DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's Second Quarter Earnings Webcast for fiscal 2023. Today's webcast is being recorded. [Operator Instructions].

Before we get started, I would like to remind you of the company's safe harbor language. This presentation includes forward-looking statements with expectations for the performance of the 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 and uncertainties in the Management's Discussion and Analysis of Financial Condition and Results of operations, the MD&A, which was filed with the Canadian regulatory authorities and is available on www.sedar+.ca 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 the company undertakes 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 the MD&A. 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, executive]

Thank you, operator. Good morning, everyone. Our sales in the second quarter continued to reflect cautious consumer behavior due to the challenging economic environment. We also believe that our online sales continued to be impacted by some order fulfillment failures we experienced back in the fourth quarter.

We fully aim to provide a better delivery experience now that we have internalized our fulfillment. In the second quarter, we terminated our relationship with our third-party fulfillment service provider and brought this important function in-house before the end of July, resulting in immediate and noticeable improvements in the overall customer experience.

It was a necessary but difficult decision. However, we are pleased with the immediate benefit to our operations and our customer experience. We continue to work on improving the online customer experience as we move forward with updating the shopping and product knowledge experience on our website, and we are excited about the upcoming release of our shoppable mobile app.

Many upgrades to our website continue to be rolled out, and we expect these improvements to continue to have an impact this year. As we navigate today's complex economic landscape, I wanted to take the time this morning to provide an update on the initiatives we have taken and continue to take to address our post-COVID alignment of the business and drive profitable growth.

In response to consumer demand, late last year, we launched our innovative in-store Tea Bar concept in our store in CF Carrefour Laval followed by Les Galeries de la Capitale store in early 2023. Designed to enhance the shopping experience and boost food traffic, our Tea Bars provide new proprietary technologies that accelerate the beverage preparation experience without diluting the specialty components.

The Tea Bar offer an exclusively curated and seasonally changing menu that showcases a wide variety of beverages at David's team from hot and iced tea and matcha to tea pop and tea-pop Lemonade. During the second quarter, in June, we added a Tea Bar at our Toronto Eaton Center location, marking our first in-store Tea Bar outside of the Quebec market. And we have additional Tea Bar locations slated to open later this year in Ottawa's Rideau Center and in Vancouver Pacific Center. We have continued to focus on profitable sales in our wholesale channel, both in Canada and the U.S.

We continue to sell our premium sachet product in 3,800 locations in Canada and through seasonal offerings in Costco across Canada. Finally, as you know, innovation remains at the core of our strategy, from ready-to-drink beverages, tea-pops, super food powders, cold relief, immunity and wellness products to matcha latte and lemonades. We believe that our enhanced product offering will ensure we continue to delight our customers while also helping drive future sales growth. While the economic environment remains challenging, we are confident that our focus on value creation, innovation and elevating our brand will position us for long-term success.

We are grateful for your continued support as shareholders, and we look forward to sharing the benefits of these initiatives with you in the form of sustainable growth and increase shareholder value. Thank you for your attention today.

I will now turn the call over to Frank.

[Frank Zitella, executive]

Thank you, Sarah, and good morning, everyone. As Sarah mentioned, our sales for the second quarter were impacted by the current economic climate and by order fulfillment failures back in the fourth quarter. Total sales for the quarter were down 35.3% to $9.8 million. In Canada, which represented 85.2% of total revenue, our sales were down 34.5% while our U.S. sales declined 39.6%.

Our online sales decreased 41.4% as we continue to see a leveling out after the pandemic fuel peak we experienced back in calendar 2020. Online sales represented 49.5% of total revenues compared to 54.8% in the prior year quarter. Again, we also believe that our online sales in the second quarter continued to be impacted by the order fulfillment challenges in Q4.

And as Sarah had mentioned, we've taken our fulfillment back in-house to ensure our online consumers receive the experience they would expect from a premium brand such as DAVIDsTEA. Wholesale channel sales decreased 47.5% to $1.4 million, representing 14.3% of total revenues compared to 17.6% a year ago.

Meanwhile, our brick-and-mortar stores posted a 15.4%, sales decline to $3.6 million, representing 36.2% of total revenues, which was up from 27.6% a year ago. Our gross profit in the quarter was down slightly to 36.9% compared to 38.3% in the prior year quarter due to a per unit increase in freight shipping and fulfillment costs.

Gross profit in Canada was down to 36.2% from 38%, while our U.S. gross profit increased to 41.3% from 40% a year ago. We're happy to report on the progress to date from our cost containment plan, which amounted to a 25.1% reduction in selling, general and administrative expenses in the quarter compared to the same quarter last year.

SG&A expenses totaled $7.9 million in the quarter, which was down from $10.6 million in the prior year quarter. In addition to the elimination of software implementation costs, we reduced other costs, including staff compensation costs, online marketing expenses and professional and consulting fees.

Importantly, through the first 6 months of the fiscal year, we reduced our SG&A expenses by [ $5.0] million, which has us well on our way to achieving our goal of reducing our annual SG&A cost by between $8 million and $10 million.

Adjusted EBITDA for the quarter was negative $2.6 million compared to negative $2.1 million for Q2 of last year. The decrease reflects our lower sales and gross profit, partially offset by the reduction in our SG&A expenses. We finished the quarter with a cash position of $14.2 million, working capital of $24.5 million and no interest-bearing debt. Although we're not pleased with our overall financial performance, they are in line with management's expectations as we navigate towards the return to profitability.

We remain committed to delivering long-term value for all shareholders, and we believe that our value creation initiatives, combined with our cost continuing plan, will help renew the journey towards profitable growth.

This concludes our review of the second quarter. We encourage investors wishing to obtain additional color on the quarter to contact Investor Relations, who will coordinate access to management. On behalf of the entire DAVIDsTEA team, we thank you for joining us today.