Hella. It’s been awhile since Planet 13 ($PLTH) has filed a set of financials. Their Q3 was reported way back in November of 2020. I had used them as an example in a post on managing forward exchange exposure – their financials were impressive to me. I’d swung traded them a little around the $7-$9 mark – but there’s no way I’d consider an entry for hold at these levels. There’s far too much extrinsic value for me in those prices at this point. And honestly, until Schumer drops a federal bill, potential sector outcomes are just too broad for me to be comfortable. For the speculative bulls, there’s nowhere to go but up.

One thing I notice is the reactions when TheCannalysts publish a contrary opinion, or just present an analysis of potential risk in sector. At some points over the past three years, some people have become unhinged on what are really objective statements. I’ve had folks (Blue gets some real gems) hurl insults and go ad hominem on me for suggesting that maybe all things aren’t going up forever. The animosity gets worse in pullbacks. It’s an odd feature of human behaviour – when emotion becomes wound up with investing.

Our recent write-ups on the DCC and the 3-Tier regulatory framework’s potential for impacting asset valuations are simply that: illustrating the potential. We’ve been called many things recently, simply for surfacing potential risk. I’d hope you try to self evaluate, and keep emotion and ‘hope’ away from your investments. We all have views and preferences – but keeping objectivity front of mind is the best way to doing your own investing.

I mention this because I really like the numbers and financials of $PLTH. It’s really an outlier in cannabis to myself. I’m a skeptic at heart, and coming from a professional background of trade and risk – I’ve seen losses and circumstances come about that were utterly unpredictable, and extremely negative. Capital preservation is my priority, and creating returns relative to risk is why I do trade/invest.

And there is absolutely no way in the world I can see a risk/reward ratio in $PLTH that supports a long term entry at these price levels. I have been trading its’ volatility since the last Structure (mid-Jan ~=$7 w/2 entries) as $PLTH maintained relative liquidity well into March (with w/tight stops). Holding MSO exposure at this point is highly speculative in the absence of the Democrats forthcoming bill, I see it as a mystery box. When Blue brought up the potential for 3-Tier in early March, I ran for the exits. I think the chart below reflects the uncertainty that NY has surfaced, yet this thing is still running hot. The volatility is simply nuts:

Since we’ve been waiting 5 months for these $PLTH’s statements…we won’t be waiting long for the next ones. I’m curious to see if that run-rate of their Superstore is maintained, and how their new dispensary near the stadium/University is doing.

To the financials!

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• Cash up $14MM. $116MM of sequential raises in January will see that number swell next quarter. November’s came in at ~=$28MM).
• Inventory relatively flat (~=$7.4MM), good with revenues of $20MM. But, that’s off $2.6MM. The new store (Medezin) brought in $654k in the 5 weeks it was open (~=$125k/wk, $6.5MM/yr).
• That gives us a good look at overall expected (e) run rate of ~=$86MM/yr. Man, for a $1.3B market cap, that’s a helluva extrinsic value. Must be giving C21 Investments ($CXXI) heartburn that despite having an annual (e)run-rate of just less than half of $PLTH’s – $CXXI’s market cap is around $150MM. More below.
• That’s something to watch as well, when the market is pricing assets so discordantly. All stores/companies are not created equal.
• 48% margin on the year, 53% at 9m, 49% at 6m, 54% at 3 m of fiscal 2020. Curious swings that alternate across quarters.
• And that means Q4 must’ve been low. And….yep, 37% GM in the fourth quarter. Hmm. Sales are off 10%+ QoQ too, despite that new store coming online.
• It looks like a cultivation facility they picked up last July wasn’t quite the producer they thought it was. G&A increased $1.3MM QoQ – some of which was likely from its’ on-boarding.
• An un-named ’employee’ hit a jackpot, getting 500k in RSU’s granted to them in the quarter. $2.6MM SBC for the year.

Well, I’ve been running around these for a few hours. What stands out in these financials is sales taking a dump, and margin cratering. It hasn’t taken long to piece together why.

Regarding G&A, it blew out in a couple of places QoQ. The bulk of it was from ‘Salaries and wages’ & ‘Miscellaneous’ (the latter being a catch all ‘yuck’):

Good segmentation is presented across product platforms. Regarding that crappy lower gross margin reported this quarter, they also point to wholesale as being lower margin, and home delivery. Given wholesale is so low, it’s an odd call out:

If you’d like another example of good disclosure, $PLTH relates COVID’s impact on their business by segmenting by purchase methods YoY. If there is a clear weakness in the financials, it’s that their QoQ disclosure isn’t always there. I can impute all I need though:

I still *heart* these financials. They even lay out the existence of a State resident discount, hence the home delivery being of lower margin:

The acquisition of a cultivation facility (WCDN) was closed in November – and it looks like it came in as a real mutt. I’m not sure if $PLTH hadn’t done due diligence or if this was a ‘surprise’ or what. I’d bet heavy on a crop failure if I was to wager. Might be just crappy QA and they had to bin product. I’ll defer to how $PLTH describes it….. the disclosure is fantastic, even if its’ about a really ugly facet of operations this quarter. Note the impact on aggregate yields reported….ouch!:

