DAVIDsTEA's (DTEA) CEO Sylvain Toutant on Q4 2015 Results - Earnings Call Transcript

| About: DAVIDs TEA (DTEA)

DAVIDsTEA (NASDAQ:DTEA)

Q4 2015 Earnings Conference Call

April 12, 2016 16:30 ET

Executives

Rachel Schachter - Investor Relations

Sylvain Toutant - President and Chief Executive Officer

Luis Borgen - Chief Financial Officer

Analysts

Matthew Boss - JPMorgan

Lorraine Hutchinson - Bank of America

Kelly Bania - BMO Capital

Tania Anderson - William Blair

Operator

Good day and welcome to the DAVIDsTEA Fourth Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Rachel Schachter of ICR. Please go ahead.

Rachel Schachter

Thank you. Good afternoon, everyone. With me on the call is Sylvain Toutant, President and Chief Executive Officer and Luis Borgen, Chief Financial Officer.

Before we get started, I would like to remind you of the company’s Safe Harbor language, which I am sure you are all familiar with. This presentation includes forward-looking statements about our expectations for the performance of our business in the coming quarter and years. Each forward-looking statement contained in this presentation is subject to risk and uncertainties that could cause actual results to differ materially from those projected in such statement. Additional information regarding these factors appears under the heading Risk Factors in our SEC filings available at www.sec.gov and on our 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. If any non-IFRS financial measure is used on this call or presentation of the most directly comparable IFRS financial measure to this non-IFRS financial measure will be provided as supplemental financial information in our press release.

Now, I would like to turn the call over to Sylvain Toutant, President and Chief Executive Officer of DAVIDsTEA.

Sylvain Toutant

Thank you, Rachel. Good afternoon, everyone and thank you for joining us today. I will begin by reviewing the highlights of our fourth quarter and full year performance and then discuss our progress on our growth strategy as well as thoughts on the coming fiscal year. Luis will then go over our financial results in more detail and review our outlook. After which, we will open up the call to your questions.

We are very pleased to have ended the year with a strong fourth quarter, which came in above our top and bottom line guidance ranges. The highlights include revenue growth of 22.7%, comp growth of 6.6% and adjusted EPS of $0.45. As I look back to our performance for the entire fiscal year 2015, I am very proud that we delivered on our top and bottom line financial goals that we set for ourselves at the beginning of the year in addition to our operational goals.

For the fiscal year, revenues increased 27.3% to $180.7 million, comp increased 6.6% and adjusted EPS was $0.40. Looking more closely at the fourth quarter, total sales of $75.8 million were nearly $4 million above the high end of our expectations despite a choppy overall retail environment and pronounced economic headwinds affecting the Canadian market. Total sales increased 22.7% compared to the fourth quarter of the prior year, which was driven by strong new store performance and a healthy comparable sales increase of 6.6% on top of an 8.2% comp sales increase in the prior year period.

Q4 2015 marks our 26th consecutive quarter of comp increases and this strong comp performance was again fueled by our innovative merchandise assortment, our engaging in-store experience and our unique and compelling marketing efforts which continued to resonate with our customers. We opened 10 new stores during the fourth quarter, including 3 stores in the last 8 weeks ending the quarter with 193 stores or an increase of 25% versus the end of Q4 last year. This includes the 156 stores or 81% of our base in Canada and the remaining stores in the U.S. We achieved our 2015 goal of growing our store base by 25% or 39 net new store which is well above our long-term target of store growth in the high-teens. Our 2015 openings included 27 new stores in Canada, with 1 store closure due to the termination of a sub-lease and 13 new stores in the U.S. as we continue to expand our footprint to realize the total potential of over 550 stores that we believe exist for the DAVIDsTEA brand in North America.

For our fiscal 2016, we are again planning to open around 40 new stores representing 21% store growth with a similar Canada-U.S. mix of opening as we had in fiscal 2015. Our current plan includes 23 to 27 new stores in Canada and 13 to 17 new stores in the U.S. In Canada, our new store will mostly be instilling existing market with some smaller market openings, while our U.S. store openings will be more skewed toward mall, lifestyle and outlet location. Overall, we remain disciplined with our real estate strategy as we continue to target high traffic locations that are ideal for our concept. We are excited about our fiscal 2016 class of store and will announce these locations around each store opening date.

