DAVIDsTEA Second Quarter Earnings Call Outlines Turnaround

DAVIDsTEA

During a second-quarter earnings call, DAVIDsTEA executive chairman and interim CEO Herschel Segal described the changes he believes will return the company to profitability following several quarters of declines.

In the first quarter, DAVIDsTEA reported a $10 million net loss following board upheaval that led to a change in management. Sales declined 12 percent compared to the same period in 2017 when the company reported a net loss of $5.6 million.

Segal referenced a Euromonitor 2017 report describing Canada’s tea market as divided into two distinct segments: teabags and the loose-leaf segment. Teabag products are mainly sold in supermarkets, hypermarkets, and discount retailers. Loose leaf purveyors frequently offer tea in sachets, but primarily focus on loose-leaf and organic teas.

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Segal said Montreal-based DAVIDsTEA intends to capture more of the teabag market by implementing better pricing and providing consumers with a convenient tea experience in supermarkets.

The process will take place in two steps:

• First, DAVIDsTEA will purchase teabags at a lower price point.
• Secondly, Loblaw Companies will begin DAVIDsTEA at its 450 Canadian stores under various banners including flagship Loblaws, Fortinos, Provigo, Dominion, Atlantic Superstore and Valu-Mart. These stores feature the company’s best-selling 15-pack tea sachets, which are displayed at eye-level.

Segal described DAVIDsTEA as principally a merchant with the goal to deliver a good product at a fair price. This mindset carries through all retail channels: 239 stand-alone shops, grocery stores and online, as well as possible future expansion into hospitality, and travel markets.

“Following a thorough evaluation, we determined that we need to get back to the basics of product innovation and procurement,” Segal said. To achieve this objective, additional leaders were added in the buying, marketing, and product development divisions. The Board of Directors appointed Pat De Marco, CPA, CA as lead director. Corporate leaders are also being more cost efficient.

Next on the agenda is finding a CEO who can “lead with a realistic optimism and bring vision,” said Segal.

Chief Financial Officer Howard Tafler then reviewed the company’s fiscal 2018 second quarter results (all figures are reported in Canadian dollars). A 12 percent decrease in sales to $40.2 million compares to $45.7 million for the same period in 2017.  Gross profit as a percentage of sales decreased year-over-year from 44.2 percent to 43.2 percent.

DAVIDsTEA increased its store count by three compared to the previous year. Tafler attributes the sales decline to product offerings that did not “resonate” with customers. He added, they have revised their merchandising strategy.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were negative $5.9 million compared to a negative adjusted EBITDA of $2.2 million last year. DAVIDsTEA ended the quarter with $39.6 million in cash.

Segal announced Tafler’s plans to leave the company. Joe Bongiorno, the director of finance, will assume the position of interim CFO during the search for a permanent successor. The board of directors appointed two independent directors: Susan Burkman and Anne Darche. Burkman has 35 years of experience in the investment banking industry and Darche brings 20 years of experience in the advertising industry.

Segal concluded the earnings call by saying, “We have now entered a new era at DAVIDsTEA. Our dynamic management team is focused on what needs to be done as we begin the road back to profitability. I am confident that our shareholders will see improved results within the next nine months, and we will continue to share our progress with you as we move forward.”

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