Cantor Downgrades Fire & Flower, Auxly Cannabis

Cantor Fitzgerald analyst Pablo Zuanic downgraded Fire & Flower (OTC: FFLWF) and Auxly Group to Neutral from Overweight and cut his price targets for both. Challenges within the Canadian cannabis market were cited as the overarching reason.

Canadian Problems

Zuanic noted that the market seems to have hit a saturation point. He wrote in his report, “There are now over 3,300 stores in Canada (~1,600 in ON; 765 in AB, 435 in BC, 89 in QB). Store density in Canada (85 stores per 1mn people, with ON at 108) is above that in most states in the US, ex CO (129), OR (171), and OK (590).”  He went on to write, “Price deflation in Canada (flower prices down 36% in the last two years), has not all been caused by competition among licensed producers (LPs), but also by some cutting prices and pursuing a discount strategy. Thus, overall, we think this is a tough market climate for retailing.” At this point, Cantor only gives three companies an Overweight rating and those are Aurora (ACB), Organigram (OGI), and Village Farms (VFF).

Fire & Flower

Zuanic dropped his rating on Fire & Flower to Neutral from Overweight and lowered his 12-month price target to C$2.60 from C$9.50 (last published 4/26/22) on reduced estimates and increased operational risks. It was last trading at $1.65 or C$2.11. He wrote, “Our recent surveys show that Fire & Flower stores (factoring-in its Spark membership offers) are now pricing in line with High Tide’s stores (NASDAQ: HITI), below Nova Cannabis, and well-below the OCS online store. While we believe this makes sense, we think competitive dynamics have forced Fire & Flower to take more draconian measures on the pricing front than management may have initially envisaged. The transition (likely increased sales but lower margins) generates uncertainty and makes us wonder about the company’s ability to make meaningful improvements to cash burn; we think this is also reflected by the company’s decision to delay its NASDAQ listing.”

Following the April quarter, the cantor analyst noted that sales fell 4% seq to $41 million, with retail store revenues dropping 7% sequentially and that same-store sales fell 26% year-over-year to $30 million. In addition to that, the store count fell to 101 stores at the end of April from 105 at the end of January. He also pointed out that tech revenues were down 28% to $3 million, and wholesale and delivery was up (but on lower margins).

That said, we appreciate Fire & Flower’s asset-light strategy, prudent brick & mortar growth plans, its inroads in tech services and delivery, and the strategic benefits of the partnership with Circle-K (ATD.TO/NC). However, given heightened competitive challenges and further potential shareholder dilution down the road, we now prefer to rate the stock Neutral.

Auxly Cannabis

The analyst lowered his 12-month price target on Auxly to C$0.08 from C$0.20 on reduced estimates and a lower multiple used. The stock was last trading at $0.06 or C$0.075. Zuanic wrote, “The heavy debt load and likely equity-holder further dilution, combined with worsening scanner trends prompt us to downgrade our rating to Neutral. We do see much improvement on cash burn. Based on our math, Auxly has the highest debt-to-sales ratio among LPs. This includes convertible debt held by Imperial Brands (IMB.LN/NC) due Sep 2024; but with a conversion price of $0.81, we think terms will be renegotiated.”

The analyst also lowered his sales estimates based on the latest Hifyre data, which showed Auxly losing further market share in the vape and flower segments (vape is >40% of sales, and the company’s vape share is now 16% vs. 24% a year ago), and sales dropping at a faster pace at retail. He also pointed out that Auxly has been lowering prices, which is not a good sign for profitability. Having said that he believes Auxly could still be an attractive target (given 2.0 share, pre-rolls gains, and supposedly more-efficient flower cultivation), but the convertible debt held by Imperial Brands may deter interested parties.

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