High Tide (HITI): Q1 FY2025 Earnings Review

Yesterday, High Tide (HITI) released its fiscal Q1 2025 results for the three months ending January 31, 2025.

The market didn’t take it well, with the stock dropping as much as 15% in today’s session. But what exactly happened?

In this article, I break down the good, the bad, and where my long-term investment thesis stands.

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Consolidated Numbers

The best way to understand what happened is by first looking at the consolidated numbers, and then breaking things down segment by segment.

Here’s a quick snapshot of the quarter:

• Record Revenue of $142.5M vs. $138.8M est. (up 11% YoY)
• Gross margin of 25% vs. 28% YoY
• Adj. EBITDA of $7.1M vs. $6.4M est. (down 32% YoY)
• EPS of ($0.03) vs. ($0.01) est.
• FCF of ($1.9M) vs. 3.6M YoY
• Cabana Club members at 1.76M, up 33% YoY
• ELITE members up 153% YoY (4.6% of total members vs. 4.2% QoQ)
• Same-store sales increased 5% YoY
• Market share of 11% vs. 11% QoQ, slightly up YoY

The outlook for 2025 remains unchanged:

• To open 20-30 new stores organically in Canada (3 opened so far, with 12 more currently in development)
• To remain FCF+ for the entire fiscal year
• To enter the German medical cannabis market, with or without Purecan
• Stay open to M&A opportunities for footprint expansion — but only if they complement the existing portfolio of stores (finding good targets is becoming more challenging)

Core Business: Brick-and-Mortar Stores in Canada

High Tide’s core business accounts for approximately 95% of total revenue.

Growth in this segment accelerated from +12% last quarter to +17.3% this quarter, the fastest pace in a long time, driven by a ramp-up in store openings and the good performance from same-store sales.

However, the acceleration in revenue growth came at the cost of lower profit margins, driven by two main factors:

1) New stores act as a drag on the numbers until they mature.

New stores typically take 6–9 months to mature, but as High Tide’s footprint expands, this timeline is stretching slightly longer.

• In 2024, High Tide opened 29 stores compared to 13 in the prior year, and we’re now seeing the effects of that rapid expansion.

• Opening a store requires approximately $260K in build-out costs plus $100K–$150K in working capital (WC), which significantly impacted FCF this quarter. Without these WC changes, FCF would have remained positive, and management expects this to balance out in future quarters.

Management has consistently stated that FCF will be lumpy on a QoQ basis due to the aggressive expansion, but they still project a positive full-year FCF figure.

Yes, I’d prefer to see a positive number every quarter, but if that means slowing down expansion, I’d rather see the company continue strengthening its market leadership.

For context, TTM FCF remains over $16.5M, a substantial increase from the prior 12-month period.

2) The resurgence of the illicit market led to a decrease in the gross margins of this segment, from 27% to 25% YoY.

To stay competitive, the company lowered prices in some municipalities like Virginia, Toronto, and Ottawa, where illegal stores are proliferating.

If High Tide is “struggling”, I can only imagine how much worse independent operators are faring. These short-term headwinds may actually accelerate further market consolidation, ultimately benefiting High Tide in the long run.

Raj Grover reaffirmed that High Tide will hold the line on margins to protect market share while waiting for weaker competitors to exit the industry — a trend we’ve already seen play out in recent quarters.

Long-term, several initiatives should help boost margins, including the expansion of white-label product lines (e.g.: Queen of Bud, which sold out its $0.5M inventory in just a few weeks), growing ELITE memberships, and strategic price adjustments in select areas as market consolidation continues.

As a result of these headwinds, adj. EBITDA margins declined from 8.3% to 6.2% YoY for this segment.

On a positive note, operating expenses improved to 22.8% of revenue vs. 24.2% YoY — a significant efficiency gain.

Another aspect I didn’t particularly like was High Tide’s market share remaining flat QoQ once again. This figure needs to return to its consistent upward trend.

All in all, the core business remains strong, and we’re already seeing the impact of High Tide’s accelerated store openings. However, there are some short-term pressures weighing on the numbers.

To me, the key variable to watch is how the illicit market situation evolves. If it stabilizes, High Tide should see margin recovery alongside continued growth. Additionally, it's crucial to monitor whether the new store openings contribute to an accelerated pace of market share capture, which has recently stagnated.

Everything else looked solid.

Ecommerce Segment: The Root of Most Problems

Although it accounts for just about 5% of the company’s total revenue, this segment has had a significant impact on many of the issues reflected in the consolidated numbers.

The image below clearly illustrates how poorly the ecommerce side of the company is performing:

Essentially, the ecommerce segment consists of a portfolio of brands that High Tide acquired a few years ago in the U.S. and Europe, which sell CBD products and consumption accessories. At the time (2021-2022), these subsidiaries had exceptionally high margins, much higher than High Tide’s core business. As a result, they supported the initial rollout of the discount club model the company launched in October 2021, offsetting the margin decline in the core business caused by this strategic move.

Looking back, acquiring these companies was a smart decision because it allowed the company to become the leading cannabis retailer in Canada. However, after the pandemic ended and global inflation rose, consumers drastically cut their budgets for CBD products and consumption accessories, causing the segment to struggle as the market became more fragmented and saturated.

But that’s not the main reason we saw these terrible results in Q1 2025. It was actually due to a change in the business model, intended to revive the strong performance this sector had a few years ago.

On December 2, 2024, High Tide announced the expansion of its discount club model to its ecommerce brands, unifying its retail ecosystem.

Basically, by paying a small membership fee, customers gain access to unbeatable prices across all brands owned by High Tide, with discounts of over 80% on some SKUs.

The goal is clearly to capture market share in the fragmented CBD market. However, this business model change has led to a significant decrease in both revenue and margins, creating a major headwind for the company’s consolidated results.

