Jover a year ago, High Tide (HITI) has completed the acquisition of Meta Growth – a major strategic step in the company’s history that has firmly positioned it as one of Canada’s leading cannabis retailers.
The company’s latest actions could prove just as vital, says Andrew Semple, 5-star analyst at Echelon.
Last week, the company announced plans to transform all of its Canadian branded stores into a discount club model where members of its Cabana Club loyalty program will be offered substantial price reductions. By doing so, High Tide hopes to gain “defensible market share”.
“After reviewing market conditions and consumer preferences, we believe this decision will be positive for High Tide,” Semple said. “The announcement firmly cements management’s near-term focus on market share gains in the cannabis retail segment.”
As cannabis consumers have proven to be quite “price sensitive”, the analyst believes the new model will likely result in much higher revenue due to increased transaction volumes.
In fact, the analyst believes sales are already up at converted stores due to higher traffic volumes.
That said, the move is not without repercussions; gross margins will suffer initially as sales reach the level required to counter the “lower gross margin profile”.
“We expect this period to take at least six months before the stores reach the appropriate level of sales, where the sales gains should start to become a positive net income on EBITDA in the long term”, explained the analyst.
Over time, through price increases on particular SKUs and new private label products, margins should improve “modestly”. That said, Semple no longer sees the company achieving retail margins “approaching or even above 30%.” The new model is likely “here to stay,” and Semple believes the company is in an excellent position to lead the advance in discount cannabis retail.
“High Tide has the largest network of corporate stores in Canada, one of the widest selections of accessories, is among the best capitalized and has a captive audience through its Cabana Club membership program (already over 245,000 members),” the analyst summed up.
Semple thinks not only will earnings be soaring, but High Tide’s stock will also rise much higher; meeting the price target of C$18 ($14.57), the stock will change hands for a premium of 168% within a year. The analyst’s rating remains a speculative buy. (To see Semple’s record, Click here)
Two other colleagues recently reviewed HITI’s outlook, and both are equally enthusiastic; therefore, the stock has a consensus strong buy rating supported by an average price target of C$17.17 ($14.54), suggesting one-year gains of around 160%. (See High Tide stock analysis on TipRanks)
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