ATB Capital keeps Buy rating on Fire & Flower

After the company missed on its quarterly estimates, ATB Capital Markets analyst Frederico Gomes poured a bit more cold water on Fire & Flower (Fire and Flower Stock Quote, Chart, News TSX:FAF) in a recent update. Gomes dropped his one-year target price from $9/share to $7/share despite maintaining an “Outperform” rating in his Tuesday report, with the revised figure representing a one-year return of 153 per cent.

Founded in 2017 and headquartered in Toronto, Fire & Flower Holdings is an independent retailer of cannabis products and accessories through its locations in Alberta, Manitoba, Ontario, Yukon and Saskatchewan where the company also engages in the wholesale of regulated cannabis products and accessories.

Gomes attributed the softer quarter to a challenging competitive environment due store saturation and aggressive pricing from discount retailers.

“Despite the underwhelming results, we believe FAF is taking a positive turn with the implementation of a disciplined operational culture that prioritizes FCF generation,” Gomes said. “In our view, the new leadership will take measures to rightsize the Company’s cost structure and improve operating efficiency—including through the new Spark Members Pricing Program, which targets value-driven consumers.”

For its opening quarter of the 2022 fiscal year, Fire & Flower delivered $40.9 million in revenue, which settled in between the ATB estimate of $38.8 million and the consensus projection of $43.1 million, though it was down seven per cent year-over-year. While the digital ($2.9 million) and wholesale ($8.5 million) segments grew by three and 11 per cent, respectively, retail sales saw a 12 per cent year-over-year decline to $29.6 million.

On the margins, Fire & Flower reported gross profit of $12.2 million (ATB estimate was $11.1 million, consensus had projected $13.8 million) with a gross margin of $29.7 per cent (ATB estimate was 28 per cent, while consensus projection was 32 per cent), while the adjusted EBITDA loss of $2.3 million settled in between the consensus estimate of a $1.9 million loss and the ATB projection of a $4 million loss.

“Fire & Flower has delivered impressive growth in the early stages of our business and now we are moving forward to focus on the next phase of our evolution,” said Stéphane Trudel, Chief Executive Officer of Fire and Flower in the company’s June 14 press release. “As we evolve, our goal is to deliver positive Adjusted EBITDA and free cash flow. These goals will be achieved through a focus on operational excellence in all our business segments, continual growth in our Hifyre cannabis consumer technology platform, and expansion of our Pineapple Express Delivery service, now integrated in our Wholesale and Logistics segment.”

Going forward, Gomes believes Fire & Flower’s partnership with Alimentation Couche-Tard will only get stronger given the recent appointment of Trudel, Alimentation Couche-Tard’s Senior Vice President of Operations, as the new Chief Executive Officer.

“FAF is evaluating every asset possible in ATD’s network for the expansion of Circle-K co-located stores (there are over 1,800 potential locations in Canada),” Gomes said. “Above and beyond capital, management noted that the partnership with ATD brings value through ATD’s real estate network across North America (the expertise to find hightraffic locations) and its retail operational expertise.”

On account of challenging conditions in Canada and a slower store count ramp, Gomes has made revisions to his financial estimates moving forward, slightly dropping his 2022 revenue target from $189.6 million to $186.9 million for a potential year-over-year increase of 6.5 per cent. Looking ahead to 2023, Gomes dropped his revenue target from $274.7 million to $256 million, though the revised figure still constitutes a potential year-over-year increase of 37 per cent.

From a valuation standpoint, Gomes forecasts the company’s EV/Revenue to maintain a 0.4x multiple in 2022 before dipping to a projected 0.3x in 2023.

Meanwhile, Gomes raised his adjusted gross profit expectation for 2022 from $47.3 million to $50.3 million for a 26.9 per cent margin, with a slight uptick to a 28.3 per cent margin in 2023 despite the gross profit projection dropping from $77.8 million to $72.5 million.

Gomes also revised his adjusted EBITDA projections for Fire & Flower, as he now forecasts a $10 million loss in 2022 instead of a $19.6 million loss. However, he lowered his expectations for 2023 with a revised figure of $2.8 million (1.1 per cent margin) compared to the previous estimate of $15.2 million. Gomes also reintroduces an EV/EBITDA multiple in 2023, setting the mark at 24.8x.

Fire & Flower has traded to about a 53 per cent loss over the course of 2022 and almost an 80 per cent decrease in value over the past 12 months.