Moving on to profitability, gross profit dollars in the fourth quarter increased by 21% to $42.2 million. Our gross profit as a percent of sales was 55.7%, a decrease of 80 basis points over the same quarter in 2014 driven mostly by FX impacts. On a constant currency basis, gross profit as a percent of sales was 57.9% or up year-over-year, which Luis will discuss in more detail shortly. Driven by the sales outperformance, adjusted EBITDA of $18.9 million was towards the high end of our guided range and increased 15% compared to the prior year period level of $16.5 million.

Adjusted results from operating activity were $16.2 million. Adjusted earnings per share for the quarter, was $0.45, a $0.01 above the high end of our guidance and compared to adjusted earnings per share of $0.46 in the prior year period. The strength of our fourth quarter and fiscal 2015 performance continues to reflect the broad demographic appeal of our multi-channel concept with a flexible store format and compelling unit economics as well as a growing and accretive e-commerce business.

Our unique brand is modern and accessible, which is reinforced through our effective grassroots marketing strategy. Innovation and design have always been a top priority for us and we continue to drive a steady stream of newness in both the tea and the hard good categories to which our customers are very receptive. Our strong quarterly and annual performance is also the direct result of the progress we are making across our strategic growth priorities combined with our targeted retail expansion, which all continued to drive brand awareness.

Let me briefly outline what our priorities were heading into 2015, discuss our progress on each as well as share how we are approaching fiscal 2016. Our number one priority was opening profitable new stores in 2015, which I just discussed and this remains our number one priority for 2016 with 40 planned store openings representing 21% store growth. Another top priority in 2015 was driving comparable sales growth, which remains a key focus for 2016. While we benefit from the increasing health and wellness awareness taking place in the tea industry, we are continuously focused on innovation, which is a key driver of our comp performance. For the holiday season, we launched new tea flavors, including Cardamom French Toast, Hot Chocolate and Gingerbread Cookie and also a wellness in January, which all received a very positive customer response. All of our blends are available for purchase as a prepared beverage to encourage tasting and help introduce new customers to DAVIDsTEA, while also introducing new teas to our existing customers.

We are excited about the recent launch of our new iced tea press, which allows customer to make iced tea on the go and we have many other exciting and innovative products that we will launch throughout fiscal 2016, which we are confident our customer will love. Additionally, we continue to focus on new and exciting tea blends as we introduced new teas each year that contributed a fun and sensory environment within our stores that our customers enjoy. Our unique grassroots marketing efforts combined with our digital campaigns continued to drive brand awareness in 2015.

During the fourth quarter the newness and customization of our holiday gift set, again resonated with our customer as they share their love of tea over the holiday with tea gifting. We also participated in quite a few community events in the fourth quarter across both Canada and the U.S. including the Vancouver Tea Festival, the Toronto Tea Festival, the Lung Force Walk in Los Angeles and Boston Common Tree Lighting, just to name a few of those events. For 2016, we have many exciting marketing initiatives in the pipeline including our recent partnership with Me to We, an innovative social enterprise that supports the work of charity partner Free the Children. In collaboration with Me to We, DAVIDsTea has created the collection of Me to We tea and tea related accessories that are available on our website and in store as well as on the metowe.com.

Every purchase of DAVIDsTea product from the Me to We collection will contribute to giving clean water to a child in a developing community in Kenya. We are very excited to be working with Me to We and are inspired by the positive impact we can have in developing communities in Kenya. Additionally, in 2016 we will focus on more targeted and personalized digital campaigns as a result of our enhanced CRM capability, which brings me to our e-commerce site. As a reminder, in July 2015, we made significant improvements to our e-commerce site including full integration with our Frequent Steeper loyalty program as well as personalized content. In the fourth quarter we again saw improved conversion as well as a better customer experience including optimized search engine capabilities and increased speed for customer assessing information content which was very beneficial for both our customer and us during the holiday season.

