DAVIDsTEA Inc (NASDAQ: DTEA) Q4 2019 Earnings Call Transcript

DAVIDsTEA Inc (DTEA) Q4 2019 earnings call dated Jun. 15, 2020

Corporate Participants:

Herschel Segal — Executive Chairman and Interim Chief Executive Officer

Frank Zitella — Chief Financial Officer and Chief Operating Officer

Presentation:

Operator

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA’s Conference Call for the Fourth Quarter of Fiscal Year 2019. [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 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 Securities and Exchange Commission today, and is available at www.sec.gov and on DAVIDsTEA’s website. 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.

A reconciliation of non-IFRS measures to the most direct comparable IFRS financials is detailed in our Form 10-K, which was filed with the Securities and Exchange Commission earlier today. As a reminder, all dollar amounts are referred to in Canadian dollars, unless otherwise indicated.

Now, I would like to turn the call over to Mr. Herschel Segal, Executive Chairman and Interim CEO of DAVIDsTEA.

Herschel Segal — Executive Chairman and Interim Chief Executive Officer

Thank you, operator. Good afternoon, everyone and thank you all for joining us as we review our results for the fourth quarter of fiscal 2019, and an update on the business including more recent and key financial metrics. With me is Frank Zitella, DAVIDsTEA’s Chief Operating Officer and CFO.

Since we last spoke in December, the world has certainly changed. Our results for fiscal 2019 were below our expectations. We did however actively manage our working capital, including reducing the inventory that allowed us to finish the year in a solid financial position.

Prior to COVID-19 we were on the right path to execute our transformation strategy, consisting of stabilizing our business from unfavorable trend lines, strengthening and restructuring the business with a new operating model, allowing us to tackle the challenges and uncertainties of the future. The COVID-19 pandemic has forced us to take a difficult and more drastic measure including furloughing a large number of our employees. I will let Frank give you more details.

Where do we stand now? COVID-19 has been a significant cause of anxiety in these past several weeks and many have wanted nothing more than to settle down with the a fine cup of tea. We know the benefits of our health and wellness teas are greatly appreciated.

Effective March 17, 2020, we closed all our stores in response to government mandated measures. Fortunately, our customers in large numbers have shifted to buying our online in supermarkets and drug stores. The performance of these sales channels in recent months has been excellent, continuing to surpass our expectations. We have an amazing brand and portfolio of products that continue to resonate with consumers across North America.

Tea is the most popular drink in the world, and consumption continues to grow. We believe we have a solid plan to turnaround DAVIDsTEA, but we have too many brick and mortar stores losing money. The unpredictability surrounding the recovery from COVID-19 pandemic and the impact of changes in consumer behavior represent significant uncertainties for all retailers.

Our challenge is to execute on our strategy to restructure our North American retail footprint in order to decrease the ongoing losses caused by unprofitable stores. If we are not successful in negotiations with our landlords to optimize our retail footprint to reflect the new circumstances, we may need to pursue a formal restructuring in order to do so. With the full support of the Board of Directors, our management team is aligned and focused on ensuring we successfully navigate the challenges ahead, to emerge with a profitable network of stores complementing our e-commerce wholesale distribution channels.

I wish to underline the devotion of our leadership team and of all employees, particularly during these extremely trying times. And I now turn this call over to Frank to tell us — for a review of our various initiatives and our financial results.

Frank Zitella — Chief Financial Officer and Chief Operating Officer

Thanks, Herschel, and good afternoon, everyone. With the closure of our stores in mid-March, we quickly adapted our business strategy to the new environment and reduced cost to align expenses with our revised revenue streams coming from both our online and wholesale channels. This included temporarily furloughing all store related employees and moving substantially all non-essential remaining employees to afford a work-week. Furthermore, management and members of the Board agreed to reduce their compensation during this crisis. These measures, among others, are intended to better align the Company’s cost structure with its current sales and help preserve its financial position.

Our performance in fiscal 2019, clearly underlines the need to implement change. The COVID-19 crisis has created a sense of urgency and at the same time provides an opportunity to accelerate our business plan. We’re very pleased with the strong performance of our e-commerce and wholesale channel sales during the 8-week and 17-week periods ended May 30. This provides us with the confidence that our transformation strategy will bring the needed results. The past few months have proven, and we’ve never really had any doubt that our exceptional brand resonates strongly with consumers, well beyond our brick and mortar stores.

