Release Date: September 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- High Tide Inc (HITI, Financial) reported a record-breaking quarter with revenue up 6% sequentially to $131.7 million.
- The company has been free cash flow positive for five consecutive quarters, generating $2.1 million in Q3 and $21.8 million over the trailing four quarters.
- High Tide Inc (HITI) achieved a 12% market share, up from 10% a year ago, and is on track to reach its goal of 15% market share in the provinces where it operates.
- The Cabana Club membership grew to 1.55 million members, up 8% sequentially and 41% year-over-year, with the ELITE paid membership tier growing 30% sequentially and 203% year-over-year.
- The company reported a net income of $800,000 in Q3, continuing its upward momentum from previous quarters.
Negative Points
- Consolidated gross margins decreased to 27% in Q3 2024 from 28% in the previous quarter and the same quarter last year.
- Salaries and wages increased in Q3 due to the pace of store growth, impacting overall expenses.
- Adjusted EBITDA was down 4% sequentially, attributed to the heightened pace of store growth and the ramp-up period required for new stores.
- The e-commerce segment experienced a revenue decline, impacted by inflationary pressures and a tough market environment.
- The resurgence of the illicit market has led to increased competition, particularly in regions like Regina, Ottawa, and Toronto, affecting legal sales and necessitating margin adjustments.
Q & A Highlights
Q: Congrats as there are only a handful of cannabis companies reporting positive EBITDA and net income. Congrats on that. Just wanted to follow up on stores, providing you're 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 stores in '25? 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 optimal, 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 of color on your store kind of outlook as we move into '25 here?
A: Scott, thank you 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. Already, we're 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 have provided between 20 and 30 will 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 kind of keep this approach exactly the same going into 2025, especially given we have five consecutive quarters. Our 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 CCAA 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 it 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: Perfect. And then a follow-up, one follow-up. You recently launched Queen of Bud and kind of the branded white label products. You're offering in your five provinces, you've added -- BC has come on board now, which is great. But can you provide more timing of the delivery and expectations of the white label sales for kind of the rest of '24 and kind of more your expectation of the ramp in '25? And then does you recently announced a JV with positive intent events and more pop-up opportunities kind of events. Does that allow you to push your white label products there? Or how can you look at that strategically from a JV standpoint?
A: Yes, absolutely, Scott. So look, we're very, very excited about our long-term strategy. I always use the word long term for white label because you can't be blind folded just because you have a significant amount of stores, you don't look at what's happening in the market. So I've said these things 100 million times that LPs still have a lot of weed. Now those weed levels are topically coming down. We're seeing stability in wholesale prices. And long term, white label will account for 20% to 25% of everything that we sell in our stores will be our own brands. So currently, we're sitting at just 2.5%, 3% in cannabis. On the accessory side, we have a lot more on the cannabis. That's a smaller part of the equation. But on the cannabis front, we're sitting at, let's say, 2.5%, 3%. We're going to take this number up to 20% to 25% in the long term. And a brand like Queen of Bud, which has existed in Canada for over four, five years now, and it does and has produced millions of dollars and sales prior, going to be so hard for us to build it when we can pull position it in our stores, given that it's our own brand. So we're very, very excited about the trajectory of the Queen of Bud brand of Cabana Cannabis co and new brands that we will eventually introduce. Going on your question on what was launched and what is getting launched in 2024 and 2025, we just -- just on Friday, we actually launched the Queen of Bud, very, very beautiful and elegant candles in our stores. I'm very happy to report to you that we sold 200 units in the first two days, 222 to be precise. I got the numbers prior to this call because we know those candles were amazing. We've never sold candles before, but they're crushing it. And now we're launching Zipos in a couple of weeks. We're launching Queen of Bud Zipos. I'm also very happy to report that Zipo is including all of Queen of Bud branded Lighters, they're so excited about it themselves that they're including it in their spring catalog, which is going to get launched to 170 countries. And then we're launching six cannabis SKUs, a very differentiated -- very female focused, differentiated tariff SKUs, very elegant, very beautiful that are getting launched throughout October. Maybe they'll spill a little bit into November as well, but they will be launching across all four provinces. So Alberta, Manitoba, Saskatchewan and Ontario. The accessories are getting launched in BC as well. And then in 2025, we're just going to continue banking up the success and continue launching more Queen of Bud SKUs, more Cabana Cannabis SKUs. And of course, our accessories are getting bigger and bigger on the white label front. So having said that, we -- it's a long-term approach for us. We're not rushing to take the -- I always say I don't like rushing into things just because we have the strategy overnight, we need to get to some point. We're absolutely enjoying how much cannabis is available in this country. And there's always an opposite reaction to something that you're experiencing right now. So right now, and
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
