The Best Value in Canadian Cannabis Retail Today?

The Best Value in Canadian Cannabis Retail Today?
The Best Value in Canadian Cannabis Retail Today?

Momentum is building for Canadian cannabis retailers, as the Canadian cannabis market (belatedly) gains momentum in Year 2 of cannabis legalization.

It was the lack of cannabis retail stores that caused cannabis sales to disappoint in Year 1 of full cannabis legalization in Canada. In 2020, it’s the growth in the number of these stores that is powering a turnaround for Canadian cannabis retailers.

Former leader in numbers of cannabis stores, Meta Growth (CAN:META / US:NACNF) has already doubled off its November low, from CAD$0.155 to $0.305. New leader in Canadian stores, Fire & Flower (CAN:FAF / US:FFLWF) is up 37% from its November low – sitting at CAD$1.02.

The Seed Investor has already been banging the drum for these companies going back to the summer of 2019. However, another one of Canada’s leading cannabis retailers, Choom Holdings (CAN:CHOO / US:CHOOF) has also started to move.


[chart courtesy of Stockcharts.com]

Currently sitting at CAD$0.20, Choom is also more than 40% above its November low of $0.14. But it’s still several multiples away from its 2019 high of CAD$0.88. In contrast, Fire & Flower is trading at more than half of its 2019 high.

Why look at Choom?

Like META and FAF, Choom has a strong presence in Alberta, which continues to set the pace in Canada for licensing stores.

Choom already has a foothold in the key Ontario cannabis market with its Niagara Falls cannabis store.

Anecdotally, Cannabis 2.0 products have been flying off the shelves in Ontario. With product lines still just starting to expand, retailers are struggling to meet demand.

More recently, Choom has been targeting British Columbia. Canada’s 3rd largest province was also a significant underperformer in 2019. Per capita cannabis sales were just as low as Ontario – Canada’s biggest disappointment in Year 1.

Now B.C. is opening up its cannabis market and Choom is already building a strong footprint. The Company has three locations currently under development in the significantly under-served Vancouver cannabis market.

How important is Cannabis 2.0 in this equation? Very.
 
  1. Three million new Canadian consumers (roughly a 50% increase).
  2. Higher margin products with stronger revenue growth (based on U.S. numbers)
  3. Much stronger demand from female cannabis consumers

Multiply strong growth in licensed cannabis stores by strong growth in Canadian cannabis consumers and the product is massive overall growth potential.

These cannabis derivative products – primarily concentrates and edibles – generally offer stronger retail margins. This means that cannabis retailers should be able to preserve their own margins even as a rising store count increases competition.

In the U.S., these concentrates and edibles have led sales growth in cannabis-legal states.
 
  • 20% for dried flower
  • 33% for cannabis edibles
  • 41% for cannabis concentrates (including vapes)

[Source: Arcview/BDS Analytics]

There is no reason that consumer patterns in Canada should differ much from this profile.

Then there is the market for female cannabis consumers. Sales of cannabis dried flower are dominated by Canadian males (according to Statistics Canada).
 
Males (21%) were almost twice as likely to have used cannabis in the first half of 2019 as females (12%). This held true for every age group except seniors aged 65 and older.

Almost three in five females reported never having consumed cannabis (59%), compared with just over half (51%) of males.

Conversely, female consumers gravitate much more strongly to the derivative cannabis products now coming to market in Cannabis 2.0.
 
…females (23%) were almost twice as likely as males (12%) to report using only products other than dried cannabis.

This fully engages all Canadian consumers in the legal cannabis market. The final driver for sales growth in legal cannabis is rising usage rates.

Alberta opened up over 300 cannabis stores in the first year of full legalization. This broad access to legal cannabis caused cannabis use to increase in Alberta by 25%, from 16% to 20% of the population.

As the rest of Canada starts to catch up to Alberta, increased access should also have a positive influence on overall cannabis usage.

Choom is well positioned to capitalize on these trends.

Bolstering the Company’s growth trajectory is strong leadership. New CEO Corey Gillon boasts broad experience – and deep connections – in the retail industry. This comes via his previous senior management roles with both Walmart and Aritzia.

As Canada’s retail market for cannabis matures in 2020, investors should expect Gillon’s retail depth to increasingly come into play.

The Seed Investor sees last year’s collapse in Canadian cannabis company valuations as this year’s opportunity. Along with Canadian cannabis extraction specialists, we see Canadian cannabis retailers leading this rebound.

As investors look for the best opportunities here today, Choom Holdings is presenting investors with a strong value proposition.



DISCLOSURE: Choom Holdings is a client of The Seed Investor. The writer holds shares in Choom Holdings and Meta Growth.
 
Tags
Choom, Marijuana Investing