To achieve a successful turnaround, one of the critical components is to optimize our North American retail footprint to better reflect our omnichannel strategy and the growing emphasis we are placing on our online and wholesale channels. However, there is no assurance that customers will purchase our products at previous volumes through these alternative channels. Furthermore, the duration and impact of the pandemic is unknown and may influence consumers’ shopping behavior and consumer demand, including online shopping.

Now on to the numbers. For the fourth quarter period-ended February 1, 2020, sales decreased 11.6% to CAD73.5 million and comparable same-store sales declined 17.3%. For the same period, wholesale and e-commerce sales increased by 18.5%. Adjusted EBITDA was CAD9.7 million compared to CAD10.9 million in the prior year.

On the positive side, we generated positive cash flow from operating activities of CAD24.9 million and finished the year with a net cash position of CAD46.3 million. We accomplished this by actively managing our working capital and we were able to significantly reduce our inventory levels.

For fiscal 2019, sales decreased by 7.7% to CAD196.5 million from CAD212.8 million in the previous year. Sales from our e-commerce and wholesale channels increased 20.9% driven primarily by greater online adoption as well as by increased demand in our grocery distribution channel. This was offset by a decline of 12.7% in same-store sales. Adjusted EBITDA for fiscal 2019 amounted to CAD11 million compared to a negative CAD1.3 million in the prior year.

We decided to report key financial and unaudited information for the 8-week and 17-week periods to present the snapshot of our more recent financial performance. Sales generated after we shut-out [Phonetoic] all our stores for the period March 18, 2020 through May 30, 2020, grew at an exceptional pace. For that period, e-commerce sales increased by over 268% and wholesale sales increased by over 81% compared to the same period last year.

For the 17-week period ended May 30, 2020, sales decreased by 27.4% to CAD41.2 million compared to the same period last year. This reflects the closure of all our stores during part of the period due to the pandemic. This was offset by exceptional sales growth in our e-commerce and wholesale channels of over 170% and 83% respectively. We are happy with these results and I’m pleased to say that DAVIDsTEA continues to benefit from a solid financial position with no debt and cash position of CAD41 million as of May 30, 2020.

Let me address the current situation. Our stores have been closed since March 17, and as retailers in North America begin to re-emerge from the government mandated measures, we are cautiously balancing the safety of our employees and customers with the desire to reopen select stores in our network. Accordingly, we have not remitted rental payments for the months of April, May and June at this time. We expect to test the reopening of a few stores and we will be very cautious in our approach due to factors over which we have no control.

At this stage we are unclear as to how the pandemic will continue to unfold, and of the impact of any government and landlord programs in our business. Furthermore, the deconfinement measures may be, may place undue operational constraints on our business. At this time, the Company is unable to predict when and how many of its retail locations it will reopen.

That being said, the Company’s ability to successfully execute its strategy is dependent on its success in stabilizing its business from unfavorable trend lines, strengthening its business by focusing on growing its product portfolio, including sales and customer service execution, and effectively optimizing its North American retail footprint. Once completed, this would allow DAVIDsTEA to emerge as a leaner, more sustainable physical presence that complements the growing world-class online grocery business, all supported by a right-sized support organization.

While our stores remain closed, consumers can continue to buy our teas online and in over 2,500 supermarkets and drug stores across Canada. We are confident in our ability to execute our transformation strategy to stabilize, strengthen and restructure the business on an accelerated timeline.

I’d like to echo Herschel’s comments and express the utmost appreciation to our staff for their ongoing efforts to make DAVIDsTEA a better Company. These have been uncertain times and certainly difficult for many of our employees.

To our loyal customers, thank you for continuing to choose our products as your tea of choice. We will continue to do everything possible to live up to your expectations.

To our shareholders, we are extremely conscious of our duty to enhance value. We are totally committed to making this happen, and thank you for your continued patience. We want to wish everyone a great summer and to be safe.

This concludes our remarks, and thank you for joining us today.

Operator

[Operator Closing Remarks]