Fire & Flower is our Top Pick in cannabis, says AltaCorp

AltaCorp Capital analyst David Kideckel is staying with Fire & Flower (Fire & Flower Stock Quote, Chart, News TSX:FAF) as his “Top Pick” in the cannabis space after the cannabis retailer’s recent quarterly earnings.

In an update to clients Tuesday, Kideckel said FAF’s Hifyre digital retail and analytics platform remains a key differentiator with significant monetization opportunities in the North American retail pot market.

Edmonton-based Fire & Flower, which has stores across Alberta, Saskatchewan, Manitoba, Ontario and the Yukon, along with a strategic investment from convenience store giant Couche-Tard, announced on Tuesday its first quarter 2020 results for the period ended May 2, 2020.

The company posted total revenue of $23.1 million at a gross profit of 32.6 per cent versus revenue of $9.5 million and a gross profit of 38.5 per cent a year earlier. Adjusted EBITDA was a loss of $2.7 million compared to a loss of $3.4 million a year ago.

In the press release, management noted the company’s adjustments made during the time of COVID-19 including starting home delivery in Ontario via Hifyre and curbside pickup in other locations.

“Fire & Flower's financial and operational results for the first quarter, fiscal 2020 demonstrate that the Company continues to show positive growth quarter over quarter and over its previous fiscal year. We will continue to work towards positive operating EBIDTA delivered through four-wall retail economics,” said Trevor Fencott, CEO.

Looking at the Q1 numbers, the $23.1-million top line was a beat of both Kideckel’s forecast of $19.5 million and the consensus estimate at $20.8 million, while the EBITDA loss of $2.7 million was also better than Kideckel’s negative $3.7 million and the Street’s $3.9 million.

Overall, Kideckel called the results a positive, saying, “We believe that FAF is executing well amid the COVID-19 crisis as the Company leverages its Hifyre digital analytics platform. With the backing of Alimentation Couche-Tard and a long runway for profitable growth driven by its retail store expansion plan, Hifyre monetization opportunities, and a thriving wholesale business in Saskatchewan, FAF remains our top pick in the Canadian cannabis retail space.”

Kideckel noted that FAF has updated its store opening timelines, calling for 65 stores open by the third quarter of this year as opposed to the previous plan for 72 by that time.

Things are back on track over the longer term, however, with guidance calling for 88 stores by Q1 of next year (no changes), for example, and 118 by Q4 2021 (no changes).

On Hifyre, Kideckel pointed to its three verticals in point-of-sale, loyalty and rewards and retail platform as providing not just a competitive advantage for FAF but a monetization opportunity.

“Hifyre tracks real-time data on products, leading to insights in consumer preferences and purchasing patterns, and provides tools to optimize sales and customer service, with the ability to be forward-thinking to customer purchases. Amid the COVID-19 crisis, Hifyre enables FAF to adapt its customer service quickly. FAF believes that its contactless curbside pickup and delivery services are a model for safe retail operations during the COVID-19 crisis, and its initial deployment in Saskatchewan, followed by Ontario, makes it a model for the rest of Canada,” Kideckel wrote.

With the update, Kideckel has maintained his “Buy” rating and $1.80 per share target, which at press time represented a projected 12-month return of 147 per cent.