Ms. Sarah Segal reports

DAVIDSTEA REPORTS FINANCIAL RESULTS FOR SECOND QUARTER OF FISCAL 2023

Davidstea Inc. has released its second quarter results for the period ended July 29, 2023.

"While our sales continued to be dampened by challenging economic conditions, particularly in our on-line channel, we moved forward with our focus on value creation initiatives during the quarter and delivering excellent customer experiences," said Sarah Segal, chief executive officer and chief brand officer, Davidstea. "In June, we opened an in-store tea bar at our Toronto Eaton Centre location, marking our first in-store tea bar outside of the Quebec market following the tea bars at Galleries Les Capitales in Quebec City and Carrefour Laval in the greater Montreal region. We look forward to continuing our focus on our flagship stores and customer experience by bringing the tea bar concept to an even larger Canadian consumer audience with additional locations set to open in Ottawa's Rideau Centre and in Vancouver's Pacific Centre later this year. Towards the end of the quarter, we internalized our on-line fulfilment to provide an elevated brand experience, resulting in immediate improvements in the overall customer experience. Still to come, we have the release of our shoppable mobile app, the planned expansion of our wholesale footprint into the U.S. this fall, and the ongoing strengthening of our flagship store model with the launch of new and upgraded retail stores.

"At the same time, we continue to fuel innovation through an enhanced premium product offering featuring an expansion of our cold relief, immunity and wellness tea assortment. This fall, we're delighted to introduce four new wellness-driven teas designed to support immunity and overall well-being. Our Immunity SOS tea combines citrusy orange, ginger and echinacea to boost immunity as a complement to our popular line of cold-relief teas. Our Golden Sun tea powder and Ashwagandha pumpkin superfood tea powder are blended for immunity-boosting and relaxation. Lastly, our Super Shroom matcha features adaptogenic mushrooms on an organic matcha base for balance and focus. The company remains committed to delivering natural and organic ingredients to tea lovers, catering to all consumer preferences, making tea fun and accessible to all," added Ms. Segal.

"While we are not pleased with our overall financial performance, we are very satisfied with the results thus far from our cost-containment plan, as we reduced our year-over-year SG&A expenses by 25.1 per cent in the quarter," said Frank Zitella, president, chief financial and operating officer, Davidstea. "Having reduced our SG&A expenses by $5-million through the first six months of fiscal 2023, we are well on our way to achieving our goal of reducing our annual SG&A costs by between $8-million and $10-million. At the same time, we anticipated a slower quarter and fully expected to incur losses over the short term as we focus on stabilizing the business and returning to profitability with positive EBITDA [earnings before interest, taxes, depreciation and amortization] for the year. We exited the quarter with a solid cash and working capital position, which should allow us to manage operations while we continue to implement value creation initiatives aimed at driving profitable growth."

Operating results for the second quarter of fiscal 2023

Three months ended July 29, 2023, compared with three months ended July 30, 2022

Sales

Sales for the second quarter of fiscal 2023 decreased by $5.4-million, or 35.3 per cent, to $9.8-million. Sales in Canada of $8.4-million, representing 85.2 per cent of total revenues, dropped $4.4-million or 34.5 per cent over the prior-year quarter. U.S. sales of $1.5-million declined by $1-million or 39.6 per cent over the prior-year quarter.

Sales continue to be impacted by unfavourable economic conditions that dampen consumer demand. Davidstea also believes that its e-commerce revenues have been significantly impacted by order fulfilment failures in the fourth quarter of 2022 that left many consumers frustrated. On June 9, 2023, the company sent a notice of termination, effective July 23, 2023, to its fulfilment service provider at that time. The company internalized fulfilment services to its Canadian consumers effective July 24, 2023, and to its U.S. consumers effective July 29, 2023, and as a result the company has seen immediate and tangible improvements in the overall customer experience.

Tea and variety box assortment sales decreased by 34 per cent or $4.5-million to $8.7-million over the prior-year quarter. Tea accessories sales decreased by 36.1 per cent or $500,000 to $900,000 over the prior-year quarter.

On-line sales of $4.8-million decreased by $3.5-million or 41.4 per cent from the prior-year quarter as the company continued to see a levelling out of pandemic-fuelled on-line sales, in addition to the impact to consumer loss resulting from order fulfilment challenges experienced in the fourth quarter of 2022, that Davidstea has not recovered from. E-commerce sales represented 49.5 per cent of sales compared with 54.8 per cent of sales in the prior-year quarter.

