KeyStone’s Your Stock Our Take: Aphria Inc. (APHA:TSX), DOG: GNC Holdings Inc. (GNC:NYSE), and STAR: Aritzia Inc. (ATZ:TSX).

In our Your Stock Our Take Segment we answer a timely question on, Aphria Inc. (APHA:TSX), a licenced, Canadian-based cannabis producer. It is one of the largest cannabis stocks in Canada based on revenue and market cap. James from Abbotsford, emailed in about Aphria. He wants to know why the stock has lost so much value and what our outlook is over the next 12 to 24 months.

Our Dog of the Week is, GNC Holdings, Inc. (GNC:NYSE), a company engaged in the global retail of health, wellness and performance products. The stock was down 14% in the last week and 24% this past year.

Our Star of the Week is well known to KeyStone clients having been in our Canadian Growth Stock Focus Buy Portfolio for over a year now. Jumping over 20% this week alone, the company, Aritzia Inc. (ATZ:TSX), is a vertically integrated, innovative in store and online fashion retailer selling its own brands. The company currently operates 67 boutiques in Canada and 27 boutiques in the United States. Better-than-expected Q3 earnings boosted the stock over 20% to start the week and the stock is up over 45% in the past year.

 

Your Stock, Our Take

A listener, James from Abbotsford, emailed in about Aphria. He wants to know why the stock has lost so much value and what our outlook is over the next 12 to 24 months.

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Aphria Inc. (APHA:TSX) 

Current Price: $6.67

Market Cap: $1.7 billion

What does the company do?

Aphria is a licenced, Canadian-based cannabis producer. It is one of the largest cannabis stocks in Canada (or even the world) based on revenue and market cap. The company has previously disclosed plans to ramp its production to up to 255,000 kg per year over the next several years.

Key Points:

Our listener is correct that Aphria has lost a tremendous amount of value over the last year. The stock price reached $20 around the time of legalization in October 2018 and since then has declined over 75%. This is nothing specific to Aphria as these kinds of losses (or even worse losses) have been seen in nearly every cannabis stock in Canada.

Its good timing to talk about Aphria because KeyStone just released its 2020 cannabis investor report. A common theme among cannabis stocks continues to be lack of profitability, missing targets, and reducing guidance. Aphria has clearly been no exception.

Recent Quarterly Financials

  • The company just reported its fiscal Q2 2020 results this morning on January 14th.
  • Aphria reported net revenue $120.6 million, which was an increase of 457% from the same period last year, but a sequential decline from the $126.1 million in the previous quarter.
  • Revenue underperformed analyst expectations of $130 million.
  • Aphria also downgraded its 2020 revenue outlook to between $575 million to $625 million, compared to its previous outlook of $650 million to $700 million.
  • Ahpria, like nearly all of its peers, also continues to lose money with negative cash flow of $71 million for the first 6 months of the fiscal year.
  • The stock price is currently down about 6% today after the release of the results.

Conclusion

Our take is that we would continue to steer clear of Aphria and 99% of cannabis stocks. As I mentioned, KeyStone just released its 2020 Cannabis Investor Report which is a comprehensive update to our Cannabis Investor Report released last year. Within this research, we analyze the market, and every single cannabis stock trading on Canadian exchanges, which is currently 215 companies. I won’t get too into the details of the report but there is a massive supply / demand imbalance brewing. Essentially too many companies and too much potential supply chasing a limited domestic market. This was something that we highlighted in our 2019 report which was released shortly after legalization in October 2018 and since then the top 10 cannabis stocks have lost an average of over 60% of their market value.

We continue to see a huge amount of risk in the sector. Looking at Aphria specifically, while the revenue growth year over year is impressive, the quarter over quarter drop shows that this revenue growth is slowing and potentially even starting to decline. The company is far from profitability and continues to lose tens of millions in cash flow on a quarterly basis. Aphria does report quarters which appear to be profitable to the untrained eye but the reality is that any profit they have reported has been the result of non-cash, changes in the fair value of biological assets…this is not real profit.

