DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript 2024-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's Fourth Quarter and Full Year Results 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 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, the MD&A, which was filed with the Canadian regulatory authorities and is available on www.sedars.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. Fiscal 2023 was a challenging year as our online business didn't perform as well as other channels. Our results prove to be lower than expected overall caused primarily by a slower drive to online consumption by consumers as challenging economic conditions negatively impacted spending for the better part of the year. Altogether, we reported negative adjusted EBITDA of $5.4 million on sales of $60.6 million for the fiscal year ended February 3, 2024.

Frank Zitella, our President, Chief Financial and Chief Operating Officer, will provide you with more details in his overview. Being a seasonal business, I look towards encouraging results in our fourth quarter that point towards tangible signs of a turnaround, and I am highly encouraged by mid-single digit growth in brick-and-mortar sales in the fourth quarter and in the first 12 weeks of fiscal 2024 compared to the same periods in the prior year. The drive for customers wanting an in-store retail shopping trend witnessed that DAVIDsTEA was validated with focus groups and the message was resoundingly clear.

Consumers want to touch, smell and taste our premium specialty teas in store as part of the discovery and purchase experience. Our strength in experiential retail and the desire for our customers to return to stores are aligned with our growth strategy, involving the opening of 3 new stores in the province of Quebec in the fall of 2024 and including locations in Mount Royal, downtown Montreal and Quebec City and more than doubling our Canadian store footprint in the next 3 years.

On the wholesale front, sales decreased 10% in 2023. However, excluding decisions we made to several relationships with unprofitable accounts, sales improved 10.8% year-over-year. We are optimistic about growing this business in 2024 based on our recently announced partnership with Couche-Tard/Circle K, which will offer hot Tea-2-Go go at more than 1,500 convenience stores across Canada. If you recall, we announced in mid-March that DAVIDsTEA will provide a curated assortment of 8 best-selling flavors available in a convenient sachet format to consumers on the move at Couche-Tard and Circle K stores. The tea collection selected for customers includes organic flavors such as Cream of Earl Grey, Silk Dragon Jasmine, David's Breakfast Blend, cold 911 and Cinnamon Rooibos Chai. Herbal caffeine-free varieties like Forever Nuts and Just Peachy and a popular coffee replacement black tea, Vanilla cappuccino.

In addition, as an extension of our partnership, DAVIDsTEA will open 7 full tea bar concepts at select Couche-Tard stores to offer a wide variety of hot and iced teas with a dedicated section and wider offering. The expansion of our wholesale offering of teas into the Northeast United States in the second half of 2023 continued with the release of 4 flavors of premium tea sachets at Stop & Shop supermarket stores and Roche Brothers supermarkets.

We have since continued our U.S. expansion by offering our premium loose leaf tea matcha and premium plastic-free tea sachets into additional accounts. As a result, our optimism for revenue growth in our wholesale channel is supported by concrete strategic actions. In the next month, DAVIDsTEA will enter the ready-to-drink market with a trial launch of sparkling cans of cold brew tea in 3 flavors. A smooth black tea with rich notes of vanilla and citrus bergamot, Cream of Earl Grey, a natural berry-free -- caffeine-free flavor called Magic Potion and an energy giving guayusa [ blend ] with hibiscus featuring our Queen of Tarts tea.

Two of the flavors are sweetened with natural cane sugar while one will be sugar-free and unsweetened. Cold brew teas feature best selling DAVIDsTEA blends and are the first effort by the company to recreate the flavors that customers love in an authentic and premium format. The new ready-to-drink line is on the cusp of being launched at DAVIDsTEA stores and online. Ready-to-drink is part of a larger strategy of building our in-store availability of iced tea, hot tea and specialty beverages, and the company continues to develop and test new ways to make premium tea, easy to consume in many formats to address a sizable market space that is looking for convenience and healthy benefit-driven beverages that are better for you.

Trends that continue to drive innovation in the beverage space for the company include flavors that can be sold as alcohol replacement options as well as emerging demand for bubble tea, milk tea and other novelty tea beverages. I will now turn the webcast over to Frank.