Importantly in fiscal 2015, our e-commerce penetration increased to 9.4% of sales from 7.9% in 2014 as we make progress towards our long-term target of 15%. Our enhanced e-commerce platform also has allowed us to collect personalized data on individual customer preference from of Frequent Steeper loyalty program which in turn affords us to – the opportunity to create a deeper connection with our loyal customer. We are excited that we now have the ability to tailor our marketing strategies by geography in turn be even more relevant to our customers. As an example, we just launched a targeted marketing campaign in California around ice tea since our customers are more likely to drink ice tea in the winter months given the warmer weather.

In 2016, we will continue to customize our marketing efforts which we believe will enable us to drive incremental sales over time. Lastly, we remain excited about continuing to increase our brand awareness through the relatively new opportunity within the hotel, restaurant and institutions sector given our partnership with Air Canada as well as Le Germain and Alt Hotels across Canada. Both are great opportunities to increase our brand visibility in North America. So overall, we are pleased to have ended the year with a strong fourth quarter and came in ahead of our guidance despite the choppy retail environment that existed for many North American retailers. We remain focused on our strategic priorities in 2016 and expect to deliver a year in line with our longer term growth targets despite absorbing greater FX headwinds and wage and compensation increases.

In closing, I want to reiterate the attributes, the unique attributes of DAVIDsTea. We believe that our high growth and modern brand that is reinventing the tea experience, broad and innovative product offering, distinct retail concept with a focus on customer service, broad demographic appeal, versatile store model and compelling e-commerce platform all support our longer term outlook of sales growth of about 20%, store growth in the high-teens, comp sales growth in the low to mid single-digit range and adjusted EBITDA margin in the high teens and net income growth of about 25%.

Before I end, I want to take a moment to thank all of our team members for their tireless contribution to our company and our customers. They have driven our success to-date and we look forward to building on this track record in 2016. And now for a more detailed review of our fourth quarter and fiscal 2015 results as well as our fiscal 2016 guidance, I will turn the call over to Luis Borgen, our Chief Financial Officer.

Luis Borgen

Thanks Sylvain and good afternoon everyone. I will begin my remarks with a view of our fourth quarter and full year 2015 results and then discuss our outlook for fiscal 2016. Before I begin let me remind you that we report our results in Canadian dollars, so please keep in mind that the dollar amounts I refer to when reviewing our results and guidance are Canadian dollars. In addition, our fiscal 2015 results included 52 weeks compared to 53 weeks in fiscal ’14 or a 13-week fourth quarter in 2015 versus a 14-week fourth quarter in 2014. This change in the number of weeks from fiscal 2014 to fiscal 2015 affects the comparability of results for the fourth quarter and fiscal year 2015 compared to the same periods in fiscal 2014. The additional week in fiscal 2014 contributed approximately $2.7 million in consolidated net sales. Our sales in the fourth quarter of 2015 were $75.8 million, up 22.7% from $61.8 million reported in the fourth quarter of 2014. On a comparable 13-week basis, sales for the fourth quarter of fiscal 2015 increased 28.3%. During the fourth quarter we opened 10 new stores and ended the year with 193 stores including 156 stores in Canada and 37 stores in the U.S., an increase of 39 net new stores or 25% versus the prior year period.

We are pleased with our overall new store performance in the fourth quarter and our existing new stores continue to deliver strong performance as reflected in our 6.6% comp. Our fourth quarter comparable sales increased by 6.6% on top of an 8.2% comp increase in the fourth quarter of last year. As Sylvain mentioned Q4 2015 marks our 26th consecutive quarter of positive comp sales growth. The team has executed well against this holiday season with our compelling array of holiday and gift giving merchandise as well as effective marketing message. Our 6.6% fourth quarter comp was more than entirely driven by ticket increases with U.S. comps again outperforming Canada. Merchandising execution is highlighted by strong performance of personalized and customizable gifts and kits as well as innovative hard goods product that resonated with customers during the important holiday quarter was the driver of our ticket increase.

