High Tide CEO On M&A, New Products And 3 Factors Holding The Cannabis Stock Back

M&A is down across most industries, yet High Tide HITI remains on the hunt for targets.

"Our M&A strategy is a marked departure from other companies," CEO Raj Grover tells Benzinga.

The Calgary, Alberta-based company had an active year and will likely keep busy in 2023. Meanwhile, other Canadian cannabis retailers struggled to gain market share and "are all fading away," Grover explains.

See Also: Cannabis Companies Struggle, Lay Off Employees To Control Costs

"We kept our foot on the gas and continuously focused on growing our [brick and mortar] portfolio through organic store openings," Grover adds. "Same-store sales and accretive M&A is one of the main reasons why we are more successful than some of our deep-pocketed competitors."

The following interview has been edited for length and clarity:

BZ: High Tide has been expanding; what's the company's M&A strategy?

Grover: A potential target has to be a good fit in our ecosystem, which is retail-focused and federally legal. For specific stores, our real estate team vets their suitability to thrive in the long term. From a financial perspective, they need to be generating solid EBITDA today, which is what we use to derive our purchase price. We are very transparent with our shareholders regarding what we are buying and what we are paying. As a rule, we buy actual, tangible EBITDA the company generated over the last few months; we don’t buy hope, speculative projections or turnaround stories.

To get to profitability, we need to stay ahead of our competition and capitalize on quality growth opportunities as they present themselves. We expect to develop one of the largest cannabis [brick and mortar] store portfolios in the U.S. once we are able to participate in that market. We have been in conversations with multiple U.S. groups for a potential acquisition. And given our access to U.S. cannabis retail operators, our track record of executing large M&A deals and being skilled at winning licenses organically positions us well for future growth in the U.S. THC market when the time comes.

Revenue and profit spiked in Q3; did it meet or exceed expectations?

Showing 98% revenue growth and $95.4 million for the third quarter, we've been hailed as one of the most underrated growth stories in cannabis retail, and we are said to be massively undervalued. Our growth in the quarter was driven by our Canadian operations, demonstrating the impact of our discount club model gaining steam across the country. Third-quarter results were even stronger than our “best case” internal projections — as well as analyst consensus for revenue and EBITDA.

I strongly believe our company’s shares are undervalued, especially given our leading national position, financial strength and international exposure.

What's holding the stock back?

Three macro factors are unfortunately holding our stock back — despite the fact that they don’t specifically apply to us. First is a lack of enthusiasm regarding Canadian cannabis companies. This has been driven by the large quantums of money many licensed producers have raised from the public, which, unfortunately, has still not been able to position the vast majority of them to generate positive EBITDA four years into legalization. In contrast, High Tide has created more than $400 million in annual business, which has generated positive EBITDA for the past 10 quarters — without ever having a cash balance exceeding $29 million.

The second factor is a frustration with inaction on the cannabis file in Washington, which has deflated investor sentiment across the board. While we would like the opportunity to participate in the U.S. THC market, and we believe we can eventually be a "Top 5 MSO," the reality is we are very active — and profitable — in the U.S. today. We have over 2.4 million customers in our database in the U.S. alone who have bought consumption accessories and/or CBD online from us. When legalization happens we plan to start selling these customers THC, under whatever the regulations happen to be. So while other companies may be sitting on their hands waiting for Washington to move, we are very active in the U.S. as we speak.

Finally, there is the state of the broader capital markets, which has been very weak. The Nasdaq Composite Index has gone from approximately 16,000 a year ago to approximately 11,000 today. Such a "risk off" environment results in holding back the stock of companies such as ours — again despite the fact that we continue to grow and execute on all our plans. While these factors have been holding back the price of our shares over the past year, I strongly believe that they can’t last forever. The market will eventually turn, and when it does, I believe that companies such as ours — with strong fundamentals and industry-leading positioning — will significantly outperform our peers in the next bull market.

With credit being so hard to come by, plus interest rates and inflation soaring, how does that impact financing?

Credit can be very hard to come by, especially in Canadian cannabis, where positive cash flows are more of an exception to the rule. However, given our financial strength, we were able to secure a $19 million non-dilutive credit facility with connectFirst Credit Union, at their floor interest rate.

These funds will help retire older, more expensive debt, and add working capital and Capex to keep growing our footprint. It was a long, drawn-out process, particularly given what’s been happening with Canadian cannabis companies, as well as broader market weakness over the summer. But we got it over the line.  As we continue to execute, the size of the line will also grow.

New hemp products debuted in October; what other products do you hope to unveil in the next year?

We are looking forward to expanding our Cabana Cannabis Co. product line throughout next year, providing us with a margin-enhancing opportunity. The ramp-up of our newly built and acquired British Columbia locations will be another catalyst. Closing on some attractive e-commerce opportunities in front of us will further add to our momentum next year.

The German market potentially opening up in 2024 will provide a significant growth opportunity in that market through the launch of our Canna Cabana brand. The put and the call option are both in play for FAB and Blessed, and only the call option is in effect for NuLeaf presently.

We now have the Fastendr tech installed at 90 locations (a total of 169 kiosks). We’ve rolled out a newer and faster version of the kiosk operating system, which was recently completed in all stores that have Fastendr technology. We anticipate installing another 20 or so locations with this tech before the end of this year. We also have opportunities in the U.S. that we are exploring to license this tech.

We are also very excited to introduce Cabana ELITE to our loyal club members where provincial regulations allow. This is the first of its kind, paid membership program as far as we know in Canadian cannabis. Our intention is to convert as many customers as possible into the ELITE membership, and we feel the program has great benefits to attract high subscription rates; however, we are just getting ready to launch this program, and it’s hard to predict how steep the uptake curve will be. My best guess would be breaching 900,000 members by the end of this calendar year, and we believe we can achieve over one million members by the end of the first calendar quarter in 2023. Presently, Cabana Club is only available in Canada, with future plans to make it into a global cannabis community.

Is the goal still to grow retail (200 stores by the end of 2023)?

We are still in a hyper-growth stage with our long-term goal of reaching 250 stores in Canada. Currently, we have 141 locations spanning British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Our same-store sales continue to grow handsomely, and more than the national average, which tells us that our concept continues to resonate with our customers and that we should continue expanding our footprint.

We’ve never had much more than $29 million in our bank account and still managed to fuel this growth from $8 million four years ago, to an over $400 million run rate trajectory today. Generating such a meaningful amount of sales growth through organic openings and M&A has to be financed either by a large war chest of cash or by issuing equity. We are in a fortunate position. Sellers want to take our stock, seeing the difference in execution from our peers. Finally, the non-dilutive credit facility from connectFirst we recently obtained is almost unheard of in Canadian cannabis retail. We expect to be able to increase the size of the facility as our fundamentals continue to improve, which should drive further growth while minimizing dilution.

Next: 10 Predictions For The Cannabis Industry In 2023