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Good morning. We would like to welcome everyone to Alcanna Inc.'s Third Quarter 2020 Earnings Results Call. [Operator Instructions] A copy of the company's earnings press release and management's discussion and analysis is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. All amounts discussed on today's call are quoted in Canadian dollars. I will now turn this call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thanks, operator. Good morning, everyone. Thank you for dialing in to our quarterly analyst call. As per recent tradition here, I will not be giving any prepared remarks, just a very brief overview. We had an excellent quarter, as the results showed and assuming everyone on this call has read them. Gross margin dollars, particularly being -- sales being extremely strong and margin dollars as strong or greater in terms of percentages. So that's really -- it's about making money, and the company continues to make money. And the REIT we see, no, as we said in our MD&A, nothing in the marketplace that dictates that this is going to change anytime soon, and we'll stay this way for the foreseeable future. Province in Alberta just announced on Friday that restaurants were to stop serving alcohol at 10:00 p.m. and close for the night at 11:00 p.m., so which greatly reduces interest in demand in on-premise. Article on the globe this morning on BC restaurants that are allowed open, but the customers are not coming. So we just see this is not a COVID blip. This is a change in consumer patterns. So going forward, and it bodes well for our business in many ways. And with that, I'll just turn it over to questions. Operator, please.
[Operator Instructions] We have a first question from Kyle McPhee from Cormark Securities.
Just on your plans to add more Wine and Beyond locations in Western Canada, I see your official guidance calls for one that will be open next year. I'm wondering if there's plans for more Wine and Beyond, beyond that. How many and when could we see that happen? And what's that calls to get them in your official guidance? Are you still waiting on good locations and good leases? So any color on that would be appreciated. And I'm referring to Western Canada, not the potential opportunity in Ontario.
Right. We -- just I think as we've sort of mentioned, maybe in the last analyst call or -- that we're -- we would like to put 2 more in Calgary, that's actually 3, certainly, 2. But we are waiting for landlords to accept the new reality that what they -- rents they thought they were entitled to before March 12 of this year are no longer market rents. And so if we need to wait for 4 or 5 empty big box or retail shelves to be in the same-center before we run words get realistic, then we'll wait. So it's really a function of the landlord marketplace, accepting the reality of the new situation here. Whether that comes in first half of next year after Q4, we'll see how that does for retailers entering into Q1 and Q2 are traditionally big money-losing for traditional retail anyway. We'll see if that accelerates that. But other than that, we're waiting for good sites at appropriate rents. And we don't really feel we're in any hurry. When the site -- good sites come, we'll take them and if the landlords are being in denial, then we'll wait.
Got it. And assuming those rents move to where you want them, is there more in the cards beyond the 2 in Calgary you mentioned?
Well, as we continue to look for BC sites, it's very difficult, but it's because of the radius restrictions and there's very few areas in BC which don't have a liquor store less than a kilometer or so from another liquor stores. So you don't really have any gaps to fill in the market other than greenfield sites, of which there are some very interesting ones coming up as especially throughout the lower mainland, the population in the residential building is exploding. So there are the new centers coming that we're in talks with on a handful of there. Those are a little further out, those are more 2022, 2023 sites. And so if we're going to get some in the interim, we're still looking, but again, it's -- there, it's different. It's a combination of landlords and having to deal with, most likely having to deal with an existing liquor store operator. Liquor stores are relatively high demand these days, even for a single store owner operators because of how healthy the business is during these times. So the prices of a single store are certainly gone up beyond what they used to be just for the raw license. So we're looking, Kyle, but we're cautious and we'll get deals that we think we have a good deal, but we're not chasing them just for the sake of making announcements.
Our Wine and Beyond brand continues to do spectacularly well here into Q4. And they've really become a traffic driver in all of the centers that they're in. And I know landlords are actively pursuing us to put them in their centers. So we feel we're in a good position to grow when we want to grow it.
