DAVIDsTEA Inc. (Nasdaq:DTEA) (DAVIDsTEA or “the Company”), a
leading tea merchant in North America, announces its second quarter
results for the period ended August 1, 2020. All dollar amounts are
expressed in Canadian dollars.
“Second quarter results reflect the solid
performance of our online retailing and wholesale distribution
activities as we accelerate our transformation towards a digital
first strategy. We are very pleased by the momentum experienced in
the first quarter carrying over to the second quarter, resulting in
sequential sales growth of 35%. Consumers are responding positively
to the online experience we offer and continue to enhance. We are
confident that we are well-positioned to execute our business plan
and to sustain a return to profitability once the ongoing CCAA
process and our transformation is complete,” said Frank Zitella,
COO and CFO.
Digital First Strategy
The Company continues to pivot to a digital
first strategy focused on promoting customer migration from retail
store to online and wholesale channels, and to generate organic
growth. Several key initiatives have been implemented or are
underway in support of this strategy. Since the beginning of the
year, the Company has continued to enhance the customer experience
via davidstea.com, including the ability to virtually connect with
its tea guides, providing a human and personalized interaction.
This is in addition to the capabilities of DAVI, the virtual
assistant that helps customers shop, discover new collections, stay
in the loop with the latest tea accessories, and much more. From a
product development and go-to market standpoint, DAVIDsTEA also
continues to enhance its ability to quickly launch new tea blends
and better anticipate and adapt to the needs of its customers. The
Company’s digital first strategy will be supported by a network of
18 retail stores located across Canada, with a concentration in the
Ontario and Quebec markets, re-opened subsequent to second quarter
end on August 21, 2020.
“The simplicity and clarity of our brand is
resonating online as we successfully bring our tea expertise
online, by providing a clear and interactive experience for our
customers to continue to explore, discover and taste teas they
love. Our virtual tea guides, video content and tea learning have
been great tools to enhance a tea experience at home. We continue
to leverage our online platform to connect with customers in a
personal and responsive and personal manner, while at the same time
more efficiently launching new tea blends in response to emerging
consumer trends,” said Sarah Segal, Chief Brand Officer.
“DAVIDsTEA’s shift towards e-commerce and
wholesale is progressing above our expectations, and we are pleased
to see that our brand continues to passionately resonate with
consumers,” stated Herschel Segal, Founder, Chairman and Interim
CEO of DAVIDsTEA. “The management team is working tirelessly to
emerge from our Restructuring process as a stronger, more efficient
and focused company, better adapted to the needs of North American
consumers.”
Operating Results for the
Second Quarter of Fiscal
2020
Three Months Ended August 1, 2020 compared to
Three Months Ended August 3, 2019
Sales. Sales for the three months ended August
1, 2020 decreased 41.2%, or $16.1 million, to $23.0 million from
$39.2 million in the prior year quarter. On March 17, 2020, in
response to the COVID-19 pandemic, the Company closed of all its
retail stores in Canada and the United States. The Company only
reopened 18 stores subsequent to quarter-end. With all retail
locations closed for the duration of the second quarter, this
resulted in a $31.3 million decline in sales and customer migration
to online and wholesale channels. Sales from e-commerce and
wholesale channels increased by $15.0 million or 189.9% to $23.0
million, from $7.9 million in the prior year quarter. E-commerce
and wholesale sales represented 100% of sales compared to 20.2% of
sales in the prior year quarter.
Gross profit. Gross profit of $8.3 million for
the three months ended August 1, 2020 decreased by $13.5 million or
61.8% from the prior year quarter due primarily to a decline in
sales during the period. Gross profit as a percentage of sales
declined to 36.2% for the three-month period ended August 1, 2020
from 55.7% in the prior year quarter. Gross profit was also
impacted by the significant increase in e-commerce sales during the
period ended August 1, 2020 and resulted in an increase of $3.0
million in delivery and distribution costs, partially offset by
better gross margin on hard goods and kits. Further impacting our
margins in the quarter was occupancy costs related to terminated
store leases amounting to $1.7 million.
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. We
expect that the increased cost to deliver online purchases will be
less than the selling expenses incurred in a retail 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 $24.2 million or 76.5%, to $7.4 million in the three months
ended August 1, 2020 from the prior year quarter. Excluding the
impact of the $1.2 million subsidy received through the Canadian
government COVID-19 Economic Response Plan, Adjusted SG&A
decreased by $18.0 million for the three months ended August 1,
2020. The decrease is explained by the closure of all stores
effective March 17, 2020 and the corresponding impact on wages,
salaries and employee benefits amounting to $11.5 million, and a
$3.6 million reduction 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 decreased to 37.2% from 67.8% due
to lower selling expenses resulting from the closure of all stores
effective March 17, 2020.
