Alberta-based cannabis retailer High Tide Inc. (CSE:HITI) saw sales climb to $6.6 million in the second quarter for fiscal 2019, the company released last week. High Tide benefited from a growing Alberta cannabis retail market and its sales improved not only by 324 per cent over the same quarter last year but was also up around 30 per cent from the Q1. The marijuna retailer also opened three stores in Ontario and its 15th location in Alberta all under its Canna Cabana brand in its last quarter.
But it wasn’t all good news for High Tide. At a 36 per cent margin, it’s still a decent gross profit for the company, but it is noticeably down from the 54 per cent margin that High Tide recorded a year ago. In addition, operating expenses of $1.6 million last year’s quarter have more than quadrupled to $6.9 million. The biggest increases in costs came from salaries and wages which were up $1.6 million and general and admin expenses which grew by $1.2 million.
As a result of both lower margins and higher costs, High Tide absorbed a bigger loss this quarter of $3.3 million, far worse than the $396,000 loss the company recorded last year. But in terms of dollars, it may not concern investors considering the growth that’s still available in the Canadian industry, especially with the edibles and derivatives market coming for sale late this year.
Improvement in cash flow a good sign
Although High Tide continued to burn through cash during its expansion, the bleeding has actually slowed down. Last year, the company used up more than $10.5 million in cash from its operating activities during the first six months. This year, it has used up $7.1 million in cash, but that’s mainly a result of improvements in its working capital.
Any cash High Tide can save will be crucial to facilitate the company’s long-term growth strategy as it still spent around $11 million in investing activities, including $4.7 million on property and equipment, and a similar amount to purchase online retailer Grasscity.
While High Tide didn’t sell its shares to raise capital, it did issue convertible debt worth $19.2 million. But unless the company improves its margins to raise cash flow, it may still need to sell stock to continue to expand.
Bottom line
High Tide achieved some strong sales numbers in its last quarter, and while it did record a loss, it’s not a huge concern for now.
The Calgary-based cannabis retailer opened its 15th Canna Cabana location in Alberta this last quarter and announced a third store opening in Ontario. The vertically-integrated company also possesses Smoker’s Corner Ltd., one of Canada’s largest smoking accessory chains with 14 locations, that it plans to convert into cannabis retail stores.
Investors can expect more losses and cash burn as the company continues to grow but with decent margins, there’s definitely potential for High Tide to be profitable in the near future.
The company has some key large marijuana companies backing it up including Aphria Inc. (NYSE:APHA)(TSX:APHA) and Aurora Cannabis Inc. (NYSE:ACB)(TSX:ACB) and High Tide could generate more interest as it extends its reach beyond Alberta. And with a small market cap of $66 million it is still a relatively unknown cannabis firm that could be off investor’s radars.
