High Tide Inc. Q3 FY2024 earnings call

• Record revenue of $131.7 million in Q3, up 6% sequentially. • Achieved 12% market share, up from 10% a year ago. • Free cash flow was $3.1 million in Q3, with trailing four quarters' free cash flow at $21.8 million. • Cabana club members reached 1.55 million, up 8% sequentially and 41% year-over-year. • Same-store sales growth: cumulative 118% since launch of discount club model, with 5% sequential growth in July 2024. • Annualized sales per square foot was $1,658 in Q3, an improvement from $1,637 in Q2. • G&A expenses were 3.7% of revenue in Q3, the lowest in four years. • Adjusted EBITDA was $9.6 million in Q3, up 24% year-over-year.

Revenue for Q3 was an all-time record of $131.7 million, up 6% sequentially. The bricks-and-mortar segment, which drives over 90% of revenue, was up 10% year-over-year. Cabanalytics business data and other revenue, including management fees, interest income, and rental income, was $9 million in Q3, up 36% year-over-year and 1% sequentially. Consolidated gross margins were 27% in Q3 2024.

• Expected to reach the upper end of the 20-30 new store guidance for 2024, having already opened 21 stores by Q3. • Intends to continue organic store growth in 2025, with potential M&A opportunities. • Long-term plan to have white label products account for 20-25% of sales in stores.

• Illicit market resurgence causing pricing pressure and margin impacts. • Competition from defunct cannabis companies leaving behind unprofitable leases. • Need to navigate lease negotiations and manage rents as five years since adult-use sales pass.

Q: Thanks for the opportunity. Good morning and congrats as there are only a handful of cannabis companies reporting positive EBITDA and net income. Just wanted to follow-up on stores providing, your tracking to hit the top end of your 24 store guidance here of 20 to 30. Do you see any changes or strategy regarding opening new stores into 2025 or still driven primarily organically versus more M&A opportunities out there? And then can you touch base on the new store economics as they become fully optimized? As you mentioned, after two, three quarters regarding kind of average sales and margins compared to your existing profitable stores, kind of, obviously you're still seeing strong economics in the Ontario store ramps. Just a little bit color on your store kind of outlook as we move into '25 here?

A: Good morning, Scott. Thank you so much for your question. So on the topic of 20 to 30, I think you asked me, how is organic store growing for the year? It has been going very, very well. We've already put up 21 stores at the end of Q3, and since then, we continue to do our -- we are in construction mode, so we're very confident that we will reach the upper end of our guidance that we had provided. Between 20 and 30, we'll be close to like 27, 28 stores, I think, and nothing will change going into next year. Scott, we found our secret mantra of growing organically. When we're building stores organically, I'd like to remind investors that we're spending just $260,000 to build out these locations and then loading them up with $100,000 or so in inventory and working capital. And then we just go back to ramping up these stores, and you can get better, higher quality growth in amazing locations that you can cherry pick than what we are doing currently. So we're going to keep this approach exactly the same going into 2025, especially given we have five consecutive quarters or positive free cash flow. We've always said the quantum can significantly vary, but our intention is to remain free cash flow positive. Going into 2025, you talked about store economics a little bit. I had provided in my previous calls, I had noted that we may be able to raise margins towards the back half of this year. I don't see that happening. We're holding the line on margin. We may even go slight reduction in margin given the illicit market resurgence that we are seeing a little bit. And you're clearly seeing a lot of competitors go out of business. Tokyo Smoke just went bankrupt. I believe that over 100 locations, or they filed for CCWA proceedings. And we don't want to help the larger chains, the smaller chains and the independents that are just hanging by the thread. So, we're going to hold the line of gross margins because we already have amazing economics. As you pointed out, one quarter up or down on adjusted EBITDA is not going to change anything. When we're growing at the pace that we're growing and generating 12% market share, this clearly exceeded our expectations. We thought would be around, that 11, 11.2, and that is a victory. But getting to 12% is an absolute win. So everything that we've been doing is working out for us and we're going to stick to our plan going into 2025, Scott.

