Fire And Flower: Why This Analyst Lowered His Price Target Yet Remains Bullish & Sees Nearly 100% Upside Potential

The Analyst

Pablo Zuanic, an analyst with Cantor Fitzgerald, qualified Fire And Flower (FAF) FAF FFLWD as Overweight and lowered its price target to C$10.40 from C$13.

The Thesis

In his analyst note, Zuanic argued that Canadian retailers “are in for a rough year ahead as more stores open and some chains opt for blanket discounting. That said, we are more comfortable with Fire and Flower's asset-light business model and technology-driven tactical approach to price adjustments.”

Zuanic added that Fire and Flower is assembling a “robust” tech platform that may eventually lead to growth not just in Canada. “At 1.1x our 2022 sales estimate (factoring in the Series B warrants held by Alimentation Couche-Tard), we find the valuation attractive. Management is guiding for a NASDAQ listing in early calendar 2022.”

"The Tech Vision Should Drive Growth"

With the acquisition of Pineapple Express Delivery (an e-commerce delivery service in Canada), management expects to deliver a full suite of tech solutions (including the recent acquisitions of pot-guide and Wikileaf).

Zuanic noted that Pineapple Express is the industry leader in Canada, with 40,000 deliveries per month and that as boards ease rules, the company's delivery will become a bigger part of the retail chain's strategy.

Outlook

Management expects a challenging January quarter due to disruptive changes at retail (more stores, blanket discounting by some retailers), and implied (in Zuanic’s view) “a drop in retail gross margins to the mid/high 20 percent range from 30.3% in the October quarter.”

Zuanic highlighted that the company should benefit from six new stores opened in the January quarter. “According to management, FAF will collect 5-10% in licensing revenues from these stores, depending on the range of services provided to each store. While a shake-out in Canada’s retail industry may eventually happen, as seen in Alberta province, this process could still take about 18 months. Meanwhile, FAF, using its proprietary data tools and says it can be more tactical about price reductions/promotions.”

Highlights Of The Third Quarter

• Total revenues increased 5% sequentially (after a 2% drop in July), with retail sales (74% of revenues) up 6%, wholesale (17%) up 2%, and digital (9%) up 3%. “If we take the average count, we estimate C$1.46 Million in revenue (or US$1.17 Million) per store, per annum, in ON, which is even below OR, the state with the lowest average revenue per store in the US,” Zuanic said. 

• Consolidated gross margins dropped to 34.6%, driven by retail gross margins (these fell 380bp seq to 30.3%); wholesale gross margins were stable at 21.7% while the company reported 100% tech gross margins.

• Total corporate expenses increased ~C$3 Million sequentially to C$5.1 Million due to M&A costs and the upcoming NASDAQ listing.

• Operating cash flow improved sequentially to -C$0.3 Million from -C$7.3 Million. FAF finished the October quarter with net cash of C$14.8 Million (C$16.5 Million in cash; C$1.7 Million in debt).

37% YoY Revenue Increase

Fire & Flower Holdings Corp. announced its financial and operational results on Tuesday for the fiscal third quarter ended October 30, 2021. The Toronto-based company reported a 37% year-over-year improvement in revenue and sixth consecutive quarter of positive adjusted EBITDA. The company also bolstered the Circle K co-location program to expand its retail footprint.

Trevor Fencott, the company's CEO said that apart from its "continued strong financial performance," Fire & Flower's progress in the third quarter was demonstrated by its "many growth opportunities that we successfully advanced in order to solidify our high-margin, asset-light cannabis retail business model."

Price Action

FAF traded lower 3.61% at C$ 5.61 per share, at the time of writing, Wednesday noon.

Photo Courtesy of Lelen Ruete