Fire & Flower is Lighting up the Cannabis Retail Market

Fire & Flower Inc.’s (TSX:FAF) subscription agreement with Alimentation Couche-Tard Inc. (TSX:ATD.B) allows the world’s largest convenience retailer to invest up to $380M in the Company

SmallCapPower | August 22, 2019: Fire & Flower Inc. (TSX:FAF) is an independent retailer for recreational use cannabis. Through the aid of the Hifyre digital platform, the Company provides customers with cannabis and accessory products. The Company operates 17 cannabis retail locations in Canada, with nine in Alberta, six in Saskatchewan, and two in Ontario. Additionally, the Company has licenses for six more retail locations in Alberta, which are fully built, but are pending provincial approval. Of the pending locations, two are currently operating as cannabis accessory stores. On July 23, 2019, the Company announced it had received a license for a retail store in the Yukon. Fire & Flower announced the procurement of two additional cannabis retail store licenses in Edmonton on August 8, 2019, which are expected to begin selling on August 26, 2019. Currently, the Company owns, or has interest in, 28 Canadian cannabis retail store licenses.

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    Figure 1: Projections for Fire & Flower’s Breakdown of Store Locations

Source: Investor Presentation

Fire & Flower Inc’s subscription agreement with Alimentation Couche-Tard Inc. (TSX:ATD.B) allows Couche-Tard, the world’s largest convenience store retailer, to provide the Company with an investment in aggregate of up to $380M. Announced on July 24, 2019, this strategic investment is expected to help Fire & Flower with expansion plans globally. Couche-Tard will provide Fire & Flower with its leadership guidance, a network of over 16,000 stores in 25 countries and a digital platform to catalyze the Company’s international growth. The first tranche of the agreement is for $25M of convertible unsecured, debentures representing a converted 9.9% ownership. As well, Couche-Tard will receive three series of warrants, which will increase its ownership interest in Fire & Flower to 50.1% if exercised fully and provide $380M in growth capital to Fire & Flower. The investment will be used by Fire & Flower to further develop its Hifyre digital retail platform and expand its retail locations.

Fire & Flower’s digital product studio Hifrye provides the Company with an in-depth analysis of consumer behaviour and preferences. Additionally, the Retail 2.0 platform allows Fire & Flower to utilize predictive analytics to forecast required inventory. Fire & Flower acquired Hifyre in July 2018 and launched the industry-first regulated cannabis eCommerce platform on March 18, 2019. Currently, the platform will allow for recreational online ordering and delivery in Saskatchewan and accessory distribution across Canada.

Figure 2: Outline of Hiyfre Digital Platform

Source: Investor Presentation

Fire & Flower has demonstrated its ability to successfully expand retail locations in multiple jurisdictions with diverse regulatory requirements. We believe this shows the Company should be able to effectively follow through with its plan to open the 45 stores it has planned for F2019E and capitalize on international growth opportunities.

Overview of Financial Performance

Since Canadian recreational cannabis legalization occurred in October 2018, the Company has generated more than $36.4M in sales. On June 6, 2019, Fire & Flower closed a private placement for $25M. On June 26, 2019, FAF reported its last quarterly financials, highlighted by $9.5M in revenue, with $9M from cannabis and cannabis-related accessories, and $0.5 from digital development sales.

In terms of trading multiples, Fire & Flower stock trades at 0.7x 2021E EV/sales and 8.7X 2021E EV/EBITDA, a premium to its peers, which trade at an average of 0.5x and 5.2x, respectively. We believe Fire & Flower has generally outperformed its peers and should continue to trade at a premium if the Company continues to execute on its rapid trend of opening successful stores across Canada.

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