DavidsTea files for bankruptcy protection, plans to transform into ‘leaner’ company
DavidsTea Inc. has become the latest Quebec retailer to file for creditor protection in 2020 amid the coronavirus pandemic as it couldn’t overcome the closure of its retail network.
The Montreal-based tea merchant said Wednesday its application for an initial order under the Companies’ Creditors Arrangement Act was expected to be heard by the Quebec Superior Court by the end of the day.
It plans to apply for similar orders for its U.S. subsidiary under Chapter 15 of the United States Bankruptcy Code, according to a company statement.
DavidsTea joins retailers such as shoe seller Aldo Group, clothing chain Reitmans Canada Ltd. and sporting-goods company SAIL Outdoors Inc. in seeking protection this year as a result of the crisis. DavidsTea shut its stores March 17, and said Wednesday they would remain closed until further notice.
As it morphs into a “leaner and more efficient company,” DavidsTea said it plans to “significantly” reduce its brick and mortar footprint while accelerating a transition to online retailing and wholesale distribution in North America.
DavidsTea had warned shareholders June 15 that it might need to restructure if negotiations with landlords failed to yield substantial savings.
At the time, the company said it hadn’t paid rent for any of its stores for three months.
“Our challenge is to restructure our North American retail footprint in order to decrease the ongoing losses caused by unprofitable stores,” founder and interim chief executive Herschel Segal said in the statement.
“Both management and the board of directors believe that a formal restructuring leading to a significant reduction in our brick and mortar presence is the best path forward to ensure the longterm success and sustainability” of the company.
Many customers have already shifted to buying the company’s products online, and in supermarkets and pharmacies across
Canada. Online sales will continue during the restructuring process, as will sales in grocery stores and pharmacies.
“The transformation of our business model is necessary to position the company for a return to profitability,” said chief operating officer Frank Zitella. “DavidsTea has experienced a multi-year decline in brick and mortar sales, and the post-COVID-19 retail environment creates significant challenges for our unique in-store customer experience.”
DavidsTea is continuing to seek more favourable lease conditions, and “ultimately may terminate a significant number” of its 222 leases, Zitella added.
Many of the company’s stores occupy prime locations — such as 1 Place Ville Marie in downtown Montreal, or shopping malls including Promenades St-Bruno — that typically command higher-than-average rents.
DavidsTea’s growth was already slowing before COVID -19 hit, and the company had reached a point where it needed to rationalize, said JoAnne Labrecque, a marketing professor at the HEC Montréal business school.
“This is an example of a company that experienced rapid growth, opened a lot of stores, and finally the concept reached a saturation point,” Labrecque said in a telephone interview. “The lockdown accelerated everything. When you don’t have any revenue, the business model quickly becomes unsustainable.”
DavidsTea has never posted an annual profit since the company’s June 2015 initial public offering. Its net loss for fiscal 2019 narrowed to $31.2 million from $33.5 million as sales dropped 7.7 per cent to $196.5 million.
Revenue for the 17-week period ended May 30 plunged 27 per cent to $41.2 million, DavidsTea said June 15. The company had $41 million of cash on hand as of the end of May, with no debt.
DavidsTea shares fell nearly 12 per cent to US79 cents Wednesday in New York.
When the company went public in 2015, the stock debuted at US$19.