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DavidsTea plans to revamp after profit tumbles; shares drop

DavidsTea’s new chief executive, Joel Silver, said the retailer has ‘overwhelmed’ customers with new weekly products.

Fred Lum/The Globe and Mail

The new leader of DavidsTea Inc. says the company is struggling with "self-inflicted" wounds as he looks to oversee a revival of the chain that helped reshape the retail tea market in Canada.

Joel Silver, new chief executive officer of Montreal-based DavidsTea, said the retailer has "distracted" and "overwhelmed" customers with a weekly flow of new – and often unappealing – products arriving at stores. The chain is reducing to monthly its new product introductions, investing in pumping up its digital business and conducting consumer research to help it return to its tea roots, he said.

"While we have our work cut out for us, we are focused on reinvigorating our sales and customer experience in order to achieve the full potential that we believe exists for the DavidsTea brand," Mr. Silver said late Wednesday as the chain released disappointing fourth-quarter results and warned of an even worse first quarter.

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DavidsTea's executives told an analyst conference call they face a "meaningful deterioration" in the number of visitors coming to their stores in the first quarter so far – and anticipate an operating loss in the period.

In its fourth quarter ended Jan. 28, DavidsTea's profit tumbled to $2-million or 8 cents a share from $14.7-million or 61 cents a share a year earlier. Sales rose to $86.3-million from $75.8-million.

Same-store sales at outlets open a year or more – a key retail measure – picked up just 0.4 per cent in the fourth quarter compared with a 6.6-per-cent gain a year earlier.

As a result of its troubles, DavidsTea is taking a $13.1-million or 31-cent-a-share charge in the quarter tied to underperforming stores. At year-end, it had 231 outlets, 181 in Canada and 50 in the United States, where it is having difficulty building brand awareness, Christine Bullen, who heads the U.S. division, said.

The chain grappled with soft sales and traffic to its stores in its fourth quarter, forcing it to discount prices to clear the overabundance of merchandise, Luis Borgen, chief financial officer of DavidsTea, said.

"We've seen these trends persist and deteriorate into the first quarter," Mr. Borgen said.

DavidsTea reinvented the retail tea market in Canada starting in 2008 with bright and airy teal-hued stores featuring rows of 150 different loose leaf teas in metal cans on its "tea wall" and takeout tea latte for $4.45 a cup.

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Investors initially warmed to the stock when the company went public in mid-2015 at $19 (U.S.) a share but the shares subsequently sunk on the Nasdaq market although they've recovered a bit so far this year. They closed down 17.2 per cent to $6.25 on Thursday.

DavidsTea was launched by Herschel Segal, founder of clothier Le Chateau Inc., and his younger cousin David Segal – the David in DavidsTea – but is now revamping its blueprint in the United States where it struggling to take on stiff competition from Teavana, which is owned by U.S. giant Starbucks Crop.

Mr. Silver joined DavidsTea as CEO on March 20 with a track record of overseeing growth strategies at consumer brands, most notably as president of Indigo Books & Music Inc. He oversaw its expansion into non-book products such as toys and other children's goods, which has helped bolster its performance. Most recently he was general partner of TrilogyGrowth LP, a venture capital fund that invested in products that can reinvent their fields with the use of technology.

The fund had backing from Gerald Schwartz, Canada's premier leveraged buyout specialist who heads giant Onex Corp.

Mr. Silver has worked closely with Mr. Schwartz's wife, Heather Reisman, CEO of Indigo and Mr. Silver's former boss.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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