DAVIDsTEA Inc. (Nasdaq:DTEA) (“DAVIDsTEA” or the “Company”), a
leading tea merchant in North America, announces its third quarter
results for the period ended October 31, 2020. DAVIDsTEA also
announces the appointment of Sarah Segal as Chief Executive Officer
(CEO), in addition to her position as Chief Brand Officer, and
Frank Zitella as President, in addition to his position as Chief
Operating Officer and Chief Financial Officer (CFO). Herschel Segal
will be stepping down as interim CEO and will remain Chairman of
the Board of Directors. Frank Zitella will remain CFO pending the
appointment of a new CFO. The appointments of Sarah Segal and Frank
Zitella will be effective December 16, 2020.
“Sarah and Frank have demonstrated strong
leadership and know-how in the face of the ongoing challenges
DAVIDsTEA has faced and have both been instrumental in setting the
strategic vision and executing our ongoing transformation into a
digital-first organization, better adapted to evolving consumer
behaviour. On behalf of the Board, I congratulate them on their
well-deserved appointments as DAVIDsTEA embarks on a new and
exciting chapter,” stated Herschel Segal, DAVIDsTEA’s Chairman and
Founder.
“As one of the leading tea merchants in North
America, DAVIDsTEA is on a new path, squarely focused on becoming a
more agile organization. I look forward to continuing to work with
our talented team as we build a stronger and more focused
DAVIDsTEA, and solidify our position as a digital-first, industry
leading provider of on-trend, high-quality loose-leaf tea, tea
accessories and gifts. Our shift towards e-commerce and wholesale
continues to progress above our expectations and our latest results
clearly indicate that we are making good progress,” said Sarah
Segal.
“With the continued solid momentum in our
e-commerce and wholesale channels, combined with the benefits of
our restructuring process, adjusted EBITDA was in positive
territory for a second consecutive quarter and reached $3.3
million. Sales traction for both channels during the quarter
remained strong, translating to more than 145% growth over the
prior year. I look forward to continuing to work closely with the
management team in place as we position the Company for a
sustainable future,” said Frank Zitella.
Operating Results for the Third Quarter
of Fiscal 2020
Three Months Ended October 31, 2020 compared to
Three Months Ended November 2, 2019
Sales. Sales for the three months ended October
31, 2020 decreased 33.6%, or $13.3 million, to $26.2 million from
$39.5 million in the prior year quarter. On March 17, 2020, in
response to the COVID-19 pandemic, the Company temporarily closed
all its retail stores in Canada and the United States, and
subsequently, as part of its formal Restructuring Plan, exited all
of its brick and mortar stores except for 18 Canadian stores which
were reopened on August 21, 2020. Accordingly, brick and mortar
sales for the quarter declined when compared to the prior year
quarter by $26.4 million or 86.5% to $4.1 million. Sales from
e-commerce and wholesale channels increased by $13.1 million or
145.5% to $22.1 million, from $9.0 million in the prior year
quarter. E-commerce and wholesale sales represented 84.3% of sales
compared to 22.8% of sales in the prior year quarter.
Gross profit. Gross profit of $10.8 million for
the three months ended October 31, 2020 decreased by $10.5 million
or 49.3% from the prior year quarter due primarily to a decline in
sales during the period. As the Company pivots to a digital-first
strategy, the cost of delivery and distribution that is included in
arriving at gross profit will compare unfavorably to prior periods
that were predominantly focused on retail sales distribution. The
significant increase in e-commerce sales resulted in an increase of
$4.2 million in delivery and distribution costs, thereby negatively
impacting gross profit percentage. As a result, gross profit as a
percentage of sales declined to 41.3% for the three-month period
ended October 31, 2020 from 54.1% in the prior year quarter. We
expect that the increased cost to deliver online purchases will be
less than the selling expenses incurred in a brick and mortar
environment that have been historically included as part of
Selling, general and administration expenses.
Selling, general and administration expenses.
