Turmoil at DAVIDsTEA Leads to Missed Opportunity

MONTREAL, Quebec

DAVIDsTEA President and CEO Joel Silver resigned this week after a vicious proxy battle that returned control of the public company to co-founder Herschel Segal. A block of investors, led by TDM Asset Management Director Benjamin Gisz, and supported by proxy consultants Glass, Lewis & Co., vigorously objected to a seven-member slate of board members loyal to Segal. Segal, 87, who founded the Le Chateau clothing chain, is DAVIDsTEA’s largest shareholder. In 2008 his young cousin David Segal suggested tea retailing and the two men became partners during a period of high profitability and rapid expansion. The company lost $30 million last year on $224 million of sales at its 240 outlets, which are located mainly in Canada (190). Same-store sales declined in each of the past five fiscal years leading to losses. The company went public in June 2015, when it was listed on the Nasdaq at $19 per share. Shares reached a high of $30 but are now trading at $4. An expensive 50-store expansion into the U.S. followed the IPO, which also financed a Boston headquarters that has since closed. While profitability lags, sales have doubled in the past five years. A succession of senior executives, including three CEOs in four years, has hampered execution. Same-store sales are declining with mall-based stores suffering and sales of tea ware down 27%. In a letter to prospective board members and in concert with two other investors (Porchlight Equity and Edgepoint Wealth Management) totaling 36.5 percent of outstanding shares, Gisz wrote that “we are not disputing that change is required at DAVIDsTEA. The board could benefit from fresh input and no doubt the company needs to be turned around.” “Mr. Segal clearly wishes to take control of DAVIDsTEA. However, the combination of Mr. Segal's insistence on control at the effective exclusion of other stakeholders, as well as his basic leadership deficiencies, create an environment where DAVIDsTEA will not be able to reach its potential,” he wrote. He described Segal’s management as “erratic” and cautioned board members that “any person acting as director on a board under these circumstances runs the risk of being put into a position where they are "rubber stamping" key decisions to support Mr. Segal’s own agenda.” Glass Lewis said that "While DAVIDsTEA's financial performance has been highly unfavourable in recent years, we believe Mr. Segal, the controlling shareholder of the dissident, bears considerable responsibility for this poor performance given his role as co-founder and largest shareholder of the company and as a director of the company until his resignation in March 2018." “We find it disingenuous for Mr. Segal to blame the incumbent directors for the company's poor performance given his outsize role and influence there," Glass Lewis wrote.

Segal resigned his seat in March following a meeting at which the board said it was considering putting the company up for sale. He initially indicated he might acquire the business. Instead, his Rainy Day Investments Ltd., which owns a 46 percent share, nominated seven board members to replace the incumbent board. Segal’s slate received 54 percent of the vote. In a statement celebrating his victory, Segal said U.S. operations are “on hold.” He promised a quick return to profitability. “We now have a little time to examine exactly how we can get this company back on track,” he said. “Now it is time for the new board of directors to get to work, for the benefit of all shareholders,” he said. One of the board’s first tasks is to replace Silver, 47, a former CEO of Indigo Books & Music who was elected by shareholders June 14 but resigned his seat. Opportunity only knocks once Among the 379 Teavana stores that Starbucks abandoned in 2017, at least 100 mall locations were grossing around $1 million in annual sales over a long period, and with margins exceeding 20 percent (EBITDA). Teavana’s 56 Canadian outlets were the first to be shuttered, easing the competitive pressure. In October Starbucks switched off its online tea store which generated several million in monthly sales. As same-store sales began to flatten, particularly at its mall locations, Starbucks management refined the retail model to the point that Teavana stores far outperformed independent and small-chain tea outlets. But even the best Teavana locations earned about a half million less per year than the typical Starbucks coffee shop.  Starbucks re-directed its resources to sell Teavana iced teas in-store (up 20 percent), sold internal rival Tazo Tea for $384 million and launched a bottled line of Teavana teas now sold in 48 states. Teavana’s annual revenue, which is not reported separately, is estimated at $1.6 billion with a 2022 goal of $3 billion. The Teavana pullback presented a golden opportunity for Montreal-based DAVIDsTEA, the only specialty tea chain of comparable size to Teavana operating in both U.S. and Canada. Instead, e-commerce sales declined. Revenue was down to $45.8 million from $48.7 million in the June reporting period. Same-store sales were down 7 percent, compounding an 8.1 percent decline during the same period of the previous year. At the end of the latest fiscal year revenue was down 6 percent. In his first year Silver, DAVIDsTEA’s new CEO, saw the opening, investing $3 million in a website upgrade unveiled in April. E-commerce was up double digits, he reported. He said the company has also approached supermarkets and distribution partners eager to offer a premium tea brand at a time when commodity tea sales are lagging. Silver outlined efforts to refocus on merchandising and marketing, leverage the brand and build a stronger store network.

But  DAVIDsTEA's business model didn’t align with its site selection strategy at the company’s 50 U.S. locations. Mall customers already familiar with specialty tea, and eager to grab-and-go, were forced to wait in line as staff retrieved selections from the company’s “wall of tea.” Merchandise missed its mark, declining by 27 percent. Teabags represent only 11 percent of sales, due in large part to a price that hovers around 92-cents compared to 40-cents per tea bag price charged by rivals (and the 15 cents on offer by grocery brands). Silver said that many of these problems were addressed in a retail refresh he called DAVIDsTEA 2.0. Execution in the past year was anemic. Since 2014, DAVIDsTEA has had eight director resignations, three CEOs and one interim CEO, and two COOs and has lost many other senior executives, including the company's co-founder and brand ambassador, David Segal; the chief financial officer; the chief human resources officer; the general counsel; the vice president real estate; the national director of retail and the chief marketing and merchandising officer. “We have a sharp focus on driving traffic into our stores and to our new online platform. We have a clear plan in place and we are executing on it, but it will take some time to see sustainable results,” wrote Silver. Segal came to view the effort as too little, and too late. Elected to the board were: M. William Cleman, former chief executive officer of Bouclair Inc., a retail chain in the home furnishings sector; Pat De Marco, former president and chief executive officer of Moores Retail Group, a menswear retailer; Emilia Di Raddo, president of Le Château Inc., Peter Robinson, former chief executive officer of Mountain Equipment Co-op and Roland Walton, former president of Tim Hortons Canada. Sources: TDM Asset Management, DAVIDsTEA