Cowen & Co Questions MedMen's Cost Cutting Goals

On Tuesday, Cowen & Co. senior analyst Vivien Azer issued new comments on MedMen MedMen Enterprises Inc. (CSE: MMEN) (OTCQX: MMNFF) following the company’s earnings announcement after the close of trading on Monday. Azer has an Underperform rating on the company and an 85 cent price target.

She pointed out that the company delivered a bigger than expected adjusted EBITDA loss, and then backed away from previous guidance on the company’s cost-cutting goals.

She wrote, “In FY4Q19, MMEN continued on its cost-cutting pathway, having reduced corporate SG&A spend by 14.6% or $5.6 mm relative to the company’s December spend (FY2Q19). Importantly, however, the company reiterated its cost-cutting target relative to the guidance offered in May 2019 (where they called for a 20% reduction from 2Q to 2Q). This, unfortunately, ignores the company’s most recent guidance from August, where the company: 1) expanded the cost-cutting target to a 30% SG&A reduction, and 2) targeted achieving this bigger reduction by the September quarter (one quarter earlier).”

Azer also highlighted the changes to Gotham Green’s investment saying, “In our view, this change reflects a capital preservation stance from MMEN’s lenders, as they are offering near-term bridge financing, while also acknowledging that medium-term financing will be dependent on improved financial metrics, but clearly not at the rate they had originally envisioned.”

Azer has adjusted her estimate for the company and now believes that in FY 2020, MedMen will generate $244.4 million in sales, growing to $424.7 mm in sales in FY2021. She is inline with the company’s projections to “achieve break-even adjusted EBITDA around calendar 4Q20 (FY 2Q21), where we have the company losing $4.5 mm in EBITDA, but being EBITDA positive in the following quarter.”

Looking Ahead

“On the retail front, we saw another deceleration in quarter over quarter growth, which was up 13% (vs. +16% in 3Q19); meanwhile wholesale revenues were up 49% QoQ in FY 4Q19,” Azer wrote in her note “While we commend the company’s commitment to transitioning its revenues away from retail (which currently accounts for 93% of sales), MMEN is behind on this initiative, relative to its peers under our coverage (where other operators, like GTI, generate as much as 42% of revenues from non-retail sales).”

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