Now with the profitability, gross profit dollars increased by 20.9% to $42.2 million, up from $34.9 million reported in the fourth quarter of 2014. Gross profit as a percent of sales was 55.7%, the decline versus the prior period of 80 basis points was due primarily to foreign exchange headwind, partially offset by supply chain efficiencies. Excluding the FX impact on a constant currency basis, gross profit dollars in the fourth quarter were $43.9 million, up 25.8% year-over-year with a corresponding gross profit as a percentage of sales of 57.9%, up 140 basis points from last year and driven by improvements in supply chain efficiency and lower product costs. As we have said in the past, we have a Canadian dollar denominated P&L and approximately 85% of our sales are generated in Canada. However, 70% to 80% of our purchases are in U.S. dollars. As a result the strengthening of the U.S. dollar relative to the Canadian dollar in the last year has a significant impact on our cost of goods sold.

On an adjusted basis SG&A increased to 34.3% from 33.3% due to public company related costs and higher wage and compensation costs. Adjusted operating income for the fourth quarter of 2015 was $16.2 million as compared to last year’s adjusted operating income of $14.3 million. As a percentage of sales adjusted operating margin decreased 170 basis points to 21.4% from 23.1%.

Our effective tax rate for the fourth quarter of 2015 was 27.3% compared to minus 15.4% in the fourth quarter of 2014. We expect the annual effective tax rate on a go forward basis in 2016 to be approximately 30%. When I refer to adjusted net income and adjusted EBITDA, this excludes the impact of any one-time cost in both time periods. And when I refer to adjusted EPS, it is EPS based on adjusted net income using an adjusted fully diluted weighted average share calculation for both time periods that assumes the IPO took place at the beginning of each respective period to facilitate a cleaner comparison. Please see the IFRS to non-IFRS reconciliation tables in our press release for further detail.

Adjusted net income for the fourth quarter of 2015 was $11.8 million or $0.45 per fully diluted share as compared to adjusted net income of $11.4 million or $0.46 per fully diluted share in the prior year period. Adjusted EBITDA for the fourth quarter of FY ‘15 was $18.9 million, an increase of 14.5% compared to adjusted EBITDA of $16.5 million in the prior year period.

Looking at our full year results, for fiscal ‘15 our sales were $180.7 million, an increase of 27.3% from $141.9 million in the prior year period. On a comparable 52-week basis, sales for the full year 2015 increased 29.8%. Our comparable sales for the year increased by 6.6% on top of an 11.1% comp increase in 2014. Gross profit dollars increased by 22.7% to $95.3 million up from $77.7 million in fiscal 2014. Gross profit as a percent of sales decreased 200 basis points to 52.8% from 54.8% in the prior year period due primarily to foreign exchange headwinds. On a constant currency basis, gross margins increased 40 basis points driven by supply chain efficiencies primarily.

On an adjusted basis, SG&A decreased to 44.2% from 44.4% due to leveraging our fixed cost. Adjusted operating income for the year was $15.5 million as compared to last year’s adjusted operating income of $14.7 million. As a percentage of sales, adjusted operating margin decreased 180 basis points to 8.6% from 10.4%. Adjusted net income was $10.5 million or $0.40 per fully diluted share for fiscal 2015 as compared to adjusted income of $9.6 million or $0.38 per fully diluted share in the prior year period.

Adjusted EBITDA for fiscal 2015 was $24.6 million compared to adjusted EBITDA of $21.9 million in the prior year period. Touching quickly on the balance sheet and cash flow, we ended the year with $72.5 million in cash and no debt. Cash was $52.7 million higher than the prior year period as a result of the cash received from the proceeds of the IPO. Year end inventory was $17.8 million as compared to $12.5 million in inventory in the prior year period. This increase was due to investment in inventory to support new store growth as well as higher inventory costs related to a stronger U.S. dollar. On a constant currency basis, inventory growth was approximately 33% broadly in line with our 2015 sales growth. During fiscal year 2015, we incurred approximately $18 million in capital expenditures, which was in line with our expectations.

