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MedMen turnaround looks increasingly unlikely

Summary

  • MedMen has been in restructuring mode since 2019, and the company has fired its co-founders, slashed corporate costs, and divested licenses.
  • However, MedMen’s business remains unprofitable and cash burn is estimated at ~$25M per quarter.
  • We think MedMen’s turnaround is looking increasingly unlikely, and the company could be taken over by its lenders in the near term.
  • Public shareholders should be extremely cautious given the risks are very high in this situation; we maintain negative view on MedMen shares.

MedMen (OTCQB:MMNFF) has faded out of the limelight for cannabis investors after a tumultuous few years post-IPO. The company has lost the majority of its equity value and is now selling off pieces of its assets to protect its remaining portfolio. We think MedMen’s shares remain too speculative to invest given its fragile balance sheet and large cash burns.

Image result for medmen logo

(All amounts in USD)

Broad Retreat

Since MedMen handed management to its current CEO after the founders exited the beleaguered retailer in early 2020, the company has been in restructuring and turnaround mode. The playbook for the new professional turnaround management team is straightforward: slash costs as hard as one could, sell off non-core assets, and restructure the balance sheet.

First of all, MedMen has announced several asset sales to help raise cash in order to support the rest of the business, including:

  • California: Even in MedMen’s home turf it has been losing ground as it had to sell some licenses for cash. It sold a retail license in Seaside for $1.5M another non-operational license for $3.75M.
  • New York: Sold 87% interest in its New York operation to Ascend Wellness (a private MSO) for $73M with an option to acquire the rest of the business for another $10M once recreational sales are legalized. MedMen does not receive any cash from this deal and instead will offload secured debt.
  • Arizona: MedMen sold its three vertically-integrated licenses with retail stores in November 2019. Recall that MedMen spent heavily on Arizona including acquiring a company called Monarch in 2018 that comes with one dispensary and a production license; shortly after it acquired another two Level Up vertically-integrated licenses for $33M.
  • Illinois: MedMen first sold its cultivation and production license in 2019 and then sold its retail license in 2020 for $20M.

Going forward, we think the company is clearly focusing its efforts and resources on California, Massachusetts, Nevada, and Florida. Among these markets, California is clearly the most iconic market for MedMen and generated 60% of its current sales. Nevada is a likely divestiture target given the lack of scale and challenges with COVID-related reduction in tourism. Florida is also a potential divestiture target depending on whether MedMen could raise additional financing to fund its growth. Due to cash flow difficulties and COVID, MedMen actually shut down 5 of its 8 Florida locations in March 2020 but it is now trying to open new stores. The Florida market is a very attractive but also very capital-intensive market because the wholesale market does not exist. Each operator needs to be vertically-integrated and only sells its own products, which means that cultivation and retail assets go hand in hand. Trulieve is dominating the market but many MSOs are also spending money such as Curaleaf (OTCPK:CURLF). We think MedMen is disadvantaged in Florida from a balance sheet perspective and it might decide to sell its Florida business for a handsome profit to fund its remaining portfolio.

(Source: IR Deck)

While asset sales were ongoing, MedMen continued to fund its money-losing operations. As we have painstakingly pointed out in the past, MedMen’s problem was both its balance sheet and cash flow. The company was spending too much money on flagship California locations that were cashflow negative. Additionally, the California assets are generating very little organic growth which is also a big problem. MedMen reported the latest quarterly results which showed a modest sales decline mainly due to the sale of its Illinois location. However, the rest of the business did not grow at all which is very troubling. Most of the other MSOs have reported high double-digit organic growth during 2020; MedMen’s challenges are likely due to a combination of its weak home delivery service in California and ongoing restructuring efforts that undoubtedly impacted staff morale and customer perception.

To Read The Rest Of This Article By Cornerstone Investments on Seeking Alpha

Published: March 04, 2021

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