MONTREAL, Quebec

Joel Silver

DAVIDsTEA President and CEO Joel Silver resigned this week after a vicious proxy battle that returned management of the general public firm to co-founder Herschel Segal. A block of traders, led by TDM Asset Management Director Benjamin Gisz, and supported by proxy consultants Glass, Lewis & Co., vigorously objected to a seven-member slate of board members loyal to Segal. Segal, 87, who based the Le Chateau clothes chain, is DAVIDsTEA’s largest shareholder. In 2008 his younger cousin David Segal recommended tea retailing and the 2 males grew to become companions throughout a interval of excessive profitability and speedy growth.

The firm misplaced $30 million final yr on $224 million of gross sales at its 240 shops, that are situated primarily in Canada (190). Same-store gross sales declined in every of the previous 5 fiscal years main to losses. The firm went public in June 2015, when it was listed on the Nasdaq at $19 per share. Shares reached a excessive of $30 however are actually buying and selling at $4. An costly 50-store growth into the U.S. adopted the IPO, which additionally financed a Boston headquarters that has since closed. While profitability lags, gross sales have doubled prior to now 5 years. A succession of senior executives, together with three CEOs in 4 years, has hampered execution. Same-store gross sales are declining with mall-based shops struggling and gross sales of tea ware down 27%.

In a letter to potential board members and in live performance with two different traders (Porchlight Equity and Edgepoint Wealth Management) totaling 36.5 p.c of excellent shares, Gisz wrote that “we are not disputing that change is required at DAVIDsTEA. The board could benefit from fresh input and no doubt the company needs to be turned around.”

“Mr. Segal clearly wishes to take control of DAVIDsTEA. However, the combination of Mr. Segal’s insistence on control at the effective exclusion of other stakeholders, as well as his basic leadership deficiencies, create an environment where DAVIDsTEA will not be able to reach its potential,” he wrote.

He described Segal’s administration as “erratic” and cautioned board members that “any person acting as director on a board under these circumstances runs the risk of being put into a position where they are “rubber stamping” key choices to help Mr. Segal’s personal agenda.”

Glass Lewis stated that “While DAVIDsTEA’s financial performance has been highly unfavourable in recent years, we believe Mr. Segal, the controlling shareholder of the dissident, bears considerable responsibility for this poor performance given his role as co-founder and largest shareholder of the company and as a director of the company until his resignation in March 2018.”

“We find it disingenuous for Mr. Segal to blame the incumbent directors for the company’s poor performance given his outsize role and influence there,” Glass Lewis wrote.

DAVIDsTEA’s new web site

Segal resigned his seat in March following a gathering at which the board stated it was contemplating placing the corporate up on the market. He initially indicated he would possibly purchase the enterprise. Instead, his Rainy Day Investments Ltd., which owns a 46 p.c share, nominated seven board members to substitute the incumbent board.

Segal’s slate obtained 54 p.c of the vote. In a press release celebrating his victory, Segal stated U.S. operations are “on hold.” He promised a fast return to profitability. “We now have a little time to examine exactly how we can get this company back on track,” he stated. “Now it is time for the new board of directors to get to work, for the benefit of all shareholders,” he stated.

One of the board’s first duties is to substitute Silver, 47, a former CEO of Indigo Books & Music who was elected by shareholders June 14 however resigned his seat.

Opportunity solely knocks as soon as

Among the 379 Teavana shops that Starbucks deserted in 2017, at least 100 mall areas had been grossing round $1 million in annual gross sales over a protracted interval, and with margins exceeding 20 p.c (EBITDA). Teavana’s 56 Canadian shops had been the primary to be shuttered, easing the aggressive strain. In October Starbucks switched off its on-line tea retailer which generated a number of million in month-to-month gross sales.

As same-store gross sales started to flatten, notably at its mall areas, Starbucks administration refined the retail mannequin to the purpose that Teavana shops far outperformed unbiased and small-chain tea shops. But even the most effective Teavana areas earned a few half million much less per yr than the standard Starbucks espresso store.  Starbucks re-directed its assets to promote Teavana iced teas in-store (up 20 p.c), bought inner rival Tazo Tea for $384 million and launched a bottled line of Teavana teas now bought in 48 states. Teavana’s annual income, which isn’t reported individually, is estimated at $1.6 billion with a 2022 purpose of $three billion.

The Teavana pullback offered a golden alternative for Montreal-based DAVIDsTEA, the one specialty tea chain of comparable measurement to Teavana working in each U.S. and Canada. Instead, e-commerce gross sales declined. Revenue was down to $45.Eight million from $48.7 million within the June reporting interval. Same-store gross sales had been down 7 p.c, compounding an 8.1 p.c decline throughout the identical interval of the earlier yr. At the top of the most recent fiscal yr income was down 6 p.c.

In his first yr Silver, DAVIDsTEA’s new CEO, noticed the opening, investing $three million in a website improve unveiled in April. E-commerce was up double digits, he reported. He stated the corporate has additionally approached supermarkets and distribution companions keen to supply a premium tea model at a time when commodity tea gross sales are lagging. Silver outlined efforts to refocus on merchandising and advertising, leverage the model and construct a stronger retailer community.

DAVIDsTEA Toronto Pearson Airport

But  DAVIDsTEA’s enterprise mannequin didn’t align with its web site choice technique at the corporate’s 50 U.S. areas. Mall clients already accustomed to specialty tea, and keen to grab-and-go, had been compelled to wait in line as employees retrieved picks from the corporate’s “wall of tea.” Merchandise missed its mark, declining by 27 p.c. Teabags characterize solely 11 p.c of gross sales, due largely to a worth that hovers round 92-cents in contrast to 40-cents per tea bag worth charged by rivals (and the 15 cents on supply by grocery manufacturers). Silver stated that many of those issues had been addressed in a retail refresh he known as DAVIDsTEA 2.0.

Execution prior to now yr was anemic. Since 2014, DAVIDsTEA has had eight director resignations, three CEOs and one interim CEO, and two COOs and has misplaced many different senior executives, together with the corporate’s co-founder and model ambassador, David Segal; the chief monetary officer; the chief human assets officer; the overall counsel; the vice chairman actual property; the nationwide director of retail and the chief advertising and merchandising officer.

“We have a sharp focus on driving traffic into our stores and to our new online platform. We have a clear plan in place and we are executing on it, but it will take some time to see sustainable results,” wrote Silver.

Segal got here to view the trouble as too little, and too late.

Elected to the board had been: M. William Cleman, former chief govt officer of Bouclair Inc., a retail chain within the dwelling furnishings sector; Pat De Marco, former president and chief govt officer of Moores Retail Group, a menswear retailer; Emilia Di Raddo, president of Le Château Inc., Peter Robinson, former chief govt officer of Mountain Equipment Co-op and Roland Walton, former president of Tim Hortons Canada.

Sources: TDM Asset Management, DAVIDsTEA

 

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