Selling, general and administration expenses (SG&A) decreased
by $23.6 million or 76.8% to $7.1 million in the three months
ended October 31, 2020 from the prior year quarter. Excluding the
impact of the $1.4 million wage subsidy received under the Canadian
government COVID-19 Economic Response Plan in Fiscal 2020, and the
impact in Fiscal 2019 of the impairment of property and equipment
and right-of use assets amounting to $2.1 million, Adjusted
SG&A decreased by $20.1 million. In connection with our
Restructuring Plan, we terminated the leases for all of our stores
in North America except for 18 Canadian stores which reopened on
August 21, 2020. As a result, wages, salaries and employee benefits
were reduced by $12.2 million, and we realized a reduction of $3.8
million in amortization expenses due to a lower right-of-use asset
value at the beginning of the period. Adjusted SG&A as a
percentage of sales in the quarter decreased to 32.7% from 72.5% in
the prior year quarter.
Results from operating activities. Income from
operating activities was $14.4 million compared to a loss of $9.3
million in the prior year quarter. Excluding the impact of the
Restructuring Plan announced on July 8, 2020, the wage subsidy
received from the Canadian government under the COVID-19 Economic
Response Plan, the impact of the impairment of property and
equipment and right-of-use assets and the loss on disposal of
property and equipment, Adjusted results from operating activities
amounted to $2.3 million in the three-month period ended October
31, 2020 compared to a loss of $7.3 million in the prior year
quarter. This resulting improvement of $9.6 million is explained by
a reduction in wages, salaries and employee benefits from stores
and head office, amounting to $12.2 million, a reduction of $3.8
million in amortization expense due to a lower right-of-use asset
value at the beginning of the period, and a reduction of other
brick and mortar selling expenses of $3.5 million, partially offset
by the reduction of gross profit of $10.5 million.
Finance costs. Finance costs amounted to almost
nil in the three months ended October 31, 2020, a decrease of $1.7
million from the prior year quarter. The interest expense relates
to lease liabilities and has decreased slightly from the prior year
quarter.
Finance income. Finance income of $0.1 million
is derived mainly from interest on cash on hand and has decreased
slightly from the prior year quarter.
EBITDA. EBITDA was $15.3 million in the quarter
ended October 31, 2020 compared to a negative $4.5 million in the
prior year quarter, representing an increase of $19.8 million over
the prior year quarter. Adjusted EBITDA for the quarter ended
October 31, 2020, which excludes the impact of stock-based
compensation expense, Restructuring plan activities, the subsidy
received from the Canadian government under the COVID-19 Economic
Response Plan, and the impairment of property and equipment and
right-of-use assets amounted to $3.3 million compared to negative
$2.2 million in the prior year quarter. As the Company pivots to a
digital-first strategy, we are seeing an improvement in EBITDA
driven from our focus on e-commerce and wholesale channels. In this
quarter, EBITDA also improved as a result of a reduced general and
administrative infrastructure to support the on-going business.
Net income (loss). Net income was $14.5 million
in the quarter ended October 31, 2020 compared to a Net loss of
$10.8 million in the prior year quarter. Adjusted net loss, which
excludes the Restructuring plan activities, the subsidy received
from the Canadian Government under the COVID-19 Economic Response
Plan, and the impairment of property and equipment and right-of-use
assets amounted to $2.3 million compared to a loss of $8.8 million
in the prior year quarter. This $11.1 million improvement is driven
by the same reasons mentioned above in “Results from operating
activities”.
Fully diluted income (loss) per common share.
Fully diluted income per common share was $0.54 compared to a loss
of $0.42 in the third quarter of Fiscal 2019. Adjusted fully
diluted income per common share, which is adjusted net income
(loss) on a fully diluted weighted average shares outstanding
basis, was $0.09 per share compared to a loss of $0.34 per
share.
Liquidity and Capital
Resources
As at October 31, 2020 we had $21.9 million of
cash primarily held by major Canadian financial institutions.
Working capital was negative $12.2 million as at October
31, 2020, compared to $36.4 million as at February 1,
2020.