Results from operating activities. Income from
operating activities was $4.1 million compared to a loss of $9.8
million in the prior year quarter. Excluding the impact of the
Restructuring plan activities under Companies’ Creditors
Arrangement Act (CCAA) announced on July 8,2020, the subsidy
received from the Canadian government 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 a
loss of $0.2 million in the three-month period ended August 1, 2020
compared to a loss of $4.7 million in the prior year quarter. This
resulting improvement of $4.5 million is explained by a reduction
in wages, salaries and employee benefits amounting to $11.5 million
and a reduction of $3.6 million in amortization expense due to a
lower right-of-use asset value at the beginning of the period, and
a reduction of other selling expenses, partially offset by the
reduction of gross profit of $13.5 million.
Finance costs. Finance costs amounted to $1.6
million in the three months ended August 1, 2020, a decrease of
$0.2 million from the prior year quarter. The interest expense
relates to lease liabilities and has decreased slightly from 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 prior year quarter.
EBITDA. EBITDA was $5.4 million in the quarter
ended August 1, 2020 compared to a negative $4.8 million in the
prior year quarter, representing an increase of $10.3 million over
the prior year quarter. Adjusted EBITDA for the quarter ended
August 1, 2020, which excludes the impact of stock-based
compensation expense, Restructuring plan activities and the subsidy
received from the Canadian government COVID-19 Economic Response
Plan, amounted to $1.4 million compared to $0.4 million in the
prior year quarter. As the Company pivots to a digital first
strategy, we are seeing an improvement in free cash flow 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 $2.6 million
in the quarter ended August 1, 2020 compared to a net loss of $11.3
million in the prior year quarter. Adjusted net loss, which
excludes the Restructuring plan activities, the subsidy received
from the Canadian Government in response to the COVID-19 Economic
Response Plan, the impairment of property and equipment and
right-of-use assets, and the loss on disposal of property and
equipment amounted to a loss of $1.7 million compared to a loss of
$6.3 million in the prior year quarter. This $4.6 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 $0.10 compared to a loss
of $0.44 in the second quarter of Fiscal 2019. Adjusted fully
diluted loss per common share, which is adjusted net loss on a
fully diluted weighted average shares outstanding basis, was a loss
of $0.06 per share compared to a loss of $0.24 per share.
Liquidity and Capital
Resources
As at August 1, 2020 we had $34.3 million of
cash primarily held by major Canadian financial institutions.
Working capital was negative $13.2 million as of
August 1, 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 a 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 Initial Order obligations upon acceptance
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.
Condensed Consolidated Financial Data |
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(Canadian dollars,
in thousands, except per share information) |
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For the three months ended |
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For the six months ended |
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August 1, |
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August 3, |
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August 1, |
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August 3, |
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2020 |
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2019 |
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2020 |
|
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2019 |
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|
|
|
|
|
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Sales |
|
$ |
23,031 |
|
|
$ |
39,167 |
|
|
$ |
55,273 |
|
|
$ |
83,432 |
|
Cost of sales |
|
|
14,694 |
|
|
|
17,362 |
|
|
|
32,263 |
|
|
|
35,291 |
|
Gross profit |
|
|
8,337 |
|
|
|
21,805 |
|
|
|
23,010 |
|
|
|
48,141 |
|
SG&A expenses |
|
|
7,409 |
|
|
|
31,563 |
|
|
|
29,042 |
|
|
|
59,583 |
|
Restructuring plan activities,
net |
|
|
(3,172 |
) |
|
|
— |
|
|
|
34,228 |
|
|
|
— |
|