Now, I would like to turn to our guidance. For the first quarter of fiscal 2016, sales are expected to be in the range of $43 million to $44 million based on opening 2 new stores and assuming a comparable sales increase in the mid single-digit range. Our Q1 guidance assumes a decline in operating income rate versus the prior year due to lower gross profit rate driven primarily by foreign exchange headwinds. We have hedged all of our U.S. dollar purchases for fiscal 2016 and this is reflected in our outlook. In addition, we expect SG&A de-leverage due to higher wages and higher stock-based compensation expense versus Q1 2015.

Adjusted EBITDA is expected to be in the range of $4 million to $4.5 million. Adjusted net income is expected to be in the range of $900,000 to $1.2 million, with adjusted income per fully diluted common share in the range of $0.04 to $0.05 on approximately 26.0 million fully diluted weighted average shares outstanding. For fiscal 2016, net sales are expected to be in the range of $215 million to $219 million, a 19% to 21% increase over FY ‘15. This is based on opening 40 net new stores for the full year and assuming a comparable sales increase in the mid single-digit range. Our full year 2016 guidance assumes FX driven gross profit as a percent of sales declines are offset by anticipated leverage of fixed cost and SG&A. Adjusted EBITDA is expected to be in the range of $31.0 million to $33.0 million. Adjusted net income is expected to be in the range of $13 million to $14 million or $0.50 to $0.54 per share, which represents EPS growth of 25% to 35% on about 26.1 million adjusted fully diluted common shares outstanding.

Now, I want to make some comments about the expected cadence of fiscal 2016 as you should keep in mind as you update your quarterly models. While we expect adjusted EPS for the full year to increase in the 25% to 35% range from fiscal 2015, we expect Q2 and Q3 loss per share to be slightly higher than the prior year periods due to FX headwinds as well as higher wages and higher stock-based compensation expense. Also, as we anniversary FX headwinds, higher wages and compensation expense in Q4 and benefit from higher sales volume associated with the holiday season, we expect our fourth quarter 2016 EPS increase to be above the increase we are projecting for the full year. Finally, we expect CapEx in 2016 to be approximately $21 million to $23 million. We have planted about 85% to 90% of our capital budget to our 40 planned new stores and some store renovations with the remainder of the capital budget allocated towards making continued investments in our infrastructure. For all other details related to our resulting guidance, please refer to our earnings press release.

And with that, I would like to turn the call back to our operator to start the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Matthew Boss with JPMorgan.

Matthew Boss

Hi, congrats on a nice quarter.

Sylvain Toutant

Thanks, Matt.

Matthew Boss

So, on same-store sales, can you breakout traffic versus ticket in the quarter, what you are seeing in the U.S. versus the Canadian store base? And then just on the overall key market, any change to the high single-digit industry growth rate that you cited at the time of the IPO?

Sylvain Toutant

Yes. So, let me start with the traffic versus ticket. The first thing as we said, it was driven mainly – or taking our average comp was driven mainly by our ticket obviously, but this really reflects the strong performance of our gift kits and hard goods, which is a key priority in our merchandising strategy, especially in the all important holiday quarter. So, the other thing is to keep in mind is we don’t have traffic counters. So, when we talk about traffic, we actually talk about transaction. And so when you start looking at our transaction, you have to take what is driving our transaction down is mainly especially in Q4 the stores were so busy is a decrease in beverage only transaction, cannibalization and the e-comm penetration and maybe Luis, do you want to add some colors to that knowing that the U.S. business is more balanced from a traffic and ticket than the Canadian business.

Luis Borgen

On the cannibalization, we saw no change in the trend between Q3 and Q4. It’s been pretty consistent. I mean, that’s despite a very strong new store performance in Canada and the e-comm penetration obviously goes to the dynamic between higher average ticket and e-comm relative to the retail purchase. So, pretty consistent quarter-to-quarter, we are very pleased with the 6.6% comp, Matt.

Sylvain Toutant

Absolutely.