Our primary source of liquidity is cash on hand
as we have no access to any form of debt financing. Our primary
cash needs are to finance working capital and capital expenditures
in connection with enhancing the functions and features of our
online store. Our working capital requirements are for the purchase
of inventory and payment of payroll and other operating costs.
Furthermore, in light of implementing the Restructuring Plan, the
Company expects to use cash on hand to pay for professional fees
and for the settlement of obligations upon acceptance, if any, of a
plan of arrangement that will be presented to creditors. Our
working capital requirements fluctuate during the year, rising in
the second and third fiscal quarters as we take title to increasing
quantities of inventory in anticipation of our peak selling season
in the fourth fiscal quarter. We fund our capital expenditures and
working capital requirements from a combination of cash on hand and
cash provided by operating activities.
New Executive Appointment
Biographies
Sarah Segal – Chief Executive Officer and Chief
Brand Officer
Sarah Segal has most recently served as
DAVIDsTEA’s Chief Brand Officer responsible for tea and product
development, spearheading the digital transformation and
development of new sales channels. From 2012 to 2017, Ms. Segal was
a member of the Board of Directors of DAVIDsTEA. Since 2013 and up
until her appointment as CEO of DAVIDsTea, Ms. Segal served as CEO
of artisanal candy retailer SQUISH Candy, based in Montreal,
Quebec, a company she founded. Ms. Segal has a B.A. in
Environmental Health from McGill University and a M.Sc. in Water
Science, Policy and Management from Oxford University.
Frank Zitella- President and Chief Operating
OfficerFrank Zitella has nearly 30 years of experience in finance,
strategic planning and governance. Mr. Zitella joined DAVIDsTEA as
CFO in December 2018 and was subsequently promoted to the position
of Chief Operating Officer in May 2019. Prior to joining DAVIDsTEA,
he was CFO of Loop Industries, Inc. (Nasdaq:LOOP). Prior to that
and for more than a decade, he served as CFO of DST Health
Solutions, a subsidiary of SS&C Technologies Holdings, Inc.
(Nasdaq:SSNC). From 1998 to 2006, he was CFO of International
Financial Data Services, a joint-venture between SS&C and State
Street Bank, where he successfully maximized profitability and
top-line growth. Earlier in his career, Frank gained M&A and
transaction experience as a senior manager with
PricewaterhouseCoopers. He also previously worked as a senior
internal auditor for Coca-Cola.
DAVIDsTEA Obtains Amended Court Order
under CCAA
On December 15, 2020, the Québec Superior Court
extended the previously-announced stay of all proceedings against
the Company to March 19, 2021 under the Companies’ Creditors
Arrangement Act (Canada).
Condensed Consolidated Financial
Data(Canadian dollars, in thousands, except per share
information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
November 2, |
|
|
October 31, |
|
|
