The Analyst
Pablo Zuanic from Cantor Fitzgerald maintained a Neutral rating on High Tide Inc., lowering its 12-month price target to C$2.75 from C$2.80, "given the overall sectoral derating and industry challenges."
"High Tide continues to consolidate the Canadian retail industry (Choom being the latest deal), is expanding its discount loyalty program, and is achieving double-digit same-store sales growth north of 20%. That said, given tough retail cannabis industry dynamics and a lack of visibility on medium-term profit margins and cash flow, we prefer to remain sidelined," Zuanic explained.
HITI’s Second Quarter: Retail Sales And 'Cash Burn' Increase
HITI's total sales in the July quarter were up 18% sequentially to $95.4 million, compared with CA $81 (US$61.1 million) in the prior quarter. On an annual basis, sales increased by 98% compared with sales in the third quarter of 2021 ($48.1 million).
The Canadian retail business grew 31% sequentially to $75 million (inc. M&A), compared with 23% sequential growth in the prior quarter and sales of $57 million.
“The company finished the quarter with 131 stores, and the loyalty program now has over 750,000 members, of which the company confirmed accounts for over 90% of daily transactions. Canadian retail sales growth was driven by same-store sales gains (+18% QoQ, +46% YoY) and the addition of six new stores,” Zuanic said. “The US business (mostly CBD and accessories) fell 20% sequentially to $12.8 million, partly due to consumer spend pressures.”
Zuanic also noted that the international piece (mostly Blessed CBD in the UK) increased to $1.9 million from $1.6 million. “Reported gross margins were 27% vs. 28% in the April quarter (Canada 23%; US 47%); management attributes the small sequential margin compression to a high percentage of the sales mix coming from Canadian retail sales (78% in 2Q22 compared to 85% in 3Q22), which have lower margins.”
Adjusted EBITDA increased 77% sequentially to $4.2Mn (op cash flow was C$0Mn) from C$2.4Mn, and negative free cash flow improved to -C$2.1Mn from $4.7Mn in April. “Still, net debt appears to be manageable at 0.1x sales,” Zuanic added.
According to Zuanic, management is pleased with HITI's performance. “The company says that it continues to gain Canadian cannabis retail market share and that it has generated sequential same-store sales growth north of 18% for three quarters in a row.”
“For the July quarter, we calculate High Tide had a 7.6% retail share, excluding Quebec, vs. 6.2% in the April quarter,” Zuanic said. Retail gross profits, increased sequentially by CA $5 million to CA $18.9 million. However, Zuanic said negative EBIT for the Canadian piece “remains north of -$4 million.”
“With gross margins stabilizing (...), [it] is key for the Canadian unit to become EBIT positive and to reduce cash burn,” the analyst said.
Outlook: Organic Openings And Accretive M&A
Zuanic explained that management confirmed prior plans to reach 150 stores by the end of 2022, “via M&A and organic openings,” and it is currently on “an annual run-rate exceeding C$400Mn in revenues.”
After the end of the July quarter, the company closed on the Choom acquisition of a nine-store portfolio. The nine stores generated, on an annual basis, CA $10.2 million in sales and CA $1.3 million in EBITDA.
HITI confirmed its plans to expand its retail presence in British Columbia via “organic openings and accretive M&A.” The company anticipates launching a paid version of the Cabana Club program. It expects the private label program “to account for 20-30% of cannabis retail sales.”
In the US and Europe, HITI continues to expand its CBD offerings, recently entering Germany after the UK acquisition of Blessed CBD (with hemp-derived CBD).
“Management stated that it plans to be active in attempting to participate in German recreational sales, which the company anticipates will not start before 2024. Management anticipates that tough macro conditions will force approximately one-third of Canadian retail stores to close, helping to drive its market-share gains and increase M&A opportunities,” Zuanic concluded.
Photo by Lance Asper on Unsplash.
