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MedMen: Stock Falls over 20% after Q4 2019 Earnings

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MedMen Enterprises (MMEN) (MMNFF) reported its fourth-quarter earnings after the market closed on October 28. For the quarter that ended on June 30, the company reported revenues of $41.97 million. However, this was lower than analysts’ expectation of $42.2 million.

The company’s net loss per share came in at $0.15 higher than analysts’ expectation of a loss of $0.13. The weak fourth-quarter performance appears to have led MedMen’s stock to fall. On October 29, the stock fell to a low of $1.37 Canadian dollars before closing that day at $1.42 Canadain dollars, a fall of 21.1% from its previous day’s closing price.

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MedMen’s revenue rises

In the fourth quarter, MedMen’s revenue rose 104.2% YoY (year-over-year). Sequentially, its revenue increased by 14.7%. The company’s retail sales made $39.0 million in revenue. Additionally, its cultivation and manufacturing business made $3.0 million in revenues. YoY, MedMen’s retail sales grew by 90%. The same-store sales growth of 35% and the net addition of 10 new stores in fiscal 2019 drove the company’s revenue.

California is the largest cannabis market in the world. MedMen made $27.5 million in revenue from the state, which makes up 70.5% of the company’s total retail sales. Also, the company has 13 stores in the state. MedMen has seven stores in Florida, in which all of then opened in this year only. Also, the company has four medical dispensaries in New York, three stores in Arizona, and one medical dispensary in Illinois.

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Better adjusted EBITDA

For the fourth quarter, MedMen has reported a gross margin of 50% compared to 53% in the third quarter. During the quarter, the company opened two stores. The company’s management said that during the initial phase of opening new stores, its gross margins will be on the lower side. So, the new store openings lowered the company’s gross margin.

MedMen’s SG&A (selling, general, and administrative) expenses fell 6% from its previous quarter to $33.0 million in the fourth quarter. The improvement was primarily due to lower payroll-related expenses. The decline in the company’s SG&A expenses improved its adjusted EBITDA by 7% to a loss of $39.4 million compared to its third quarter.

For the quarter, MedMen reported a net loss of $24.2 million or $0.15 per share. This is an improvement from a net loss of $0.20 per share in the third quarter of fiscal 2019.

MMEN outlook

For fiscal 2020, analysts expect MedMen to report revenues of $297.6 million. This implies a rise of 129.0% from $130.0 million in fiscal 2019. We expect the growth in both the company’s retail and cultivation and manufacturing businesses to drive its revenue.

The company owns licenses to operate 70 stores. However, they only have 32 stores as of October 28. So, there is considerable scope for expansion. In California, the company plans to grow its store count to 30 by the end of this year from its present 13 stores. Also, the company plans to open five more stores this year in Florida.

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Along with the opening of new stores, MedMen is focusing on same-store sales growth. Subsequent to the quarter, the company has introduced delivery service in California and southern Nevada. Also, the company plans to start the service in Florida by the end of this year. In August, the company launched its loyalty program MedMen Buds. As of October 28, the program is running in Arizona, California, Florida, and Nevada.

Analysts’ lower their price targets

Following MedMen’s weak fourth-quarter earnings, Canaccord Genuity Group downgraded the stock from “speculative buy” to “hold.” Also, it lowered its price target from $3.75 Canadian dollars to $2 Canadian dollars.

Additionally, Eight Capital lowered its price target from $5 Canadian dollars to $2 Canadian dollars. Analysts’ consensus price target was lowered from $5.43 Canadian dollars in the last month to $3.23 Canadian dollars as of October 29. The new price target represents an upside potential of 127.5%.

Currently, analysts favor a “hold” rating for MedMen. Of the eight analysts that cover the stock, 62.5% have rated it as “hold,” 25% have given a “buy” rating, and 12.5% have rated it as “sell.”

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Analysts’ peer recommendations

Let’s look at analysts’ recommendations for its peers:

  • Analysts are bullish in Curaleaf Holdings (CURLF) (CURA). Of the eight analysts that follow the stock, 87.5% are in favor of a “buy” rating. Analysts’ consensus price target stands at $16.57 Canadian dollars. This implies a return potential of 130.2%.
  • All 10 analysts that follow Cresco Labs (CRLBF) rated it as “buy.” Analysts’ consensus price target stands at $17.83 Canadian dollars. This implies a return potential of 105.9%.
  • Analysts are bullish on OrganiGram Holdings (OGI), with all 14 analysts recommending a “buy” for the stock. The company trades at a discount of 142.7% from analysts’ consensus price target. For more, read, “Organigram Holdings: Why Analysts Are Bullish.”

MedMen’s YTD stock performance

So far this year, MedMen underperformed the broader equity market and its peers. YTD, the company’s stock shrunk by 63.1%, as of October 29. The accusation of financial irregularities, termination of its merger with PharmaCann, and weakness in the cannabis sector have led to a fall in the company’s stock price. During the same period, its peers Curaleaf Holdings, Cresco Labs, and OrganiGram Holdings have returned 11.5%, -6.4%, and -8.3%, respectively.

The management’s optimistic outlook and its recent acquisition of Select and Grassroots Cannabis have led to a rise in Curaleaf’s stock price. Recently, Cresco Labs got five licenses to sell adult-use cannabis in Illinois, which drove its stock price. For more, read, “Cresco Labs Stock Rises on Dispensary Approval.”

Follow 420 Investor Daily for news and updates in the cannabis sector.

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