DAVIDsTEA Inc.

Good morning, ladies and gentlemen. Welcome to David Stee's third quarter results webcast for fiscal 2024. Today's webcast is being recorded and is in a listen-only mode. Before we get started, I would like to remind you of the company's safe harbor language. This presentation 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 presentation 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, EMDNA. which was filed with Canadian regulatory authorities and is available on www.cedarplus.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 Siegel, Chief Executive Officer and Chief Brand Officer of David's Tea.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. I am thrilled to share some exciting updates about David's Tea's ongoing transformation and our remarkable progress this year. As we enter the final stretch of fiscal 2024, our business momentum continues to build, while our financial results reflect the strength of our strategy, our brand, and our people. We are highly encouraged by the ongoing sales momentum in the third quarter of 2024, with consolidated sales increasing 15.6% year over year to $14 million. This growth was driven by double-digit increases across all distribution channels, where tin mortar sales were up 19.2%, online sales rose 11.4%, and wholesale channel sales were 19.3%. These results affirm our value proposition, the appeal of our premium ski products and accessories, and the unmatched quality that resonates with ski lovers everywhere. Equally important, our multifaceted omni-channel growth strategy continues to bring traction, supported by early signs of an improving economic environment, lower interest rates, and easing inflation. By being present everywhere, whether in stores, online, or through wholesale, David's Tea continues to win over tea lovers and those new to the category. Simply put, tea lovers are discovering and rediscovering the world of David's Tea. I am particularly optimistic about the performance of our new retail locations. Our newest location in the Montreal Eaton Centre, which opened just over a month ago, is perfectly situated at a significant hub of downtown commuter traffic and is already on track to become a top tier location in our 20 store network. Meanwhile, our September opening in Canada's newest luxury mall, Montreal's Royal Mounts Mall, is also delivering impressive financial results as tenant occupancy improves leading to greater hype and mall traffic. These successes highlight the importance of choosing the right location for our stores and reflect the readiness of consumers to indulge in affordable luxuries like our premium seats. Our ability to deliver a heightened in-store experience for shoppers, along with the passion of our key guides, enables us to connect with customers in person to listen to their requests and provide guidance. Looking ahead, we are reiterating our intent to significantly increase our store footprint over the next three years to drive sustained profitable growth. That said, delivering sustainable profitability remains our primary goal. Despite recent revenue expansion, including two consecutive quarters of double-digit year-over-year growth, we continue to focus on profitability. David's Tea reported a net loss of $1.6 million in the third quarter of 2024 and $5.7 million after nine months of the fiscal year. While these results represent an improvement over last year, it is not sufficient to secure our long-term success. To address this profitability issue, in September, we terminated our head office lease and relocated our headquarters into one of our warehouses, and in early November, converted all our IT systems to a more agile and cost-effective platform. These moves are expected to generate annual savings of a little over $4 million, bolstering our efforts to achieve sustained profitability in 2025. Frank Sotela, our President, Chief Financial and Operating Officer, will provide more details about these initiatives in his prepared comments. I want to emphasize that the main objective of our leadership team remains to reach profitability while delivering long-term value to our stakeholders. Our company relies on innovative people, creative ideation, and a desire to push the envelope in a category that is an exciting space to be in. Our customers love tea for the taste, the health benefits, the way it makes you feel, and the constant discovery. We invest in our people and rely on constant feedback from our customers. We listen and react in a way that leads us into adjacent tea categories like ready to drink, functional tea powders, and the use of functional ingredients to boost our loose-leaf tea benefits with healing organic and high-quality wellness blends that have been embraced by customers looking to expand their tea journey. We continue to drive innovation by relying on our team's connection with our customers as well as global inspiration to bring new seasonal drops, limited-edition blends, and exclusive partnership teas with a constant strategy to always test and confirm our innovation with customer appreciation and data insights. Our product development cycle and latest collections mean there is always a new reason to drop into David's team. Lastly, I'd like to touch on the impact of the recent Canada Post strike on our operations. While order volumes stacked according to plan until mid-November, the strike caused a decline in online orders and delays in holiday season deliveries. I want to reassure you that these delays are unrelated to the fulfillment challenges we experienced a few years ago. Those have been fully resolved by bringing order fulfillment in-house. And this season, our distribution team has been able to keep up with all order volumes and deliver excellent service. Any delays are due to carrier capacity, and we are actively working with alternative carriers to resolve any lingering backlogs and expect to mitigate much of the impact by increased volumes in our stores and wholesale channels. The disruption in delivery capabilities has led us to innovate and diversify our delivery partners, resulting in faster options being added, and even next-day delivery in major Canadian metropolitan cities. We continue to innovate on delivery capacity to make our products even more accessible faster. In summary, David's Tea delivered a strong third-quarter performance, sales increased 15.6% year-over-year, given by a resonating value proposition and an improving economic environment. Our new Eaton Center store is off to a phenomenal start, complementing the earlier success of our Royal Mount Mall location. We implemented a key cost-saving initiative with the IT system transition, expected to generate $4 million in annual savings. And we remain committed to achieving sustained profitability by 2025. I will now turn the webcast over to Frank.

