Inner Spirit Holdings Ltd. (CSE: ISH) says its Spiritleaf retail franchise model helped it reach a new financial milestone during the pandemic.
On Monday, the cannabis retailer reported its first positive earnings before interest, taxes, depreciation, and amortization of $0.5 million for the second quarter ended June 30.
The Calgary-based firm says it owns the largest retail brand in Canada with 58 franchised and corporate-owned Spiritleaf stores now open for business, with another 30 currently under development. Inner Spirit leads the Alberta market with 40 stores and has locations in British Columbia, Saskatchewan, Ontario, Newfoundland and Labrador, with expansion set for Manitoba.
Across its network, the company reported $20.5 million in second quarter system-wide retail sales, climbing 17 per cent from the prior three-month period.
“This performance comes at a time when the country is facing ongoing challenges related to the Covid-19 pandemic,” CEO Darren Bondar said in a statement. “We know that operating effectively and efficiently will be key in the fast-growing retail cannabis sector, and we like our position and the positive impression we are making on our stakeholders.”
However, total revenues collected solely by Inner Spirit were a reported $5.4 million in the second quarter. That’s because the majority of the firm’s Spiritleaf stores are owned by private operators, which only brings in a $25,000 upfront franchise fee and a 5 per cent royalty fee on gross sales, according to Inner Spirit. It should be noted that the company also collects another 1 per cent of gross sales from its franchisees that gets put into Spiritleaf’s advertising fund.
By comparison, Canadian retail leader Fire & Flower Holdings Corp. (TSX: FAF) reported net revenues of $23.1 million in its last quarter. The Edmonton-based rival has taken a different approach by owning and operating all of its 50 stores, with further expansion slated across five Canadian jurisdictions.
And the two major retailers will also have to contend with High Tide Inc. (CSE: HITI), which said last Friday it will acquire Meta Growth Corp. (TSXV: META), a deal that would push them ahead of the pack with 63 stores across the country.
Although for Inner Spirit, its asset-light franchise model helps it keep costs low while enabling local entrepreneurs to enter the market by applying their capital to grow the Spiritleaf network. The company says the strategy has helped it accelerate expansion with one new location opening every 10 days over the last 18 months, with a total of 100 expected by early 2021.
While the company’s revenues may dwarf the bigger retail players for now, it reported a second quarter gross profit of $2.5 million and a gross margin of 47 per cent. That’s well ahead of Fire & Flower with its reported gross margin of 33 per cent in the last quarter.
Inner Spirit also says it reached positive cash flow from operations for the first time, albeit a meager $30,000. However, the company reported a net loss of $1.2 million in the second quarter.
Despite the crazy ride the cannabis industry has been on through the last 12 months and with Covid-19, the company sees even bigger growth potential ahead.
According to Statistics Canada, retail sales hit a record $201 million in June with cannabis 2.0 products hitting store shelves in bigger numbers.
Inner Spirit notes that as vapes, edibles and drinks ramp up further, the total Canadian licit market is on pace to reach $2.5 billion this year, and to $4.1 billion in 2021.
The company will rely on its asset light model and partnerships with three major licensed producers to fund expansion.
In June, Inner Spirit said Nanaimo-based Tilray Inc. (Nasdaq: TLRY) invested $1.6 million in the company. Inner Spirit said it held $3.4 million in cash at the end of the quarter.
After the quarter, the company added former Deloitte vice-chairman Frank Rochon to its board of directors to add corporate leadership and financial, market and governance expertise.
Shares of Inner Spirit ticked up 3.5 per cent Monday, closing to $0.14 on the Canadian Securities Exchange.
Top photo via Inner Spirit