High Tide Slowing its Roll After Record Quarter

High Tide CEO expects to benefit as other companies close their doors.

Canada’s High Tide Inc. (Nasdaq: HITI) (TSXV: HITI) (FSE: 2LYA) is hitting the brakes on expansion plans and M&A activity for the foreseeable future, despite coming off a quarter that CEO Raj Grover said had “record revenue” for the company.

Raj Grover, High Tide
Raj Grover

Grover forecast that in doing so, High Tide – which topped C$359 million in revenues for its 2022 fiscal year – will reach C$500 million in revenue this coming year.

During the company’s recent earnings call, he said that now is the time for High Tide to put its head down and grind out profits in the 151-store footprint it already has, in part to build up more cash reserves and in part to take advantage of widespread financial distress that Grover believes will drive more of High Tide’s competition out of business, delivering the company easy new income.

That means delaying a previously stated goal of opening 200 stores across Canada.

“(Two hundred) stores was our goal almost to reach in 2023 or early to mid-2024. But we are now focusing on free cash flow generation ahead of broadening our store network,” Grover said, adding that he’s “not concerned” about hitting that target anymore, but with becoming profitable.

“In terms of what we are seeing in the competitive dynamics in Canadian cannabis retail … many operators can’t keep up with this market and are closing stores,” Grover said. “We expect this to continue as we approach the five-year anniversary of cannabis legalization this year, and we expect to receive a disproportionate amount of that revenue.”

That added revenue, Grover said, can be realized without needing to open dozens of storefronts each year, but instead by waiting for customers to come to them.

“We will continue to grow, but it’s no longer the time to keep the gas pedal continuously slammed on the floor and drive as fast as possible unless a compelling opportunity presents itself,” Grover said.

Grover also said the macro environment itself wasn’t as conducive to M&A as it has been the past few years, another factor in the company’s pivot.

“The environment for consummating M&A transactions has become much tougher,” Grover said. “Despite of proven leadership in the market, the consistently improving profile of our financials and a strong balance sheet, our share price has nonetheless fallen to new lows, which we largely see as a guilt by association phenomena across the cannabis sector.

“As a painful milestone of this disconnect, I note that we just reported about the same level of revenue for one quarter as entire current market cap. This has made entering into M&A now significantly less attractive or accretive than in the past,” Grover pointed out.

To be prudent, Grover said, “We have raised the bar for what we will buy. And therefore, we no longer expect to add 40 to 50 stores in this calendar year.”

One major upside to that, he argued, is that not spending cash on M&A will likely make it easier for High Tide to get to profitability sooner than many of its competitors.

And growth, Grover reassured stakeholders, will still come – eventually.

“We can always shift back to store growth again and meet our long-term goals of 200 stores in the next year and a half,” Grover said. “And in the next two to three years, our overall long-term goal of hitting 250 stores in Canada.”

On Tuesday, High Tide shares were trading at $1.18 per share, down from a high of $10 per share in March 2021.

John Schroyer

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