DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's Second Quarter Results Webcast for Fiscal 2024. 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 about 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, MD&A which was filed with Canadian regulatory authorities and is available on www.sedarplus.ca as well 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 during this webcast, 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. We are pleased to report DAVIDsTEA reached a key inflection point in the second quarter of 2024, with sales increasing 12.8% year-over-year. We are grateful for the trust of our loyal consumers to seek out the best flavor profiles available in the market, as we continue to innovate and introduce new and incredible tasting tea blends to enjoy.

This sales growth was driven by series of actions initiated in recent months to counter challenging economic conditions through a strong focus on product innovation, eclectic assortment of premium teas to attract consumers in stores and online as well as focused product assortment management and value-focused efforts through smarter purchasing and sourcing.

Given in an ongoing inflationary environment, coupled with elevated interest rates, we addressed where needed product margins through various levers. The end result was that we delivered our highest gross profit margin in recent memory at 47.3% in the second quarter, along with double-digit sales growth. Equally important, consumer reaction to our product variety and adaptations have been positive. Clearly, consumers still look to DAVIDsTEA as a beacon of tea excellence in Canada.

Early in the third quarter, this momentum continues with revenues up more than 18% compared to the same period in 2023. With our continued emphasis on in-store experience and community, we are particularly excited about the opening of a new location earlier this month in Mount Royal, Quebec, and another opening slated for early November at Montreal Eaton Center that will raise our number of flagship stores to 20 in Canada.

As mentioned in my prepared remarks last quarter, we are focused on an in-store growth strategy to support our digital platforms because shoppers are increasingly demanding a sensory experience, touching, smelling and sampling our teas before making a purchasing decision. In addition, we witnessed consumers returning to certain shopping centers significantly post-pandemic, particularly premium malls, where people can sample products and share impressions with a knowledgeable tea guide.

Accordingly, we targeted 2 high traffic malls for our store openings in the Montreal area that should bolster sales. As a result, we are highly optimistic that the initiatives outlined earlier, combined with the new store openings, will deliver sustained growth in the revenue-intensive third and fourth quarters.

On the profitability side, we are encouraged by our significant improvement in the second quarter of 2024 as net loss was reduced to $1.5 million, but there's still some lifting that needs to be done to continue the momentum.

Frank Zitella, President, Chief Financial and Operating Officer of DAVIDsTEA, will address this topic in his prepared remarks, but I can tell you it revolves around working capital management and a continued focus on cost reductions and improving operational delivery excellence that should help place the company on the path towards profitable growth.

In summary, DAVIDsTEA delivered solid second quarter results. Sales were up 12.8% year-over-year from a culmination of initiatives, including product innovation, a wider inventory of teas available and assortment management. Two new stores in the Montreal area should contribute to sales growth in the second half of the fiscal year, and a working capital management plan has been implemented to preserve our cash position and accelerate our return to profitability.

I am very proud of the extremely hard work of the team at DAVIDsTEA across our Montreal offices, stores across Canada and in our fulfillment centers. The turnaround and continued success of our mission to bring tea to the world would not be possible without their creativity, tenacity and overall hard work. I am grateful to our customers who are passionate about the brand. We are encouraged by all the feedback and support.

I will now turn the webcast over to Frank.

[Frank Zitella, executive]

Thank you, Sarah, and good morning, everyone. Our financial results are moving in the right direction, as we continue to execute our operational strategy. Revenue are up and costs are down, both year-over-year and sequentially across all significant categories. We also have significant leverage in our business model, which positions us well for the second half of this year as we stabilize against unfavorable headwinds and double down on investments in our brick-and-mortar and online operations.

Alongside the revenue-generating initiatives in the second quarter, we focused on our working capital management to preserve our short-term cash position, which stood at $6.7 million at the end of the quarter. Key measures undertaken include reducing staff in nonstrategic areas, placing head office employees on a 4-day work week over the summer months, eliminating all discretionary expenditures, moderating paid marketing efforts towards reengaging last consumers, improved processing fees to ensure we were never out of stock in store and online, and focused efforts to reduce the unit cost of last-mile delivery to our end consumers.

These decisions and actions enabled us to reduce our net loss to $1.5 million in the second quarter of 2024 from $4.3 million in the second quarter of 2023. Furthermore, working alongside our key vendors to optimize the flow of inventory and perfect our supply chain processes will pay dividends in the future results, as well as terminating our head office lease and moving into smaller quarters will provide savings into the early part of next year.

Moving on to our second quarter financial results. Consolidated sales improved 12.8% year-over-year and 1.6% year-to-date in fiscal 2024. Canada, which currently represents our main focus in terms of sales and marketing efforts, accounted for 87% of revenue, while the U.S. totaled 13%. Brick-and-mortar sales increased 17.8% to $4.2 million, marking the third consecutive quarter of year-over-year revenue growth for business.

Brick-and-mortar sales represented 38% of sales in the second quarter compared to 36% in the second quarter of 2023. Online sales grew 12.5% to $5.5 million as management initiatives that Sarah outlined earlier to gain traction in both online and in-store. Online sales represented 49% of total revenues in the second quarter compared to 50% in the same period last year.

For their part, wholesale channel sales remained stable at $1.4 million in the second quarter, accounting for 13% of total revenues. We retained high hopes for this -- for our expansion into the U.S. The building blocks have been put in place with a new agent and a series of distributors, but it's going to take some time to generate material results. We expect to see some growth in 2025.

Gross profit margin improved to 47.3% in the second quarter from 36.9% in the second quarter of 2023. The significant year-over-year increase was largely due to increased sales combined with lower freight, shipping and fulfillment cost per unit.

In terms of SG&A, they declined 15.2% or $1.2 million to $6.7 million in the second quarter of 2024. Decreased costs related to internalizing fulfillment services, lower marketing expenses and reduced depreciation and amortization drove the improvement. These factors were partially offset by an increase in the impairment of property and equipment and other selling and general and administrative costs. As a percentage of sales, SG&A expenses amounted to 16.5% in the second quarter.

Turning to the bottom line. Adjusted EBITDA for the second quarter was negative $0.3 million compared to negative $2.6 million in the second quarter of 2023. The improvement in adjusted EBITDA can be attributed to increased sales and higher gross profit, along with lower SG&A expenses.

To wrap up, we're highly encouraged by our second quarter financial results and operating performance. Sales have returned to growth mode, new initiatives have been implemented to sustain that growth, and we have executed a disciplined working capital management plan to protect our cash position and accelerate our return to profitability.

This concludes the review of our second quarter results. We encourage investors wishing to obtain additional color about DAVIDsTEA to contact Investor Relations, who will coordinate access to management. Thank you for joining us today.