.2% penetration, what is if I remember correctly the goal with longer term of 15% sales, has that changed now with the multi-million dollar investment in the new e-commerce site in the way I mean how things are tracking pretty well there?

[Joel Silver:]

Yeah. No, I think we think there is a lot more headwind than out there, so that was a bit of our short term goals we wrap our head around. But again as we go through this holiday and as we go through this year, we continue pushing ourselves to see what we deliver to that channel.

[David Lans:]

Great, thank you very much.

[Operator:]

There are no further questions at this time. I will turn the call back over to Mr. Silver.

[Joel Silver:]

Thank you for joining us this afternoon. I look forward to continue to update you on our progress. Thanks.

[Operator:]

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