Let us review Fire and Flower earnings for the quarter ended October 31, 2020.

FAF quarterly earnings release.

Open up the financials and MDA and follow along.

Income Statement Drivers and Breakeven Sales: Trend

This Q:

Total stores as per Q end 54, +3 from last Q.

• Alberta 40
• Sask 7
• MB 1
• YK 1
• ON 5 +3

Total stores as per MDA date 67, +17 (+4 accessory stores) from last MDA.

• Alberta 37 -1 since last MDA
• Sask 7
• MB 1
• YK 1
• ON 21 +18 since last MDA

Molly has covered FAF adding stores: Three additional Ontario stores (closed November 1 and Dec 6, 2020), and the Friendly Stranger fleet (closed Dec 1, 2020). This revenue will roll in next Q.

• The numbered company went for a total of some $961k ($750k+(248k*.85)); Busboy’s 2 stores coming in at an average of $1. 3MM each (($700k+(2.2MM*.85))/2).
• Barely coming 2 weeks after announcing the last shopping trip he took, the Friendly Stranger acquisition appears to be more expensive on a per store basis – with a total of some $25MM being paid for (what I can gather) 6 operational stores (not all carrying cannabis currently), as well as 4 planned and authorized locations to open by the end of this quarter.

Revenue increased by $4.5 million +16% to $33 million, reductions from last Q growth of $5.5 million and +24%.  That will change next Q with onboarding of a lot of new stores.

Retail sales were $27 million an increase of $3.2 million +14%, wholesale revenue increase by $0.8 million to $5.1 million +19% and digital revenue was $1.5 million an increase of 56%.

Wholesale revenue is “Open Fields” a distributor in the province of Saskatchewan. Saskatchewan had rec sales in the first two months of FAF Q of $25.4 million +17% versus the first two months of the prior Q of $21.8 million.  So FAF’s +19% is pretty much in line with that figure.

Expect the next two Q’s to see revenue increases as acquisitions are on boarded (next Q) and are around for a full Q (the following Q).

Revenue Per Store: Peer & Trend

What this metric does is take the retail cannabis revenue for FAF and others, and divides that amount by the average number of stores they have open for the Q.  This attempts to capture the average revenue per average number of stores per Q.

The metric is not perfect, as it can be skewed by how early or late in a Q the stores open. But until someone discloses existing store versus new store revenue, we have to create a metric.

On this basis FAF in the Q had an increase in revenue per Q. Per store revenue increased from $463k in the previous Q to $505k or +9%.   Those Ontario stores are dragging the average up.  If we see an inflection we will start thinking about saturation.

From MDA:

• Same-store sales is the comparison of sales of the Company’s stores that are open at the beginning of the period and have been operating for more than a year. The Company has twenty and nine stores with operations throughout the thirteen and thirty-nine weeks of Q3 2020 and Q3 2019, respectively. For the twenty stores, sales grew 11% for the thirteen weeks ended October 31, 2020 compared to the thirteen weeks ended November 2, 2019. The growth level of same-store sales is attributable to merchandise planning and assortment, in store experience, customer engagement attributable to the Spark Perks™ membership base, and the selling of cannabis 2.0 products which offset the impact of increased market competition. During the thirty-nine weeks ended October 31, 2020, same-store sales decreased 27% compared to the thirty-nine weeks ended November 2, 2019. This was primarily due to limited competition in Alberta for the first half of fiscal year 2019. Expected and planned average sales per store have reduced with the increase in competition.

Income Statement Drivers and Breakeven Sales: Peers

FAF remains in the lead from a sales perspective.  I am interested to see both FAF and HITI after these acquisitions are all on boarded. 

Gross Margin %: Trend and Peer

GM remained flat at 35% aggregating $11.5 million in GM, an increase of $1.5 million.  Cannabis GM was 31.7% at $8.6 million versus 32.6% and $7.7 million the previous Q.

Wholesale had a 30% GM versus the last two Q’s at 32%, and digital development is 95%.

