The Analyst
In a recent note, Pablo Zuanic from Cantor Fitzgerald provided an update of his investment model for Fire & Flower Holdings Corp. (TSX:FAF) (OTCQX:FFLWD) an independent adult-use cannabis retailer with a focus on the Canadian market.
Zuanic remained Neutral on shares of FAF and changed its 12-month price target to CA $2.70 from CA $2.60.
The Thesis
Zuanic noted FAF disclosed a 10% drop in same-store sales for the July quarter compared with 18% growth for competitor High Tide Inc. (NASDAQ:HITI) (TSXV:HITI).
“FAF began the shift to discount loyalty later than HITI and management said sales were up 10% in July MoM. FAF management is confident that a slew of recent changes will lead to a sales ramp-up. The stock now trades at 0.5x CY23 sales,” Zuanic said.
According to Zuanic the company could be “gradually and reluctantly joining the discount parade, but Nova and HITI are more advanced).”
Retail: New Strategy, Sales Up
For the July quarter, FAF total revenue was CA $40.7 million (~$ 30.7 million), down 6% YoY (CA $43.3 million). The consolidated gross profit margin was 23.8% (CA $ 9.7 million), down sequentially 29.7%.
On the wholesale side, gross margin declined to 11%, compared to 21% in the second quarter of fiscal 2021. “Management attributes margin compression to increased delivery costs,” Zuanic said.
Retail sales represented 75% of revenue, up 3% QoQ. “During the quarter, FAF implemented several significant changes to its retail strategy (...) the company closed 11 underperforming stores and opened 2, ending the quarter with a retail network across Canada of 92 stores,” Zuanic explained.
Additionally, on May 19, the company launched Firebird Delivery, a virtual marketplace in seven Ontario cities. “Management attributes the sequential growth in retail revenues to the launch of Spark Perks member pricing program, which drove an increase of 18% in average annualized sales per store in F2Q compared to F1Q,” Zuanic continued. “The company has seen a significant increase in memberships to more than 485k, with between 65-75% of in-store transactions coming from members.”
Adjusted EBITDA was C$-6Mn (-15% of rev), compared with C $3.1Mn in the previous year. “Free cash flow burned in 2Q22 was C$9.8Mn, primarily driven by negative cash from operating activities,” Zuanic said.
Outlook
Zuanic explained the company strives to continue its path toward free cash flow generation and remains convinced that market consolidation will bring opportunities for companies like FAF “with strategic partnerships, strong balance sheets, and scalable infrastructure.”
“The company guided for expectations of having 10 co-located stores with Circle-K in the next 12-months in Western Canada (several already built, awaiting licenses to start operating), with plans of scaling operations to 200 stores long-term,” Zuanic said. “On the digital side, the company anticipates the substantial renewal of data subscription agreements to be completed in the back half of 2022, bringing the segment run rate back to around C$3Mn per qtr. Additionally, management anticipates receiving licensing revenues in future quarters from co-located sites and US expansion by Fire & Flower US.”
Photo by Richard Balog on Unsplash.
