News this morning about High Tide ($HITI) buying an online seller of smoking accessories adds fuel to a stock that’s been on a rip lately:

Investors have never really had much to choose from in looking for exposure to cannabis retail in Canada (in terms of numbers). There is/was/were only a handful of outfits to choose from: Fire & Flower ($FAF), Inner Spirit Holdings ($ISH), High Tide ($HITI), YSS Corp ($YSS), Alcanna ($CLIQ), META Corporation ($META)).

$META wasn’t bearing out as an operator, $YSS didn’t have capital to expand….and relatively landlocked. Alcanna (via their NOVA Cannabis brand) was imperfect as vehicle for those seeking exposure to cannabis: with liquor operations swamping cannabis related revenue and exposure. $ISH is ‘$YSS’ in corporate stores with a franchise bolted on (albeit expanding into ONT). Tokyo Smoke….is as best a path possible for a producer (in $WEED) to soft-pedal facings, also franchising. $HITI…a smoke shop that built weed sales out as a natural extension of their existing ancillary business.

<If you aren’t aware, $CLIQ was originally bought by Aurora Cannabis ($ACB) in the heady days of legal cannabis, under the belief that producers would be able to go full vertical. BC was the first province to crush that idea by limiting LP’s retail ownership potential. The deal never delivered $CLIQ the horsepower the thing was predicated upon, and $ACB ended up selling it. The current owners seem to be making moves to walk away from weed, or at least compartmentalize it from core ops>

I really liked the disparity in the businesses though. Unlike having to choose from 4 companies with the same business models, investors can look at differences….. and ‘choose’ one that fits their interests best.

I was drawn to $HITI’s CEO Raj Grover because of his experience through ‘Smoker’s Corner’: a decade old head-shop that went through a couple of boom/busts…surviving while selling rolling papers out of the ass end of strip malls. He used that competency to take $HITI public using interest in legal cannabis to raise money, and created pot shops.

The Smoke Cartel acquisition represents the natural extension of that core business model: selling bongs.

There’s a few things about rolling papers and bongs and gear that are very ‘unsexy’ to traditional retail. It supports the type of customer that few mainstream companies have interest in presenting themselves to – at least in how the space has traditionally looked. I don’t expect that segment to change much. The munchies and Cheech and Chong and Snoop Dog dab rigs and perpetual ‘sales events’ are a norm (although there are less bikini pictures on the side than there were a few years ago).

There’s been companies happy to create and develop a more refined/upscale segment of the ‘smoking accessory’ market, like a Jane West or BRNT (BRNT makes a helluva bong btw. Full disclosure….TheCannalysts have been given free ones, and BRNT was a sponsor of WeCann™ West).

Ostensibly, these companies want to capture the demographic who isn’t looking for a 6′ tall triple bubbler in the shape of Godzilla.

Smoke Cartel fits $HITI like a glove, with $HITI’s stated goal of the acquisition being a step towards becoming the “…dominant global consumption accessories and CBD products e-commerce retailer.” Exactly what a retail bong seller would aspire to be. The average sale of Smoke Cartel last year? Sixty bucks.

Bullseye.

While many get off on the margins of selling baggies, I like the idea that people need something to consume with, and that ‘traditional’ discount providers and customers have been ignored by the money so far. There is a listed Canadian outfit that claims wholesale in accessories: Wildflower Brands ($SUN). I had a quick look at them back in December of 2018, but never needed another go…and they look somewhat terminal.

The preceding is a lot words to say about an $8MM USD acquisition. But in a short period – Raj now has exposure to 9 countries….including soon to be legal Mexico. Whether he can pop the clutch…appear culturally specific in presentation…..and expand beyond the existing sales levels……is core to the deal’s value. And that’s what’ll bring value out of buys like this. I say ‘buys’ because ‘dominant’ is a big word. And a strong share price will accelerate his ability to acquire land in a space that’s largely been ignored: bongs for people on a budget.

Nothing says ‘average pot smoker’ more to me than those words.

The company is running ridiculously hot in terms of valuation and share count, and I’m concerned about both of these. $HITI will need to accrete revenue and margin hard to support both. His GrassCity property is showing (very incremental) improvement, but far from what it’ll need to. Next financials will reveal latest performance. The $META buy is on-boarding $4-$5MM/yr in accessory sales (according to Raj).

As Canada’s legal market matures, the domestic cannabis landscape is proving finite. Global expansion is the path forward for any and all Canadian companies with ambition. Ancillary products tie into expectations about the adoption of legal weed in other countries, and it isn’t limited to the actual status of legalization in any given country. Call me bullish on the thought of someone consolidating this space within the cannabis market, legal or not.

I’d really like to know what’s going through $FAF’s CEO Trevor Fencott’s mind about their own plans. I’ve talked about their Circle-K platform, and there’s much that’s attractive about the idea. But dealing with the 10 Princesses and Princes of Canada’s provincial fiefdoms will limit the portability and replicability of the concept.

Retail may be unsexy in terms of profitability and the grubbiness of having to ring up individual transactions of less than $5.

It’s still business, and to me, an interesting business story within legal cannabis.

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 holds $HITI.