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Cannabis-Connected

This major operator of liquor stores in Western Canada has seen its sales stall and revenue decline, due in part to increased competition in Alberta. 

The company has formed an agreement with one of Canada’s biggest marijuana growers to establish cannabis retail outlets. It will have exclusive rights to brand its Canadian stores with the grower’s name. A new venture like this carries risk, although the grower’s background in marijuana sales could help reduce that.

ALCANNA INC., $9.64, Toronto symbol CLIQ (Shares outstanding: 37.1 million; Market cap: $377.9 million;www.alcanna.com), changed its name from Liquor Stores N.A. in May 2018.

The company operates 229 retail liquor stores. Of that total, 173 are in Alberta, 33 in B.C., 22 in Alaska and one in Connecticut.

Alcanna’s banners include Liquor Depot, Liquor Barn, Brown Jug, Wine and Beyond, and Wine Cellars.

The company’s sales increased 4.9%, from $630.1 million in 2012 to $661.0 million in 2013. Sales then rose 5.0% in 2014, to $694.2 million, before rising 7.5% in 2015 to $746.4 million. Alcanna saw sales jump another 9.6% in 2016, to $817.7 million. Most of that growth was achieved through acquisitions in the U.S. In 2017, the company sold most of its U.S. operations (see below), and revenue fell 24.0% to $621.4 million.

Alcanna’s earnings fell from $0.82 a share (or a total of $18.8 million) in 2012 to $0.49 a share (or $11.3 million) in 2013. They then improved to $0.54 a share (or $12.7 million) in 2014. Excluding one-time items, the company made $0.57 a share (or $15.7 million) in 2015, before earnings fell to $0.46 a share (or $15.1 million) in 2016. Alcanna’s earnings then dropped to $6.6 million, or $0.24 a share, in 2017. The decline was mostly due to restructuring costs and other expenses related to its U.S. exit.

Activist investor PointNorth Capital won a proxy fight in June 2017 that saw six of Alcanna’s eight board members replaced. Under the new board’s direction, the company abandoned its plan to grow sales through U.S. acquisitions and instead re-focused on its core Alberta, B.C., and Alaska markets.

The company subsequently sold its 15 stores in Kentucky for $29.8 million and its interest in two stores in New Jersey for $2.2 million. It plans to complete the sale of its one location in Connecticut soon. Alcanna also closed its U.S. head office, eliminating the need for U.S.-based executives.

For the three months ended June 30, 2018, overall sales were down 0.8%, to $161.1 million from $162.4 million a year earlier. Earnings, excluding one-time items, were $2.0 million, or $0.05 a share. That’s down 54.4% from the $4.3 million, or $0.15, a year earlier.

The weaker results were mostly due to a decline in overall industry liquor sales across Alberta. As well, the year earlier-period included the Easter weekend—the loss of that holiday traffic for the most recent quarter reduced same-store sales by roughly 0.9%. Alcanna also had higher expenses due to the launch of a discount liquor store banner, Deep Discount Liquor. That expansion included ten locations close to competitors that already operate discount stores. The company’s higher spending on marketing to boost its sales in Alberta also contributed to the higher expenses.

Alcanna’s long-term debt was $72.7 million on June 30, 2018, or a low 20.3% of its market cap. It also held cash of $78.6 million, or $2.12 a share.

The company acknowledges that growth for its core Alberta business has stalled. The province’s laws regulating the minimum distance between liquor stores have been relaxed. That has added to the number of competitors. More generally, the regulated Canadian liquor market offers few growth opportunities.

As a result, Alcanna has teamed up with big marijuana grower Aurora Cannabis (symbol ACB on Toronto). As part of the deal, Aurora has bought CLIQ shares (for $138 million) and now holds a 25% stake in the company. With additional investments, Aurora can raise its interest in Alcanna to 40%. The deal also gives Alcanna exclusive rights across Canada to own and operate Aurora-branded cannabis stores.

The company intends to use the proceeds of the share sale to establish and launch a brand of cannabis retail outlets in Western Canada. To do that, it will convert some of its existing liquor outlets into cannabis retail stores; it will also establish new cannabis retail outlets. In addition, Alcanna will also use a portion of the proceeds to renovate some of its existing liquor stores.

In Alberta, the company expects to have 37 Aurora stores open following legalization on October 17, 2018. Under provincial regulations, that’s the maximum number of locations allowed a single operator for the first year of legalization. Alcanna aims to open a large number of retail stores across Canada where permitted. This includes Ontario, where Premier Doug Ford has now opted to sell recreational cannabis products through private retailers rather than government-operated storefronts. The government will, however, be the only online seller in Ontario, at least until April 1.

Alcanna’s move to offset slowing sales for liquor by branching out into cannabis sales adds a lot of risk. However, its link-up with Aurora, an established online seller of medical marijuana with a strong reputation, will help to reduce some of that risk.

Meanwhile, the stock yields 3.6%.

Alcanna Inc. is okay to hold, but only for aggressive investors.