Matthew Boss

And then just a follow-up on store growth, can you just provide an update on your new store economics, how your more recent builds are performing versus planned, just your ultimate confidence in the 300 store goal? And then higher level, any changes to note on the competitive front at all in either the U.S. or Canada?

Luis Borgen

Sure, Matt. I will cover the U.S. store performance and the Canadian new store performance and then Sylvain could touch on competitive landscape. So, we still believe in the potential for both the Canadian and the U.S. market, 325 is our target for the U.S. in terms of potential and in Canada still to remain in the low to mid-200. In terms of the store economics of both the U.S. and Canada, we still are holding to our pro forma target. And just to remind for the Canadian market, if year one sales are $600,000 and for the U.S. its year one sales of $550,000. On the Canadian new store performance, they are performing significantly better than essentially year four. They are opening up very, very strong in year one. In the U.S. market for the 2014 vintage which we have data for over 1 year those are sales for the pro forma are essentially in line with the $550,000 and for the 2015 vintage we have a handful of stores that have been opened approximately three quarters are right in line with that $550,000 average as well. So we feel that for both the Canadian and in U.S. market we are opening up against that target of 500 plus stores in North America.

Sylvain Toutant

Yes. And Matt from a market perspective I mean the permiumization of the tea category is still going on and the market is growing about the same speed we were talking about when we went public about a year and a half ago. And from a competitive point of view, I would say that it’s a – because it’s a big market, we see new players, some original players getting into the game. But we have a great concept and we continue to improve that concept. We are all about testing new things and we continued to believe that the market is very large and specialty tea within that market is growing faster. So we feel very comfortable that we can keep on opening the stores at the rate we have been going and get our own share of the market.

Matthew Boss

Great. Best of Luck.

Sylvain Toutant

Thank you.

Operator

We will take our next question from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson

Thank you. Good afternoon. I was hoping for a little bit more detail around the wage pressures that you are speaking of, are they encompassed in any specific region or maybe just a little bit more quantification on how much pressure you are seeing there?

Sylvain Toutant

It’s happening both in the U.S. and the Canadian markets. In the United States obviously there is some wage pressure in California specifically, but some in New York and some of it is legislated and some of it is just market pressure to attract the type of talent that we need. And in Canada we are also seeing some of that being legislated as well as some market pressure and it’s kind of throughout the country. But in general we have been able to offset some of that through productivity improvements not all of it. We are obviously looking to continue to – we have scheduling effectiveness and to improve and refine our staffing model. But we are not able to completely offset it and we think that’s prudent to bake that into our guidance in terms of the wage pressure we are seeing there to remain competitive in terms of attracting the type of talent and deliver the type of service that our customers expect.

Lorraine Hutchinson

Thanks. And then if you look back to your website re-launch in the middle of 2015, did that perform to expectations and what kind of lift did you see to the e-commerce business?

Sylvain Toutant

Well, e-commerce penetration went from 7.9 to 9.4, in line with our goal. I would say that what we have seen – we have done the refresh in July 2015. And so by I would say like the month after that we started to get some efficiencies and we saw conversion rate go up in every type of platform whether it’s mobile, tablet or desktop which is a very good news for us. So we also see more engagement and through all the key PIs that we track through global analytics and everything. We have more engagement than we used to have. So these are very good news for us and what we are starting to leverage is really because of the integration with the Frequent Steeper loyalty program on the web and people being able to redeem their points on the web. Now we are starting to be able to get some data which is very improvement for us as we move forward to more CRM and we will be able leverage that more and more. So and we are going to keep on improving the website, it’s not about a Phase 2 or a Phase 3, it’s continuous improvement of our website through rich content, getting more interaction with customers and creating a richer experience for the consumers.

Lorraine Hutchinson

Alright. Thank you.

Sylvain Toutant

Thank you, Lorraine.

Operator

We will take our next question from Kelly Bania with BMO Capital.

