Showdown in Vegas: Tryke vs. Planet 13 – sales, margins and multiples

As noted in our last Weekly Wrapup, the acquisition of Tryke Cos. by Cresco Labs (CSE: CL) provides great sales, profit margin and valuation comps for Planet 13 (OTC: PLNHF), which has their main “experience” dispensary literally across the street from Tryke’s Reef Dispensary.

Net, Tryke has higher sales per foot and margins and is already at scale, but Planet 13 equity could rise about 60% if they achieve their goals.

As shown in the Cresco-Tryke presentation on the acquisition, Tryke runs six dispensaries under the Reef brand along with some cultivation assets and licenses, but 70% of its revenue comes from two dispensaries in Las Vegas:

  • The flagship Reef Dispensary on the Las Vegas Strip generated $31 million of revenue in 2018, or 44% of the $70 million total revenue for Tryke; the North Vegas store generated $18 million or 26%.
  • The Las Vegas Strip dispensary has 5,000 square feet of retail space, while the North Las Vegas store had roughly 2,500 square feet in 2018, based on reports of it recently tripling its footprint to 7,500.
  • This dispensaries yields revenue per square foot of $6,200 and $7,200, respectively.

Before Nov. 1, 2018, Planet 13 operated a 2,300 square foot dispensary 6 miles from the Strip, which generated the $13.0 million of revenue at at 19.3% EBITDA margin, which yields $5,652 per foot, about 9% less than the Reef Strip store.

On Nov. 1, 2018, Planet 13 opened its new Las Vegas Strip dispensary across the street from Reef with 16,000 square feet of retail space and plans to add another 4,500 square feet for a cafe and pizzeria.

For the first half of 2019 the new store generated $30 million of revenue, or an annualized $3,795 per foot.

Consensus estimates for Planet 13 are for $4,459 per foot in 2019 and $5,039 per foot in 2020. This is 28% and 19% less per foot respectively than the Reef store.

Planet 13’s strategy is to use an “experience” store sell 2X-3X the revenue in a store 3X-4X larger.

Tryke’s higher margins come at lower sales levels

Tryke achieved an impressive 34.9% EBITDA margin across its six dispensaries. Given the scale of the Las Vegas stores, it is safe to assume they independently achieve at least 34.9%, yielding $11 million of EBITDA at the Strip dispensary.

Based on our comp table, consensus expects Planet 13 to generate 20% EBITDA margins for 2019 and 30.5% calendar 2020. For the trailing twelve months ended June 30, 2019, Planet 13 posted revenue of $19.8 million and an EBITDA loss of $1.4 million as they grow volumes into the new space.

Planet 13 guided to 35%-40% margins on the company’s most recent earnings call once the dispensary expands with the cafe and pizzeria, and consensus has 30.5% EBITDA margins at $100 million of volume in 2020. Note that this is 3X-5X the sales volume of Reef achieves similar margins, highlighting the higher risk of the Planet 13 strategy.

Tryke LV Strip 2018A Tryke North LV Old Disp. 2018A Planet 13 Old Disp. TTM 9/2018 Planet 13 New Disp. 1H19 Planet 13 New Disp. 2019E Planet 13 Exp Disp. 2020E Planet 13 Target Margin Est
Retail Square Feet          5,000          2,500          2,300        16,000        16,000        20,500        20,500
Revenue ($ millions)  $     31  $    18  $     13  $     30  $     72  $   103  $   103
EBITDA ($ millions)  $     11  $      6  $      3  $      4  $      14  $     32  $     36
Revenue / Ft  $ 6,200  $ 7,200  $ 5,652  $ 1,897  $ 4,494  $ 5,039  $ 5,039
EBITDA / Ft  $ 2,166  $ 2,516  $ 1,093  $   250  $   894  $ 1,537  $ 1,764
EBITDA Margin % 34.9% 34.9% 19.3% 13.2% 19.9% 30.5% 35.0%
EBITDA Estimate for Tryke applies company-wide margin to Store level revenue

Planet 13 valuation favorable versus Tryke

Cresco will pay 4.0X revenue and 11.5X 2018 EBITDA for Tryke, which is higher than Planet 13’s 2.5X revenue and 8.1X EBITDA multiples on the 2020 consensus estimates.

Of course Tryke has already executed and achieved the 35% EBITDA margin last year, while Planet 13 still must execute and grow into this valuation – and any competitive impact from Planet 13 on Tryke would increase the multiple paid by Cresco Labs.

The fact that Cresco Labs separated out the “real estate” consideration from the “operating asset” consideration, and the emergence of REITs and sale-leasebacks in cannabis, implies there will be probably be a sale-lease back on the $30 million in real estate to let Cresco Labs generate some capital at the expense of EBITDA margins.

Curaleaf noted a “double-digit” cap rate on their latest $28.3 million sale leaseback. A 10% cap rate on Tryke would reduce EBITDA by $3 million and margins by 425 bps to 30.7%, as noted in the “PF leaseback” column below.

Valuation Multiples Tryke 2018A Tryke 2018 PF Leaseback Planet 13 TTM 9/2018  Planet 13 2018A Planet 13 TTM 6/2019A Planet 13 2019E Planet 13 2020E Planet 13 Target 35%
Enterprise Value  $ 283  $ 253  $ 259  $ 259  $ 259  $ 259  $ 259  $ 259
Revenue  $  70.4  $  70.4  $  13.0  $  21.2  $  43.7  $  71.9  $ 103.3  $ 103.3
EBITDA  $  24.6  $  21.6  $   2.5  $  (0.8)  $   2.7  $  14.3  $  31.9  $  36.2
EBITDA Margin 34.9% 30.7% 19.3% -3.9% 6.2% 19.9% 30.9% 35.0%
EV/S 4.0 3.6 19.9 12.2  5.9  3.6  2.5  2.5
EV/EBITDA 11.5 11.7 103.0  n.m. 95.7  18.1   8.1   7.2

Margin and multiple opportunity at Planet 13 – if they execute

The key question: What has happened to the revenue trends at the Reef dispensary on the Las Vegas strip since the arrival of Planet 13? (Note that Tryke gave 2018 revenue, which only had Planet 13 across the street for two months).

It is possible that the Reef revenue at the strip has taken a hit with the new competition. It’s also possible that Reef has maintained or even grown sales with the added traffic from Planet 13 and clustering (similar to the “auto mile” in most cities with multiple car dealerships on one street).

Tryke’s achievement of 35% margins in 2018 overall show that Planet 13’s long term target for the Vegas Strip store is possible, and Cresco’s acquisition multiple compares favorably to Planet 13’s current multiple.

If Planet 13 generates 35% EBITDA margin on $103 million in sales and then trades at the multiple Cresco paid for Tryke of 11.5X EBITDA, that would yield about a 60% return on the Planet 13 shares from current levels.

Of course that is a very big “if” that will come down to the execution and whatever the market pays for dispensaries in 2021.

Planet 13 too big or Reef too small?

For Planet 13, it also begs the question of why use so much space to provide an experience (as Planet 13 does) when one can earn similar margins by just selling more in a smaller box.

The higher capital costs associated with building out the a larger store are excluded from the EBITDA margin, as EBITDA is “before depreciation and amortization,” which is how capitalized costs are expressed in the income statement.

But the Planet 13 store should generate much higher total sales and EBITDA.

If the volume demand is there on the Vegas Strip, the question for Tryke and Cresco is if the Reef dispensary there needs to be expanded or relocated, like the North Las Vegas store.

Mike Regan can be reached at miker@mjbizdaily.com.