Raj Grover: Matt, thanks for your question. So to your point, Matt, we already have the infrastructure. We have a massive footprint generating close to $500 million on a brick-and-mortar level, or over $450 million Canadian on a brick-and-mortar level. So as we already have our accessory brands, we already have our CBD brands, this is a natural step in the direction to start building our own cannabis brands. Like I was just talking to Fred about it when we have our competitors that are vertically integrated and they’re launching their own brands, the one advantage that they have is, again, we can’t own those brands or sell those brands in our stores, which gives them a competitive advantage on margin. So as we build Queen of Bud in our stores and maybe even more forthcoming cannabis brands, we’re going to have that margin arbitrage that does not exist for us today.
So for that particular reason, you can call this a trial case, but I would say it’s not because we already have experience with accessory brands. What we are doing with accessories, we are leading the country in accessories. Our competitors typically do about 1%, 1.5% of accessory sales are close to 4% to 5% of accessory sales and 90% of those sales are coming from our own brands. Now if we could do the same thing in cannabis, long term, we want to have 25% to 40% of all of our sales come from our own brands, and that’s without adding the cost and the overhead of these growing facilities. Ashley already had the contracts established. She knows all of the players in Canada. We also know all the players in Canada. So we’re just going to leverage that with our size and scale.
And because the brand is so differentiated, I think it’s going to add very meaningful value for shareholders.
Matt Bottomley: Got it. And then just another question for me, something that you mentioned in your prepared remarks that I was just looking to expand on a bit. So the Ontario License cap is doubling. I know you spoke a bit about this last quarter. But just given the dynamics, a bit of softness in the industry, from a macro level and there’s still a lot of stores in Ontario. Do you need to see the market retrace a little bit with respect to the number of doors before you would accelerate that? I know your guide for this year is a lot less than the 90 you could open. But I’m just curious how much of those 90 stores might make sense at the end of the day to open in the current environment in Ontario?
Raj Grover: Great question, Matt. So look, historically, we’ve always done some M&A to support our organic growth. I don’t think that is going to change in our mindset for the Ontario market. We’re going to be doing exactly that. We can still add 90 more stores in Ontario. I already have close to 15 leases still despite opening about seven in Q1, seven stores, we still have 15 leases in our hands. These are high-quality leases. We’re patient in terms of the locations we get. There are anchored locations, as I always talk about, their Costco, LCBO, Big Grocery Anchors. And as we are securing these high-quality locations, despite the fact that there is existing competition in that area or there may be because we have a location that trumps everybody else is, and given our model, we start generating sales very, very quickly.
So I’m not worried about the fact that Ontario is hitting saturation levels. It is an absolute problem in multiple areas of urban neighborhoods in Toronto and other places in Ontario. But given our location selection criteria as these locations come up, we are selectively taking these locations, and we feel that we can easily add 20 to 30 stores this calendar year, again, focused on the Ontario market. So you could see roughly 20 of them opened in Ontario. And then if we get our hands on a good M&A transaction, that can go up even higher from that. But underpromise overdeliver, the goal is to do 20 to 30 in Ontario, and I don’t see any problem for us to get there.
Operator: Our next question comes from Andrew Semple from Echelon Capital Markets.
Andrew Semple: I also just want to call out the new segment disclosures are helpful. So appreciate that update. First question would be, it looks like the business is making a more intensive push for ELITE membership taking up inventory allotted to lease members from 2% to 12%. I guess I just want to understand how consumers are responding to this? Obviously, the ELITE lineups have been accelerating, so that’s great to see. But what’s happening in stores? Is that inventory allotment driving increased number of ELITE sign-ups.
Raj Grover: Andrew, thank you for your question. So look, we’ve been so methodical with ELITE. When we launched ELITE, we didn’t sweep the rug off our customers’ fleet and go straight to 12% of inventory. When we launched ELITE, less than 2% of our in-store inventory reflected ELITE, but we messaged this very clearly to the market that long term, we want 20% to 30% of all of our in-store inventory reflect ELITE. And I’m extremely happy to see that within 1.5 years or close to 1.5 years of launch, we’ve already ramped up our inventory to 12%, and that is having a ripple effect. As you can see, last quarter, which was last quarter, Q4, we grew at the fastest pace for ELITE since inception. This quarter, sequentially from January 2019, when we last reported to today, we have upped that pace even more.
