DAVIDsTEA Inc

XTSX:DTEA

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to DAVIDsTEA's Second Quarter Results Webcast for fiscal 2025. Today's webcast is being recorded [Operator Instructions] Before we get started, I would like to remind you of the company's safe harbor language. This webcast includes forward-looking statements about expectations for the performance of the business in the coming quarter and year.

Each forward-looking statement contained in this webcast is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Risk Factors and Uncertainties in the Management's Discussion and Analysis of Financial Condition and Results of Operations, the MD&A, which was filed with Canadian regulatory authorities and is available on www.sedarplus.ca.

The forward-looking statements in this discussion speak only as of today's date, and the company undertakes no obligation to update or revise any of these statements. If any non-IFRS financial measure is used during this webcast, a reconciliation to the most directly comparable IFRS financial measure will be detailed in the MD&A.

As a reminder, all dollar amounts referred to are in Canadian dollars unless otherwise indicated. Now I would like to turn the call over to Sarah Segal, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA.

[Sarah Segal, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. DAVIDsTEA stayed the course with its omnichannel growth strategy in the second quarter of 2025, supported by retail stores and wholesale channel sales increases of 9.1% and 2.5% year-over-year, respectively. Overall, we reported a net loss of $1.6 million on sales of $11.1 million in the second quarter, which is typical of our seasonally driven business.

While our online sales have not grown to target, we are encouraged by the halo effect of our retail locations, which continue to drive brand awareness and customer engagement. As we expand our store footprint, we are intensifying our community and brand marketing efforts across both digital and physical media to ensure we remain top of mind with consumers heading into our peak selling season.

If you recall, we generate more than 60% of our annual sales volume in the third and fourth quarters. For example, we have invested in online advertising, billboard ads, wellness influencers, affiliate programs and promotional events to raise brand awareness with consumers as they seek to buy gifts for themselves and their friends during the upcoming holiday period.

We expect these initiatives to generate a strong return on investment and contribute to profitable growth. Against this backdrop, our business continues to operate in a challenging environment characterized by the imposition of tariffs in the U.S., higher unemployment and inflationary pressure, but our brand has demonstrated remarkable resiliency against these macroeconomic headwinds.

Looking ahead, we fully intend to make retail stores the focal point of our omnichannel growth strategy. After all, the best advertising for DAVIDsTEA is a new store, which continues to provide a superior personal experience through our knowledgeable tea guides. We believe this positive in-store consumer experience in turn, will continue to convert non-tea drinkers or casual tea drinkers into devoted tea lovers.

Accordingly, we are currently renovating our flagship store in Montreal South Shore and remain on track to reopen in mid-November. This represents an exciting first step in our renewed retail expansion strategy. We have also signed a second lease agreement in Quebec City. The opening of a store at Laurier in Quebec City's provincial capital will supplement our current offering at Les Galeries de la Capitale.

In addition, we are planning to unveil a third store at the Square One Mall in Mississauga, one of the premier shopping centers in Canada come July 2026. This store will be based on a new concept that is more open, including an accessible tea bar that enables consumers to sample a wide variety of premium teas and blends with curated signature drinks that change seasonally.

So notwithstanding these 3 store openings over the next 12 months, we are currently negotiating with high-end mall owners across Canada to introduce additional new stores within our portfolio and be well on our way to significantly increasing our store footprint over the next 3 years.

In summary, DAVIDsTEA stayed the course with its omnichannel growth strategy in the second quarter of 2025. We reported as expected financial results in what can best be described as a stable quarter with preparations to conclude the year on target.

More importantly, we are firmly on a path to increasing our store footprint over the next 12 months while also increasing our marketing efforts in new and exciting demographics with a focus on experiential marketing to ensure that DAVIDsTEA brand is top of mind with consumers.

Ultimately, with these actions, we have our sights set on delivering sustained and profitable growth in the periods ahead. I will now turn the webcast over to Frank Zitella, President, Chief Financial and Operating Officer of DAVIDsTEA.

[Frank Zitella, executive]

Thank you, Sarah, and good morning, everyone. Consolidated sales improved 0.5% to $11.1 million in the second quarter of 2025. This slight year-over-year increase can be attributed to higher brick-and-mortar and wholesale channel sales, partially offset by lower online revenues.

On a channel basis, brick-and-mortar sales grew by $0.4 million or 9.1% to $4.6 million in Q2 of 2025, driven by the contributions of 2 additional stores in the Montreal area and positive comparable store sales growth of 0.6%. Wholesale channel sales, meanwhile, rose by $0.1 million or 2.5% to $1.5 million in the second quarter as we restocked grocery stores, pharmacy chains and big box stores with our core products.

For their part, online sales decreased by $0.4 million year-over-year or 6.7% to $5.1 million as macroeconomic headwinds and noise surrounding tariffs were a drag on e-commerce revenues. Geographically, Canada represented 90% of total sales in the second quarter of 2025, while the U.S. accounted for 10%. Revenue south of the border decreased by $0.3 million year-over-year.

Gross profit remained stable at $5.3 million or 47.2% of sales in the second quarter of 2025 as a slight decline in product margin was offset by lower freight, shipping and fulfillment cost per unit. Selling, general and administrative expenses decreased by $0.1 million or 1.9% to $6.6 million in the second quarter of 2025.

The slight year-over-year improvement was driven by improved IT expenses, resulting from the successful conversion of our full technology stack to a lower cost operating system. During the quarter, we also reversed previously incurred IT expenses. In addition, we reported an impairment charge on property, equipment and intangible assets in Q2 of 2024 that did not reoccur in the most recent quarter.

These savings were mostly offset by increased marketing expenses in the second quarter of 2025, which Sarah referred to in her prepared remarks, along with higher wages and employee benefits. In terms of profitability, net loss remained stable at $1.6 million in the second quarter, while adjusted EBITDA amounted to negative $0.2 million compared to negative $0.3 million in the same period last year.

Moving on to liquidity and capital resources. DAVIDsTEA's cash position improved to $7.6 million in the second quarter of 2025 from $6.7 million in the second quarter of 2024. On a sequential basis, our cash declined from $10.4 million in the first quarter of 2025 due to the seasonality of our business.

Cash flow used from operations, meanwhile, amounted to $1.5 million in the second quarter of 2025 compared to $1 million in the same period of 2024. The year-over-year increase in cash used was mainly due to higher inventories in preparation in the upcoming selling season, partially offset by greater trade and other payables compared to the prior year quarter.

In closing, the entire DAVIDsTEA team is brimming with excitement for the upcoming selling season with brand-new collections and innovative gifts prepared for our loyal customers. Behind the relentless push to elevate the wellness of tea drinking across our brick-and-mortar online and wholesale channel sales, we remain focused on delivering profitability on a sustainable basis.

Consequently, all investments undertaken, including those to raise brand awareness and to be top of mind with consumers are judiciously scrutinized to deliver significant ROI over time. Finally, we announced that Ernst & Young LLP, Chartered Professional Accountants, resigned as auditors of DAVIDsTEA at the company's request and that the Board of Directors appointed Richter LLP Chartered Professional Accountants as the company's new auditors.

DAVIDsTEA thanks Ernst & Young for its service as auditors since fiscal 2011. This concludes our review of second quarter results for fiscal 2025. We encourage investors wishing to obtain additional color about DAVIDsTEA to contact Investor Relations to coordinate access to management. Thank you for joining us today.