Our 2020 Cannabis Investor report provides a comprehensive analysis of the top stocks in the stock based on financial success as well as the key risks and opportunities facing the sector overall. There are a very small number of companies out of the 215 stock group that are transitioning, or have transitioned into profitability, and we were able to identify 2 stocks that we recommended as high risk investments, as well as a third that we are monitoring very closely and could potentially be a recommendation in the near future.

 

Weekly Dog

 GNC Holdings, Inc. (GNC:NYSE)

Current Price: $2.26

Market Cap: $194 Million 

What does the company do?

GNC Holdings, Inc. engages in the global retail of health, wellness and performance products, including vitamins, minerals and herbal supplements products, sports nutrition products and diet products.

GNC has a multi-channel business model which generates revenue from product sales through company-owned retail stores, domestic and international franchise activities, third-party contract manufacturing, e-commerce and wholesale partnerships.  

Dog Performance:

The stock was down 14% in the last week and down over 24% this past year.

Since the stocks 2016 highs of $35, the share price has slid around 93% destroying investor capital.

What is driving the stock?

The company’s poor financial performance has been driving the stock lower.

Financial Results

Q3 2019 (October 25th, 2019)

  • Revenue decreased 14%, to $499 million compared to the same quarter last year.
  • EBITDA increased 10% to $35.12 million.
  • Fully diluted loss per share was $0.09 compared to a loss of $0.10 per share for Q3, 2018.

Conclusion:

The company’s long-term financials are quite worrying, with twelve-trailing-month (TTM) revenue decreasing 9% period over period while the company is very indebted. Having net debt of $736 million and a net debt-to EBITDA ratio of 5 times. So, the company is having a tough time paying off this debt. In late 2016, GNC even turfed its quarterly dividend signalling that management knew tough times were ahead.

On a valuation basis the company looks cheap with an EV/EBITDA multiple of 6.3x, but of course considering its plummeting revenue and decreasing net income, the company is anything but cheap.

It isn’t hard to spot that this is a stock you want to avoid at all costs and serves as a good lesson of what can happen to a once booming business dominating its market. GNC operates in a very competitive landscape with few barriers to entry allowing everyone from Costco to boutique supplement shops to compete. I like Warren Buffet’s term of an economic moat – which is a business’s ability to maintain its competitive advantage over competitors in order to protect is profits and market share. GNC has no economic moat and it now appears to be paying so financially.

Considering the stocks poor performance, its further slide this week and month make it our dog of the week.

 

Weekly Star

Aritzia Inc. (ATZ:TSX)

Current Price: $23.60

Market Cap: $2.6 Billion

What does the company do?

Aritzia is a vertically integrated, innovative in store and online retail fashion operation with its own brands. The company currently operates 67 boutiques in Canada and 27 boutiques in the United States.

Star Performance:

The stock jumped 21% this past week and is up 45% in the past year.

What is driving the stock?

Aritzia’s Q3 Fiscal 2020 reported numbers were better-than-expected and have driven the stock to new highs. Adjusted net income grew to $0.32 per diluted share, up from $0.31 in the same period in fiscal 2019. Analysts were looking for $0.31. Revenue was $267.3 million compared with $242.9 million a year earlier. Analysts had expected $266.2 million. Comparable sales grew 5.1%, driven by the strength of the company’s eCommerce business, strong U.S. growth and the performance of its boutique network.

Financial Results

Q3 Fiscal 2020

Net revenue increased by 10.0% to $267.3 million from $242.9 million in Q3 2019, with positive performance across all geographies and all channels.

Conclusion:

In the quarter Aritzia launched first foray into men’s, with outerwear – men’s Puff Jacket – sold out. 
Achieved meaningful eCommerce revenue growth through increases in both 
traffic and transactions in Canada and the United States. 
 On a geographic basis, momentum in the U.S. market continued, with revenue up 28% year over year. The U.S market continues to be a key expansion area long-term. We just released our full update to clients with our near and long-term ratings on the stock.

The 20 plus percent jump over the past week and the 40 plus percent jump in the past year, give Aritzia claim our coveted status of Star of the Week.