HITI - High Tide Q2 Review: Plenty Of Sparks To Keep It Interesting

2023-06-24 05:02:13 ET

Summary

• High Tide reported Q2 earnings highlighted by solid growth and improving financials.
• The stock has been pressured by poor sentiment towards the broader cannabis sector.
• High Tide could emerge as a compelling turnaround opportunity, but we expect shares to remain volatile.

High Tide Inc ( HITI ) is recognized as a leader in the Canadian cannabis market with 153 branded retail locations. The business is further complemented by a global e-commerce operation for consumption accessories and major U.S. CBD presence.

The company's latest quarterly result was highlighted by solid growth and improving financials, with management citing several operational milestones. At the same time, shares of HITI are down more than 40% over the past year, with the market focusing more on the lack of consistent profitability against otherwise poor sentiment across the cannabis sector dealing with excess supplies and falling wholesale prices .

Our takeaway from looking through High Tide is that its outlook is certainly better than what the recent stock price performance would suggest. While ongoing headwinds may keep shares volatile, we see plenty of reasons to keep HITI on your radar for a potential turnaround.

HITI Earnings Recap

HITI reported its Q2 earnings on June 14th with a net loss of CAD 0.02 per share, which narrowed from a loss of CAD 0.14 in the period last year. Revenue reached CAD 118 million, up 46% year-over-year, which includes a boost from opening 27 stores in the past year.

While the gross margin at 27% has been steady in recent quarters, cost savings efforts including a decline in general and administrative expenses as a percentage of revenue has helped narrow the financial loss. On this point, adjusted EBITDA at CAD 6.6 million climbed from CAD 2.4 million in Q2 2022.

While not announcing any formal financial guidance, the expectation is that earnings continues to improve going forward, with a path to generate positive free cash flow by the end of this year.

Management notes its "Canna Cabana" retail network is the largest in the country and has gained momentum through a loyalty program that now counts on more than 1 million members beyond the more than 4.5 million customers globally across all platforms, including sites like "GrassCity" and "Smoke Cartel".

Favorably, cumulative same-store-sales climbed by 5% in Q1, which management notes is outpacing national average. The data shows that Canna Cabana has reached a 9.5% market share, outside of Quebec, the seventh consecutive quarter of gains.

Finally, we can mention that High Tide ended the quarter with CAD 22.5 million in cash against CAD 38.5 million in debt. The net leverage ratio under 1x highlights an overall solid balance sheet.

What's Next for HITI?

In our view, there are enough tailwinds here to support a positive long-term outlook between the ongoing growth, narrowing net loss, solid balance sheet and climbing retail market share.

Management sees room to reach upwards of 250 stores long-term in Canada. Efforts to expand the company's white label business is expected to drive margins higher. High Tide is also keeping an eye on U.S. legalization efforts as a potential new market for recreational cannabis sales down the line.

In terms of valuation, annualizing the Q2 adjusted EBITDA level to a CAD 26 million run rate (approximately $20 million), shares are trading at an EV to forward EBITDA multiple under 5x. We believe this level is attractive for what remains a category leader that just reported annual top-line growth of 46%.

Still, the biggest headwind in our view remains the poor industry sentiment and lack of major near-term catalyst for a sustained rally with positive momentum.

Beyond the question marks facing cannabis wholesale pricing, market supply levels, and the legalization efforts in the U.S., there is also an understanding that cannabis sales are exposed to shifting macro trends. A risk to watch would be a broader economic slowdown in Canada, hitting consumer spending and forcing a reset of growth expectations lower.

Final Thoughts

We like the stock, but not ready to assign a buy rating given the weak trading action and concerning technicals. This is a case where we would be more comfortable buying into strength, which for use would be a clear breakout higher above the $1.40 -$1.50 level, which has worked as an important area of resistance over the past year.

To the downside, the $1.00 price level is a key area to watch, as HITI would be up against NASDAQ listing compliance. With a current market cap under $100 million, readers should note that HITI as a nano-cap remains speculative and subject to wide swings of volatility.

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