Visibility has been markedly reduced on The Supreme Cannabis Company (The Supreme Cannabis Company Stock Quote, Chart, News TSX:FIRE), says Stifel GMP analyst Robert Fagan, who in an update to clients on February 14 delivered a review of the company’s latest quarterly results.
Toronto-based Supreme Cannabis released its second quarter fiscal 2020 results on February 13, which featured sales down 21 per cent from the previous quarter to $9 million on lower volumes, while SG&A expenses rose by 30 per cent quarter-over-quarter and contributed to an adjusted EBITDA loss of $8.6 million, excluding inventory write down, the company’s largest quarterly EBITDA loss to date.
Citing current market conditions including a slower than expected retail rollout nationally, management has withdrawn its fiscal 2020 guidance, which as last stated on November 19, 2019, had called for revenue of between $150 and $180 million, while at the same time stating its confidence in FIRE’s position in the growing market.
“As we realign our structure and expectations with the current state of the industry, I maintain my strong belief in Supreme Cannabis' ability to drive near-term revenue growth, profitability and long-term value with new high-quality brands and products at every key price segment,” said Colin Moore, Director and Interim President and CEO, in a press release.
Supreme’s $9 million in sales was below Fagan’s $13 million estimate and the consensus $12 million, while the $8.6 million EBITDA loss was worse than Fagan’s and the Street’s negative $3 million estimate.
In his update, the analyst noted that FIRE’s wholesale sales were down to 38 per cent of total sales from 54 per cent during the previous quarter, a sign of the company’s intended shift to the recreational marijuana channel. Fagan sees the shift as progressing only gradually and likely due to slower retail store penetration in Alberta and BC and lesser reordering in Ontario.
The analyst said Supreme’s move to offering more mid-level and value products, a departure to its traditional branding through its high-quality flower product and premium pricing, adds uncertainty to the company’s outlook, meanwhile management’s removal of its 2020 guidance also reduces visibility on the company’s path to growth in the rec market.
“Historically, we believe FIRE has pivoted its approach in several operational areas (facility build, sales channel focus, out- versus in-source extraction), in our view possibly signalling some challenges for the company to optimize its overall strategic direction. This combined with a management team in transition and shifts in product strategy inject new uncertainty into FIRE’s outlook, prompting us to take a more cautious approach with our forecasts, driving our lower valuation,” Fagan wrote.
The analyst is calling for fiscal third quarter sales to be “largely stable” compared to the second quarter and for the EBITDA loss to remain at similar levels. Fagan’s new forecast calls for fiscal 2020 revenue of $47.2 million (down from $100.8 million) and EBITDA of negative $21.7 million (down from positive $6.7 million).
With the update, Fagan is reducing his rating from “Buy” to “Hold” and dropping his price target from $1.75 to $0.50, which at press time represented a projected 12-month return of 23.5 per cent.