Fire & Flower raised to a Speculative Buy from Echelon

Echelon Capital Markets analyst Andrew Semple is feeling fired up about Canadian cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF). Semple raised his rating from “Hold” to “Speculative Buy” in a Tuesday note where he reviewed FAF’s latest quarterly results, saying the company’s progress is encouraging, while the recent drop in share price now presents a better opportunity for investors.

Fire & Flower reported its fiscal third quarter 2022 financials on Tuesday for the period ended October 29, coming in with sales down 3.5 per cent year-over-year but up 7.6 per cent sequentially to $43.8 million. The company’s core Retail segment generated revenue of $33.0 million compared to $33.7 million a year earlier, while Wholesale and Logistics was at $7.9 million and FAF’s Digital Platform was at $3.0 million compared to $3.8 million a year earlier.

“Our strategic relationship with Alimentation Couche-Tard has been strengthened through our recent license agreement for five additional co-located cannabis stores adjacent to high-traffic Circle K in the Greater Toronto market, expanding on the existing program in Western Canada,” said FAF CEO Stéphane Trudel in a press release.

“In addition, if approved by shareholders, Fire & Flower will benefit from favourable financing to execute on our plans for growth with a $5 million private placement, in addition to the non-dilutive $11 million loan that has been secured,” he said.

Semple said the Q3 was better than expected, with the $43.8 million topline beating the consensus estimate at $43.5 million as well as Echelon’s own $41.9 million call. Gross margin at 27.0 per cent was well ahead of the Street’s estimate at 19.7 per cent and Semple’s 24.1 per cent, while the quarterly adjusted EBITDA loss of $2.8 million was also better than the consensus at negative $3.4 million and Semple’s negative $4.3 million.

Semple said Fire & Flower’s retail performance was strong, given the net reduction of two stores over the quarter, while better than expected digital sales drove the margin improvement. Semple noted that the quarter was FAF’s first under new CEO Trudel, saying that Trudel’s emphasis on returning the company to profitability was evident both in the Q3 results as well as in Trudel’s tone on the earnings call.

With his “Speculative Buy” rating, Semple lowered his target price from $3.00 to $2.50 per share, representing a projected one-year return of 108.3 per cent.

“We issued a Hold rating on Fire & Flower for just under two months. Over that timeframe, Fire & Flower’s share price declined by ~38 per cent. Following this price reset, we now believe the share price offers better opportunity for upside appreciation, with our target price implying upside of 108 per cent,” Semple wrote.