Fire & Flower has a big upside, says PI Financial

The picture appears to be improving for Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF), according to PI Financial analyst Jason Zandberg, who delivered a report to clients on Wednesday. Zandberg reviewed the latest quarterly numbers from FAF and reiterated a “Buy” rating, saying while earnings are still a work in progress, topline growth looks good on the Canadian cannabis retailer.

Toronto-based Fire & Flower, which has over 90 stores across Canada as well as cannabis analytics platform Hifyre, announced its third quarter fiscal 2022 financials on Tuesday for the period ended October 29. FAF’s revenue was $43.8 million, representing a three per cent year-over-year decline but a nine per cent sequential uptick. Adjusted EBITDA at a loss of $2.8 million compared with positive $2.1 million a year ago and negative $6.0 million over the previous quarter.

The company said it raised its average annual sales per store by 15 per cent sequentially, while gross margin went from 24 per cent in the Q2 to 27 per cent, with contributions from FAF’s Spark Perks member pricing program and merchandise strategy. Hifyre brought in $3.0 million in revenue compared to $1.9 million over the previous quarter.

“The Company continues to be focused on driving the goal of positive Adjusted EBITDA and Free Cash Flow,” said CEO Stéphane Trudel in a press release. “We aim to accomplish our goal through a disciplined approach to driving topline revenue, gross profit dollars and reducing selling, general and administrative expenses.”

Zandberg said FAF’s Q3 top and bottom numbers were close to what he expected, the $43.8 million in revenue comparing to his estimate at $44 million and the adjusted EBITDA loss of $2.8 million coming in a bit deeper than his forecast at negative $1.7 million.

Overall, Zandberg called the impact of the quarter a positive, noting that the results indicated an uptrend over the past three quarters on revenue, which would be a nice turnaround compared to the slumping results from 2021.

“When we dig into the same-store sales growth (SSSG) figures from the last three years we see an interesting trend that points to an improving sales picture that began in Q1/22. In 2022, SSSG has progressively gotten better and while the growth figures are still negative, the trend would suggest a positive SSSG for next quarter,” Zandberg wrote.

Zandberg noted opex costs for FAF were down to $15.6 million compared to $16.9 million for the previous quarter and dropped as a percentage of revenue to 36 per cent from 42 per cent. But the analyst maintained that further opex trimming will be needed in future quarters for the company to hit positive adjusted EBITDA.

With the update and retained “Buy” rating, Zandberg also kept his target price at $5.50 per share, representing a projected one-year return at the time of publication of 366 per cent.

“FAF’s Q3 reported financials have not changed our forecasts materially but has instead provided us with greater conviction that the macro factors in the Canadian cannabis retail landscape are improving,” Zandberg said.