Yes. They've had spectacular sales increase week after week after week for the whole 9 months. I mean, it just -- it's -- I guess, we don't disclose the actual number, but it's really incredible, way, way more than the whole company is skewing. And it's the big spaces and people feel safe. They can spread out, the aisles are big with tons of room. So we're enjoying exceptional performance. So we will get them, but we're not going to do it at the expense of time the company to an overly expensive 10-year lease, so -- which is really a 20-year lease because you get a 10-year option, but the leases never let you go down when you renegotiate. They are always flat or up. So we're going to be careful and make sure the lease arrangements are appropriate for the conditions of the market.
Okay. Just also hoping to get a little color on how Q4 is playing out so far for the liquor business. So first, are you still seeing that same extent of same-store sales lift for your liquor stores, which I suspect might be the case given how COVID is playing out, maybe even accelerated? And then second, on the liquor is, your gross margin is still picking up. I know there's usually a seasonal lift in Q4 from mix, but should we also expect that lift from you guys just normalizing at higher still as in recent quarters?
Kyle, we're happy with the trend so far in Q4. We've had a couple of weather weeks, which is normal at this time of year. But now, we're very happy with the trend, and we'll see how things shake out over the next few months, but happy as -- happy where we are. In terms of margin, you will see a bit of the seasonal lift, for sure. But we're not pushing through to the end of the year on making significant improvements in gross margin percentage. We're focused squarely on margin dollars. And we see this as a continued good opportunity to gain market share, in Alberta specifically.
Got it. Okay. And last quick one for me. On your inventory and working capital flows, I know you changed your inventory buyer and practices a bit. So I'm wondering if we should still expect that huge Q4 release of cash from working capital?
Yes. You're going to see inventory come down quite dramatically. The investment in working capital was really just a decline in accounts payable and accrued liabilities. From June to September, our inventory numbers stayed fairly flat, June to September. But yes, you will see the normal reduction of inventory as we go through to the end of the year. And that's plus or minus if we see some good opportunities from the vendors to pick up some limited time offers. But barring that, yes, you'll see the reduction.
The next question is from John Zamparo, CIBC World Markets.
I wanted to follow-up on the margins' question. The year-over-year improvement you saw in Q3 had accelerated. Are there any nuances that you can call out in Q3 or maybe for Q4 about whether it's sales mix or a more or less promotional environment that you saw earlier this year or maybe an impact from the divested stores? Any commentary there would be helpful.
When you look at last year, we were very much in market share growth mode. And so we were being very aggressive in the marketplace. So we are lapping that. You're going to see that strong increase over Q4 last year as well. And as a reminder, we implemented a very aggressive pricing strategy in Wind and Beyond last year at this time. So again, we'll lap that. You'll see a nice lift in margin. We have changed our promotion strategy a bit, primarily because of COVID. People just aren't looking at advertising and promotions the same way that they have in the past. And so we are writing that way, even saving -- frankly saving a few dollars at the -- for the time being on marketing. But most of it is just as we did, and we implemented early in 2020 is just our continued strategy to bring profit to the bottom line now that we've captured market share.
Yes. But we're never ever taking our eye off the market share, both. So it's a very competitive business. And so far, with the margins that we've been able to achieve are holding. But if there's any competitive response to the contrary, we'll meet it.
Yes. But so far, very stabilized industry.
Got it. On the Alberta cannabis front, the 2 to 4 stores that you plan to open, are those greenfield sites? Or are you seeing opportunities from competitors looking to sell?
No, they're new locations. We're not really looking for any new locations in Alberta, but I mean we've had landlords come to us or one landlord, which -- relatively big landlord in the province, which had never allowed cannabis on its sites before for its own personal reasons, reached out to us a little while ago and said, okay, and they were now opening up, and they gave us first crack at the sites and questions. So stuff like that, John, as opposed to any competitors. The competitors call all the time. And -- but we're not really interested in acquiring in those bases, usually the ones that are calling or probably the locations are very good or businesses aren't really fit into this kind of thing that we're doing. The Alberta cannabis market hasn't started to rationalize yet. It's coming. But it hasn't started yet. People are calling with big numbers in their mind, but they'll foam back in a few months or half a year with lower numbers.
