DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to DAVIDsTEA's Second Quarter 2022 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, which is filed with the Canadian and U.S. Securities Regulatory Authorities and is available on www.sedar.com, www.sec.gov as well as in the Investor Relations section of the company's website at www.davidstea.com. 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 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.

Now I would like to turn the call over to Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

[Sarah Segal, CEO and Chief Brand Officer]

Thank you, operator. Good afternoon, everyone. DAVIDsTEA experienced volatility in our channels. Retail and wholesale channels were stable, however primarily in our online channel, there was a slowdown in the second quarter of 2022, with sales and profitability decreasing year-over-year mainly due to an uncertain macroeconomic environment dampening demand. After successfully navigating through this COVID-19 pandemic we are coping with additional headwinds, notably mounting inflationary pressure and recessionary fears that are affecting consumer habits, and possibly discretionary spending in North America.

Despite these temporary challenges, our wholesale business in Canada expanded in the second quarter with sales more than doubling year-over-year on the strength of a growing footprint at grocery chains, drug stores and big-box locations to 3,800 doors, including a wider assortment of wellness-focused and organic products.

We have complemented our wholesale strategy with store-in-store concepts in drugstores like Rexall, London Drugs and Neighbourly. We are currently selling 30 key assortments within store-in-store concepts across 230 doors in Canada and plan to reach 40 assortments and nearly 300 doors early into calendar 2023. Our entire wholesale strategy is predicated on selling through these customers to consumers at an attractive product margin.

To build on this success story, we will launch the new sachet format that will soon be available throughout our wholesale channel. The new convenience-driven, individually wrapped, fully compostable sachet offering will elevate the consumer experience and speak even more to the brand value and accessibility of DAVIDsTEA.

Beginning in the fourth quarter, we plan to start replicating this wholesale success in the United States with a gradual step-by-step launch at select locations. The plan is to release a curated assortment of loose-leaf tea products, learn from the outcome and expand accordingly. We anticipate it will take two to three years to penetrate the U.S. wholesale market and leverage the expected high volume sales it will generate.

In addition, we intend to introduce our plant-based ready-to-drink beverages in the first quarter of 2023, according to our current projections and fluctuating supply chain constraints, which tends to lengthen new initiatives. These helpful benefit-driven tea-based RTD beverages will build on our expanded wholesale presence and will target a large addressable market with marked differentiation in terms of health and wellness and convenience.

DAVIDsTEA continues to excel in tea-sourcing, lending and expertise in tea knowledge, education and community building, both in our stores and online. The brand's continued focus on tea excellence and expanding the market for premium loose-leaf tea remains our team's focus. Notwithstanding industry-wide supply chain challenges, DAVIDsTEA is moving forward with its growth strategy based on allocating resources to demand creation, product innovation and operational excellence and an entrepreneurial culture. We will focus on what we can control, while taking precautionary measures to manage market volatility.

Thank you for your attention today. I will now turn the call over to Frank Zitella, President, Chief Financial and Operating Officer at DAVIDsTEA.

[Frank Zitella, President, CFO & COO]

Thank you, Sarah, and good afternoon, everyone. Sales decreased 18.7% to C$15.2 million during the second quarter of 2022, mainly due to a decline in e-commerce sales of C$6.5 million. And as COVID-19 restrictions loosened in 2022, consumer spending shifted from online to brick-and-mortar. We believe e-commerce sales will stabilize coming out of this uncertain macroeconomic environment, but we will continue to build on the wellness trend for healthier beverages with our target market.

Brick-and-mortar sales grew 35.5% year-over-year to C$4.2 million in the second quarter of 2022, partially due to the absence of pandemic-related restrictions in Q2 compared to the same period last year. For their part, sales from our wholesale channels more than doubled to C$2.7 million in the second quarter, as mentioned earlier by Sarah. In terms of revenue breakdown, e-commerce, brick-and-mortar and wholesale channels accounted for 55%, 27% and 18% of total sales, respectively in the second quarter.

Gross profit reached C$6.5 million in the second quarter of 2022, down C$1.5 million from Q2 of '21, mainly due to the sales shortfall, partially offset by lower delivery and distribution costs. As a percentage of sales, gross profit amounted to 42.5% for the quarter compared to 42.7% in the second quarter of 2021.

SG&A expenses increased 23.1% year-over-year to $11.2 million in the second quarter of 2022. Excluding software implementation and configuration costs, as well as the wage and rent subsidies received under the Canadian government COVID-19 Economic Response Plan, adjusted SG&A declined 1% year-over-year to C$9.9 million. This drop can be attributed to decreases in depreciation and amortization, marketing expenses and credit card fees, partially offset by increases in ongoing IT expenses, as we continue our transformation to become an omni-channel organization.

As a percentage of sales, adjusted SG&A expenses in the second quarter of 2022 attained 65% compared to 53.5% for the same period last year. Net loss in the second quarter of 2022 totaled C$4.8 million compared to net income of C$75.5 million in the second quarter of 2021. Adjusted net loss, which excludes the impact of restructuring plan activities, the wage and rent subsidies from the Canadian government as well as software implementation and configuration costs amounted to C$3.5 million compared to an adjusted net loss of C$2 million in the same period last year.

Adjusted EBITDA meanwhile amounted to negative C$2.1 million compared to a negative C$0.6 million in Q2 of 2021. The decrease in adjusted EBITDA reflects the impact of sales decline, resulting in a lower gross profit combined with an increase in online marketing expenses. These factors were partially offset by less administrative staff and professional fees. At quarter end, we had C$19 million in cash held by major Canadian financial institutions backed by a strong growth plan. We also recently secured a C$15 million line of credit with the Bank of Nova Scotia to assist with working capital needs and to help us along our path to profitability.

This concludes our Q2 2022 webcast. On behalf of the entire DAVIDsTEA team, thank you for joining the call today.