Let’s review High Tide earnings for the quarter ended January 31, 2021

Hightide quarterly earnings release

What we said last Q:

• Progress continues as the more sale robust Ontario stores contribute to the portfolio. 
• They remain +EBITDA but had minor slippage.
• Their efficiency ratios improved on a revenue per store and SGA per store basis.
• They renegotiated term debt favorably and raised more cash post Q end.

This Q:

• With Meta and New Leaf in the fold, sales increased +43%
• Gross Margin improved 39% driven wholly by Retail GM increasing +4% QoQ.
• NOP slid to negative from positive
• They remain +EBITDA but Interest costs are almost equal to EBITDA
• Retail sales per store is industry leading
• SGA per store crept up a bit, but we should give them a Q or two to adjust given merger was Nov 18, 2020.
• Post Q: They raised $23 million via new equity and converted $23 million in debentures

Income Statement Drivers and Breakeven Sales: Trend

Sales Table:

Sales increased 43% QoQ as HITI brought on META and New leaf stores November 18, 2020.  Next Q will have 18 additional days of sales, so expect a bump from that alone as well as the nine new stores opened by MDA date.  Store count increased to 72 owned and 80 owned, JV or branded.  As they state at MDA date, it is tricky to adjust to Q end.

Retail increase 50% to $37 million. Wholesale saw a decrease -31% with sales of $0.7 million.  The slide in wholesale is worrisome.  We will see if the Smoke Cartel acquisition props it up next Q.

Adult rec cannabis sales accounted for the entirety of the increase with +$12 million, as both wholesale and corporate dropped an aggregate $0.7 million.

Looks like they fixed last Q break between Geographic and Segment Sales. Canada saw a 66% +$13.6 million increase, while USA saw a -4% -$0.1 million decrease. International is nominal.  USA down during a holiday season is disappointing.

Revenue Per Store:

In this calculation we use ONLY the HITI Cannabis stores and not wholesale revenue.

Revenue per store increased to $919 thousand +16% in the Q.  They are leading the other retail Pubcos by a substantial margin and that includes me dividing sales over stores opened at MDA date as they do not give me a Q end count.

Income Statement Drivers and Breakeven Sales: Peers

HITI takes over the top spot form FAF.  We are still awaiting FAF latest Q.

Gross Margin %: Trend and Peer

GM in retail tends to be boring.  So I will be excited about the 4% improvement QoQ for HITI.

Gross Margin Table:

Absolute GM was $14.7 million a $5.3 million increase over the previous Q.   

From the fine print in the earnings release LAST Q:

• The decrease in gross profit margin was driven primarily by the Company’s closure of the remaining Smoker’s Corner locations resulting in a one-time inventory write-off of $252 and a true up of a United States sales tax provision related to Grasscity in the amount $396. Adjusting for these items, gross margin for the fourth quarter of 2020 would have been 38%.

Molly and I often talk about looking for “breaks” in management narrative to the actual results.  In the case above, management held to their narrative and GM returns to 39% and industry leading.

It is also good to see that Retail lead the improvement.

SGA & SBC as % of Sales: Trend

Selling expense for the Q remained nominal at $0.1 million versus $0.1 million QoQ and remained at less than 1% of sales.

G&A increased last Q to $9.9 million from $6.7 million QoQ, the loading of META and New Leaf and professional fees +$0.9 the reason.    Salaries increased +$2.6 million to $5.9 million and are now 16% of sales.  I wonder how much of that is corporate salaries.

SGA totaled $10 million for the Q an increase of $3.1 million from $6.8 million last Q. 

SBC was minimal at $0.6 million versus a minimal amount in Q4.

Depreciation was $6.1 million a substantial increase from Q4 which was $1.8 million.

Total Opex was $16.8 million versus $8.8 million last Q.  I note that corporate overhead in Opex averaged $1 million per Q during the fiscal 2020 but jumped to $3.1 million this Q.  I would hope to see some trimming as the new acquisition are integrated.

SGA per Store:

SGA per store increased +13% amount to $249 thousand.  This includes corporate overhead.

SGA & SBC as % of Sales: Peer

HITI is leading peers across the board.

+Net Operating Profit:

High Tide evidenced negative NOP for the Q of -$2.0 million after a +$0.6 million +NOP last Q.  The increase in GM was offset by Opex increases listed above.

Other expenses aggregated $14 million vs expenses of $2.3 million last Q, items of note:

• Finance costs of $4.3 million vs $2.0 million last Q.
• Debt restructuring gain of $1.1 million versus nil last Q
• Revaluation of derivative liability was an expense of $10.5 million versus $0.7 million last Q.  This arose due to META acquisition and their debenture.

Taxes were a $0.6 million.

Net income was -$16.7 million versus -$2.0 million last Q, the revaluation of derivative liability was the major swing, along with increased finance costs and an SGA increase.

Sales Required to reach +EBITDA

Take the above chart with a grain of salt (unless +EBITDA).  As the above would be the amount of sales per EXISTING store necessary at present GM% and OPEX $’s to reach breakeven EBITDA.  In order to increase sales more stores will be required.  Those stores will need more OPEX for staffing, rent, utilities… increasing the OPEX $’s.

HITI EBITDA was +$4.8million an improvement from $3.0 million last Q Note: Their adj EBITDA is $4.6 million a $0.2 million difference than mine.

Balance Sheet items of note:

At Q end HITI had $16 million in cash +$9 million QoQ.  They also did a raise post Q of $23 million as well as a conversion of debentures to equity of $23 million.

Right of Use assets increased +$11 million and lease liabilities increased by $9 million.

Goodwill and Intangibles increases $60 million to $78 million on the acquisitions. Meta was acquired for $47 million of which G/I was $64 million.

Convertible debt at Q end increased $14 million to $39 million but was reduced post Q.

Share capital increased $44 million with in Q raise and META onboarding.

In closing:

Raj has put his acquisitions in the boat and is opening up stores at a rapid pace. We will see if they can trim SGA as % of sales which is something I expect having watched this operation for the past few years.

USA and international sales need a boost as they have not impressed in each of the last two Q’s. 

The recent equity raises and the swap of debentures to equity should lighten the debt load as synergies are wrung out of META and New Leaf. 

It is nice to see progress on the top line, now it’s time to see Raj bring the acquisitions in and tighten the expense control.

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 HITI and will not start one in the next five days.