Fire & Flower is a double, says Echelon

Results were mixed in the latest quarter from Canadian cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF), according to Echelon Capital Markets analyst Andrew Semple, who provided an update to clients on Wednesday. Semple kept a “Speculative Buy” rating on the stock while lowering his target price from $2.25 to $2.00 per share, saying profitable growth opportunities are opening up for FAF.

Toronto-based Fire & Flower, which has a stable of over 90 corporate-owned cannabis stores along with cannabis retail platform Hifyre, announced on Tuesday its quarterly financials for the stub nine-week period ended December 31, 2022, as the company moves its fiscal year-end to December 31. FAF registered revenue of $30.5 million, gross profit of $7.4 million and an adjusted EBITDA loss of $3.8 million.

“We look to 2023 as a transformative year where we anticipate achieving positive Adjusted EBITDA during the first half of the fiscal year through a disciplined approach to our core retail business, driving top line revenue, gross profit dollars and reducing our overhead expenses,” said CEO Stéphane Trudel in a press release.

Looking at the numbers, Semple said the $30.5 million in sales was better than his estimate at $28.8 million, while the consensus expectation was $30.2 million. Semple said retail revenues at $22.9 million were driven by improving same store sales growth, which ended in positive territory at 3.9 per cent for the nine weeks compared to negative four per cent registered in the third quarter 2022. 

At the same time, gross margins at 24.3 per cent fell from 27.0 per cent for the Q3 and were below Semple’s estimate at 25.5 per cent, while the EBITDA loss of $3.8 million was wider than expected, with Semple having called for a loss of $1.9 million and the Street forecasting negative $3.3 million.

Semple said same store sales growth and better-looking retail margins indicate that Fire & Flower has turned a corner with its operating momentum, and the analyst said he expects further positive results throughout 2023.

“Operating conditions in retail cannabis are improving for the larger and better-capitalized retailers as competitive pressures ease from peak levels, and we believe Fire & Flower stands to benefit from this positive momentum this year while it simultaneously makes internal operating improvements that support the flip to positive EBITDA and eventually positive free cash flow,” Semple wrote.

After minor tweaks to his forecast, Semple is now calling for 2023 revenue of $201.0 million and adjusted EBITDA to be negative $0.9 million. Semple said his target trim is due to his discounted cash flow valuation where the company’s net debt position has modestly increased with a quarterly decline in cash balance and a slight decrease in the analyst’s longer-term forecasts due to fewer expected store openings in 2023. At press time, Semple’s $2.00 target represented a projected one-year return of 102 per cent.