Operating income (loss) |
|
|
4,100 |
|
|
|
(9,758 |
) |
|
|
(40,260 |
) |
|
|
(11,442 |
) |
Finance costs |
|
|
1,559 |
|
|
|
1,781 |
|
|
|
3,226 |
|
|
|
3,608 |
|
Finance income |
|
|
(68 |
) |
|
|
(195 |
) |
|
|
(308 |
) |
|
|
(386 |
) |
Net income (loss) |
|
$ |
2,609 |
|
|
$ |
(11,344 |
) |
|
$ |
(43,178 |
) |
|
$ |
(14,664 |
) |
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EBITDA1 |
|
$ |
5,426 |
|
|
$ |
(4,829 |
) |
|
$ |
(34,940 |
) |
|
$ |
(1,687 |
) |
Adjusted SG&A1 |
|
|
8,565 |
|
|
|
26,538 |
|
|
|
28,480 |
|
|
|
54,558 |
|
Adjusted operating loss
1 |
|
|
(228 |
) |
|
|
(4,711 |
) |
|
|
(5,470 |
) |
|
|
(6,395 |
) |
Adjusted EBITDA1 |
|
|
1,365 |
|
|
|
361 |
|
|
|
430 |
|
|
|
3,630 |
|
Adjusted Net loss 1 |
|
$ |
(1,719 |
) |
|
$ |
(6,297 |
) |
|
$ |
(8,388 |
) |
|
$ |
(9,617 |
) |
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Basic earnings (loss) per
common share |
|
$ |
0.10 |
|
|
$ |
(0.44 |
) |
|
$ |
(1.65 |
) |
|
$ |
(0.56 |
) |
Fully diluted earnings (loss)
per common share |
|
|
0.10 |
|
|
|
(0.44 |
) |
|
|
(1.65 |
) |
|
|
(0.56 |
) |
Adjusted basic loss per common
share1 |
|
$ |
(0.07 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.37 |
) |
Adjusted fully diluted loss
per common share1 |
|
$ |
(0.06 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.37 |
) |
Gross profit as a percentage
of sales |
|
|
36.2 |
% |
|
|
55.7 |
% |
|
|
41.6 |
% |
|
|
57.7 |
% |
SG&A as a percentage of
sales |
|
|
32.2 |
% |
|
|
80.6 |
% |
|
|
52.5 |
% |
|
|
71.4 |
% |
Adjusted SG&A as a
percentage of sales1 |
|
|
37.2 |
% |
|
|
67.8 |
% |
|
|
51.5 |
% |
|
|
65.4 |
% |
|
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|
|
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|
|
Cash (used in) provided by
operating activities |
|
$ |
(3,823 |
) |
|
$ |
3,083 |
|
|
$ |
(7,879 |
) |
|
$ |
3,443 |
|
Cash used in financing
activities |
|
|
(1,195 |
) |
|
|
(5,799 |
) |
|
|
(5,571 |
) |
|
|
(11,622 |
) |
Cash provided by (used in)
investing activities |
|
|
(40 |
) |
|
|
(3,050 |
) |
|
|
1,397 |
|
|
|
(4,170 |
) |
Decrease in cash during the
period |
|
|
(5,058 |
) |
|
|
(5,766 |
) |
|
|
(12,053 |
) |
|
|
(12,349 |
) |
Cash, end of period |
|
$ |
34,285 |
|
|
$ |
29,725 |
|
|
$ |
34,285 |
|
|
$ |
29,725 |
|
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|
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|
August 1, |
|
|
|
May 2, |
|
|
|
February 1, |
|
|
|
August 3, |
|
As at |
|
|
2020 |
|
|
|
2020 |
|
|
|
2020 |
|
|
|
2019 |
|
Cash |
|
$ |
34,285 |
|
|
$ |
39,343 |
|
|
$ |
46,338 |
|
|
$ |
29,725 |
|
Accounts receivable |
|
|
6,757 |
|
|
|
4,371 |
|
|
|
6,062 |
|
|
|
3,913 |
|
Prepaid expenses and
deposits |
|
|
8,476 |
|
|
|
4,928 |
|
|
|
4,542 |
|
|
|
9,890 |
|
Inventories |
|
|
24,354 |
|
|
|
23,450 |
|
|
|
22,363 |
|
|
|
27,893 |
|
Trade and other payables |
|
$ |
26,642 |
|
|
$ |
18,000 |
|
|
$ |
20,794 |
|
|
$ |
13,810 |
|
________________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 loss, 3) Adjusted selling, general and
administration expenses, 4) Adjusted net loss, 5) Adjusted fully
diluted loss per share and 6) Adjusted selling, general and
administration expenses as a percentage of sales. These non-IFRS
financial measures are not defined by and 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, the closing of
certain of our retail stores, 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 set forth in our
annual report on Form 10-K for the fiscal year ended
February 1, 2020, and in our Form 10-Q for the three-month
period ended May, 2, 2020 filed with the United States Securities
and Exchange Commission and with the Autorité des marchés
financiers.
About DAVIDsTEA
DAVIDsTEA is a leading branded retailer and
growing mass wholesaler of specialty tea, offering a differentiated
selection of proprietary loose-leaf teas, pre-packaged teas, tea
sachets and tea-related gifts and accessories primarily through its
e-commerce platform at www.davidstea.com. A selection of DAVIDsTEA
products is available in more than 2,500 grocery stores and
pharmacies across Canada. The Company also owns and operates 18
retail stores in Canada. The Company is headquartered in Montréal,
Canada.
Investor Contact |
Media Contact |
MaisonBrison Communications |
PELICAN PR |
Pierre Boucher |
Lyla Radmanovich |
514-731-0000 |
514-845-8763 |
investors@davidstea.com |
media@rppelican.ca |
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