MedMen reported its earnings results for the second quarter of fiscal 2020 on Wednesday. The company reported double-digit revenue growth but missed analysts’ estimates. Also, the company’s losses widened in the quarter. As a result, management made some tough decisions and the stock took a hit. MedMen closed with a loss of 14.4% on Thursday on the OTC markets and 11.1% on the Canadian Stock Exchange.
MedMen’s losses widen in Q2
MedMen reported 47.2% YoY (year-over-year) revenue growth in the second quarter to 44.0 million Canadian dollars. The company missed analysts’ estimates of 50.1 million Canadian dollars. The revenue across MedMen’s operations in California, Nevada, New York, Illinois, and Arizona drove the total revenue growth. Sequentially, the company grew its revenues by just 0.2%, while analysts expected 14% revenue growth.
MedMen reported an EBITDA loss of 22.0 million Canadian dollars in the second quarter, which was higher than analysts’ estimate of 19.6 million Canadian dollars. The gross margin for the quarter was around 52%.
New strategy will focus on retail
Due to the losses and cash crunch, the company decided to make some tough calls. CNN reported that MedMen plans to simplify in order to survive. The company decided to shift from cannabis cultivation and focus on the retail side. MedMen plans to thoroughly investigate which stores aren’t generating cash. The company will decide if the stores shut down.
In the second-quarter earnings call, Zeeshan Hyder, MedMen’s CFO said, “One, we continue to burn significant cash at our factories where we are as a company and where this industry is from a capital markets perspective, we cannot continue to invest in assets that are not producing near term cash returns regardless of the value they hold long-term.”
In November 2019, MedMen announced a five-part plan to achieve positive EBITDA by the end of 2020. As part of rightsizing, the company planned to lay off 190 employees, which would result in 10 million Canadian dollars in annual savings. MedMen has also lined up some other cost-savings measures.
- MedMen can obtain 20 million Canadian dollars in annual savings through reduced marketing and technology spending.
- The company can generate 2 million Canadian dollars in annual savings through re-negotiated insurance policies for healthcare, D&O, and property.
MedMen’s stock performance
Currently, eight analysts cover MedMen stock. Among the analysts, five recommend a “hold,” (down from six before its earnings), one recommends a “buy,” one recommends a “sell,” and one recommends a “strong sell.” The average target price for MedMen stock fell to 1.4 Canadian dollars from 1.6 Canadian dollars. The target price implies an upside potential of 305% for the next 12 months. The stock closed with a loss of 14.4% on Thursday in the OTC markets.
Eight Capital downgraded the stock to “sell” from “neutral” and cut the target price to 0.30 Canadian dollars from 0.75 Canadian dollars. Cormark Securities cut the target price to 0.35 Canadian dollars from 0.85 Canadian dollars.
MedMen stock has lost 83.9% of its stock value in 2019. In 2020, the stock has lost 48.7% as of Thursday. Meanwhile, Aurora Cannabis (NYSE:ACB) has fallen 32.8%, while Canopy Growth (NYSE:CGC)(TSE:WEED) has fallen 12.5% year-to-date. Recently, Cowen downgraded Aurora Cannabis. Cowen maintained a “market perform” rating for Canopy Growth. However, Constellation Brands decided not to increase its investments in Canopy Growth.
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