Another retailer has issued financials in short order. Our last look at YSS Corporation ($YSS) – a dressed-down 18 store chain – was a little less than a month ago.
At the time, we pointed out that the press release they put out with those financials promised ‘positive corporate EBITDA’ by the end of this fiscal year. Our last structure saw some challenges for them in the relatively low margins they report. Despite being a smaller outfit with very little debt: $4.7MM in sales last quarter delivered a $1.6MM operating loss.
This quarter saw 17 stores in total or partial operation (an 18th outlet opened in Edmonton Oct 16).
To the financials!
- Cash & receivables down to $3MM (from $4.3MM prior). The change is solely from operations – and indicates a shortening of their runway.
- 132MM shares o/s. 9.4MM options lying around, nowhere near strike.
- Last time around, they assured us that no further financing was required this year. That changed a week before these financials came out. More below.
- They’ve taken a $160k in COVID relief in accepting federal gov’t loans. 25% of which will be forgiven if it’s paid in full before December 31, 2022. Outside of leases, it’s the only debt on their books right now.
- Their Sweet Tree buy – for some $8MM (!) – is probably floating the franchise in terms of total dollar revenue. It’s a prime location right in the middle of where a weed store should be in Calgary. The final 6MM shares in compensation for it went out this year. Given one of their organic roll outs can be done for $400k (their number), Sweet Tree will need to move a lot of pounds.
- There’s three more stores landing in the same area over the next few months. Lake City Cannabis being one of them. I highlight this only to reveal the competitive pressure coming across retail. Ontario will be the land of milk and honey, at least for awhile longer than the retail saturation emerging within Alberta.
- Inventory is run really tight. $1.2MM for the entire 18 store system, which includes accessories and such. Less working capital needed equals better margin. They report average inventory per store of $64k, down from $79k year prior.
Ok, the financials are really straightforward. There isn’t much we haven’t covered previously. An incremental store was opened after the quarter was reported, 6 more in the hopper. Cash (at $2.9MM) is not in a good place right now.
That errata about inventory levels held per store is from the MD&A, they take pains to illustrate what they’re thinking about. And again, their disclosure is pretty good. I’ve seen them essentially put this thing together as they’ve gone, and have watched them formalize over time.
Looking at these guys, it’s not surprising that retail is a bit of a goat in cannabis. Sure, the ossified 30% margins gifted so generously by the State Monopolies to retailers is a big part of it. Another part is price competition – where retailers are stuck within a general paradigm of either moving volume, or, being a sniper for margin via differentiated offerings.
A week before these financials dropped, $YSS announced plans to ink a $4MM secured debt facility. Quelle surprise. It comes in at around 10% interest, issuable in $1MM tranches (an accordian), and an added sweetener of 12MM/5 year/$0.14 warrants is going out to the lender with the paper. I calculate the price of the warrants around $0.07, or, about $870k in extrinsic value. Half of them vest upon the initial $1MM issuance under the facility (that’s not a good sign, and demonstrates the lender’s strength in negotiation).
For a company as lean as $YSS is…….with 18 stores in production and $24MM/yr in sales……that’s pretty expensive money. That level of expense reflects that they haven’t been able to make money much selling weed more than a year in.
Last quarter, it cost them $1.6MM (Operating cost + G&A) to generate $1.3MM in gross margin. This quarter: it cost them $2MM to generate $1.8MM in gross margin. Below that line are finance costs related to leases (of about $240k/quarter).
They have improved QoQ in terms of profitability, as operating cost increased $200k on an incremental $1.1MM in total sales. That’ll have to improve more….in terms of total revenue and margin and cost reductions. That these guys run about as lean as it can appear to get – it might be difficult for them to find that last mile of savings. They might need to do something at head office they wouldn’t have considered previously. SBC went down by a $100k this quarter from prior (reported at $167k), but their operating cost and G&A are tracking somewhat linearly with sales. As an observation – from their last 3 financial statements, it appears like they’re in a margin trap. – with variable costs outside of COGS that aren’t scaling down (or able to be). Expanding on this, I’d guess that they have direct sales cost that isn’t being captured in their COGS calculation.
$YSS has stuck to their guidance of being profitable corporately – and this will happen (according to them) in the next quarter. That makes my job easier in terms of what to suggest to look for next time. How they’ll do it….I don’t have a clue. The investor should hope that this quarter’s sales increase isn’t primarily seasonal.
At any rate, the guidance is a great litmus test for them. Perhaps guidance was presented in hopes of securing additional financing, or, perhaps it was put out to mollify shareholders…..who were wondering when $YSS was going to be profitable. It was likely both.
We’ll see if they can achieve their guidance, and if so, hopefully be able to divine the ‘how’. For $YSS to get there, look for an empty seat (or two) in the executive. That financing was expensive, and suggests these guys need to get things on track fast. I suspect little will be safe internally until that guidance is hit.
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 $YSS