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Let’s review High Tide earnings for the quarter ended October 31, 2020
Hightide quarterly earnings release
What we said last Q:
A second Q in a row of +NOP and +EBITDA continues. And their NOP now exceeds their interest expense.
And the newest subsequent event, the acquisition of META, will be interesting to watch unfold. If Raj and his team can eliminate the $4 million in quarterly corporate overhead at META, while adding the accretive stores … this could get interesting.
- 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.
Income Statement Drivers and Breakeven Sales: Trend
Note: As no standalone Q4 has been delivered Sales is a Q4 YTD less Q3 YTD true up. This also extends to Opex.
Sales increased 16% QoQ as HITI new Ontario stores are picking up traction. Store count remained at 31 for the Q, next Q they add Meta (11) and New Leaf (19).
Retail increase 20% to $25 million. Wholesale saw a decrease -15% after a sizeable increase the preceding Q. Corporate negligible.
Adult rec cannabis sales accounted for the entirety of the increase with +$4 million, as both wholesale and corporate dropped an aggregate $0.4 million.
Geographic sales are a little off, as MDA has Q1-Q3 underreported and Q4 over reported as compared to Income Statement and Q4 true up. F2020 does balance.
Canada saw a 13% +$2.3 million increase, while USA saw a -27% -$1.5 million decrease. International is nominal. Expect next Q, which includes Holiday Season, to show improvement.
Revenue Per Store:
In this calculation we use ONLY the HITI Cannabis stores and not wholesale revenue.
Revenue per store increased to $792 thousand +19% in the Q. They are leading the other retail Pubcos by a substantial margin. The Ontario stores are likely driving the increase as Ontario has less competition than Alberta, meaning higher per store sales out of Ontario.
Income Statement Drivers and Breakeven Sales: Peers
HITI remains in 2nd place for Cdn publicly traded retail stores trailing FAF. They should leapfrog them next Q.
Gross Margin %: Trend and Peer
GM in Cannabis retail is very boring. …. 35-36% across the board.
Gross Margin Table:
Absolute GM was $9.4 million a $0.2 million increase over the previous Q.
From the fine print in the earnings release:
- 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%.
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 $6.7 million from $5.0 million QoQ. Salaries and professional fees decreased, so the increase is in G&A.
SGA totaled $6.8 million for the Q an increase of $1.7 million from $5.1 million last Q.
SBC was minimal with a negligible change QoQ.
Depreciation was $1.8 million, flat QoQ.
Total Opex was $8.8 million versus $7.1 million last Q. I note that corporate overhead in Opex averaged $1 million per Q during the fiscal.
SGA per Store:
SGA per store decreased a -12% amount to $184 thousand.
SGA & SBC as % of Sales: Peer
HITI is leading peers across the board.
+Net Operating Profit:
High Tide evidenced positive NOP for the Q of $0.6 million after a $2.1 million +NOP last Q. The increase in GM of $0.2 million coupled with an increase in Opex of $1.7 million are the reasons.
Other expenses aggregated $2.3 million vs income of $2.4 million last Q, items of note:
- Finance costs of $2.0 million vs $2.7 million last Q.
- Gain on sale of marketable securities of $1.6 million Halo shares last Q and nil this Q
Taxes were a credit $49.
Net income was -$1.7 million versus + $4.2 million last Q. NOTE: My net Income, due to a lack of standalone Q4 is $0.4 million worse than their stated -$1.3 million.
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 +$3.0 million slide from $4.1 million last Q. Opex increases is the largest contributor. Note: Their adj EBITDA is $3.6 million a $0.6 million difference than mine. $0.4 million is their Net income being better than my True Up Q4 by $0.4 million.
EBITDA is greater than interest in the Q. Next stop, albeit likely with a detour as they absorb Meta, is covering amortized principle.
Balance Sheet items of note:
At Q end HITI had $7.5 million in cash flat QoQ. They did a raise post Q and report cash balances of $38 million
From earnings release Subsequent events:
- The Company extended the maturity date on a $10.0 million credit facility with Windsor Capital to December 31, 2021 with a subsequent one-year extension to December 31, 2022 and a reduction of interest rate from 11.5% to 10.0%.
- The Company entered into a loan agreement for $6.75 million maturing on December 31, 2024 of an undrawn balance on a $20.0 million credit facility obtained through the acquisition of META Growth Corp. Additionally, the Company extended maturity of META’s existing debt to December 31, 2024 and a reduction of all-inclusive interest rate from 12.5% to 10.0%.
They still have $14 million in current portion of convertible debentures that will need to be taken care of.
Another progress quarter for Hightide. Sales improved. Gross margin remained comparable to peers. NOP and EBITDA slid a bit as G&A increased. Expect G&A to stay elevated as they work through the Meta acquisition.
Hightide has become an interesting operation to follow. With the acquisition of Smoke Cartel and Meta in the next financials, it will be interesting to see how quickly they optimize.
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.