Q: Hey, everyone. Thanks for the question. Raj, just wanted to follow-up with some of your commentary when it goes back to -- there being sort of a wash of cannabis out there, and I know that's certainly the case when it comes to sort of the biomass of it. But I'm just wondering, as a purchaser, if you look at more of the CPG segments, the vape pens, the edibles, the beverages. Are you ordering from the provinces in any different patterns when it comes to consumers actually having brand awareness with some of these products? I know there's still hundreds, if not more LP's out there. But I'm just wondering if the things that look a little more CPG friendly are starting to change at all in the current environment with respect to where demand's coming from?

A: Good morning, Matt. Thank you so much for your question. So, look, you nailed it. There's hundreds and hundreds of LP's out there, Matt. And we've had the same situation for years and years now, but we know that a lot of LP's are going out of business and new ones are not coming back into the game at the same pace. My estimates were that the Johnnie Walkers and the grey gooses of the world that are built in alcohol will be built in cannabis. But I can tell you it's being proving extremely difficult, although good businesses are good businesses. Amazing LP's are amazing LP's, there's some that are doing a tremendous job that we know. We get customers asking for their brands, right? There are a ton of brands that customers ask by name now, which is great. But what I also see, Matt, at the same time that for some reason, three to six to nine months in, the product starts to fiddle away or fade away. But the one thing I've noticed, what the producers are doing better is that they're keeping the brand. So even at the SKU levels, their interest is starting to fade away, because there's just so much innovation in cannabis The producers are doing a better job in terms of brand positioning and of course, the ecosystem that we have in Canna Cabana where we move so much cannabis, we are also helping generate brand visibility. Just like we're helping take down the illicit market, we're also helping generate brand visibility for a lot of these producers. So, yes, the brands are picking up, perhaps not at the pace that the producers would be expecting, where people come and ask through names. Now, let me put another spin on this. We bought the Queen of Bud having 183 locations. By the way, we bought the Queen of Bud brand for just a million dollars and having 183 locations and doing close to $500 million in brick-and-mortar revenue, with only 5% of the countries or the provinces where we operate the brick-and-mortar store count, we couldn't be more happier to position our own brand front and center to the millions of customers that we have or to the hundreds of thousands of customers that come visit our stores. So we're in a good position. But to go back to your answer, certain producers are definitely doing a better job and brands are starting to pick up.

Q: Thanks for the good quarter. In terms of what you said before about Tokyo Smoke going bankrupt. Are those 100 stores actually still operate or are they closing? And sort of what are you seeing just on the competitive landscape of stores closing as their five-year leases come up, five years into adult use at this point?

A: Good morning, Mike. Thank you so much for your question. So I believe they have 101 stores. Don't quote me on it, but that's my very good educated guess. They have announced that they are closing 29 stores, or they have already closed 29 stores. I can tell you that we are looking many of these closed locations. But again, let me remind everyone listening on this call that these companies are not going bankrupt because they've done a great job on site selection criteria and the size of these units and the rental rates that they're paying. I look at a lot of these stores with our real estate team, and I'm shocked sometimes to see a three, four, 5000 square feet store in Canada pop up. Who's going to take that at $100 a square foot, even if it's in the best location ever? The landlords are not going to take a haircut because it's a fully built store and they're trying to get pass on this store to some other business, some other operator. That's not going to be us, Mike. We are disciplined. We like quality locations, we like square footages that we can live with and we like rental rates that can stand the test of time, which is an opportunity for the landlord and the tenant and not one directional. A lot of these leases were signed when legalization took place in 2018 or even prior in some cases, and those groups are licking their wounds. It's not a good place to be in. Fire & Flower, Kiaro, Trees, Tokyo Smoke, 420, I can keep going ShinyBud, there's endless companies that have gone bankrupt. And again, the reasons for them going bankrupt is just how they've looked at their real estate portfolio and how they've managed their operating expenses. So as much as we are in these portfolios, the opportunities are thin because we don't want to get a three, 4000 square feet store paying $80, $90 a square foot. It defeats the purpose of just making an announcement that we took over ten Tokyo Smoke stores. But I'm not taking over that pain and bringing it over to High Tide. So, we're looking at everything, Mike, but it's not a slam dunk by any means.

