DAVIDsTEA, Inc. (DTEA) CEO Herschel Segal on Q3 2019 Results - Earnings Call Transcript

Dec. 23, 2019 12:40 PM ETDAVIDsTEA Inc. (DTEA)13 Comments
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DAVIDsTEA, Inc. (NASDAQ:DTEA) Q3 2019 Results Earnings Conference Call December 20, 2019 5:00 PM ET

Company Participants

Herschel Segal - Executive Chairman & Interim CEO

Frank Zitella - CFO & COO

Operator

Good afternoon, ladies and gentlemen. Welcome to DAVIDsTEA Conference Call for the Third Quarter of Fiscal Year 2019. Today’s call is being recorded and all lines are 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 Securities and Exchange Commission on May 2, 2019, and is available at www.sec.gov and on DAVIDsTEA 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, a reconciliation to the most directly comparable IFRS financial measure will be detailed on our Form 10-Q, which was filed with the Securities and Exchange Commission earlier today. As a reminder, all dollar amounts referred to are in Canadian dollars, unless otherwise indicated.

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

Herschel Segal

Thank you, operator. Good afternoon, everyone, and thank you for joining us as we review our results for the third quarter of fiscal 2019. With me today is Frank Zitella, DAVIDsTEA’s Chief Financial and Operating Officer.

Our third quarter sales performance reflected normal seasonal patterns, which included a high proportion of discounted residual teas and unfavorable product mix in addition to a reduction in the scope of our tea accessory line. Furthermore, during the quarter, we encountered slight delays for the launch into additional stores in our wholesale channel. We are very pleased to confirm that our teas are now available in an expanded network of over 2,500 outlets in drugstore and grocery stores across Canada.

In addition to driving sales, this provides increased feasibility for the DAVIDsTEA brand in markets across Canada.

Consumers continue to enjoy the DAVIDsTEA experience both online and in our stores. This was confirmed by recognized independent third parties during the third quarter of 2019. DAVIDsTEA's products and brand earned three accolades. Newsweek, a premier U.S. weekly news magazine and website recognized DAVIDsTEA as one of the best U.S. online shops in the food category. Leger, a recognized Canadian marketing research and polling firm, ranked DAVIDsTEA the number 1 Canadian specialty store amongst millennials and Gen Z, and second in overall customer experience in the retail category in Ontario.

In terms of product innovation, we continue to improve and expand our tea bag offerings that provides customers with an additional and easier way of consuming our high-quality offering of loose leaf teas. We are ready to make a significant increase in tea bag sales by the second quarter of 2020. Another major increase of sales volume will be in the food and beverage category. A full assortment of superior food product will be combined with a more focused and efficient delivery of in-store beverage. We also continue to strengthen our management team. We recently appointed a Senior Vice President of Merchandising, Fiona Horgan, who brings more than 25 years of experience in retail operations in Canada. She is a great addition to the team.

And with that, I will turn the call over to Frank to discuss our financial results in more detail.

Frank Zitella

Thanks, Herschel, and good afternoon, everyone. In the third quarter of 2019, we continued to streamline our portfolio of products to improve our customers’ experience.

While we successfully managed to reduce our inventories by over 26% year-over-year, the transition impacted sales and our margins were affected by the unfavorable product mix. We continue to face challenges, but we are taking tangible steps towards a return to growth and profitability and we do so from a position of financial strength, with $28 million of cash on hand, our balance sheet at the end of the quarter.

Allow me now to go over the key financial highlights of the quarter. Sales decreased by $4.2 million to $39.5 million from $43.7 million for the same period in 2018. Sales from e-commerce and wholesale channels remained healthy at $8.9 million, representing a 14.1% increase year-over-year. This increase was driven primarily by greater online adoption as well as from increased demand from our existing grocery chain distribution across Canada. In-store sales were impacted by the decision to reduce our tea accessory SKUs and an unfavorable product mix with a higher proportion of residual items.

Excluding the impact of IFRS 16, the loss from operating activities was $12.1 million, representing an increased loss of $1.4 million from the prior year's quarter. This increased loss was mainly due to the deleveraging of fixed costs due to negative comparable store sales and the impairment of right-of-use assets, offset by the absence of adjusted items incurred in the comparable quarter of fiscal 2018. We were able to partially offset lower sales activity in the quarter with lower spending on SG&A expenses. Excluding the impact of IFRS 16 and the impairment of property, equipment and right-of-use assets during the quarter and adjusted items incurred in the third quarter of 2018, adjusted SG&A expenses decreased by $1.3 million.

EBITDA which excludes non-cash and other items in the current and prior periods was negative $4.5 million compared to negative $8.6 million in the prior year quarter. Excluding the impact of IFRS 16, EBITDA would have amounted to negative $10.3 million. Adjusted EBITDA for the quarter amounted to negative $2.2 million, compared to negative $6.2 million in the prior year quarter. We ended the quarter in a leaner inventory position as we optimized our product assortment with inventories at the end of the quarter of $32.6 million, a 26.5% reduction from the same period in the prior year. As indicated before, our balance sheet remains strong with cash at quarter end of $28 million, a $9.3 million increase year-over-year.

In closing, we continue to work towards optimizing our product portfolio and introducing the most innovative and compelling new offerings to our consumers.

Near-term sales challenges remain as we are confidently taking steps to stabilize the business. We are firmly focused on product innovation, enhancing the customer experience both online and in-store and to ensuring that we have a compelling and innovative product assortment. We are on the right track, but it's taking a little longer than anticipated. We are nonetheless encouraged that our customer experience and engagement efforts continue to resonate with consumers as evidenced by recent surveys. Our presence in over 2,500 retail locations across Canada and the wholesale channel in addition to our own stores has significantly extended the availability of our tea sachets and provides additional visibility to our brand.

Finally, we want to acknowledge the tireless effort of all our employees across the DAVIDsTEA network. We've assembled a passionate team dedicated to product innovation and enhancing every customer’s experience with the brand. We thank them all and wish them, and our customers and our shareholders, happy holidays.

This concludes our remarks. Thank you for joining us today.

Operator

This concludes today's conference call. You may now disconnect.

Question-and-Answer Session

End of Q&A

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