Alcanna Inc: An Overlooked Pot Stock That Insiders Love

A Fast-Growing Cannabis Business…from a Liquor Store Company?

The name Alcanna Inc (OTCMKTS:LQSIF, TSE:CLIQ) does not always come up when people talk about pot stocks.

The reason is simple: for most of its history, Alcanna was known for its liquor store business. But now, it has boarded the cannabis profit train.

Allow me to explain…

Headquartered in Edmonton, Alberta, Canada, Alcanna currently operates 224 liquor stores in Alberta and British Columbia—making it the largest private sector retailer of alcohol in Canada.

The company has three well recognized brands in its liquor retail network: Ace Liquor, Wine & Beyond, and Liquor Depot.

Ace Liquor is a discount banner geared towards consumers seeking value when it comes to beer and spirits.

Liquor Depot is a convenience-format store focused on prime real estate.

And Wine & Beyond is a large format banner with the largest selection of SKUs in Canada.

One of the major milestones for the pot industry was Canada legalizing recreational marijuana for adult use on October 17, 2018.

And Alcanna Inc was ready to capitalize on the new era right from the start. On the day of legalization, the company introduced the “Nova Cannabis” brand to its portfolio of controlled substance retailer banners and opened five stores in Alberta. (Source: “Alcanna’s NOVA Cannabis opens 5 stores in Alberta,” Alcanna Inc, October 17, 2018.)

Since then, the business has grown tremendously. Today, Alcanna operates 33 Nova Cannabis retail stores, with 32 locations in Alberta and one location in Ontario.

One thing that sets Alcanna Inc apart from other cannabis companies is its experience in retailing controlled substances in Western Canada and the infrastructure it already has in place.

Alcanna has good relations with provincial regulatory authorities and experienced finance, IT, supply chain, store construction, and real estate departments. Leveraging the existing company infrastructure can give Alcanna an upper hand in what is still considered a nascent industry.

And because the company already has long-established relationships with major national landlords, it managed to secure the best locations. In the brick-and-mortar retail business, location is a key to success. The superior locations of those stores make for one of the reasons why Nova Cannabis is a leading cannabis retail brand in Canada.

In fact, with Nova Cannabis’ Toronto location generating approximately CA$18.0 million in sales in its first year, the company believes that this location has the highest revenue of all cannabis retail stores in Canada. (Source: “Investor Presentation,” Alcanna Inc, last accessed October 13, 2020.)

Of course, any discussion of a retail business in today’s environment would not be complete without looking at the impact from the COVID-19 pandemic.

In the case of Alcanna Inc’s pandemic performance, there are two things worth noting.

First, in Canada, both liquor stores and cannabis retailers have been deemed essential services. Therefore, during the shutdown of numerous non-essential businesses in Canada earlier this year, Alcanna’s stores were still open for business.

Second, while the COVID-19 pandemic has resulted in a major economic downturn, Alcanna’s business has actually been booming.

You see, due to the coronavirus outbreak, on-premise liquor establishments such as restaurants and bars were closed. This led to a change in people’s consumption habits: when they could not go to restaurants and bars, they were dining and entertaining at home. As a result, liquor store sales went up.

In the second quarter of 2020, Alcanna’s same-store liquor sales increased 13.4%. The business also became more lucrative as the company achieved a liquor operating segment gross margin of 22.7% for the quarter, marking a 100-basis-point expansion sequentially. (Source: “Alcanna Reports 25% Growth In Sales, 32% Growth In Gross Margin, And A Return To Profitability In The Second Quarter 2020,” Alcanna Inc, August 19, 2020.)

Unlike the liquor store business, cannabis retail does not have on-premise establishments as competitors. The major competitor for legal cannabis stores is the illicit market, which remained open during the pandemic. And yet, Alcanna’s cannabis retail business still delivered very impressive growth rates.

In the second quarter, the company’s total cannabis store sales increased 63.9% year-over-year to CA$14.4 million. Meanwhile, the segment’s total gross margin dollars more than doubled from a year ago to CA$4.9 million.

With both liquor and cannabis retail segments firing on all cylinders, Alcanna’s total sales from continuing operations in the second quarter rose 24.9% from a year ago to CA$215.6 million.

While the company has yet to report its third-quarter results, management did provide an update recently, suggesting that the growth momentum is continuing.

In particular, Alcanna expects its same-store liquor sales for the three months ended September 30, 2020 to have improved approximately 15% from the year-ago period. At the same time, the company anticipates its pot sales for the third quarter will be 23% higher year-over-year. (Source: “Alcanna Announces The Sale Of 8 Stores On Vancouver Island For $21.1 Million And Provides Business Update,” Alcanna Inc, October 9, 2020.)

Of course, at almost every company, management tends to be optimistic about their business. But here’s the thing: Alcanna’s management is willing to put their money where their mouth is—collectively, management owns around 8.5% of the company’s common shares outstanding. (Source: “Investor Presentation,” Alcanna Inc, Op. cit.)

In this day and age, talk is cheap, so substantial insider ownership can be viewed as a more genuine vote of confidence.

Alcanna Inc (OTCMKTS:LQSIF) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Right now, cannabis stores are still a relatively small part of Alcanna Inc’s business. However, these stores already provide a positive contribution to the company’s profit before income taxes, and the company is not standing still.

Going forward, Alcanna plans to expand its presence in the Canadian cannabis industry—it is constructing seven new cannabis locations in Ontario and one additional location in Alberta.

As it stands, Alcanna stock could represent a significant opportunity for pot stock investors.