Q: Hi, there. Good morning Raj and team and congrats on the fiscal Q3 results. Just as we get kind of near the end of the fiscal year here in 2024 and beginning to look in ahead and sharpen our estimates for 2025. Raj, just wondering if you have maybe any early thoughts on what High Tide would target for a store count and new stores opening next year, and how that mix might be between organic and acquisitions in terms of store growth?

A: Good morning, Andrew. Thank you so much for your question. So let me take this first question first, like what would 2025 store count look like. So Andrew, like I said, we're already at 21 stores opened this year in August, and we balance the art of generating free cash flow really well while growing so aggressively and rapidly and we are still free cash flow positive. So think of 2025 mirroring 2024 plus some additional M&A. We've been very, very disciplined on M&A. As you know, I bought one location in cash, and we paid just 1.5 times EBITDA, now those are the type of deals I'd like to do. When we're trading at 5 times EBITDA, you can't justify paying 4, 5 times EBITDA to a different operator. And some operators still have high hopes. And some of us are learning very fast that you join the big High Tide family, consolidate, which is the right thing to do at this point or face the risk of completely fading away. So 2025 will probably do the same thing, Andrew, to answer your question, 20 to 30 new stores, add it. Let's see where we are this year. I would like to end this year as close to 30 stores. We like to under promise and over deliver, and then we'll put our new milestone out in December when we provide a corporate update. And on top of that, we hope to do additional M&A. in '25, which has been very, very lean in 2024 because we've been waiting for the right opportunity. But we're winning on net income. We're winning on free cash flow. We're absolutely crushing in our market share, which is my favorite bullet this quarter was 12% market share. How happy can you be if you already have 12% of the market in Canada? So we don't need to do any out of the ordinary to derail our momentum. So think of 20 to 30 new stores in 2025 plus M&A.

Q: Hi. This is Brenna [ph] for Federico. Thanks for taking our questions and congrats on the quarter. On the retail front, I'd just love to get some commentary on consumer trends across your regional footprint. Specifically, the extent of product trade downs that you're seeing now versus, say, three to six months ago? And how the traction of the Cabana Club has played into that?

A: Hi, Brenna. Good morning. Thank you for your question. So consumer trends on products, so dry flower remains to be the absolute dominant category still. In that very dominant category, you have pre-rolls that I believe are 29% of all dry flower sales. And in that pre-roll category, you have infused pre-rolls that are still taking off and continue to take off. A new category that has emerged and is doing extremely well, it's also the all-in-one vape disposable vape category. Vape is also rising quite a bit. And in our stores, we sell the best read for the best price, but we definitely have a lot of value-focused consumers coming to our stores and focusing on ounce bags, which is 28 grams. Also the 14-gram formats, which are very, very popular. Edibles still remain at the -- maybe about -- it's come up a little bit, which is nice, but not up to our standards and liking. Edibles are sitting at around 5.5% in our stores. Long term, when this course correct to the 10-milligram THC issue that we've been dealing with, the limits that help Canada's enforce per package. When that goes away, we think it can go up to 10% to 12% of our sales, which may be additive in nature, because a lot of the consumers that are taking edibles are not necessarily looking for smokable formats. So this may be additive to sales. At the moment, edibles are only 5.5%, 6% of our total sales. Dry flower, like I said, is the most dominant category at around 60% pre-rolls and then infused pre-rolls in the pre-roll category would be the biggest.