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2019-11-15 16:08 ET - News Release
Mr. Adam Bierman reports
MEDMEN ANNOUNCES LAYOFFS AND OVERALL PLAN TO ACHIEVE POSITIVE EBITDA
Medmen Enterprises Inc. has created a strategic plan to achieve its target of positive EBITDA (earnings before interest, taxes, depreciation and amortization) by the end of calendar year 2020. The 90-day plan will focus on five key objectives: (1) focusing on core markets, while divesting non-core assets; (2) reducing corporate selling, general and administrative costs; (3) driving asset-level EBITDA; (4) limiting cash outlays for the next 12 months; and (5) reinvesting in the company's employees and culture. Medmen believes the company can execute this plan while still increasing its retail presence and maintaining a best-in-class retail experience.
"We have a clear plan to increase our market share, while at the same time enhancing our margins and reducing our corporate overhead," said Adam Bierman, Medmen co-founder and chief executive officer. "We must unlock our operating leverage and bring the company to positive EBITDA. Given market conditions, capital allocation is more critical than ever. As such, we announced a layoff of over 190 Medmen employees. This layoff includes many hard-working, mission-based people, whose presence will be sorely missed. While it is never easy to let employees go from the Medmen family, we believe this decision is in the best interest of our company as we position ourselves for growth in the years ahead. We thank everyone for their hard work and dedication to Medmen, and we will now set our sights on achieving positive EBITDA by the end of calendar year 2020."
Strategic plan details
(1) Focusing on core business/divesting non-core assets
As with other consumer retail industries, certain markets, such as Los Angeles, Las Vegas, New York, Miami and Chicago, present outsized potential benefits in brand creation and market demand. As such, the company will continue to focus its growth in these core markets, where it already has operating leverage. The reprioritization efforts include the following:
- Sale of interest in Treehouse REIT: The company was instrumental in the formation of Treehouse REIT, the first ever cannabis-focused real estate investment trust to target both cannabis retail and cultivation operations. As part of the plan, the company is in the process of selling its stake in the manager of the REIT for total net proceeds of $14-million. The company has received $7-million of the proceeds to date and is currently engaged with parties to sell the rest of its stake in the manager of the REIT.
- Focus on operationalizing highest-ROI-(return on investment) licences: The company will limit new store openings in 2020 to stores with revenue potential that the company believes is greater than $10-million within the first 12 months of being operational. In addition, the company will delay further investments in certain medical markets, such as New York and Arizona, which do not align with the company's recreational retail strategy. As regulations shift, the company will re-evaluate additional investments.
- Monetize minority investments: Over the past 18 months, the company made venture investments in various high-growth brands that the company believed were positioned for success. As of today, the company has agreed to exit from the majority of its positions in these brands for total net proceeds of $8-million, representing a three times cash-on-cash return for such brands in fewer than 18 months.
- Divest licences in non-core markets: The company has engaged Canaccord Genuity Corp. to explore strategic alternatives for certain operations and licences in states that are currently deemed not critical to the company's retail footprint.
(2) Reduce corporate SG&A
As of its December, 2018, quarter, the company's corporate SG&A was $154-million (adjusted for local taxes to be consistent with subsequent quarters) on an annualized run rate basis. Assuming full and successful implementation of today's cost-cutting plans, the company expects to achieve an $85-million corporate SG&A annualized run rate by the end of fiscal third quarter 2020. This will be achieved through a number of near-term initiatives, including:
- Head count reductions: As of today, the company initiated the process of laying off over 190 employees across the company, including over 80 corporate-level employees. The corporate-level layoffs represent over 20 per cent of its corporate employee base. The company expects to generate approximately $10-million in estimated annual savings through this initial head count reduction.
- Scale back marketing and technology spend: The company will significantly reduce budgets for marketing and technology. Marketing spend will now be focused on consumer engagement through digital content, retail programming and retail partnerships that have an identifiable impact on store visits. Technology spend will now be focused on driving revenue-generating activities, such as scaling Medmen's delivery platform. In total, the company expects to generate over $20-million in estimated annual savings through the reduction in marketing and technology spend.
- Renegotiate ancillary costs: The company recently renegotiated its insurance policies for health care, D&O and property to better align with industry standards. The company will also be outsourcing elements of certain functions, such as human resources. The company expects to generate at least $2-million in estimated annual savings through these measures.