November 2, |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
26,225 |
|
|
$ |
39,493 |
|
|
$ |
81,497 |
|
|
$ |
122,925 |
|
Cost of sales |
|
15,399 |
|
|
|
18,139 |
|
|
|
47,409 |
|
|
|
53,430 |
|
Gross profit |
|
10,826 |
|
|
|
21,354 |
|
|
|
34,088 |
|
|
|
69,495 |
|
SG&A expenses |
|
7,120 |
|
|
|
30,670 |
|
|
|
35,883 |
|
|
|
90,254 |
|
Restructuring plan activities,
net |
|
(10,743 |
) |
|
|
— |
|
|
|
24,017 |
|
|
|
— |
|
Operating income (loss) |
|
14,449 |
|
|
|
(9,316 |
) |
|
|
(25,812 |
) |
|
|
(20,759 |
) |
Finance costs |
|
35 |
|
|
|
1,699 |
|
|
|
3,260 |
|
|
|
5,305 |
|
Finance income |
|
(53 |
) |
|
|
(185 |
) |
|
|
(361 |
) |
|
|
(570 |
) |
Net income (loss) |
$ |
14,467 |
|
|
$ |
(10,830 |
) |
|
$ |
(28,711 |
) |
|
$ |
(25,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA1 |
$ |
15,295 |
|
|
$ |
(4,548 |
) |
|
$ |
(19,646 |
) |
|
$ |
(6,237 |
) |
Adjusted EBITDA1 |
|
3,304 |
|
|
|
(2,241 |
) |
|
|
4,265 |
|
|
|
1,387 |
|
Adjusted SG&A expenses
1 |
|
8,566 |
|
|
|
28,619 |
|
|
|
36,767 |
|
|
|
83,178 |
|
Adjusted operating income
(loss) 1 |
|
2,260 |
|
|
|
(7,265 |
) |
|
|
(2,679 |
) |
|
|
(13,661 |
) |
Adjusted net income (loss)
1 |
$ |
2,278 |
|
|
$ |
(8,779 |
) |
|
$ |
(5,578 |
) |
|
$ |
(18,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common
share |
$ |
0.55 |
|
|
$ |
(0.42 |
) |
|
$ |
(1.10 |
) |
|
$ |
(0.98 |
) |
Fully diluted income (loss)
per common share |
|
0.54 |
|
|
|
(0.42 |
) |
|
|
(1.10 |
) |
|
|
(0.98 |
) |
Adjusted fully diluted income
(loss) per common share1 |
$ |
0.09 |
|
|
$ |
(0.34 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.71 |
) |
Gross profit as a percentage
of sales |
|
41.3 |
% |
|
|
54.1 |
% |
|
|
41.8 |
% |
|
|
56.5 |
% |
SG&A as a percentage of
sales |
|
27.1 |
% |
|
|
77.7 |
% |
|
|
44.0 |
% |
|
|
73.4 |
% |
Adjusted SG&A as a
percentage of sales1 |
|
32.7 |
% |
|
|
72.5 |
% |
|
|
45.1 |
% |
|
|
67.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities |
$ |
(12,016 |
) |
|
$ |
4,786 |
|
|
$ |
(19,896 |
) |
|
$ |
8,229 |
|
Cash used in financing
activities |
|
(250 |
) |
|
|
(5,711 |
) |
|
|
(5,821 |
) |
|
|
(17,333 |
) |
Cash (used in) provided by
investing activities |
|
(94 |
) |
|
|
(756 |
) |
|
|
1,304 |
|
|
|
(4,926) |
|
Decrease in cash during the
period |
|
(12,360 |
) |
|
|
(1,681 |
) |
|
|
(24,413 |
) |
|
|
(14,030 |
) |
Cash, end of period |
$ |
21,925 |
|
|
$ |
28,044 |
|
|
$ |
21,925 |
|
|
$ |
28,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
August 1, |
|
|
February 1, |
|
|
November 2, |
|
As at |
2020 |
|
|
2020 |
|
|
2020 |
|
|
2019 |
|
Cash |
$ |
21,925 |
|
|
$ |
34,285 |
|
|
$ |
46,338 |
|
|
$ |
28,044 |
|
Accounts receivable |
|
7,669 |
|
|
|
6,757 |
|
|
|
6,062 |
|
|
|
5,430 |
|
Prepaid expenses and
deposits |
|
13,400 |
|
|
|
8,476 |
|
|
|
4,542 |
|
|
|
6,906 |
|
Inventories |
|
26,176 |
|
|
|
24,354 |
|
|
|
22,363 |
|
|
|
32,638 |
|
Trade and other payables |
$ |
3,621 |
|
|
$ |
5,441 |
|
|
$ |
20,794 |
|
|
$ |
21,155 |
|
________________
1 Please refer to “Use of Non-IFRS Financial
Measures” in this press release.
