Is Schwazze a buy? (August, 2024)

Following the company’s second quarter results, Beacon analyst Russell Stanley has maintained his “Buy” rating on Schwazze (Schwazze Stock Quote, Chart, News, Analysts, Financials NEO:SHWZ).

On August 13, SHWZ reported its Q2, 2024 results. The company posted Adjusted EBITDA of $9.03-million on revenue of $43.3-million.

“We made solid progress on our growth and optimization initiatives in Q2 and generated sequential quarterly growth across all key financial metrics while advancing our retail strategy,” interim CEO Forrest Hoffmaster said. “During the quarter, we continued to deepen our customer understanding, sharpen our pricing and promotional strategy, enhance the in-store experience, and improve our assortment and in-stock positions. These efforts drove increased store traffic and market share expansion in both Colorado and New Mexico. In our wholesale business, we generated our second consecutive period of quarter-over-quarter growth in both states with penetration growth and catalog expansion while improving wholesale margins.”

The analyst summarized the quarter.

“SHWZ recently reported Q2 revenue/adjusted EBITDA of $43.2M/$9.0M v. our forecast of $42.4M/$8.4M and consensus at $41M/$8.5M,” he wrote. “Revenue improved 2% y/y primarily through new store additions, offset by continued price pressure in both CO and NM. SHWZ has delivered strong wholesale penetration in both markets, increasing its CO penetration from 21% to 34%, and its NM penetration from 19% to 35% during H1. Gross margins were 115 bps below forecast, but still improved 94 bps q/q. The y/y decline of almost 1,400 bps can be attributed primarily to price pressure and secondarily to revenue mix (more reliance on 3rd party products in NM, and an increase in medical’s share of revenue v. adult-use in CO). Better/lower-than-expected OPEX more than offset the gross margin shortfall v. our forecast, resulting in adjusted EBITDA margins that beat our forecast by 115 bps, improving 232 bps q/q. Operating cash flow was negative $3M before working capital, missing our forecast of +$2M, although the company broke even net of working capital changes.”

In a research update to clients August 16, Stanley maintained his “Buy” rating and price target of $2.00 on SHWZ, implying a return of 545% at the time of publication.

The analyst thinks the company will post Adjusted EBITDA of$37.0-million on revenue of $171.0-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of Z$58.0-million on revenue of $188.0-million in fiscal 2025.