The Analyst

Pablo Zuanic, analyst at Cantor Fitzgerald, initiated coverage of Fire & Flower Holdings Corp. (TSE: FAF) (OTC:FFLWF) with an Overweight rating and a 12-month price target of C$1.30 ($1.04).

The Thesis

“We see an opportunity with Canada’s largest cannabis retail chains (operating in a market that we project will potentially double to $8 billion by 2024), as these stocks are undervalued vs. domestic producers (1-2x CY22E sales vs. 5-15x), in our view, and trade at a steep discount to U.S. retail staple peers on a growth-adjusted basis (operating in rather matured industries, those trade at 1x),” Zuanic said, in a recent analyst note.

The analyst noted that the retail segment remains fragmented, in addition to a crowded market with decreasing margins. A situation that “will likely lead to consolidation (M&A, attrition).”

About July Quarter Results

Total sales of $43 million were up 51% YoY, but down 2% sequentially, with retail (74% of net revenues) down 5%. Net wholesale went up 2% sequentially (18% of the revenue mix), and the digital development line (8% of sales) was up 29% sequentially and 293% YoY. Gross margins of 37.3% were stable quarter-to-quarter, up from 34.8% a year ago, mostly helped by the high margins in the digital business, which helped offset retail margin pressure. 

Management said retail sales were impacted by pricing pressures due to “an unprecedented number of licenses being issued in Ontario, and also by aggressive pricing strategies by deep-discount retailers.

Although pricing/affordability remain key factors overall; (the illicit market still represents approximately 40% of Canada’s cannabis usage, and, according to Ontario Cannabis Store, 70% of Canadian consumers are “extremely price-sensitive”), FAF's management believes in a “value strategy” that is different from category discounting.

The company launched a value range for its customers in the Fire & Flower stores, besides its more value-oriented Happy Dayz retail banner, noted Zuanic.

Management highlights five “growth pillars”:

a) monetize the Hifyre proprietary data and retail analytics platform;

b) expand the U.S. entry ahead of federal permissibility;

d) continue to expand FAF’s retail footprint throughout Canada; and,

e) expand the relationship with A. Couche-Tard (a $50Bn market cap company).

Company-Owned Retail Footprint

The company-owned retail footprint comprises 93 stores, with a four-pronged strategy targeting different segments.

Convenience store company, Alimentation Couche-Tard, (owner of Circle-K convenience store banner), already owns ~22% of the stock (with warrants that could take its stake to 50.1%), and new outlets (at Circle-K stores) “that will further expand FAF's footprint on a strategic and asset-light basis in Canada first, and elsewhere when legal.

Couche-Tard will provide ~$300Mn of potential growth capital for expansion. “The deal will help accelerate FAF’s growth pace, leveraging Couche-Tard’s vast international infrastructure.”

“In addition, FAF has an ambitious tech strategy that, according to management, should allow it to compete with Weedmaps (NASDAQ:MAPS). We believe Fire & Flower has a multi-pronged strategy to benefit from the changing retail landscape,” Zuanic said.

According to management, FAF is not just a brick-and-mortar retailer, but a “technology-driven global consumer commerce company.” Data, captured every step of the way, is used to enhance store performance and enables monetization through advertisements, Zuanic said.

FAF will be transforming the Wikileaf website, an online cannabis platform that has proven to generate significant user traffic through “engaging content” into a virtual online dispensary for cannabis and accessory products utilizing the same e-commerce proprietary technology platform that powers the company’s Fire & Flower retail network.

Photo Courtesy of Lelen Ruete