(3) Drive asset-level EBITDA
Through further retail store optimization, increases in private label penetration and growth in its delivery platform, the company expects to drive improvements in EBITDA from its operating assets and will be focused on the following:
- Retail optimization: The company recently signed vendor agreements with a number of its top suppliers in California that will be effective beginning Jan. 1, 2020. The agreements contain a number of terms, including that the brand generates a minimum 60-per-cent gross margin for Medmen. The company anticipates signing agreements with at least eight brands, which would comprise approximately 30 per cent of its retail sales. In addition to improving gross margins in this manner, the company will be executing a cost rationalization plan to further reduce retail-level operating expenses.
- Private label/factory utilization: Medmen's California and Nevada cultivation and manufacturing factories are both expected to be at full capacity by the first half of calendar 2020. During the ramp-up, the company continues to expand its private label business in both California and Nevada. Over the past eight weeks, [statemade] was the highest-selling preroll brand across all Medmen stores in Nevada and select stores in California, including its downtown Los Angeles, Abbot Kinney and Beverly Hills locations. In addition to private label, the company recently executed agreements with Platinum Vape and Nature's Lab for national co-manufacturing arrangements, which will add to wholesale revenue once such manufacturing begins.
- Scale delivery platform: The company will continue investing in the first-of-its-kind delivery platform in California, which has already surpassed $6-million in annualized sales (with an ADS of $72) based on last week within its first three months of launching. Over time, the delivery business is expected to be highly accretive to EBITDA margins through better utilization of retail employees and infrastructure.
(4) Limit cash outlays
Given the current capital market environment, the company intends to limit significant cash outlays over the next 12 months and has begun its efforts through the following initiatives:
- Delay capital intensive projects: The company has indefinitely postponed the buildouts and expansions of retail stores that are not core to the business today. In total, capital expenditures totalling approximately $55-million are now on hold.
- Renegotiate cash payment: On Nov. 13, 2019, the company signed an agreement to amend a potential $15-million cash earnout for a previously announced M&A (merger and acquisition) transaction, due at the end of calendar 2020, to a $10-million stock payment due by the end of calendar 2019.
- Slowdown in M&A: The company will focus its corporate development initiatives on highly accretive bolt-on deals in California and Nevada that are primarily stock based and on retail licence applications.
(5) Invest in employees and culture
As part of its reduction in corporate SG&A, the company will continue investing in its employees and building on its corporate culture of collaboration:
- Flatten organization: The company has and will continue to eliminate layers within the organization to create greater efficiency and communication. As such, certain functions that previously existed across multiple states will be consolidated into a centralized function.
- Realign performance incentives: The company is in the process of creating a new bonus program for its employees that is share based and heavily weighted toward company-level EBITDA targets.
- Consolidate corporate offices: The company plans to consolidate its corporate offices in Los Angeles, Calif., into one campus to reduce its overall rent burden and enable team-building.
Overall intended results and achievements to date
Through a rightsizing of the organization and a focus on generating cash flow, the company expects to enter calendar 2020 as a leaner and more flexible organization to execute on its mission, while still building on its leadership position in the industry and its many accomplishments, including:
- Being the most recognizable cannabis brand in the United States;
- Establishing the leading cannabis retail presence in California, where it outperforms the average cannabis retail store in California on a per-store basis by six times;
- Reaching $168-million in annualized revenue based on its fiscal fourth quarter 2019;
- Generating over two million transactions since 2018 and enrolling over 160,000 members into its loyalty program;
- Launching a first-of-its-kind cannabis delivery platform.
Fiscal first quarter 2020 earnings call
Medmen plans to release its financial results for the first quarter of fiscal 2020 ended Sept. 28, 2019, after market close on Nov. 26, 2019. During the call, management will further discuss these new plans for achieving positive EBITDA.
Following the release of these financial results, at 5 p.m. Eastern Time that same day, Medmen Enterprises will host a conference call and audio webcast with Mr. Bierman and chief financial officer Zeeshan Hyder to discuss the results in further detail.
Dial-in information
Toll-free dial-in number: 844-559-7829
International dial-in number: 647-689-5387
Conference ID: 7253627
About Medmen Enterprises Inc.
Medmen is a cannabis retailer with operations across the United States and flagship stores in Los Angeles, Las Vegas and New York. Medmen's mission is to provide an unparalleled experience that invites the world to discover the remarkable benefits of cannabis because a world where cannabis is legal and regulated is a safer, healthier and happier world.
We seek Safe Harbor.
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