DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA's Third 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 was 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 has not been immune to the macroeconomic headwinds that impacted retail businesses in North America in the third quarter and persisted into the fourth quarter. Although our competitive advantages remain strong, on the strength of our wellness-driven portfolio of teas, innovative product launches and broad demographic appeal of our brands, we anticipate our financial results will be under pressure until the economic environment becomes more stable.

At this time, it's difficult to forecast the extent and duration of the challenging market environment, but we can lean on our Omni channel platform and seasoned management team to navigate through this trying period. Fears of a recession, exacerbated by rising interest rates have significantly lowered consumer confidence and discretionary spending. In addition, we continue to manage through supply chain disruptions, increased input costs and periodic shortages of labor resources. As a result, total sales declined double digits to $16.2 million in the third quarter of 2022 from the same period last year, while net loss and adjusted EBITDA amounted to $4.7 million and a negative $2 million respectively.

I am also confident we will draw on the experience, resilience and increased operational efficiency gained from the COVID-19 pandemic to overcome current macroeconomic headwinds, while providing our customers with an unmatched shopping experience, both in-store and online during the upcoming holiday season.

Turning to recent operating highlights, we went live with our new enterprise resource planning, ERP and point-of-sale POS system on September 1. The implementation of these software systems marked the culmination of several months of hard work by DavidsTEA staff to build a seamless back office for order management and customer support. For the ERP system alone, we have invested $4 million since the beginning of the fiscal year. Ultimately, these investments will reduce our cost of doing business and add incremental value to consumers when fully commissioned and optimized.

We also continue to work jointly with our third-party logistics partner to optimize a 750,000 square foot distribution facility for our business. Notably during peak demand periods like Black Friday, we experience higher peak demand, causing some delays in processing orders. The mission-critical investments we have made in the past 18 months are gradually coming online, but it will take time to fully integrate and optimize them. We are focused on continual improvement and during this transition, we apologize to any customer whose experience is not perfect. We have taken steps to follow up and make it right.

Finally, I would like to reiterate that we intend to move forward with plans to test our wholesale strategy in the U.S. in the fourth quarter. We will provide a curated offering of Loose Leaf Tea products on a trial basis to wholesale partners in the U.S. Northeast. The strategy involves a step-by-step launch to gauge consumer taste and gradually replicate the success we enjoyed in Canada.

To wrap up, DAVIDsTEA is faced with yet another challenge in the form of the current macroeconomic environment. We have encountered other obstacles in the past, such as the CCAA restructuring, global pandemics as well as global supply chain issues and have always emerged stronger to meet customer demand. We believe it will be no different this time around as we continue along our path to value creation.

While the technological upgrade, system improvements and distribution optimization needed to be done, it is paired with a challenging global environment. This combination has forced us to look at how we -- how to work smarter, leaner and more focused, which will ultimately improve all aspects of the business.

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 and COO]

Thank you, Sarah, and good afternoon, everyone. Sales decreased 27.1% to $16.2 million in the third quarter of '22, mainly due to the macroeconomic headwinds that Sarah outlined earlier in her prepared comments.

Sales from our e-commerce channel declined 29.5% or $4.3 million year-over-year to $10.2 million in the third quarter. We believe e-commerce sales will eventually stabilize coming out of this volatile market environment, so we intend to build on the wellness trend for healthcare beverages with our target audiences.

Brick-and-mortar sales dropped 12.5% or $0.6 million year-over-year to $4.4 million in the third quarter of 2022, while sales from our wholesale channel decreased 41.8% or $1.1 million to $1.6 million during the same period. In September, we launched a new convenience-driven format in our wholesale channel, a fully compostable individually wrapped sachet format with an expanded assortment.

Promotional tactics accelerate the sales of existing inventory has created this revenue shortfall. It should be noted that the revenue shortfall on wholesale front is predominantly a timing issue with large grocery chains, pharmacies and big-box stores. So we're not concerned about the health of this business. Sales of our wholesale segment are up 33.5% after nine months into the fiscal year.

In terms of revenue breakdown, e-commerce, brick-and-mortar and wholesale channels accounted for 63%, 27% and 10% of total sales, respectively, in the third quarter. Gross profit reached $6.3 million in the third quarter of 2022, down $2.3 million from Q3 of '21. The year-over-year decrease was primarily due to lower sales, partially offset by reduced delivery and distribution costs. As a percentage of sales, gross profit was stable year-over-year at 38.8%.

SG&A expenses increased 6.7% year-over-year to $10.9 million in the third 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 decreased 8.1% year-over-year to $9.5 million. This drop can be attributed to decreased -- or sorry, reduced marketing expenses and credit card fees partially offset by increases in IT expenses as we continue our transformation to become an Omni-channel organization. As a percentage of sales, adjusted SG&A expenses attained 58.9% in the third quarter of 2022 compared to 46.7% in the same period last year. We acknowledge this cost level was higher relative to our current revenue run rate. So we are weighing options to realign these costs to help cope with challenging market conditions.

Net loss totaled $4.7 million in the third quarter of '22 compared to $1.9 million in the third quarter of '21. Adjusted net loss, which excludes the impact of restructuring plan activity, the wage and rent subsidies from the Canadian Government as well as software implementation and configuration costs amounted to $3.3 million compared to an adjusted net loss of $1.8 million in the same period last year.

Adjusted EBITDA, meanwhile, was negative $2 million compared to negative $0.3 million in Q3 of 2021. The decrease in adjusted EBITDA reflects the impact of the year-over-year sales decline, lower gross profit and increased SG&A expenses. At quarter end, we had $16.1 million in cash held by major Canadian financial institutions. We also had a $15 million line of credit to assist with working capital needs and help us along our way for the path to profitability.

We have considerable work ahead to stabilize the business and overcome the current economic and operational headwinds. With a healthy working capital position and a seasoned entrepreneurial team, we are focused on executing against our value creation initiatives and realigning our operating structure to meet the anticipated demand hit, ultimately driving towards the path to profitability.

This concludes our comments on Q3 2022. We encourage Investors wishing to obtain additional color on the quarter to contact investor relations, who can coordinate access to management.

On behalf of the entire DAVIDsTEA team, thank you for joining us today.