Kelly Bania

Hi, good evening. Thank you for taking my questions. Just wanted to clarify on the guidance for next year, is it fair to say that I guess relative to maybe what your expectations would have been in the past several months, it’s just a little bit of wage pressure and modestly weaker comp, otherwise the new stores are performing in line and continue to perform very well, strong in Canada?

Luis Borgen

Yes. Kelly, so the – on the revenue line we are guiding essentially in line with our consensus. The comp is mid single-digit and where we are seeing the most pressure is on the cost side, specifically gross profit rate and its primarily related to the foreign exchange pressure we had. We had an assumption for the FX rate being $1.28 in fiscal ’16. We hedge our purchases at $1.306 and you kind of run the math that’s roughly a little bit less than half of the delta between March visions for earnings, back then versus now. The second piece of the expense pressure related to primarily the wage and compensation costs including some stock based compensation expense. Those two elements account for the vast majority of the delta in our earnings profile. But in terms of our top line sales, our comp expectation, new store productivity, we remain committed to those.

Kelly Bania

And in terms of the more targeted marketing that you maybe able to do now with the Frequent Steeper loyalty card, what kind of – are you expecting any benefit from that in 2016 or what’s kind of baked in, in terms of what you should be able to leverage from that this year?

Sylvain Toutant

Yes. I would say just a comment on EPS, I mean it’s still 25% to 35% growth year-over-year if my math is right. So on the e-commerce and CRM we have just started to – as we said before we started to work on customized and personalized e-mail and we started by geography. The first thing we did is tested ice tea program, an ice tea program for California. We have did that early in this quarter and we saw lift right away on that. The weather is helping obviously and probably if you live in New York or Boston you didn’t have good weather for that. But we tested it in the California market and we had good feedback from customers and good reaction. So we believe that it’s a positive outcome for us long-term. It’s baked in our model right now in our guidance as we move forward on our top line. But we think we are going to become more and more efficient with it and more – have a better return on investment. We want to be more I would say be more relevant to our customer every time we do something in marketing and so that is really a function of that too.

Kelly Bania

Got it. And then if I can just ask about David and his departure, obviously he was influential in the innovation area, so I was just curious if you can talk maybe who is kind of spearheading innovation at this point going forward?

Sylvain Toutant

Yes. I would say we are – one of our strength is certainly our marketing strength and our marketing department, so we have been working diligently on that transition. So Isabelle Grise was now CMO came with a lot of responsibility, but a lot of experience. And she came in before David made that announcement. Actually David was part of selecting Isabelle also in the process. So we feel very, very comfortable with the transition. We have the same folks working on innovation and we feel good about what we have in the pipeline at this point in time. Honestly, we don’t feel in that department that we need at this point in time too much more horsepower.

Kelly Bania

Great. Thank you.

Operator

We will take our next question from Tania Anderson with William Blair.

Tania Anderson

Hello. Hi, could you talk a little bit more about some possible offsets to gross margin that you have talked about or the FX headwinds on gross margin that you talked about for particularly like supply chain efficiencies or anything like that?

Sylvain Toutant

Absolutely, we put a plan in place last year and we are seeing the fruits of that. One good example of that is the supply chain efficiencies, particularly delivery and distribution. We have been able to improve our rate of sales on this lines collectively by being very proactive, negotiating better rates and doing something on the supply chain have been able to offset some of that pressure. We have also had some pricing adjustments. We have been able to flow through without any material impact to our sales as well as just all sorts of small things we are doing both internally to reduce the cost to our vendors as well as to us. And so some of those benefits don’t necessarily show up in gross profit, but they will improve our gross profit rate – or excuse me, our operating income margin rate in aggregate. So, it’s a combination of trying to improve our mix, our pricing, our supply chain and our lower product cost. We have been able to negotiate lower product cost by partnering with our vendors as we increased our top line growth north of 20% we are able to gain some concessions in better cost.

Tania Anderson

Great, thank you.

Operator

At this time, there are no further questions over the phone lines.

Sylvain Toutant

Alright. So, thank you for joining us today and we look forward to speaking with you again when we report our first quarter results. Thank you.

Operator

This does conclude the presentation. Thank you for your participation.

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