The COVID-19 crisis is putting a lot of uncertainty into his forecasts but AltaCorp Capital analyst David Kideckel says there’s still tonnes of upside to Canadian cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Chart, News TSX:FAF).
In an update to clients on Thursday, Kideckel maintained his “Speculative Buy” rating for the stock while dropping his price target from $2.80 to $1.95 per share, saying FAF’s digital platform is a difference-maker.
Edmonton-based Fire & Flower has adult-use cannabis shops along with its Hifyre cannabis retail platform for live and e-commerce business.
Kideckel spoke to management on Thursday about the company’s business in light of COVID-19, with the
company saying there has been no negative impact as of yet, although FAF’s plans for expanding its business in Ontario could experience delays related to construction work which, at the moment, is still considered an essential service (as are cannabis sales).
Last month, Fire & Flower announced that in order to support social distancing norms during COVID-19, its stores across Ontario, Alberta, Saskatchewan, Manitoba the Yukon would be operating exclusively through online order and in-store pickup via the company’s Spark Perks Fastlane click-and-collect service.
Kideckel said that being in an essentially more sterile environment where patrons do not interact with products has made the operational transition to social distancing easier. As well, the analyst opined that cannabis could prove to be a recession-resilient industry much like alcohol.
“According to management, FAF saw an initial spike in cannabis demand as customers increased their order sizing to accommodate for possible store closures,” Kideckel wrote.
“Since then, consumer demand has normalized, but FAF noted some changes in behaviour, such as consumers increasing basket sizes (larger quantities) but decreasing the number of store visits (for instance, going to stores once a week instead of twice), as well as higher consumption of items with longer shelf lives, such as vape cartridges and dried flower, and lower consumption of pre-rolls (which are usually consumed in parties, shared among friends),” he said.
As far as the rollout of Cannabis 2.0 products goes, FAF related to Kideckel that derivative products have been slow to fill up the shelves although they are more in supply now, with vape pen sales have been going well. On the beverage side, FAF indicated that high-THC beverages have been outselling high-CBD beverages.
Overall, Kideckel said he sees Hifyre to be a key competitive advantage for FAF, especially during COVID-19, where the company’s digital ecosystem has allowed for a seamless transition to click-and-collect retail, while its Spark Perks program is humming along.
“According to management, Spark Perks now has over 90,000 members, which is a substantial increase from ~50,000 members in December 2019. We believe this rapid increase in membership is evidence of the compelling value proposition Spark Perks presents to FAF’s clients and indicates the Company is successfully leveraging Hifyre’s capabilities,” Kideckel wrote.
With his update, the analyst hasn’t made changes to his estimates but has raised his discount rate on account of increased uncertainty related to COVID-19.
Kideckel is calling for fiscal 2020 revenue and adjusted EBITDA of $127.8 million and $4.7 million, respectively. As of publication date, his $1.95 target represented a projected 12-month return of 355 per cent.