Thank you, Sarah, and good morning, everyone. I'm pleased to join you today to share the results of our third quarter performance, as well as the progress we're making in positioning David's piece of long-term success. As we reflect on this quarter, one thing is clear. We are a company in motion. From operational enhancements to financial performance improvements, David's Tea is taking bold steps towards becoming a stronger, more resilient business that delivers value for both our consumers and our shareholders. Let's begin with the highlights of our financial performance. For the first time in recent memory, David's Tea generated positive cash flow from operations, representing a significant milestone in our journey, and as a result, strengthened our cash position on a sequential basis of $7.9 million at the end of the quarter. It reflects our team's disciplined financial management and relentless commitment to operational excellence, providing a strong foundation for continued growth and success. Consolidated sales grew by 15.6% year-over-year to $14 million in the third quarter. This growth reflects the effectiveness of our value proposition, a unique combination of premium key products, unmatched product quality, and a memorable customer experience both online and in-store. We saw robust growth in all channels. Brick-and-mortar sales increased by 19.2% to 4.7 million, representing the fourth consecutive quarter of growth in this channel. This growth highlights the value of a physical presence, allowing key enthusiasts to connect with our brand in a more personal and immersive way. Online sales rose 11.4% to 6.3 million, showcasing the continuous strength of our digital capabilities in a world where convenience and accessibility matter more than ever. Wholesale channel sales grew by 19.3% to 3 million, driven by strong partnerships and replenishment orders from existing Canadian customers. Notably, gross profit margin improved significantly to 51.5%, up from 37.9% in the prior year. This improvement was driven by higher sales, better product margins, and a reduction in freight, shipping, and fulfillment costs. This is not just a financial metric. It's a testament to the effectiveness of our operational efficiency initiatives. Let me be clear. While we've made meaningful progress, there's still work to be done. Despite two consecutive quarters of double-digit revenue growth and significant improvements in sequential gross profit margins, we are not yet profitable. In the third quarter, we reported a net loss of 1.6 million. This represents, however, a significant improvement compared to the net loss of 3.7 million in the same quarter last year. To ensure we achieve the same profitability by 2025, we've taken decisive action. In early November, we transitioned all of our IT systems to a more agile and cost-effective set of applications. These systems enable us to better engage with new customers' relationships with existing ones. While this move required a $3.1 million write-off in the quarter, it's a forward-looking investment that is expected to generate annual cost savings of approximately $4 million. These cost savings will improve our SG&A expense run rate, and the additional system capabilities will allow us to drive growth and deliver value to our consumers. Additionally, this transition triggered a reassessment of previously impaired property and equipment, resulting in a reversal of $2.1 million. It's worth noting that this reversal is not just an accounting adjustment. It reflects the tangible progress we're making on improving our financial health and operational efficiency. In September, we terminated our head office lease and relocated our headquarters into one of our warehouses. Following one-time relocation costs, This move is expected to generate annual cost savings of approximately $200,000. Selling, general, and administrative expenses increased by $400,000, or 4.5% to $8.7 million. However, when adjusted for one-time expenses to affect the financial change, SG&A expenses actually decreased by $1 million, or 12.6% compared to the prior year. This reduction is a testament to our commitment to operational efficiency and our ability to do more with less. Turning to the bottom line, adjusted EBITDA for the third quarter was $800,000 compared to a negative $2.5 million in the same period last year. This $3.3 million improvement reflects higher sales, better margins, and a disciplined cost management approach. And as we look forward to the future, our priorities are clear. First, sustained profitability. We remain focused on achieving positive earnings in 2025. And to get there, we're later focused on revenue growth from all of our distribution channels, improving margins, and maintaining a disciplined cost management process. Second, store expansion. Over the next three years, we plan to significantly grow our store footprint, allowing us to meet the increasing demand for premium key products and bring our brand to even more communities. And finally, operational excellence. From our new IT platform to refining our omnichannel strategy and relentlessly driving cost efficiencies in our supply chain, we're laying the groundwork for long-term success. With these priorities guiding us, David C. is making steady progress, delivering improving financial results, streamlining operations, and staying true to our mission of making C. fun and accessible to all. We are confident in our ability to achieve sustainable growth and create lasting value for our customers, partners, and shareholders. We want to thank all of our passionate employees, our loyal customers, and patient shareholders for their continued support. This concludes the review of our third quarter results. We encourage investors wishing to obtain additional color about David's fee to contact Investor Relations, who will help coordinate access to management. Thank you for joining us.