Here’s how management expects these effects to evolve in the short term:

“The Company is encouraged by the initial trajectory of members signing up to its loyalty plan — and maintains its expectation that this initiative will be revenue neutral approximately six months from launch and EBITDA neutral approximately 12 months from launch. The Company is pleased to report that 4,500 members in the U.S. and Europe have signed up to ELITE.”

To be entirely honest, I’m still skeptical about the potential of this segment. Yes, it was crucial in supporting the pivotal decision that enabled High Tide to become the leader in its core business. But now, it’s turning into an expensive hurdle to carry.

Hopefully, management is right and we see some positive results in the next few quarters. If that doesn’t happen, I think the team should consider divesting some of these brands.

The Entry into the German Medical Cannabis Market

On January 13, High Tide announced its intention to enter the German medical cannabis market through the acquisition of a 51% stake in Purecan, a profitable German medical cannabis importer and wholesaler.

This move is highly strategic, as most medical cannabis in Germany is imported from Canada. Given that High Tide is the largest cannabis retailer in the country, it has established relationships with all the major Licensed Producers (LPs) — a significant competitive advantage.

However, after the German national elections last month, High Tide decided to pause the acquisition to explore alternative structures. Why? Essentially, the new government opposes telemedicine prescriptions for medical cannabis, and a substantial portion of the value High Tide was set to pay Purecan was tied to an “in-development telemedicine portal”, which now holds no value.

Here’s the update we received during today’s earnings call:

"We continue to have conversations with Purecan, but we'll enter the market with or without them. We are in the perfect position within the supply chain."

"We are in conversations with other groups, we may have an even better opportunity – stay tuned. This isn’t going to take months and months, maybe just a couple. We want to do it the right way."

It’s clear that acquiring Purecan isn’t a necessary condition for expanding into Germany, and that the team is still eager to pursue the medical cannabis market opportunity. Nonetheless, they remain cautious when deploying shareholders’ capital.

As I mentioned after last quarter’s results, this new segment has enormous potential — not only to expand the company’s TAM but, more importantly, to drive significant operating leverage. Bottom-line margins in the medical cannabis space are much higher than those in High Tide’s core business, so capturing a considerable market share would be a game-changer for the company’s financials.

Relevant quotes from Q4’s earnings call:

“The goal here is to build the biggest medical cannabis menu in Germany and become the preeminent distributor in the landscape, something that does not exist today. There are a lot of small players, very tiny players, but there’s no one of significant size and scale. I’m having excellent conversations with our LP partners here in Canada, and everyone is excited to get on board. It’s going to take us a month or two to get going, but I can tell you this is an exponential opportunity for us. And it includes the largest Canadian brands, our own white-label products, and a range of cannabis — from medium-grade to high-grade, and in some cases, even lower-quality cannabis.”

“I can tell you, with confidence and positivity, that I’ve had an overwhelming response in my conversations with licensed producers. I think I’ve had over 20 now in the last week, averaging three to four a day. Honesly, I can’t think of a single one that isn’t excited to start this venture with us. We are being offered the opportunity to distribute Canadian brands, both exclusively and non-exclusively, on top of all the momentum that’s building in Germany.”

“I believe High Tide is the most perfectly positioned company to take advantage of the medical cannabis market in Germany and capture a significant share of it.”

“Germany will be our doorway or gateway into other countries in Europe and eventually Australia.”

In essence, while the ecommerce segment has been acting as a drag on the consolidated numbers, the medical cannabis market represents a transformational opportunity for High Tide to expand its addressable market and experience significant operating leverage.

I look forward to hearing more updates on this in the coming months.

Other Updates

Balance Sheet: In my opinion, High Tide’s balance sheet has never been stronger. The company drew the final $5M tranche of debt from its recent lender and paid $13M of debt due in December 2024.

Today, the company holds $33.3M in cash & cash equivalents and just $26.4M in total debt, with no maturities over the next two and a half years. This debt level represents only 0.8x TTM Adj. EBITDA, and it is fully covered by cash. The company believes it can continue funding future store growth with cash generated from existing locations.

SNDL’s Stake: We recently learned that SNDL, one of High Tide’s biggest rivals, acquired a 5.4% stake in the company. During the earnings call, Raj addressed this issue, noting that he had already met with board members and experts in the field to discuss possible defensive strategies to avoid a hostile takeover. He also spoke with large shareholders, who assured him they were on his side in protecting long-term shareholder value.

Raj views this as a sign of how undervalued the company is right now, and I share that perspective.

Trump’s Tariffs: 99% of the company’s revenue doesn’t cross the border between the U.S. and Canada, so the company is not affected by the uncertainty surrounding Trump’s tariff policies. Regarding the potential indirect effects related to a Canadian recession, Raj mentioned that, over the past few years, both cannabis and alcohol have proven to be somewhat recession-resistant.

Conclusion

Yes, this quarter wasn’t the best for High Tide. However, I genuinely believe the investment thesis remains intact, and the market is overreacting to some temporary headwinds.

While High Tide could focus on maximizing profitability right now, that wouldn’t probably generate the best long-term results for the company. I believe the growth strategy they’re pursuing is the right one to maximize shareholder value, but time will tell.

The core business remains strong, the upcoming entry into the German medical cannabis market remains an important short-term catalyst, but the ecommerce segment has been muddying the picture.

We can’t expect every quarter to be the best ever — that’s not even a necessary condition for an investment thesis to materialize. As always, what truly matters is understanding the context behind the numbers and the direction in which they’re likely headed. In this regard, I remain confident that the future is bright for High Tide.

Disclaimer: As of writing, M. V. Cunha holds a position in High Tide (HITI) at $1.86/share.

Thanks for reading!