[Frank Zitella, executive]

Thank you, Sarah, and good morning, everyone. DAVIDsTEA made the bold decision of internalizing order fulfillment midway into fiscal 2023 to address the inadequate service customers have been receiving in recent years. Not only did this decision significantly improve the overall customer experience, but it allowed us to fundamentally lower the cost structure of our business. This significant change midyear is a testament to the agility, creativity and resilience of our associates.

During 2023, we also added important members to our management group, including a Vice President of Marketing and a Chief Digital Officer to strengthen our operational capabilities and fully execute our mission of making tea accessible to all, wherever and whenever. Given the observed shift in consumer behavior towards in-store retail shopping, we are bullish about our plans to reenter brick-and-mortar in the right locations and with the right partners with the right products to address an evolving consumer requirement. As of today, we have 18 DAVIDsTEA stores throughout Canada with the objective of more than doubling that number by the end of 2027.

And as Sarah has mentioned, we continue addressing consumer requirements with an upcoming ready-to-drink offering, brewing with healthy, all natural flavors that will fulfill an unmet needs in a very sizable convenience-driven and wellness market. Suffice to say that we have high hopes for our RTD offering, and we expect it will delight consumers.

Turning to our financial results. Total sales decreased 27% to $60.6 million in fiscal 2023 as unfavorable economic conditions and the market trend away from online consumption negatively impacted our revenues. In Canada, which represented 86% of total revenues, sales were down $15.9 million year-over-year, while U.S. sales declined $6.5 million from 2022. Online sales dropped by $20.3 million in 2023 or 39.3% year-over-year as we continue to observe a leveling out of pandemic-driven online sales. Online sales represented 52% of total revenues in 2023 compared to 62% in the prior year. Wholesale channel sales decreased 10% to $9 million in 2023, representing 15% of the total revenues compared to 12% a year ago. For their part, brick-and-mortar sales declined 5.1% to $20.3 million in 2023, accounting for 1/3 of total revenues compared to 26% in the previous year.

As Sarah indicated, we also reported mid-single digit growth for in-store sales in the fourth quarter of 2023 and in the first 4 weeks of fiscal 2024. Anticipating a lower revenue level in 2023, DAVIDsTEA significantly improved operating efficiencies and streamlined its operations during the past year. Gross profit as a percentage of sales increased more than 500 basis points to 39.9% in 2023 and reached 42.6% in the fourth quarter on the strength of internalizing our fulfillment operations.

This decision allowed us to own the overall brand experience for our consumers and reduce the unit cost of servicing them. In terms of cost savings, we reduced our SG&A expenses by $8 million to $38.2 million in 2023 as promised. Excluding the noncash impairment of property and equipment, intangible assets and right-of-use assets of $3.4 million. Turning to the bottom line. Net loss amounted to $13.8 million in fiscal 2023 compared to a loss of $14.9 million in 2022. Adjusted EBITDA for 2023 was negative $5.4 million compared to negative $5 million in the prior year. Finally, we closed the fiscal year with cash on hand of $12.6 million and working capital of $19.7 million.

To help strengthen our short-term cash position, we've entered into a nonbinding term sheet with a commercial lender to provide up to $12 million in the form of a revolving line of credit secured by the assets of the company. The final terms and conditions of the revolving line of credit are subject to completion of business and legal due diligence, including final credit committee approval by the lender. As a result, we expect to have the requisite flexibility to continue implementing our go-to-market strategy and drive towards profitability.

In summary, as we rebalanced our multichannel sales composition, supported by better margins and lower overall cost base, we continue to manage our business to withstand and proactively pivot to anticipate consumer consumption patterns and maximize our omnichannel presence and growth potential.

On behalf of DAVIDsTEA management team, I'd like to thank our employees, suppliers and other stakeholders for supporting us throughout this journey. Likewise, many thanks to our shareholders for their patience and belief in our long-term growth strategy. We know that our share price does not reflect the company's value nor what we're doing. But more than ever, we have a clear path towards profitability and desire to create shareholder value for all. This concludes our review of the fourth quarter and fiscal 2023 results. We encourage investors wishing to obtain additional cover about DAVIDsTEA to contact Investor Relations who will coordinate access to management. Thank you for joining us today.