Analyst Is Warming Up To This Cannabis Stock As It Reports Q1 Earnings & Successful Shift To Discount Model

On Thursday, Canadian cannabis retailer High Tide Inc. HITI reported that its revenue almost doubled over the year to CA$72.2 million ($57.1 million) in the first quarter of 2022,

Moreover, gross profit increased by 56% to CA$23 million in the first quarter, with the gross profit margin being 32%, compared to 39% in the same period of last year.

Raj Grover, the company's president and CEO, expects "further meaningful increases" to the company's revenue profile in view of "growth plans for the remainder of this year."

Cantor Fitzgerald's Pablo Zuanic said High Tide's quarterly sales and profit margins exceeded market expectations, with the management being pleased with the results coming from the shift to a discount model.

High Tide revealed in October that it was transitioning all of its cannabis retail stores to an innovative cannabis discount club concept that offers benefits and lower prices for its Cabana Club loyalty members.

Since then, the company's retail cannabis stores have been offering steep club discounts on products in addition to existing member-only discounts on consumption accessories, as well as other exclusive benefits for Cabana Club members.

Membership in the Cabana Club loyalty program increased to roughly 450,000 members as of March 17 from 245,000 at the launch of the discount club model.

The Analyst

Zuanic maintained a 'Neutral' rating and lowered its 12-month price target to CA$7.00 from CA$7.25 after tweaking estimates.

Quarterly Results

The analyst highlighted that quarterly sales included a full quarter of the Blessed CBD deal, which was closed in October, as well as roughly two months after the NuLeaf Naturals deal closed a month later.

In addition, the Cabana Club membership program has almost doubled since the end of October, with more than 94% of transactions are conducted by club members.

Speaking of consolidated gross margins, the analyst said that the company's management anticipates they will remain "north of 30% going forward, in part due to the higher margins of the recent CBD deals."

Zuanic expects more margin improvement in 3Q than in 2Q, owing to operating leverage.

"The CBD business should grow from entering new doors in the US and new markets in Europe," he said.

Outlook & Guidance

Zuanic also estimated that the company's retail share in the Canadian cannabis market, excluding Quebec, was 5.6% during the first quarter as compared to 4.7% in the prior period.

"We project total sales of $78Mn for 2Q and $91Mn for 3Q," the analyst said.

In addition, the company plans to end 2022 with 150 stores, up from 113, which currently operates.

"At 1.2x CY22E sales and 0.9x CY23E, we think the stock is attractively valued," Zuanic said. "We are warming up to the stock, even though we prefer to remain Neutral for now due to execution risk given the shift a discount model and integration risk from various recent M&A activity."

Price Action

High Tide's stock traded 5.23% lower at $4.53 per share at the time of writing.

Photo: Courtesy of Andrew Neel on Unsplash