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Alcanna Inc (TSE:CLIQ) Partners to Launch Nova Cannabis Toronto Location

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Alcanna Inc (TSE:CLIQ) (OTCMKTS:LQSIF) is an Edmonton based wine, beer, and spirits retailer with operations in Alberta, British Columbia and the United States. CEO James Burns explains why the company has added cannabis to its portfolio and discusses how recent structural changes to the company position Alcanna for continued growth. Burns provides an introduction to Alcanna’s Nova Cannabis branded retail stores. Alcanna opened 5 store locations in Alberta on October 17 and plans to continue to expand once the provincial regulator resumes granting licenses. Alcanna has partnered with an Ontario lottery winner to open a Nova Cannabis-licensed retail store at Queen Street West and Bathurst Street in Toronto. Burns stresses the company learned from Alberta’s retail roll out and are prepared for such a high-volume location. Burns addresses why the company eliminated its dividend and discusses Alcanna’s transformation into a growth company with multiple revenue streams.

Transcript:

James West:   James Burns joins me now via Skype. He’s the CEO of Alcanna. James, welcome back.

James Burns:  Hey, James, good to see you.

James West:   Yes, you too! James, let’s go straight to the 800-pound gorilla in the room: your share price has basically been cut in half since the last time I talked to you. Why is that, and how’s it going to go in the other direction?

James Burns:  Well, if I knew why the stock market did things, James, I’d be a multi-billionaire.

James West:   Right.

James Burns:  Yeah. We, our company, is transforming itself from a dividend-paying income stream into a growth company with several lines of business, where we intend to grow aggressively in the liquor and cannabis fields. And to do that, we eliminated our dividend because we have much better use for our capital inside our business with our investments. And obviously, people who held the stock as a dividend play, a lot of them sold and went to other yield investments.

So that was probably a major reason. The other reason, I think, is, again: as we transform and become very competitive in our market, the liquor business in particular, to get back the market share that had been lost over several years, our short term cash flow, we are reinventing that in margin and in price in the marketplace, and that reflects in quarterly cash flow results. And people who trade based on multiples of cash flow would see that the same metrics they were seeing in our company in previous years weren’t there anymore. So those are possibly some of the reasons, James.

James West:   Yeah, well, that’s an excellent explanation, and I wasn’t aware that your plan had been to become more of a growth through organic story rather than a dividend play; that’s what excited me. So I understand, of course, when you announce that you’re going to terminate the dividend in pursuit of a growth strategy, that makes perfect sense, and it looks like since you have undertaken that path, I mean, I’m guessing, looking at the chart here, that that was announced sometime towards the end of last year. But since the beginning of this year you’ve actually, you know, you’ve added 50, 60 percent in value.

James Burns:  Yeah, that’s right, James. We announced later in December, which was the time we would have paid the dividend for a quarter, that we were not doing so, and would not be doing so going forward. So precipitated the selloff, as we just discussed, on certain investors who were interested in a dividend stock, and once that happened, the market seems to have responded favourably since then.

You know, we put out some very impressive results since then. We announced our Q4 results, which were excellent in terms of – and this was all of ’18, in terms of same-store sales. We had same-store sales growth that 7 percent, which we haven’t seen for six years, and that was in the face of a declining overall alcohol business in Alberta.

So as I said in our analyst call in March, you know, we did exactly what we said we were going to do. We’ve taken on the competition, we’re gaining extremely large market share back to our company, and that’s only coming – that’s not coming from new customers. Alcohol’s a very stable, very mature business; that’s coming from existing customers.

James West:   Sure.

James Burns:  That’s up of our competition. So we’re very pleased. We’re on track, everything that we have planned in our strategy, we’re executing, and it’s all coming to pass as we predicted, and we’re going to stay the course, and we are very confident we’ll be successful.

James West:   Sure. What percentage of your revenue comes from cannabis?

James Burns:  Oh, it’s miniscule now, James. Cannabis is, we had five stores open on October 17th and many more under construction, and within three weeks, the licenses here in Alberta were frozen by the regulator due to lack of supply here. And your viewers all know what happened in Ontario; similarly, they went from a wide open market, which will still be there in time, but for the time being, the lottery, the 25 winners, everybody knows the story. So we are working with one of the lottery winners in Toronto, and we have a location at 499 Queen Street West, just a little west of Spadina, which is going to be a spectacular store.

James West:   Wow, that’s a great location.

James Burns:  As soon as we get it, it’s a great location. Used to be American Apparel. It’s a great location; a large store, 3,000 square feet, and we’ll be able to handle the volumes, and designed it to be very, very transactional in terms of processing the numbers which we know will be there given that there’s going to be so few stores, at least till December 13th, as per the government’s announcement. And they have the option, of course, to open it up earlier if supply comes earlier, but what we see here in Alberta, supply is getting worse, not better, at the moment, of the products that people want to buy.

James West:   Wow, that’s amazing. I mean, so when do you anticipate the Queen Street store opening?