Heh. Sonny Newman’s C21 Investments ($CXXI) just isn’t getting much love in comparison to $PLTH. I’ve got nothing for or against the guy, but I’m not a fan of creditors owning a public company in the general, and I see involvement by sell side funds at a company level as a general negative for shareholders as well. Perhaps that explains some of the discordance in asset valuation between $PLTH and $CXXI. It might be that Sonny’s landlocked and capital thin. The main point I’m making is that a break between asset valuations can be driven by many, many factors. And it’s not usually (if ever) because the market is ‘dumb’. I do know that one can set a metronome to $CXXI’s revenues, and even being fully vertical, it’s ostensibly run as a break even shop. I see that as a reflection of the air that gets sucked out of it by having a creditor turned CEO.

<From that $CXXI press release above, it’s notable that the guy who actually put $CXXI into Sonny’s hands didn’t actually leave the outfit until January of this year. Perhaps he didn’t want to give up his Board seat willingly, I’ve no clue of the circumstances>

$PLTH recently struck an interesting deal with Curaleaf ($CURA), where $PLTH is going to put a Select Branded ‘store’ within their Superstore. Kind of like how cosmetics companies use the main level of a department store for kiosks. I’m sure there’s similar deals with MSOs and brands and putting signage out, but this is distinctive in putting up cash for infrastructure and perhaps some sort of floor rental agreement. At least, that’s what one would expect a deal like this to contain. Replicability will probably be limited to their big stores – $PLTH’s Superstore is some 50k+ft² – and tourist oriented.

“Superstore” seems to be their thing, as they’re replicating the concept in a 33k ft² store in Orange County. It’s another high volume tourist area (Disneyland), and 3MM people live in that county. There’s also a whack more dispensaries too – it looks like there’s about 24 of them in Anaheim alone. ‘Murica does like ‘big’ – and perhaps this format of store will prove popular.

GoBlue and I have talked a fair bit about seeing so much ‘dead’ space and brand new builds in retail cannabis. ‘Typical’ retail maximizes space and margin all day every day. To set up a standalone building is anomalous too – it requires capital, and takes balance sheet space away from inventory and working capital. It’s why Innovative Industrial Properties exists, as holding real estate can’t really be described as ‘core operations’ for folks in retail. $PLTH only owns $2.3MM of $43MM in PP&E, which fits expectations. That said, this ‘Superstore’ concept appears to be a ‘destination’ experience, and leasehold improvements are a steep $30MM(!). With that Select deal, it could also be seen moving towards a pseudo-department store retail model.

I’m unaware of any other company that’s doing anything like this in the space. I am really intrigued by the concept.

I linger on this outfit for a couple of reasons. First, I like how clean the financials and capital structure is. Conversely, I’ve never disliked a share price more than the one they sport. I mentioned $CXXI as a comparative: ops in same State; limited storefronts; both with some degree of verticality. Yet, Market Cap/ Revenue is 16x for PLTH, 4x for $CXXI. Crazy right?

An easy guess at the reason is that $PLTH has funding and a future, and that $CXXI is discounted due to limited opportunity with the wrong guy in the Captain’s chair. That’d be my guess. I’d need to spend a ton more time to try and find out the actual ‘why’…. an uncertain exercise. Besides, I’m touching neither for now, but I believe they present an excellent example of disparities in asset pricing.

I also notice that edibles have fallen off of a cliff for $PLTH this quarter in terms of sales percentages, while flower is rocking. Either these guys are bucking general consensus, or perhaps they’ve got unique positioning versus reported trends. When I see things like this, I question ‘general consensus’ reflexively. Market data – the real stuff – is kept very low to the ground. In the absence of having a data service available, most publicly available and media reported numbers are (in general) low quality.

Anyhow, I’d capstone this quarter as being not only the ‘worst’ of the year, but there’s more too in terms of the sales declines. If tourist revenue is that big of an impact, then seasonality will be a big part of their future. An upside is that COVID will back off, and when it does, I suspect America (and the world) will want to gamble and drink and party for awhile. That’ll bode well for them, as pretty much most of 2020 saw a massive drop in tourism, particularly in Las Vegas.

$PLTH’s Orange County store isn’t going to be finished until summer, so we’ll look next time to see if they’ve got those cultivation issues ironed out, and if they can get G&A manageable. I assume the plants will be fine given time (barring some structural issues like the ones that plague $TGIF).

As to that G&A – they need to not only reign in increases, they need a chainsaw: its’ stunningly out of 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 holds no position in $PLTH

EDIT: Came across a ‘news’ story the day after this was published. It’s more of an advert really: media will often signal a willingness to work with potential advertisers, and couch as local interest stories. Weed will be capturing the mainstream’s attention for years as it normalizes, and the announcement of new jobs! gets clicks.