Inners Spirit Holdings is a dispensary-based cannabis company in Canada. They are opening up new stores in Canada at a very fast pace. Cannabis in Canada is growing very rapidly putting Inner Spirit in a strong position. There are a lot of things I like about Inner Spirit and it just might be a cannabis stock with a lot of potential upside. I wanted to break out some of the metrics to show some of the positives and negatives of the model.
Inner Spirit Holdings held the distinction of being one of my Top Picks. I took them out after a debate with a friend of mine. He did not believe it should be a top pick that others should be in the listing prior to this. So, this is a stock that since they have updated their latest earnings I really wanted to dig in and take an objective view of the stock.
As I write this, $INSHF is up some 6% for the day:
There has not been any real news catalyst for INSHF to push upwards. Nonetheless, let’s break down some financial data.
Revenues are impressively moving higher. At the time of the end-of-year statement, they boasted 68 retail stores open:
With 68 stores, they are now starting to print solid revenue growth. Prior to the December quarter, there were only 65 stores (At the time of Inner Spirit Holdings’ annual report release, they are now at 81). Despite opening stores up at such a fast clip, I wanted to know what same-stores were doing. There was no breakdown of each respective store revenue. My concern was that with the clip of new stores the revenue growth might have been coming from new stores. Nope.
The change in QoQ revenue was $1.1M. The previous $6.1M in revenue shows that each store is posting about $100k in revenue in total for the quarter (An average of $938k). If the increase were linear, then the new stores would have had to print a number far greater than the average. While this is not a precise measurement, it gives a conceptual ballpark of what average store sales are.
Given that, with 68 stores at year-end, and a revenue total of $7.1M, then the new average moves up to $104k per quarter. So, I feel pretty comfortable with the new number showing increasing same-store sales.
Margins are not the highest in the industry. But, they are consistent:
At 50%, this is shy of some of the best-performing cannabis companies in the industry. However, as far as a franchise business goes, this is solid since McDonald’s is on average 50% gross margins. Yet, I bet this number could trickle upwards over the next few quarters and years.
We shall see, but the goal is to clear 100 stores open by the end of the year. They had 68 at the end of last year. If they just clear 100 stores that will amount to an increase of 50% (The total is well above 100). With a 50% increase in dispensaries, I can imagine the metrics for producing product will improve. I imaging that economies-of-scale will see marginal gains.
What if each of these current 100 stores kept the same run rate of 20% increase QoQ? That would mean each store’s revenue rate would be looking to print $650k cumulative for the next year. With 100 stores, that’s a $65M revenue run rate.
Operating costs are a bright spot for Inner Spirit:
While the rate of increase in revenues is increasing, so are total operating costs. But, operating costs are not moving at the same rate, as you can see in operating efficiencies.
Operating efficiencies are total operating costs relative to total revenue. You want revenues to continuously move upwards. It is almost inevitable that operating costs move upwards along with revenues as more and more products sold need more and more inputs from operations. This is outside of gross margins and cost-of-goods. Here, we can see the vigilance of operating efficiencies moving higher (Chart above), but on a relative basis when compared to revenue, they are moving lower:
At 37.5%, this is solid. The very best cannabis companies are usually hitting between 30% – 35%. Inner Spirit Holdings is just a moment away from that level. This shows the efficiency of producing products relative to operational costs. But, this is not a productivity measure. Simply, an efficiency metric.
EBITDA & Net Income
EBITDA is an important milestone for cannabis companies. EBITDA breaks out interest, tax, depreciation, and amortization and shows that the business model is likely a profitable model:
With even greater numbers of dispensaries opening in the near future, this will only push EBTIDA higher, all else equal.
Net income turned positive for the quarter for the first time. While EBITDA is trickling through to profitability, this is the end goal:
I will be looking at potential metrics showing the breakdown of the increased revenues as well as the margins and operating costs. So, this figures in nicely that Inner Spirit is a viable, and profitable venture. What is next is figuring out where they could be with the metrics and the potential EPS.
Is Inner Spirit Holdings A Good Buy?
From an operational standpoint, this kind of business model makes solid sense. However, one of the concerns I have is the lack of social followers. I went over to Instagram to check out each of the various dispensary’s respective followers. It’s not great. But, then when you think it through, you can see some potential even with that.
First, if on a corporate level you had one entity trying to push its social presence it would be easy for every dispensary to just shrug their shoulders about social media. After all, it is in fact someone else’s job. But, with franchises, the job of bringing in the local consumers falls on each respective dispensary. If some 100 dispensaries are fighting tooth and nail to draw in customers, it becomes an army of sorts. The respective dispensary can do what it can about their store, but they are all collectively working to sell the exact same product (with the same #hashtag). That could move the needle considerably.
So, from a social media standpoint, I can definitely see benefits to having so many various tentacles working in concert.
Revenue & Margins
The stores themselves are showing a lot of signs of increasing their revenues as was seen by the change in revenue of some 18% but, only about a 4% change in new stores. This tells me the same stores are the ones adding the new revenue. That is an important distinction that the revenue be driven organically as well as adding new stores.
If Inner Spirit is already hitting the same average gross margins as McDonald’s that is impressive itself since McD’s has been in business far longer. I believe there is still upside potential with margins here since, after all, this is not burgernomics but, cannanomics. Pricing power will come as the company moves forward and matures. They will need to solidify themselves for some time, but I can see an increase overall in the metrics.
I can see continued gains in operating efficiencies as more stores are opened, revenue increases and the same staff are more productive over the long haul. This will likely be the gain that trickles through to EBITDA profits. I am looking for more immediate gains here in the shorter period of time versus the potential gains in gross margins.
Base Case Scenario
If the 100 stores hit approximately $65M in revenue over the next year, and margins improve slightly in a few areas, this could be a big year for Inner Spirit Holdings.
- $65M Revenue
- 50% gross margins for $32.5M in cost of goods
- 35% in operating efficiencies for $22.75M
- 10% in continuing costs for $6.5M
- Net Profits of $3.25M
- 300M shares outstanding
- $0.011 EPS
With a 100x future earnings multiple, this will push the stock upwards to $1.10 per share. This puts the stock on a 450% run rate from its $0.20 per share value.
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