We recently wrote about the booming, but nascent, Canadian recreational retail market. Canada launched the recreational market on October 17th, 2018. However, the retail brick and mortar stores open, stocked and ready for sales, were few and far between. Simply put, there just was not nearly enough retail to deliver on expectations and demand.
Fast forward a couple of months and the situation is not much better, although, truth be told, it is getting better. Supply is starting to come online, and edge ever closer to meeting demand. But make no mistake, supply is still well off demand and this severely impacts the retail store's revenue, and the Province's appetite for issuing additional retail licenses.
Four companies dominate the market when it comes to retail in Canada. These four, although their stock prices have been hammered over 2018 and 2019, hold the most potential to grab the lion's share of the fast-growing recreational cannabis market.
Fire and Flower
Fire and Flower is an independent retail chain that operates 9 cannabis retail stores, 3 accessory-only stores and has another 3 accessory-only stores opening in the coming month. The company listed on the Toronto Venture Exchange on February 19 with the ticker FAF.
Fire and Flower are slightly unique in its positioning, in that the company was built from the ground up to be a Canadian retail cannabis company. Others in this article are either vertically-integrated Licensed Producers or alcohol retailers that have converted to selling cannabis.
Fire and Flower aim to generate about 85% of their revenue from cannabis-related products and the balance from cannabis accessories. Currently, the company operates in the Provinces of Alberta and Saskatchewan.
FAF aims to achieve 15% market share in Alberta, which is the maximum allowed in the province for any one company. Alberta plans to have up to 250 cannabis stores in the first year, and up to 750 stores in its second year. To this end, FAF submitted 37 applications (15% of 250) in March 2018. To date, seven of those applications have been approved, and hence FAF operated seven cannabis stores in Alberta (excluding accessories shops).
FAF is also in the process of opening more stores as licensing is progressed, and has completed Alberta inspections for six additional locations and "secure room" inspections for four locations. That is, FAF is working through the process as quickly as they can to open more retail locations.
In Saskatchewan, FAF won one lottery license and then acquired a second licensed via the acquisition of Permitco in October 2018.
FAF also operates it's wholesale distribution center, Open Fields distribution, in Saskatchewan, one of four cannabis distributors in the province. Unlike every other province in Canada, Saskatchewan allows private distributors, with Open Fields receiving its permit in November 2018.
In Ontario, where the province decided to hold a lottery and award 25 retail licenses only, they have done a deal with two of the lottery license winners. They paid 900,000 shares to the one party and 800,000 shares to the other to acquire the licenses.
The company has significant future growth plans and has forecast opening an additional 18 stores by July this year, another 18 by the turn of the new year (2020) and a further 20 by July 2020, bringing the total number of stores to 65.
Earlier, in 2018, they purchased Hifyre, a digital platform, whose founders built the Mettrum Platform which Canopy Growth bought, and is now forms the foundation of Canopy Spectrum. The platform will allow for consumer data to be captured, as well as supply data fed into a machine-learning AI platform that should yield qualitative information that can drive both revenue generation and unique positioning.
During the 2018 calendar year, FAF did a number of financing rounds, and some of the investors in those rounds comprised top tier Canadian LP's. In April last year, Emblem and Terrascend invested $2.5m for ~5% of FAF, and in July, both Aphria and HEXO invested in the business. On the face of it, these deals don't really give FAF any sort of competitive advantage, as they cannot purchase cannabis directly from the LP's, but should the situation change, these are solid companies to have on the registry.
The company is very well positioned for retail in Canada and with over $10m in revenue in their first 90 days of recreational sales, the numbers should continue to grow.
High Tide started out in Calgary in 2009, with a single Smoker's Corner store. The store sold accessories to the medicinal and recreational markets. Given they did not touch the plant, they were free of any restrictions on how and where they operated. Fast forward 10 years and the cupboard is now full of retail brands.
Smoker's Corner is the largest chain of cannabis accessory stores in Canada with 9 corporate owned and 10 franchise locations across British Columbia, Alberta and Nova Scotia. They also have a Canadian Franchise Association-approved franchise program in place to drive rapid nationwide store expansion.
RGR Canada is a premier manufacturer and wholesale distributor of cannabis accessories. 75% of the company's catalog is manufactured in-house to create a "seed-to-sale" sized margin. Distribution occurs from its 27,000-square-foot facility in Calgary, Alberta.