Use of Non-IFRS Financial
Measures
This press release includes “non-IFRS financial
measures” defined as including: 1) EBITDA and Adjusted EBITDA, 2)
Adjusted operating income (loss), 3) Adjusted SG&A expenses, 4)
Adjusted net income (loss), 5) Adjusted fully diluted income (loss)
per share and 6) Adjusted SG&A expenses as a percentage of
sales. These non-IFRS financial measures are not defined by or in
accordance with IFRS and may differ from similar measures reported
by other companies. We believe that these non-IFRS financial
measures provide knowledgeable investors with useful information
with respect to our historical operations. We present these
non-IFRS financial measures as supplemental performance measures
because we believe they facilitate a comparative assessment of our
operating performance relative to our performance based on our
results under IFRS, while isolating the effects of some items that
vary from period-to-period but not in substitution to IFRS
financial measures.
Please refer to the non-IFRS financial measures
section in the Management’s Discussion and Analysis section of our
Form 10-Q for a reconciliation to IFRS financial measures.
Note
This release should be read in conjunction with
the Company’s Management’s Discussion and Analysis, which will be
filed by the Company with the Canadian securities regulatory
authorities on www.sedar.com and with the U.S. Securities and
Exchange Commission on www.sec.gov and will also be available in
the Investor Relations section of the Company’s website at
www.davidstea.com.
Caution Regarding Forward-Looking
Statements
This press release includes statements that
express our opinions, expectations, beliefs, plans or assumptions
regarding future events or future results and there are, or may be
deemed to be, “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995 (the “Act”).
The following cautionary statements are being made pursuant to the
provisions of the Act and with the intention of obtaining the
benefits of the “safe harbor” provisions of the Act. These
forward-looking statements can generally be identified by the use
of forward-looking terminology, including the terms “believes”,
“expects”, “may”, “will”, “should”, “approximately”, “intends”,
“plans”, “estimates” or “anticipates” or, in each case, their
negatives or other variations or comparable terminology. These
forward-looking statements include all matters that are not
historical facts and include statements regarding our intentions,
beliefs or current expectations concerning, among other things, our
Restructuring Plan, the COVID-19 pandemic, our strategy of
transitioning to e-commerce and wholesale sales, future sales
through our e-commerce and wholesale channels, future lease
liabilities, our results of operations, financial condition,
liquidity and prospects, the impact of the COVID-19 pandemic on the
global macroeconomic environment, and our ability to avoid the
delisting of the Company’s common stock by Nasdaq due to the
restructuring or our inability to maintain compliance with Nasdaq
listing requirements.
While we believe these opinions and expectations
are based on reasonable assumptions, such forward-looking
statements are inherently subject to risks, uncertainties and
assumptions about us, including the risk factors discussed in Part
I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for
our fiscal year ended February 1, 2020, and Part II, “Item 1A. Risk
Factors” in our Quarterly Report on Form 10-Q for the quarterly
periods ended May 2, 2020, August 1, 2020 and October 31, 2020,
respectively, filed with both the United States Securities and
Exchange Commission and with the Autorité des marchés financiers,
which could materially affect our business, financial condition or
future results.
Details of the webcastThe
Company will host a webcast at 5:00 p.m. Eastern Time to discuss
the financial results, via the internet at: www.davidstea.com, in
the "investor relations" section.
An online archive of the webcast will be
available within two hours of the conclusion of the call and will
remain available for 30 days.
About DAVIDsTEA
DAVIDsTEA is a leading branded retailer and
growing wholesaler of specialty loose-leaf tea, offering a
differentiated selection of proprietary signature blends,
single-origin teas, pre-packaged teas, tea sachets and tea-related
gifts and accessories primarily through its e-commerce platform at
www.davidstea.com. With a focus on innovative flavours,
wellness-driven ingredients and organic tea, the Company launches
seasonally driven “collections” with a mission of making tea
accessible to a wide audience. A selection of DAVIDsTEA products is
available in more than 2,500 grocery stores and pharmacies across
Canada. The Company also operates 18 retail stores in Canada. The
Company is headquartered in Montréal, Canada.
Investor Contact |
Media Contact |
Maison Brison Communications |
PELICAN PR |
Pierre Boucher |
Lyla Radmanovich |
514-731-0000 |
514-845-8763 |
investors@davidstea.com |
media@rppelican.ca |
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