Medmen’s Turnaround Plan Attracts A-List Board Members.

MedMen’s turnaround plan has been very impressive, attracting A-list board members and buy-in from landlords and lenders. Will it be enough to keep the company from having to declare bankruptcy?
 
A-List Board Members
MedMen is now under the aegis of interim CEO Tom Lynch, who has a background in restructuring companies out of court – something he did as the chairman and CEO of Frederick’s of Hollywood Group. Since Mr. Lynch has taken the reins, the MedMen board has brought in Mel Elias, the former president and CEO of the Coffee Bean & Tea Leaf; Errol Schweizer, former VP of Grocery at Whole Foods Market; and Niki Christoff, SVP of Strategy and Government Relations at Salesforce, among others. This level of board support bodes well for an out-of-court turnaround for this cannabis retailer.
 
Employees are still scoring the management low on Glassdoor. However, the current leadership hasn’t really had the reins long enough for better reviews to start showing up. In fact, the new CEO isn’t even listed there yet.

Lender and Landlord Support
On July 3, 2020, MedMen announced that their Turnaround Plan had received support from their landlords and lenders. According to the press release, “The Plan will defer approximately US$32 million in cash commitments over the next 12 months and provide additional balance sheet flexibility.” According to MedMen Interim Chief Executive Officer Tom Lynch, “We believe the widespread support we have received from our lenders and landlords will allow us to continue execution of the turnaround, continue to grow our best-in-class retail operations and drive towards positive free cash flow.”

The plan turns interest from cash payments into Payment-in-Kind warrants from now through March-June 2021, with a conversion rate of US$0.28-$0.34. MedMen’s share price on August 17, 2020, was US$0.165/share.
 
4Q 2020 and Full Year Results
One thing that could weigh heavily on the turnaround plan is the 4Q and full year 2020 earnings results covering April 1, 2020, through June 30, 2020. Earnings from that period should be announced the last week of October (based upon last year’s date of Oct. 28, 2019). In the 3rd quarter 2020 earnings call on May 27, 2020, Tom Lynch said, “We're down in April overall, but have seen a steady increase since. While we're still not back to our normal levels, pre-COVID, particularly in California, we're optimistic about our ability to recapture traffic as soon as stay at home orders are lifted.”

​If the 4th quarter 2020 revenue comes in at $46 million, where the 3rd quarter was, then the full year revenue will be in the $180 million range – +38% over last year’s record $130 million. If the 4th quarter revenue is lower (which is likely), it will still be easy for the full year to post gains. MedMen revenue in the 4th quarter of 2019 was $42 million.
 
Macro Trends
Another factor that could weigh down MedMen’s share price in the near term is the general marketplace itself. It’s rare for recessions to have more positive than negative months on Wall Street. In 2008, only 1/3 of the months were positive performers (March, April, August and December). So far in 2020, only March has registered negative, with 86% of the months accelerating gains.
 
While the recovering since the March 23, 2020, lows might seem like a boon for investors, when prices become too expensive, that typically portends a slide – especially in a recession. The only two times when stocks have been this expensive are in 1929 (before the Great Depression) and in 2000 (before the NASDAQ Composite Index lost 78% of its value).
 

CAPE ratio vs. long-term interest rates charts. (c) 2020 Robert Shiller. Yale.edu.

Liabilities
MedMen had liabilities of $739 million, of which $185 million were “current” as of the 3rd quarter 2020 (May 27, 2020 press release). As of March 28, 2020, current assets totaled $123.9 million and included cash and cash equivalents of $31.8 million. The company is looking to sell their Arizona assets and licenses to beef up their cash position.

CBD Beverages
While all eyes are on which company will produce the Budweiser equivalent of CBD beverages, mixologists are taking it upon themselves to create their own CBD concoctions. You can get CBD beverage recipes, including a cannabis-infused lemonade, and other edible ideas on Ember, MedMen’s Cannabis and Culture online Journal.

​The new landlord and lender support will help with MedMen’s planned out-of-court turnaround. However, more cost cutting and increased revenue will be necessary for MedMen to get through the COVID crisis without Chapter 11 (bankruptcy) restructuring. Fortunately, interim CEO Tom Lynch has experience doing just that. In the near term, MedMen’s share price could be vulnerable to even further weakening. However, there is now evidence that an executable Turnaround Plan is already in play.
 
MedMen's stock is high risk. However, if it works out, it will yield a high reward.


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