Sales from the wholesale channel decreased by $1.3-million or 47.5 per cent to $1.4-million, from $2.7-million in the prior-year quarter. Wholesale sales represented 14.3 per cent of sales compared with 17.6 per cent of sales in the prior-year quarter.

Brick-and-mortar sales declined by $600,000, or 15.4 per cent, to $3.6-million from $4.2-million for the same period in the prior year. Brick-and-mortar sales represented 36.2 per cent of sales compared with 27.6 per cent of sales in the prior-year quarter.

Gross profit

Gross profit dropped by 37.7 per cent to $3.6-million in the second quarter of fiscal 2023 from the prior-year quarter due to lower sales and a per-unit increase in freight, shipping and fulfilment costs. Gross profit as a percentage of sales decreased slightly to 36.9 per cent for the quarter compared with 38.3 per cent in the prior-year quarter. At a segment level, gross profit was 36.2 per cent and 41.3 per cent in the quarter compared with 38 per cent and 40 per cent in the prior-year quarter in Canada and the United States, respectively.

Selling, general and administration expenses

Selling, general and administration expenses (SG&A) of $7.9-million decreased by $2.7-million or 25.1 per cent compared with the prior-year quarter. Management set out to reduce its annual SG&A costs between $8-million and $10-million at the start of the year and is well on its way to achieving its goal. This net decrease is due primarily to the elimination of software implementation costs of $1.3-million, reduction of staff compensation costs of $800,000, a reduction in on-line marketing expenses of $600,000, and reduction of professional and consulting fees of $300,000, partially offset by costs related to internalizing fulfilment services of $800,000 and continuing information technology maintenance costs of $200,000. As a percentage of sales, SG&A increased to 80.6 per cent in the second quarter from 69.5 per cent in the prior-year quarter, due to a deleveraging of fixed costs as a result of decreased sales this quarter.

EBITDA and adjusted EBITDA

EBITDA was negative $3.4-million in the quarter ended July 29, 2023, compared with negative $3.9-million in the prior-year quarter. Adjusted EBITDA for the quarter ended July 29, 2023, was negative $2.6-million compared with negative $2.1-million for the same period in the prior year. The decrease in adjusted EBITDA of $500,000 reflects the impact of lower sales and gross profit, partially offset by a decline in SG&A expenses.

Net loss

Net loss totalled $4.3-million in the quarter ended July 29, 2023, compared with a net loss of $4.8-million in the prior-year quarter. Adjusted net loss was $3.6-million in the second quarter compared with adjusted net loss of $3.5-million in the prior-year quarter.

Fully diluted net loss per share

Fully diluted net loss per common share amounted to 16 cents in the second quarter compared with a fully diluted net loss per common share of 18 cents in the prior-year quarter. Adjusted fully diluted net loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was 14 cents compared with an adjusted fully diluted net loss of 13 cents in the prior-year quarter.

The company's primary source of liquidity is cash on hand and cash flow generated from operations. Working capital requirements are driven by the purchase of inventory, payment of payroll, continuing technology expenditures and other operating costs.

Working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as Davidstea takes title to increasing quantities of inventory in anticipation of the peak selling season in the fourth fiscal quarter. Capital expenditures of $321 in the second quarter of fiscal 2023 include furniture and equipment of $152, store leasehold improvements of $71, computer hardware of $21, and intangible assets of $77 compared with $129 additions in the prior-year quarter related to furniture and equipment.

As at July 29, 2023, the company had financial commitments in connection with the purchase of goods and services that are enforceable and legally binding, amounting to $8.3-million, net of $1.2-million of advances (Jan. 28, 2023 -- $6.7-million, net of $800,000 of advances), which are expected to be discharged within 12 months.

Conference call information

A conference call to discuss the second quarter fiscal 2023 financial results is scheduled for Sept. 12, 2023, at 8:30 a.m. Eastern Time. The conference call will be webcast and may be accessed via the investor relations section of the company's website. An on-line archive of the webcast will be available within two hours of the conclusion of the call and will remain available for one year.

About Davidstea Inc.

Davidstea offers a specialty branded selection of high-quality proprietary loose-leaf teas, prepackaged teas, tea sachets, tea-related accessories and gifts through its e-commerce platform and the Amazon marketplace, its wholesale customers, which include over 3,800 grocery stores and pharmacies, and 18 company-owned stores across Canada. The company offers primarily proprietary tea blends that are exclusive to the company, as well as traditional single-origin teas and herbs. The company's passion for, and knowledge of, tea permeates its culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea. With a focus on innovative flavours, wellness-driven ingredients and organic tea, the company launches seasonally driven collections with a mission of making tea fun and accessible to all. The company is headquartered in Montreal, Canada.

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