This company has released some information about their latest financials via press release. Yuck. Companies that provide partial and selective financial information this way….just plain yuck.

A couple of MSO’s have turned this into an art form, and it is my hope that this sort of reporting becomes viewed dimly by the majority of market participants.

At any rate, we do have their second quarter to catch up with, and with three data points coming from their fiscal 2020, we should be able to see how they are doing in successive quarters and spot emerging trends. Retail is a bit of a goat in the cannabis value chain in terms of getting attention, and virtually no matter the industry one is in….retail is generally viewed as very ‘un-sexy’. Yet I think its’ impact is going to be more important than to other sectors…..because of the nature of cannabis products themselves. In general, cannabis consumption is almost exclusively a personal experience. Despite having a ‘sesh with the crew’, it really boils down to the individual. My assumption within this is that a retailer who can get intimate and build trust with their customers will be able to guide purchases more effectively than in other consumer categories.

We’ll see.

Should this be right, the implications are big. Not only do producers and processors need to navigate consumer patterns, they need to keep relations solid (both economic and qualitative) with retailers, while coordinating with State Monopolies to ensure the supply chain is fed. As we now move towards a quarter $billion$ a month in cannabis sales (hip-hip-hooray!), formalized datasets will bring a reality to a market that’s historically been anecdotal and informally tracked. The next couple of years are going to be a very fluid and dynamic around capturing consumer cash, and I believe some retailers will gain stroke in pathing revenue upstream.

To the financials!

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• Cash down $500k to just over $4MM. Inventory relatively static at around $1MM. Lean lean lean.
• Looks like about $300k per month in rent, current payables just under $1MM, consistent with previous quarter.
• Sales up $500k in the quarter to $4.6MM. Their inventory levels and sales throughput at 4x suggests tight ordering and relatively quick fulfillment by the AGLC. Definitely a positive.
• A negative in some slight margin decay, from 30% last quarter to 29% this time around. We’ve seen the opposite in the larger ‘chains’ as accessory and ancillary sales bolster margins. With SG&A and SBC running at $2MM/q, a 1% drop in margin means $50k less to cover these expenses.
• Finance cost at $228k, or about 16% of gross margin. Low heat at this point comparatively.
• They took a $160k in COVID assistance, this one in the form of a loan that’s 75% repayable if conditions are adhered to.
• Interesting insight as to their ‘click and collect’ segment arising from COVID. They claim 11% of all sales are through this channel, and that orders are 54% larger than in-store shopper’s baskets.

Ok. I’m not really running into much more here. The financials are relatively simple, and despite some 35MM in warrants of all kinds of strikes and tenors, these are easy to follow.

An interesting line from the MD&A, noting that YSS went from 13 to 15 stores that are EBITDA positive during the quarter. They have 17 in their fleet. They also tout a reduction in G&A of some $150k from prior quarter, a good sign.

The margin is a big number for these guys. I mean, it’s relatively small compared to peers. Sales growth is present (good), as is their inventory management on the face of it. But with 17 outlets (2 running with negative gross margin), they still need to double sales to just break even.

They do mention exceeding previous ‘guidance’ in this quarter across a couple of metrics, and put up additional guidance about their next. Another increase in sales is expected (to $5.6MM), and gross margin is expected to increase as well. BUT. Their guidance is in absolute dollars. While GM is expected to exceed the $1.6MM in the third Q, we’ll have to wait and see. They note a record $1.9MM in sales from July, probably a seasonal bump. GM will need to exceed $1.7MM to maintain 30%.

I see challenges here via margin compression from retail pricing: more absolute revenue attracting less gross margin. Without ancillary/accessory uplift, diversified regions, and a wider brand array – one might see a straight up ‘dope dealer’ as dependent on State Monopoly largesse for profitability (spoiler: that ain’t gonna happen).

With a 132MM shares, a $1.8MM loss on $4.6MM in sales, it’s not far outside of where other retailers lay. The larger issue is that can this outfit get to enough outlets with enough profitability……given their capital structure. The company was begun by some refugees from the oil & gas sector, and appear to have attracted a large benefactor early on in their formation. Whether water remains in that capital pool – is unknown. I doubt a raise looks very attractive to hoist in this environment, and I keep coming back to the idea that bulking up is the path to profitability in terms of multi-store retail chains.

These guys run a very lean shop, their financial statements have improved significantly over time as they’ve gotten through teething stages. Their website doesn’t look like ass anymore, and frankly, YSS has the hallmarks of a low debt tightly run shop. Sadly, a sub 30% margin and a fleet largely elbowed into rural prairie settings will have hard speed limits in terms of growth potential, and growth is exactly what is needed. They have lost $1.8MM in each of the past 2 quarters, and guidance for the upcoming one looks about the same.

Where they are disingenuous is flipping around gross values and doing QoQ comparisons. Sure, growth is good. Unprofitable growth isn’t, and that’s what gross numbers and selective reporting attempts to mask. One can say it’s management’s job to put things in the best light, but. Combined with early press released numbers, it doesn’t leave the best taste in my mouth, but it’s a known and can be adjusted for.

As it is, their ‘earnings’ press release touts $5.8MM in sales, and a GM of $1.8MM (31%). They also have 3 additional stores under construction, so, definitely it’s being run as a going concern.

Nonetheless, this looks like a takeout to me – absent a significant raise of twice their current cash position. Might be a starvation story too, where competitors will be happy to watch them suffer……until their stores are not there anymore.

It may be too soon to be calling for their demise/acquisition, but a public company with a float and capital structure and individual store numbers like these (EBITDA of only $21k/store), won’t be bringing returns to shareholders for ages. Despite the primary investor taking out a significant chunk of value back early on, their whims of further financing may or may not be present. Despite my predicting a raise is required, $YSS declares confidently that their capital available for expansion is ‘ample’, although they don’t state what their capital program looks like beyond powerpoint.

Oh yeah, the presser. It promises ending this fiscal year with positive ‘corporate EBITDA’. There’s 2 more quarter to come – one shortly – and we’ll find out if they can get there. Signs of life may emerge, but they don’t exist strongly in these. Seasonality will be an interesting thing to look for in these and other retailers financial statements QoQ.

Even with robust growth MoM in recreational sales, we should be able to see if there is that seasonality in consumer habits. The next couple of statements from $HITI/$FAF will help validate. If present, Q4 might not bring the success $YSS is predicting.

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.