They forgot to change their calendar, it's not 2018 anymore. Those days are over.
Fair enough. On the Vancouver Island transaction, you reminded us in that press release that you are looking to exit lower volume stores in smaller communities. Are there other potential opportunities you could use to refine your network?
Yes. No, we've been actively working all year to reduce those low volume stores, which are just not efficiently run by the company. That -- but whereas they're quite attractive to mom-and-pop operator who does a lot of the labor themselves and can take home a really good income or as -- and they're not restricted to 40 hours a week. There's all such things that a big company has to do, which an owner-operator business doesn't have to do. So we are being relatively successful, again, given how popular liquor stores are right now as businesses, jobs to -- at getting off our books, the stores, which we don't want on our books. And these would be all stores that literally made nothing. So even if we sold them for a relatively small amount, and we're not -- we're getting some decent prices. These aren't big dollars, John. But they -- we get our inventory back. So you're having $200,000, $250,000 tied up an inventory in a store that's not really making any money. But some of the overhead, you have to look after them all, if you start getting an aggregate number of reductions. It is just a huge win for our return on overall capital employed.
Okay. That's helpful. And then last one for me. On the capital allocation side, outside of the priorities you listed in the MD&A, what are the primary factors that you and the Board are thinking about as it relates to a dividend or potential buyback or maybe M&A for the coming year?
Our first priority is the convertible debentures, which we can redeem at the end of January, a couple of months from now. And we have every confidence with some options that we're exploring seriously that we will be able to do so without even any need for equity raise at all. And that's just not going to happen, not required. Once that is resolved and see what -- how things stand, then I guess, John, obviously, businesses that generate significant free cash flow and don't see immediate opportunities to redeploy that at a proper rate of return for the -- to justify the investment, the 2 examples you mentioned are obviously things that we would be -- we would seriously consider.
[Operator Instructions] The next question is from Brian Lee, Eight Capital.
The majority of my questions have been answered. So just got a quick one for me. In terms of Cannabis 2.0, you mentioned during the last conference call that there weren't a lot of supply for the products that consumers really want. Has that changed in the quarter? I was wondering if you could talk about how much of that incremental margin upside with Cannabis 2.0 products could potentially offset the margin pressure coming from a competitive environment in the short to medium term?
2.0 product continues to be very sporadic. It's available, but in very limited quantities. So I think the average caseload, if my memory shows me correctly, for what's available this week in Alberta, for example, the average case of any given product, any given SKU was 200 cases, something like that. And then there's 540 stores. So you basically not even get it. So even if you get some, it's so miniscule, you can't build a brand, you can't build a program.There continues to be a shortage of things like gummies that people want and a surplus of things like chocolate, which people aren't as interested in. So it's still -- nothing's really changed in terms of 2.0 availability at all, I'm afraid. It will, but it will, for sure. It just -- it hasn't yet, it's going to take some time to roll it out.
And when it does come, it will help enhance our margins going forward but...
Yes.
Question is best for the LPs as to when do they see supply firming up and being more consistent. But when it does, gross margins will improve because of that. Now that will be offset by flower, we see margins probably coming down over the short to near medium term, just because there's so much supply in them.
Yes. The oversupply is just going to naturally push pressure on prices, which will then -- and again, the oversupply, the over in Alberta, there are far more stores than there is demand in the market, which is growing relatively slowly versus the store growth. So that is -- as we've been giving our opinion that this is what's going to happen for a couple of years now, just that kind of over store network will just has naturally no option, but to reduce prices as people get desperate to pay staff and pay leases. So we're anticipating that will probably happen.
There are no further questions registered at this time. I will return the call back to Mr. Burns.
Thank you, operator, and appreciate everybody listening this morning, and we'll talk to you again in March. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.