Famous Brands is the exclusive global manufacturers and distributors of licensed smoking accessories. In partnership with celebrity brands such as Snoop Dogg, Cheech and Chong's Up in Smoke, Trailer Park Boys, Guns N' Roses, and Sublime, they also have license agreements with Paramount Pictures and Lionsgate Studios, both with unlimited global access.
Through its two wholesale businesses, Famous Brandz and RGR Canada, and the 19 existing Smoker's Corner retail locations, High Tide serves more than 170,000 retail customers per year.
Then there's Grasscity. With over 600,000 members and approximately 5.8 million annual site visits, Grasscity is the most popular online head shop in the world. High Tide recently acquired Grasscity for $6.73 million, and we think this is smart business, as they may be able to generate wider margins as they fulfill approximately 70,000 accessory-orders per annum.
And then, of course, there are the cannabis chains. Canna Cabana (got the tune in your head yet?). With 7 locations as of January 2019, it is positioned to become one of Canada's largest cannabis retail networks. Establishing new locations while retrofitting existing stores for unbeatable speed to market. And it's a market they know. Having sold into this market for nearly 10 years, they know their customer, what they like, and what sells.
They currently operate 4 Canna Cabana stores in Alberta, and the maximum of 37 retail locations has been targeted all with leases, permits and licenses secured. They are also seeking to establish a maximum of 8 retail cannabis stores in British Columbia as well as the maximum of 75 retail cannabis stores in Ontario. They have secured the first two deals with lottery winners in Ontario, and intend to grow their footprint as fast as they can. Clever part is, they can, as they can operate as accessory shops until the necessary permits are in place.
In December 2018, Aurora Cannabis invested $10m into High Tide in the form of a brokered private placement. The debentures bear interest at 8.5% per annum and are convertible at $0.75 per share anytime before December 2020.
It is a great partnership. Aurora just placed High Tide's largest ever purchase order. Not only do they manufacture for Aurora, but they also distribute and sell Aurora branded accessories through their online and offline retail channels globally. They currently distribute to more than 20 countries, with their products sold in over 3,000 stores. A very smart deal.
They believe they are the only retail-focussed, vertically integrated business, that offers consumers a one-stop shop for cannabis. Having generated over $8.5 million in revenue in 2018, the company is targeting $25 million for 2019. One to watch.
Alcanna (formerly Liquor Stores) is one of the largest private sector retailers of alcohol in North America and the largest in Canada – owning and operating 227 locations in Alberta, B.C. and Alaska. In 2017, management had a major row with PointNorth Capital via proxy, and this led to PointNorth taking over the board and replacing six of the eight directors.
Once new management were put in place to help revitalise the stagnating business, the strategy to move into cannabis was raised, and after some time, the company decided this was a solid long-term play to drive shareholder value.
The new name Alcanna – is a combination of alcohol and cannabis.
With revenues in excess of $600 million per year, Alcanna processes over 20 million individual retail transactions of beverage alcohol per annum. The company operate 236 stores across three retail types. The first is their large-format, "category-killer" Wine & Beyond stores. These mega-stores are where Alcanna sees future growth in alcohol sales, and is where a significant portion of their proposed spending will go.
Their convenience retail brand – Liquor Depot – is located near shopping centres and other large retailers, making it an easy, one-stop shopping destination. And finally, their discount stores – Ace Liquor – are just that. Deep discount stores aimed at the price-conscious consumer. What is important, is the fact that they understand how to operate both retail and wholesale distribution in very regulated industries. They've "been there and done that" and this experience will be invaluable in their drive to create a retail cannabis brand.
On October 17th – the day Canada legalised cannabis for adult recreational use – Alcanna opened with five retail cannabis stores under the brand name Nova Cannabis.
The company's focus over the coming years is that of growth in both the large-format alcohol stores and the chain of Nova Cannabis stores. In November 2018, Aurora Cannabis took a 25% stake in Alcanna, with Terry Booth (Aurora CEO) taking a board seat. As good as this sounded when announced, changes in regulation by the Ontario Province, created a real issue for Alcanna.
The new regulations state that any pot retailer with more than one retail store, cannot have a Canadian Licensed Producer own more than 9.99% of the company. If so, then that retailer is limited to only one store. This has created a serious overhang on the stock, one that has been one of the poorest performers in the Canadian cannabis market. They are going to have to work out a way to restructure the deal with Aurora, however, the primary issue is the fact that the stock price is significantly lower than when the deal was done in the latter part of 2018.
