DAVIDsTEA’s Losses Widen on New Store Openings

Tea retailer’s sales jumped 21.5% to C$44.1 million from C$36.3 million in the year-ago same period

d1Specialty tea retailer DAVIDsTEA Inc. (NASDAQ: DTEA) announced its Q3 FY16 financial results on December 08th, 2016.

Headquartered in Montreal, Canada, the company offers approximately 150 loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts, accessories, and food and beverages in the white, green, oolong, black, pu’er, mate, rooibos, and herbal tea categories.

As of October 29th, 2016, the company owned and operated 225 DAVIDsTEA stores in the US and Canada, and its website, davidstea.com. Read more about DAVIDsTEA’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, DAVIDsTEA’s sales jumped 21.5% to C$44.1 million from C$36.3 million in the year ago same period, while comparable sales grew 0.8% during the reporting quarter. Gross profit jumped 13.9% to C$20.5 million from C$18.0 million in Q3 FY15, while gross profit as a percentage of sales decreased to 46.5% from 49.6% in the prior year’s same quarter. The decrease in gross profit as a percentage of sales was mainly due to additional promotional activity, a shift in product sales mix, and the adverse impact of the stronger US dollar.

d2During the reporting quarter, DAVIDsTEA’s selling, general, and administration (SG&A) expenses rose to C$27.2 million from C$18.9 million in the year ago comparable period. As a percentage of net sales, SG&A jumped to 61.6% from 52.0% in the prior-year period. Adjusted SG&A, which excludes CEO separation costs, impairment of property and equipment, provision for onerous contracts, and the loss on disposal of property and equipment in Q3 FY16, increased to C$23.7 million from C$18.9 million in Q3 FY15. The increase was mainly due to the hiring of additional staff to support the growth of the Company, including new stores, and higher store operating expenses. As a percentage of sales, adjusted SG&A rose to 53.7% from 52.0%.

As a result of higher expenses and new store openings, operating loss widened to C$(6.6) million compared to C$(0.9) million in the year-ago same period. Consequently, the Company went deeper into the red with net losses ballooning to C$(5.0) million, or C$(0.20) per diluted share, compared to C$(0.9) million, or C$(0.04) per diluted share, in the prior year’s same period. Adjusted net loss was at C$(2.4) million compared to C$(0.8) million in the year ago same quarter.

Market competition and growth scenario

Currently, DAVIDsTEA’s biggest competitor is Teavana and its parent company Starbucks Corporation (NASDAQ: SBUX), which serves Teavana teas in its 1,300 plus Canadian stores. Another competitor is Toronto’s Pluck Tea Inc., whose teas are available in top-end restaurants as well as online stores.

According to Agriculture and Agri-Food Canada, Canadian tea consumption is expected to jump 40% by 2020, giving DavidsTea huge scope to increase its offerings to tea drinkers and health- conscious consumers who are increasingly attracted to the beverage’s potential health benefits. Moreover, Euromonitor International research shows that North America represents only 7% of the $40 billion (US) global tea market, offering the company growth opportunities in the future.

In recent years, more and more people are taking to premium teas and loose-leaf teas in general, driven by the drink’s increasingly popularity for its health benefits; booming immigration from tea drinking cultures; and younger people differentiating themselves from their coffee drinking Boomer parents.

d3Moreover, tea is fast gaining popularity since beverage companies such as The Coca-Cola Co. (NYSE: KO) are launching healthier options such as tea-based beverages after facing consumer backlash. Coca-Cola announced on September 01st, 2016, that it will launch Gold Peak ready-to-drink (RTD) tea lattes and cold brew coffees in 2017 in the U.S. The RTD tea latte segment is considered an emerging beverage category.

Other highlights

d4Store update: DAVIDsTEA operated 225 stores in the US and Canada as of October 29th, 2016, compared to 183 stores as of October 31st, 2015. The Company opened 17 new stores in Q3 FY16, an increase of 23% from the year-ago same period.

Cash and liquidity position: As of October 29th, 2016, the Company had C$33.1 million of cash and cash equivalents and total liquidity (cash plus availability on a C$20.0 million revolving facility) of C$53.1 million.

Exit of top brass: Sylvain Toutant, President and CEO, will be leaving the Company in January 2017. As CEO, Toutant played a key role in the Company’s 2015 initial public offering, which marked the beginning of a significant growth phase in the US. In order to facilitate a smooth transition, a Transition Committee of the Board has been formed, led by Maurice Tousson, Chairman of the Board. The company also announced the appointment of Christine Bullen, Managing Director of US Markets, as Interim President and CEO. Christine will work closely with Sylvain and the Transition Committee to ensure a smooth transition when she assumes the Interim President and CEO position at the end of FY16.

Guidance for FY16

For Q4 FY16, DAVIDsTEA expects sales to be in the range of C$84.0 million to C$88.0 million, or an expected sales growth of 10.8% to 16.2% in comparison to the year ago same period, based on opening 7 new stores. Comparable sales are predicted to be in the negative low single digit range to flat. Adjusted EBITDA is expected to be in the range of C$20.0 million to C$22.0 million. Net income is forecasted to be in the range of C$12.1 million to C$13.5 million, with diluted EPS in the range of C$0.47 to C$0.52 on approximately 25.9 million fully diluted weighted average shares outstanding.

For FY16, sales are expected to be in the range of C$214.0 million to C$218.0 million, or an expected sales growth of 18.4% to 20.6% in comparison to FY15, based on opening 39 net new stores for the full year and assuming a comparable sales increase in the flat to low-single digit range. Adjusted EBITDA is expected to be in the range of C$25.0 million to C$27.0 million. Adjusted net income is expected to be in the range of C$9.0 million to C$10.5 million, with adjusted diluted EPS in the range of C$0.35 to C$0.40 on approximately 26.0 million adjusted fully diluted weighted average shares outstanding.

Stock Performance

d5DAVIDsTEA’s stock ended the day at $7.20, gaining 1.41%, at the close on Friday, December 16th, 2016, having vacillated between an intraday high of $7.25 and a low of $7.10 during the session. The stock’s trading volume was at 135,224 for the day. The Company’s market cap was at $176.90 million as of Friday’s close.

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