DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's Fourth Quarter and Full Year Earnings Webcast for fiscal 2022. 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 and Uncertainties in our Management's Discussion and Analysis of Financial Conditions and Results of Operations, the MD&A, which was filed with the Canadian regulatory authorities and is available on sedar.com as well as in the Investor Relations section of the company's website at 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 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. Sales and profitability decreased in fiscal 2022 as rising inflation and higher interest rates significantly reduced consumer demand.

Total sales declined 20% year-over-year to $83 million in 2022, while net loss and adjusted EBITDA amounted to $14.9 million and a negative $5 million, respectively. Clearly, we endured unfavorable economic conditions in the second half of the year, which prompted us to implement a cost-containment plan in early February that is expected to reduce our cost base by $8 million to $10 million annually.

Aligned with our growth strategy, we recently signed a distribution agreement with the largest publicly traded wholesale distributor of health and specialty foods in the U.S., supplying national and regional grocery chains.

We will be launching 6 SKUs of flavorful sachet packs at more than 400 grocery stores in the Northeastern U.S. this fall to further expand our wholesale footprint.

As previously disclosed, we are adopting a gradual step-by-step approach to address the U.S. wholesale market. We anticipate it will take 2 to 3 years to penetrate the U.S. market and leverage the expected high volume sales it will generate.

Earlier in 2022, we introduced our individually wrapped fully compostable sachet format that elevated the brand and convenience of DAVIDsTEA's products throughout our wholesale channel in Canada. This new sachet format is widely available across grocery chains, drugstores and big box locations totaling 3,800 stores. For example, we are currently selling a signature exclusive bag of 50 sachets in the sorted flavors coast-to-coast at Costco stores in Canada.

We are also obtaining positive results from our store-in-store concept with more than 300 locations carrying our premium tea offerings and have plans to add another 35 locations by the end of the second quarter. Customer traction has been solid, but it has been tempered by challenging market conditions.

We are upgrading our flagship stores within the DAVIDsTEA portfolio. Of note, brick-and-mortar sales were up almost 4% in 2022. So that's another strategic area where we intend to build upon and optimize the brand experience.

We fully renovated our store at Les Galeries de la Capitale in Quebec City with a focus on new beverage offerings and a heightened interactive shopping experience. Consumers are welcomed with an open table concept providing them with self exploration and self educational opportunities through the assistance of enhanced digital experience.

While unfavorable economic conditions have slowed down our ambitious long-term growth plans and we made the hard decision to align our cost structure with our current revenue run rate. We remain focused and optimistic on our competitive advantages. The strength of our innovation, new collections, match of lens and broad demographic appeal of our brand will reveal anticipated positive traction on our path towards profitability.

Long-term brand expansion and profitability remain the key focus areas of the company with a strong emphasis on tea leadership, sustainability and elevating the brand experience.

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. Sales decreased 21.4% year-over-year to $31.4 million in the fourth quarter of 2022, slightly above the range that we provided in our preliminary results announcement in early February.

The sales decrease was anticipated as continued inflationary pressures and higher interest rates negatively impacted consumer confidence. To cope with macroeconomic headwinds we proactively implemented a cost-containment plan that will be reflected in our upcoming results. More on this subject later in my prepared remarks.

Sales from e-commerce and wholesale channels declined 24% or $7.4 million to $23.3 million in the fourth quarter as previous 2 years of pandemic-fueled online sales continue to level out. Brick-and-mortar sales meanwhile dropped 12.5% or $1.2 million to $8 million in the fourth quarter of '22.

In terms of revenue breakdown, e-commerce and wholesale channels accounted for 74% of sales in the fourth quarter, while brick-and-mortar sales represented 26%. Reduced sales, combined with a highly promotional environment and operational delays in fulfilling consumer orders online lowered our margins and profitability in the fourth quarter of 2022.

We're working closely with our third-party logistics partner to help address these known operational issues as we implement permanent solutions to address spikes in demand that we experienced in the latter part of the year.

Gross profit reached $8.6 million in the fourth quarter compared to $15.3 million in the fourth quarter of 2021. The year-over-year decrease was mainly due to lower sales, a greater emphasis on promotions as well as increased freight shipping and fulfillment costs.

As a percentage of sales, gross profit decreased to 27.4% from 38.5% in the same period in 2021. SG&A expenses declined 14.4% year-over-year to $11.9 million in the fourth quarter of '22. This improvement can be attributed to reduced online marketing expenses, compensation-related savings net of separation costs, lower amortization costs, reduced professional consulting fees as well as lower insurance costs. These items were partially offset by a provision for legal claims and another provision against supplies inventory. As a percentage of sales, SG&A expenses amounted to 38% in the fourth quarter of 2022 compared to 35% in the fourth quarter of 2021.

Adjusted EBITDA in the fourth quarter of '22 was negative $0.9 million compared to $3.7 million in Q4 of '21. The decrease in adjusted EBITDA reflects the year-over-year impact of reduced sales and gross profit partially offset by lower SG&A expenses.

Net loss totaled $3.3 million in the fourth quarter compared to net income of $1.3 million in the fourth quarter of 2021. At the end of fiscal '22, we had a cash position of $22.4 million and no debt.

Now turning to our cost-containment plan. We implemented several cost-cutting measures in early February, including the layoff of 15% of head office staff and the elimination of $4 million of IT investments related to the launch of our ERP system in fiscal '22 that will now be in a maintenance mode in 2023.

As Sarah mentioned earlier, we anticipate annual cost savings of between $8 million and $10 million from this plan, which should place us on a path towards profitability.

Finally, a quick word about our transition to the TSX Venture Exchange from the NASDAQ Global Market earlier this month. Given that our common shares have traded below $1 for 30 consecutive business days, we had received the notice from the NASDAQ Global Market that our shares were not in compliance with our bid price rule.

After careful consideration, the Board of Directors determined it was in the best interest of the company to delist its shares from the NASDAQ and list on the TSX Venture Exchange. Listing on a Canadian Stock Exchange makes plenty of sense for DAVIDsTEA.

We have significant brand awareness in Canada. All our retail stores are located north of the border and the majority of our revenues are generated in Canada.

In addition, a TSX Venture Exchange listing creates opportunities to reduce administrative and compliance costs without compromising investor confidence. Shareholders and investors in the United States can trade our shares through the facilities of the TSX Venture Exchange. It's a win-win proposition for DAVIDsTEA and investors alike.

Despite a challenging environment, we remain focused on creating shareholder value for all. With a motivated and entrepreneurial team that is market-driven, we will continue to anticipate and react to changing market conditions with speed and agility with a mission to make tea fun and accessible to all.

This concludes our remarks for Q4 2022. We encourage investors wishing to obtain additional color on the quarter to contact Investor Relations at investors.davidstea.com, they will coordinate access to management. On behalf of the entire DAVIDsTEA team, we thank you for joining us today.