Look for cannabis retailer Fire & Flower Holdings (Fire & Flower Stock Quote, Chart, News TSX:FAF) to have improved profitability going forward, says Echelon Wealth Partners analyst Andrew Semple, who reviewed the company’s recent financials in an update to clients on Friday.
Shares were down sharply on Friday for Edmonton-based Fire & Flower after the company released its fourth quarter and full-year 2019 (ended February 1 2020) financials on Thursday. The company, which has stores operating in four Canadian provinces —Alberta, Saskatchewan, Manitoba and Ontario— and the Yukon, along with data analytics and marketing platform Hifyre, generated total revenue for the Q4 of $16.8
million, up from $13.7 million a year earlier.
The past year was a busy one of expansion for Fire & Flower and featured the notable strategic investment from Alimentation Couche-Tard to the tune of $25.9 million. FAF finished the fiscal year with 45 stores open and total revenue of $51.1 million and a gross profit of 36.4 per cent, compared to revenue of $13.0 million and a gross profit of 38.4 per cent in 2018.
Subsequent to February 1, 2020, FAF completed two private placements for aggregate proceeds of $28 million, entered into a commitment letter with ATB Financial for senior secured credit facilities of up to $10 million and an option for an added $5 million, and forced the conversion of all its remaining licensed producer debentures for 12.2 million shares.
FAF has had to adapt to the new norms of COVID-19-required social distancing, meaning more digital retail, curbside pickup and home delivery.
“Looking forward to fiscal 2020, our focus will be on optimizing and growing our retail network where the Hifyre Digital Retail and Analytics platform continues to be our competitive advantage. We will focus on addressable markets and participating in those markets in a meaningful and accretive fashion to our business,” said CEO Trevor Fencott in a press release.
On the quarter, Semple said FAF came out ahead of his estimates for sales and gross margins but the EBITDA loss was wider than anticipated. The top line, gross margins and adjusted EBITDA loss of $16.8 million, 36.6 per cent and negative $5.3 million beat Semple’s forecast for $14.8 million, 33.0 per cent and $3.3 million, respectively.
Regarding its finances, Semple said the company should now be sufficiently cashed up to come through on its 2020 plans and he commented that the terms of its $10-million in secured debt came with terms “far more favourable” than he had modelled, with a rate well below five per cent and making it the cheapest capital accessed by a pure-play publicly traded cannabis retailer to date, Semple said.
The analyst has modestly raised his 2020 estimates for FAF.
“We expect FQ419 will mark the low point for Fire & Flower’s sales per store. The Company opened several locations close to quarter end which impacted this metric (we estimate sales per store to be ~$1.5M, excluding Ontario stores, compared to an estimated ~$1.9M in FQ319). We look forward to the Company incorporating two Ontario stores into its consolidated results next quarter that should benefit this metric and expect stabilization of sales per store on the remainder of the portfolio. Afterwards, we expect sales per store to increase as COVID-19 emergency measures are lifted, Ontario stores become an increasing large contributor to total sales, and as supply is improved for derivative products,” Semple wrote.
With the update, Semple is maintaining his “Speculative Buy” rating and $1.75 per share target price, which at press time represented a projected 12-month return of 182 per cent.
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