So customers are absolutely enjoying the robust ELITE selection that we have now both on cannabis accessories and cannabis itself. And it’s a bit of a chicken and egg story. You can’t overnight change all of your inventory and run the risk of customers not converting into Elite because it’s an inflationary environment. So we paced it out. We methodically planned it and 12% of inventory is yielding results, and I can tell you that we are going even higher. Our confidence is also going up as we’re seeing the customers block into our ecosystem and sign up for Elite. We’ve actually raised the price on Elite membership, which is another great data point to mention here on the call. When we launched Elite, we were $30 a year per Elite membership we’ve raised that to $35 a year now.
Long term, the plan is to take Elite over $50, $60. So we can already see the benefits of that, and customers have not shied away from signing up because they’re seeing more and more of in-store inventory reflectively. So you’re going to be a lot more — you’re going to see a lot more sign-ups. You’re going to see the sustained pace going forward, and we’re going to continue updating the market in terms of where we sit in terms of in-store inventory reflecting Elite.
Andrew Semple: That’s helpful, Raj. And a good point too, that sign-ups are increasing even as the price rises. Next question would just be on inventory, which continued to trend downwards in this quarter. You’ve taken a lot of inventory out of the business over the past year even as you add more stores. I’m just wondering what’s been driving that? Have you just been getting more efficient at the store level? Has there been some inventory reductions in e-commerce? And maybe if you could comment whether you can hold similar levels of, let’s say, days of inventory or inventory turns or inventory per store, whatever your preferred metric is as you continue to grow this year?
Raj Grover: Yes, absolutely, Andrew. One thing we’ve always been very, very proud of is how we manage days on hand for our inventory, both on the e-commerce side, on the CBD side, accessories and very, very importantly, on the cannabis side. Cannabis is a perishable commodity. So you’ve got to be careful with that. And there’s so much read in the country that if you get excited and overload your stores, very quickly that SKU gets dated and something else takes over and now you have to sell it below cost. So we’ve been very, very mindful, and this is why you’re seeing massive jumps in our adjusted EBITDA margin from 4.7% to 8.1%. One big reason is that we’ve managed our inventory extremely well. We’ve done the same thing in the CBD world.
We’ve consolidated our vendors. Even when we are feeling revenue pressures on the CBD side and accessory side, what we continue to do is leverage more drop ship for the accessories business and leverage our vendors to buy all of the CBD companies, the raw materials together and to get them manufactured through New Leaf. So this very focused inventory management. We have a great team that continues to be focused on inventory management, and I personally review these numbers every single week, and we keep on top of it. And that is one of the bigger drivers. And this is not going to change, Andrew. You’re going to see that we run our show really tight. When it comes to inventory, our cannabis inventory days on hand is roughly 16, 17 days, which is, I believe, probably one of the lowest turns — most efficient turns in the industry.
Operator: Our next question comes from Scott Fortune from Roth MKM.
Unidentified Analyst: This is Nick on for Scott. Congrats on the quarter and also congrats on the free cash flow front, while reducing accounts payable. Just wondering if you could provide some color around that $3.6 million you generated and just how you see your free cash flow evolving throughout the year here? Is breaking even maybe the baseline moving forward? Are you expecting maybe some lumpiness as new stores come online? Just your sense of the free cash flow would be helpful.
Raj Grover: Nick, thanks for the question. Look, I’m very happy that this is the third consecutive quarter of free cash flow generation. Net income is another milestone, but I believe free cash flow is the most important metric we can judge ourselves with and which the market is going to judge us with because in this environment, if you don’t have to depend on external funding, and we can continue to build our store portfolio and generate free cash. And we’re super excited to see that we broke even on net income. I don’t know how much more efficiently we can run our business. So it was very, very heartening to see that we generated another $3.6 million over the last three quarters. We generated $13.3 million in positive free cash flow.
That is not going to change going forward, but I do want to highlight one thing, Nick, when we are opening up the stores, remember that — when we’re opening up these stores, you have this ramp-up maturity period, like it takes 6 to 8 to 9 months for them to ramp up to maturity. And there is a free cash flow burn at that time. And there’s an adjusted EBITDA burn at that time. So it’s a really delicate balance on how quickly we want to grow or we can afford to grow because most important metric for us to remain is to remain free cash flow positive. So the free cash flow is going to jump quarter-over-quarter, jump up or down. It’s going to be lumpy given the working capital requirements, like we plan to open a lot of stores in the remainder of March, April and also May.
