High Tide posted revenues for the quarter and the headline was impressive with well-above expectations numbers. However, you need to dig a little deeper.to fully understand what High Tide did earn and how this will affect the stock, $HITIF, moving forward. First, the Meta Growth $NACNF acquisition was fully realized. So, the revenue gains were largely the increase in revenues based upon the addition of META Growth’s revenues to High Tide’s revenues. This makes the revenue increase a little more measured than the headline story.
Something to keep in mind is that there was some jostling of stores with the deal. Some stores were closed for optimization purposes and others were sold to Halo. At the same time, management provided guidance via a presentation and I am putting together a future projection based on that.
I am going to break down the financial data and point out the highlights as well as what I am looking for over the next four quarters to show where I think $HITIF will be in one year’s time.
Here is a look at the most recent stock chart showing the market’s reaction:
The reaction to High Tide’s earnings release was largely muted. My long-term expectation is still the same: $HITIF goes much higher over the 1 -2 years. Let’s break down the numbers to determine how high the stock goes.
High Tide Revenues
As I mentioned, High Tide’s revenues were much higher but, they also fully included Meta Growth’s revenues. Here is a look at what the revenue picture looks like:
The new revenue projections are for C138M versus the pro forma presentation of $148M on the company’s website. Checking the exchange rate, that translates into $107M (at today’s rates).
You may be wondering how the $30M at four quarters without growth comes to $120M and how the company plans on reconciling that. The sale of the three dispensaries to Halo has been factored into the forward projections but, is still present in today’s numbers.
High Tide Future Projections
Management guided that there would be roughly C$148M (~$117M USD) in revenues for the year coming from the merged companies. I am going to present the information as management has presented it. But, you need to also double this simply because 12 months from now there will be double the number of dispensaries. From there, my projections begin so, this is forward-looking when High Tide realizes significant growth. Plus, there is a YoY increase in currently opened stores that needs to be factored into the equation.
I will get to future projections as well as EPS below.
High Tide Gross Margins
From a consistency standpoint, gross margins are on cruise control and show no substantial change one way or another.
Here is a look:
There is a problem here: I do not mind consistency. In fact, it is what I seek out. However, High Tide’s gross margins are consistently below average.
I look at some 350 companies at any one given time. The best gross margins tend to come in about 60% – 65%. At ~40%, this is well below-average; there is a significant opportunity to improve. To put that into perspective, after cost-of-goods were deducted, gross profits were roughly $12M for the quarter. At that rate, there would be $48M in gross profits (Assuming no increase in revenues). Conversely, with a 60% gross margin rate this would add in $72M in gross profits; an additional $24M. That is substantial.
That is also an opportunity that the market should be keeping an eye on.
Management’s job is inherently to optimize profits for investors. This encompasses driving up revenues, maximizing margins, and keeping costs under control.
A Dispensary’s Margins
Retail stores tend to have the very best margins in the industry. They buy the finished products and then sell them in-between. The margins are far easier to keep in check because it does not involve as much variability as say a grower. Growers have no idea what the final weights will be with what they produce and yet their input costs are still the same.
High Tide Operating Expenses
I scrutinize all of the levels of a company’s financials when evaluating them. High up on the list is understanding how much money a company spends on back-office aspects to sell its products. This is operating expenses:
This was a solid bright spot in High Tide’s earnings release last quarter as they were pushing down costs and hitting solid numbers. This quarter, however, the sight of an increase may seem a bit off. I see this as an opportunity simply because management stated that there would be cost savings. Any cost savings from merging two companies would mostly show up in Total Operating costs versus gross margins or continuing operations.
Here is a look at where net income took its hit, that from operational costs:
There were charges outside of normal operations and they amount to almost all of the losses for the quarter. The CFO had this to say about the cost incursion (Please note: His quotes are CAD, not USD):
One item I would like to address head on is our net loss of $16.8 million for the quarter. The single largest driver taking our record EBITDA of $4.6 million into the negative net income territory is a non-cash accounting charge, specifically a revaluation of derivative liabilities of $10.5 million.
Below, I am going to show both EBITDA and Net Income.
EBITDA & Net Income
It is all about profits of one kind or another. Here is EBITDA:
Go back to gross margins. They were all of 40% on $30M. What if they were 60% like a true industry leader. That would be an additional $6M to EBITDA which would push this up to $10M.
At the same time, the additional 10% of operating costs took away an additional $3M in EBITDA. I fully expect this to turn around. But, the gross margin issue is a sticking point for me.
The costs associated with the merge as well as opening new stores are factored into the continuing operations. They bring net income back to zero. Then, if you add in the additional $13M in margins and other costs you achieve a positive income.
First, there is yet another acquisition on the table as High Tide is acquiring Smoke Cartel. Smoke was net positive of some $300K in their latest quarter according to the most recent news release. Smoke will be in the next financial release and I will include them then. They will add about 7% in revenue and some profits.
For now, this projection is based upon the financial data presented by the company and the metrics they have.
- High Tide hits $250M revenue
- 60% margins are achieved in the next year – $150M
- 30% operating costs are achieved – $75M
- Continuing costs – $25M
- Net Income of $50M
Given the 1,100 shares outstanding, this puts HITIF at $4.50 per share starting at the beginning of next year and then future increases go from there.
The dizzying pace at which High Tide is expanding makes this difficult to determine where exactly the company’s stock will end up, but, given the information that is available today I believe the stock can hit this metric. However, I have no belief that High Tide will look the same over the course of the next year. They are rapidly expanding and growing their footprint. Next quarter, there will be even more information to analyze. I will continually look into the new information that comes forward.
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