We are removing TCNNF and HRVSF from the Hedgeye Cannabis LONG list. TCNNF is acquiring HRVSF, so we are removing it from the list. Following the Harvest acquisition, we moved TCNNF down to the bottom of the LONG list, and now we are taking the stock off the list, looking for a better entry point and catalysts to put it back on. However, we have several concerns that lead us to step to the sidelines and believe TCNNF will be a relative underperformer.
OUR TOP CONCERNS
BIG BALANCE SHEETS GOING AFTER FLORIDA
Top on the list is CURLF and its strong presence in the state and growing market share. Over the past 12-months, both AYRWF and CRLBF have entered the market and have made it public they want to grow in that state. Lastly, GTI is waiting in the wings, has recently begun construction on a new cultivation facility in the state.
MARKET SHARE LOSSES IN FL
Since June 2019, TCNNF has lost 13.4% of market share points in the state of FL. However, in the past few months, those market shares losses have begun to decelerate. See the Hedgeye Florida weeks trackers for the details.
INCREASED DISCOUNTING IN FL
The new entrants in the state are taking advantage of the TCNNF pricing/profitability umbrella and have been increasing promotional activity in the state. As a result, TCNNF's Gross Margins declined 8% YoY in the most recent quarter and posted a 41% EBITDA margin. All the new entrants into FL are looking at the outsized profitability of TCNNF and want to capture incremental profitability by aggressively buying market share. AYRWF, GTBIF, and CURLF all have gross margins at 10-15% below TCNNF and can afford to be aggressive on the price.
HARVEST ACQUISITION
The Harvest acquisition is transformative, but the timing of it is not ideal. At the same time, the company is under fire in its core market of FL; it's trying to remake the company and diversify away by buying a company, Harvest, with gross margins 16% below that of TCNNF. The Harvest EBITDA margin is 27% versus that of TCNNF at 41%. Longer-term, the combination of the two companies will be one of the largest in the US, but growing pains are sure to follow.
PERSONAL DISTRACTIONS CANT HELP
On Friday, the TCNNF CEO, Kim Rivers, was dealt a devasting blow. The CEO's husband, John “J.T.” Burnette, was convicted Friday on a host of public corruption charges. They convicted him on one count of extortion, two counts of honest services mail fraud, one Travel Act violation, and lying to the government. He faces maximum penalties of 20 years in prison on each of the extortion and fraud counts and five years on each Travel Act and making false statements count. So her husband is looking at serious jail time while reshaping the company with a transformational transaction. In addition, the company's core market is under siege from well-capitalized competitors.
THE POSITIVES REMAIN:
- The long term case for FL
- Strong cash flow and balance sheet
- The other side of Harvest