James Burns:  Oh, we’ve been ready to open since the last week of March. We were ready for April 1st, but we’re still, the AGCL, the regulator in Ontario, is going through its due diligence process, checking people out, and so on; and because the lottery winner, Heather Conlon, she’s the owner of the store, but because Alcanna has a services agreement with them and to help her as well as she’s licensing our Nova cannabis name, the AGCL needs to check us out, too. And so we’re a bigger company; we’ve got a lot of Directors, officers, and they need to check out every single individual. So that’s just taking a little time, and we anticipate it will be within the next couple of weeks, but it’s out of our control.

James West:   Sure. Well, that’s great for the lottery winner to have somebody who’s got, you know, an operating business supplying through a distribution channel all kinds of recreational products, let’s say. So that’s great news; I’m very glad to hear that. That makes me think that at this price, the stock is probably a speculative buy. I mean, 33,000 square feet – I was just at a store in San Diego…

James Burns:  Three thousand, three thousand.

James West:   …which was doing $43 million, did $43 million in 2018 from that single location, and it was certainly no bigger than 3,000 square feet.

James Burns:  Yeah, yeah, 3,000 is great. And we have, we’re, you know, we’ve learned from here. We had the first couple of weeks in October when it was crazy: lineups from 10 to 10. Basically, as fast as the tills could process, we sold product until we ran out. We learned from that, and we’ve designed this store specifically around, I mean, we’re retailers. You know, we have 240 stores; we know how to retail, and we’ve designed this store specially to handle transactions, high transactions. It’s very cool. We had, we contracted the local artists on graffiti alley on Queen Street, there, so we contracted a local artist who has an installation of six of his works inside. It’s going to be a really, really great store.

James West:   Wow, I’ll have to go by there.

James Burns:  You know, you only learn by doing things, and we’ve been doing this now for cannabis for, well, retail for 25 years, but cannabis retail since October 17th, and we know our stores are, five stores, just by what we read of some of the other people in the cannabis retail business publish and disclose, that on a per-store basis, our stores, our five, are significantly higher in volume than the other retailers – and that’s in the face of extremely limited supply up here right now.

James West:   Right.

James Burns:  Extremely limited.

James West:   Okay. How much – I mean, when did you – let me ask you this first, James: when did you start paying a dividend at Alcanna?

James Burns:  Oh, the Alcanna, which used to be called Liquor Stores NA, went public, oh gosh, 2010, I believe? But it was an income trust, and maybe even a little earlier than that. And it was an income trust at the time; I wasn’t here then. And it was designed strictly to pay out most of its cash flow. Switched to a corporation when income trusts were no longer permitted by the government as a tax vehicle, so, and has been paying the dividend ever since. So it was a very different company than the companies today.

One of the reasons that we changed the name, other than the fact that Liquor Stores was not a particularly interesting name for a company, and because we were getting in to the cannabis business, but we also wanted to signal to investors that it’s a very different company than, you know – this ain’t your father’s liquor stores, this is a different vehicle. We’re going to be very aggressive in the marketplace and grow in the cannabis business as soon as supply and regulations allow us.

We’re big; we’re very, very big. We can handle the leases and pay leases while we wait for the supply and the regulations to catch up, and we have excellent teams of retailers at all levels of the business – marketing, IT, finance – all in place, doing our 240 stores we already have, a few more, another 50, 100, it’s easy for us. It’s incremental. We can do it at very low additional cost.

James West:   Wow, fantastic. So James, is it conceivable that upon attainment of a certain equilibrium or, you know, continuity in cash flow, and, would you return to paying out a dividend?

James Burns:  Oh, you never know. Certainly not in the foreseeable future; you know, you tend to pay dividends as corporations, in theory, when you don’t have investment opportunities inside your business or M&A or whatever, which have an appropriate return on capital; so you return the capital to the shareholders.

James West:   Right.

James Burns:  We see, with the cannabis business, is going to be a tremendous growth vehicle for many, many, many years. So the chances of that business – liquor business is mature right now; we will have it where we want it to be in Alberta within a year, easily. Province of Ontario has already announced several plans, including just last week again, very strongly, that it is going to go to some kind of private-sector retail model for liquor, so that’s a tremendous growth opportunity for us, depending on how those rules are finally decided upon and announced. That, with cannabis, we have some great, great investment opportunities with our cash for quite a long time to come, James. So I don’t see paying a dividend anytime soon when we have that kind of ability to put capital to work really, really effectively.

James West:   You bet. All right, James, well, that’s a fantastic update. I am looking forward to visiting your store; please shoot me an email as soon as it’s open, because we’d love to be there on opening day.

James Burns:  We will, sure. Sure, we will for sure. We’ll get about a week’s notice, we’re told, so we’ll have lots of time to let you know, and we welcome you down there.

James West:   Great, thanks, James. Well, we’ll look forward to speaking to you then. Have a great day, thanks for joining us.

James Burns:  Thank you, James, nice to talk to you again.

James West:   You bet. Bye for now.

James Burns:  Bye.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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