On the plus side, they are very well cashed up, with over $60 million on the balance sheet, an unused credit facility of $50 million (which they voluntarily reduced from $150 million) and over $90 million in fully paid up inventory. Their aim is to open more than 52 stores in Alberta and 50 stores in Ontario in the coming two years. The capex related to such expansion is going to be significant, and hence the company made the announcement in late 2018 that they were no longer paying a quarterly dividend as they embarked on a multi-year growth strategy.
Capital will be invested in as many as 10 new Wine and Beyond stores in Alberta and possibly elsewhere, building out Nova Cannabis stores, funding the initial launch of the Canadian Liquor Retailers Alliance, as well as completion of the ERP and potential future acquisitions.
The Company believes that it is in the best interests of the shareholders to invest all free cash flow in the growth opportunities available to the business which is expected to result in an increase in shareholder value over the medium term.
We believe that with their extensive knowledge of regulated industries, their massive footprint and reach throughout Canada and the significant access to capital they currently possess, that Alcanna could end up being one of the market leaders in the booming Canadian recreational retail market.
Meta/National Access Cannabis
National Access Cannabis (NAC) is a pure-play retailer with a Canada-wide network of retail stores and medical clinics that are legal operations where they help connect licensed medical users with the right LP for their needs.
. On the medicinal side, they have partnered with over 140 pharmacies, and on the recreational front, they are driving store openings, acquisitions and re-fit opportunities.
NAC essentially operates two businesses – medicinal and recreational cannabis. On the medicinal side they have NAC Medical and NAC Bio, and on the recreational side, they run a chain of retail stores under the Meta and Newleaf brands.
In the medicinal space, they operate a chain of NAC Medical dispensaries which focus on patient education, engagement and has relationships with the Canadian Licensed Producers (LP's) for the direct supply of the medicinal cannabis products. They have since grown distribution and reach by connecting with the pharmacy network and chains.
NAC Bio is the clinical research arm of the business. They undertake research and development to drive the opportunity for product creation. Effaccacy-based results and data are processed via their propriety, big-data, software platform, driving qualitative outcomes.
However, it's their recreational play we are most interested in, and in this area, they are Canada's #1. They currently operate 23 retail locations across Alberta and Manitoba, making them the largest retail chain in Canada. Additionally, they are in the process of securing a Saskatchewan license from New Leaf Emporium for $1.2 million in cash and around $400,000 in shares.
They currently operate two retail brands. The Meta chain operates out of Manitoba and they have 9 stores currently retailing cannabis. They aim to have another 5 open by end of Q2 2019. Meta has positioned itself as a premium supply brand. With an emphasis on premium flower and innovative technology to support the purchase journey and experience, they have quickly taken a commanding 33% share of the market.
In Alberta, they operate 14 Newleaf retail stores. These are designed to have a warm community vibe with an approachable feel to them. With a focus on education, they have secured 20% market share in Alberta and have the full 15% allocation of retail licenses (37 out of 250).
They also did a deal with Canadian coffee chain, Second Cup, to convert their stores to Meta stores. In total, they aim to have 135 retail stores open by the end of 2020. 75 of these have been allocated to Ontario, and they are currently working on a deal to collaborate with a lottery winner there.
Revenue-wise, they have been performing very nicely. They reported earnings of $3.95 million in their first 50 days of recreational retail, and then went on to announce $20 million in sales, at a 32% gross margin, in their first 80 days of retail trading. Phenomenal results that they "are proud of" according to a company spokesperson.
"We expected to see this trend of solid financial results from robust continued sales. Our momentum is strong. With our growth plans over the next 18 months we expect to remain the largest private cannabis retailer in the country."
– Mark Goliger, CEO of NAC
In their recent quarterly earnings report (Q1 2019 ending November 30, 2018), they reported revenue of $3.8 million, 766% up on the corresponding quarter last year. They did however post an operating loss of $7.87 million, and with only $11 million on the balance sheet, a capital raise is inevitable. This, in turn, places downward pressure on the share price.
They have some of the highest revenue per store in the industry, and with the largest footprint in Canada, and the opportunity for high margin sales through their growing medicinal channel, they are exceptionally well positioned for growth in the coming 24 months. One to watch.