DAVIDsTEA 3rd Quarter Earnings Call Focused on E-Commerce and Sachet Expansion

Montreal, Canada-based DAVIDsTEA held its 3^rd Quarter Earnings Call on Dec. 13, 2018. Executives reviewed what precipitated the company’s losses and outlined plans for increasing profitability, which include expanding e-commerce and tea sachet sales. Executive Chairman and Interim Chief Executive Officer Herschal Segal began the call by introducing the new CFO, Frank Zitella. He also acknowledged the dedication and contributions of other members of the leadership team, including: Vice President of Information Technology Dominique Choquette, Chief Brand Officer Sarah Segal, Vice President of Sales April Sabral, Vice President of Marketing and Commerce Natalie Binda, and Vice President of Supply Chain Martin Hilcoat. DAVIDsTEA opened its first store in 2008 and by 2011 had opened 70 stores across Canada. In 2012, the company expanded into the United States, “and that is when the company began to lose its way,” said Segal. He went on to say, “The expansion did not go as planned and the Canadian operations were neglected in the process.” Though same-store sales have continued to decline, e-commerce and alternative sales indicate potential for growth, which is a reflection of industry-wide trends. E-commerce sales currently represent only 16 percent of the company’s total sales volume. In 2018, leadership evaluated the consistent issues and re-established the company’s original brand vision. Mid-June of 2018 marked a turning point for DAVIDsTEA. Segal listed five focus areas for improvement:

• Define the brand, so DAVIDsTEA is recognizable everywhere it is available.
• Improve efficiency and inspire in-store traffic.
• Increase sales through the e-commerce platform.
• Unify the product development process to improve quality and price efficiency.
• Focus on dramatically expanding the sales of tea bags/sachets, which is how the majority of Canadians consume tea. Herschel added, tea sachet sales at 450 Loblaw locations in Canada are strong, as is consumption on Air Canada flights, and in offices and hotels.

Herschel concluded by saying, “I have great confidence in our team, our brand, our growth opportunities, and our capacity to improve our financial results. I believe that our new leadership team is ready to produce more positive results and is squarely focused on restoring profitability.” Next, Zitella detailed 3^rd Quarter sales, which increased by 1.6 percent to $43.7 million, as compared to $43 million for the same period in 2017. DAVIDsTEA concluded the quarter with 238 stores, which is a net increase of two stores over the 3^rd Quarter of 2017. Leadership decreased dependency in discounting, which resulted in less product available for the semi-annual sale and a better seasonal inventory position than the same quarter in the prior year, stated Zitella. In Canada, comparable sales by region were down by 8 percent, compared to third quarter 2017’s 7.6 percent. Comparable sales in the United States showed measured improvement of nearly 16 percent, “although still in negative territory,” said Zitella. Gross profit held steady at $18.4 million, matching that for the 3^rd Quarter of 2017, but as a percentage of sales, it decreased somewhat to 42.1 percent from 42.7 percent. Adjusted Selling, General and Administrative Expenses went from $24.4 million in the third quarter of 2017 to $27 million in 2018, which Zitella attributed to pay increases, increased use of consultants and foreign exchange translation costs. At the conclusion of the 3^rd Quarter of 2018, DAVIDsTEA had $18.7 million in cash. Net loss totaled $9.1 million, an increase over the net loss of $6.5 million in the 3^rd Quarter of 2017. Fully diluted loss per common share was $0.35, compared to $0.25 in the same period of 2017.