Fire & Flower retains “Outperform” rating with ATB Capital

ATB Capital Markets analyst Frederico Gomes is staying bullish on cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF), saying in a Thursday client update that the company has a number of opportunities ahead of it to substantially grow its top and bottom lines going forward.

Fire & Flower is a cannabis retailer and distributor of cannabis products and accessories, with stores in four Canadian provinces and one territory and one in California. The company has a data gathering and retail analytics platform for the cannabis space in Hifyre with services and market insights to third parties based on point-of-sale data from its retail stores, and convenience store giant Alimentation Couche-Tard has a 35 per cent ownership in Fire & Flower.

Gomes and ATB hosted virtual marketing meetings on Wednesday with FAF CEO Stéphane Trudel, CFO Judy Adam and VP Strategic Growth Chris Bolivar along with several investors. Gomes said the discussions centred on FAF’s next growth stage, with management saying focus in previous years was on building its foundation as a tech-enabled cannabis retailer and involved the acquisition and integration of Hifyre, PotGuide, Wikileaf and Pineapple Express. That phase is now completed and management is concentrating on scaling and monetizing its tech along with leveraging its Couche-Tard partnership to improve operating efficiencies and grow the business.

“We continue to believe FAF is a differentiated player among cannabis retailers due to: (1) its partnership with Alimentation Couche-Tard, which provides capital and expansion opportunities with improved access to real estate and asset-light Circle-K co-located stores, and (2) a well-developed technology stack (encompassing e-commerce, loyalty, data analytics, retail, logistics, and fulfillment) that can be scaled and monetized in Canada and the US. In addition to these capabilities, we view management’s renewed focus on operations and delivering free cash flow as encouraging,” Gomes wrote.

Fire & Flower said it would be postponing its listing on the NASDAQ and initiating its “Get to Green” push to reach positive free cash flow. On Couche-Tard, the company said it would use the company’s Circle K stores as co-locations in its bricks-and-mortar build-out, with eight new locations expected by the year’s end. Gomes said FAF is also working on opening more FAF-branded stores in the US where it has one currently open in California and is aiming at states like Colorado, Arizona and New Mexico. Fire & Flower also has a Spark Perks member pricing program which management said is showing early signs of increases in new members who are both stickier and come with higher basket sizes.

Gomes said, “Our sector thesis is that consolidation in the retail sector will occur over the next 12 to 18 months. While FAF has recently experienced headwinds due to store saturation and pricing pressure from discount retailers, we believe the Company is well-positioned to navigate this environment and ultimately gain market share, supported by its digital capabilities and the Couche-Tard strategic relationship.”

The cannabis space continues its free fall and stocks like FAF are staying under pressure in 2022. The stock finished 2021 down 43 per cent and so far this year FAF is down a further 53 per cent.

But Gomes is seeing better times ahead, reiterating in his update an “Outperform” rating on FAF and $7.00 price target, which at the time of publication represented a projected one-year return of 191.7 per cent.

Fire & Flower finished its fiscal 2021 (year end January 28) with net sales of $175.5 million compared to $128.1 million for fiscal 2020 and adjusted EBITDA of $5.1 million compared to negative $1.0 million for the previous year. Looking ahead, Gomes thinks FAF will generate full fiscal 2022 sales of $186.9 million and adjusted EBITDA of negative $10.0 million. 

FAF went under some management changes recently, with former CEO Trevor Fencott stepping down from CEO in June and Trudel taking the helm. Trudel came from Alimentation Couche-Tard where he was Senior VP of Operations. 

The company reported first quarter fiscal 2022 earnings in June where revenue was $40.9 million, down four per cent sequentially and down seven per cent year-over-year, with adjusted EBITDA of negative $2.3 million, down four per cent sequentially. The company pointed to challenges in the cannabis retail space, including heightening competition, an expansion of licenses going beyond the pace of market growth and a more selective consumer who is leaning more towards value-oriented purchases in the space.

“With these market conditions, we look to optimize our retail network and have already seen favourable indications on our expanded Spark Perks Member Pricing program. As the market continues to grow, novel offerings such as the Firebird Rapid Delivery service, which brings cannabis products to consumers’ doors within hours, will become important service differentiators for our customers. We remain focused on improving near term financial performance and remain steadfastly focused on our ultimate goal of financial sustainability through driving towards positive free cash flow,” said Trudel in a press release.