SGA & SBC as % of Sales: Trend

Note: To keep peer comparable consistent, I moved Asset Impairment and the gain on remeasurement of lease liability to Other Income and Expenses.

A nice downward progression across all expense segments over the past 5 Q’s.

Marketing was $0.24 million, consistent over last two Q’s.

G&A was $9.6 million a $1.0 million increase QoQ and decreased to 29% of sales from 30%.  Expense creep was noticed in several subcategories, but none exceed a +$0.3 million increase and were roughly the same as % of sales the preceding quarter.

SBC reduced marginally to $0.6 million for the Q.

Depreciation remained consistent QoQ at $2.9 million.

Total Opex was $14 million or 43% of sales versus $12.5 million and 44% of sales the prior Q. 

SGA per Store: Peer and Trend

What this metric does is take the retail cannabis SGA for FAF and others, and divides that amount by the average number of stores they have open for the Q.  This attempts to capture the average SGA per average number of stores per Q.

The metric is not perfect, as it can be skewed by how early or late in a Q the stores open.  But until someone discloses existing store versus new store revenue, we have to create a metric.

SGA per store increased to $187 from $174 QoQ or +7%.  The Ontario stores likely carry higher rent and wages.

SGA & SBC as % of Sales: Peer

FAF trails HITI on all of these metrics. We will see what happens after we load in acquisitions.

Net Operating Profit:

This would be existing store sales, as the metric is derived from existing SGA and more stores would mean more SGA.

FAF would need 29% in incremental sales to hit +NOP.

NOP for the Q was negative $2.6 million even with last Q. The bump in GM and was offset by increase in OPEX are the reasons.

Other Income and Expenses: Aggregated -$22 million this Q versus -$27 million last Q

• Finance costs $6.1 million a decrease of $2.1 million. Debentures paid down in preceding Q were the reason. Interest expense is 53% of GM $’s an improvement from 82% last Q.
• +$34 million gain on revaluation of derivative liability, versus last Q -$18 million. 
• -$54 million loss on extinguishment and re evaluation of debentures versus nil last Q
• +$2.1 million for remeasurement of lease liability.  This could be the extra lease payment owing from last Q end being a couple days after the 1^st of the month.

Taxes of $1.2 million versus nil last Q.

Net Income:

Net income for the Q was negative $26 million versus -$29 million last Q.   

EBITDA:

My EBITDA is different than theirs.  They back out $0.8 million acquisition expense and $0.3 million in Professional fees related to acquisitions.  They will be in the acquisition business for awhile longer, so I am treating them as operational expenses.  They have a small difference in their monthly Lease Liability Payments than I do as well, as I use YTD less previous YTD.  They might have had an adjustment that moved last Q’s around.

EBITDA improved to +$0.4 million from -$0.3 million last Q.  The GM increase was partially offset by an increase in cash Opex being the drivers.  

With their interest expense they need EBITDA to be in the +$7 million range not just breakeven.

Sales to Breakeven EBITDA:

This would be existing store sales, as the metric is derived from existing SGA and more stores would mean more SGA.

FAF was +EBITDA this Q, and they only require 97% of sales to maintain that.

Balance Sheet Items of Note:

Cash increased by $4.6 million to $24.7 million.

• Obtained shareholder approval of the amendment agreement for the strategic investment of a wholly-owned subsidiary of Alimentation Couche-Tard (“ACT”) and received $10.3 million in proceeds from the exercise of warrants by ACT.

Derivative Liability increased to $63 million (Current and LT) from$31 million. Molly is wrestling that alligator.

All in all, a progress Q.

• Sales increased nicely despite covid with a few new.  Next Q should be a bigger increase but with that increase came dilution.
• GM as % of sales was flat and GM$ increased by $1.5 million
• Opex increased $1.0 million
• Interest expense is still eating into operations at 53% of GM$’s.   

I am still bearish on Canadian cannabis retail, the new store contributions in Ontario may make me revisit that after seeing if GM on sales added are outpacing expenses.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in FAF and will not start one in the next five days.