Following “encouraging” third-quarter results, Echelon Partners analyst Andrew Semple raised his recommendation for Fire & Flower Holdings Corp. (
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o “speculative buy” from “hold” based on its current valuation.
“We issued a Hold rating on Fire & Flower for just under two months,” he said. “Over that timeframe, Fire & Flower’s share price declined by 38 per cent. Following this price reset, we now believe the share price offers better opportunity for upside appreciation, with our target price implying upside of 108 per cent. The Company has also appointed John Chu as a new Interim CFO during this period, bridging an important vacancy, and has demonstrated improving financial results with its FQ322 earnings (though further improvements needed). We believe FAF shares have an improved risk/reward tradeoff at current levels, and therefore upgrade our rating.”
Before the bell on Tuesday, the Toronto-based cannabis retailer reported revenue of $43.8-million, up 7.6 per cent quarter-over-quarter and exceeding both Mr. Semple’s $41.9-million estimate and the consensus forecast of $43.5-million. Its core retail segment grew 8.7 per cent, which the analyst called “especially strong” given the new reduction of two stores during the quarter.
“Same-store-sale growth reached 15 per cent quarter-over-quarter, demonstrating that the Company’s relatively new Spark Perks member pricing strategy is beginning to convert additional traffic at its stores,” he said. “We estimate SSS are now 23 per cent above trough levels and are continuing to improve. Gross margins expanded 317 basis points quarter-over-quarter and adj. EBITDA loss narrowed to $2.8-million. FQ322 represents the first full quarter under new CEO Stphane Trudel, and his emphasis on returning Fire & Flower to profitability is evident through these results and his tone on the earnings call.
Mr. Semple emphasized the “outperformance” of the company’s digital segment, which grew 55.2 per cent sequentially to $3-million, exceeding his expectations.
“The digital segment saw impressive growth in FQ322 as several customers resumed data subscription agreements, a very valuable recurring revenue stream for the Company. Project-based data and analytics work also increased during the quarter. The digital segment contributed positive adj. EBITDA of $1.4-million in the quarter and was the only segment with positive contribution,” he noted.
The analyst did reduce his target for Fire & Flower shares to $2.50 from $3, citing “more conservative assumptions on the presumed exercise price of warrants held by [Alimentation Couche-Tard], and a reduced net cash position.” The average on the Street is currently $3.69.
“We also introduce our 2023 quarterly forecasts. We have modestly reduced our 2023 sales forecasts as the Company’s wholesale segment delivered slightly slower than expected growth in FQ322,” said Mr. Semple. “Our retail and digital sales estimates are roughly consistent with our prior estimates. However, we have raised our EBITDA forecast as Fire & Flower is progressing quicker than expected with cost-saving measures, and delivered better than expected retail gross margin performance. We now see Fire & Flower achieving positive EBITDA in H223, with room for further expansion into 2024.”