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COVID-19 Could Hurt This Pot Stock's Sales the Most

By David Jagielski – Jun 14, 2020 at 8:46AM

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Being based in Las Vegas may do more harm than good for Planet 13.

The COVID-19 pandemic is a massive problem -- one that investors need to factor into their decision-making process. But some stocks are a lot higher-risk than others. In particular, businesses that are dependent on tourism and out-of-state traffic are seeing a bigger impact on their sales and bottom lines. In April, retail sales in the U.S. were down 16.4% (seasonally adjusted) from the previous month, the largest drop since the Commerce Department began tracking the data back in the 90s.

Tourist-dependent companies like pot stock Planet 13 Holdings (PLNH.F 1.08%), which is based in Las Vegas, are more vulnerable to the effects of travel restrictions and consumer wariness to leave their homes and could be in for an especially challenging year.

Visitor traffic to Las Vegas was down significantly in April

The Las Vegas Convention and Visitors Authority releases monthly data on people visiting the city. As expected, tourism took a big hit in April, with visitor volume down a whopping 97%. During the month, there were 106,900 visitors to the city compared to 3.5 million a year ago. Occupancy rates of less than 2% show there's minimal traffic going through Las Vegas these days.

Las Vegas welcome sign.

Image source: Getty Images.

Can Planet 13 survive?

What makes Planet 13's flagship SuperStore location in Las Vegas popular is that it's more than just a dispensary. The location features a cafe, restaurant, a customer-facing production facility, and there's even event space. It was built to be a tourist attraction for everyone, not just cannabis customers. If volumes are down, then those sales numbers are likely taking a big hit.

The company announced on March 19 that it would be shutting down some of its operations due to the pandemic, but it did offer online ordering and delivery services. As Nevada's begun reopening, the SuperStore now allows limited in-store sales and curbside pickup.

The Nevada-based business released its first-quarter results on June 1 and there wasn't cause for concern just yet. Its sales of $16.8 million were up 21.4% from the prior-year period and it even reported a pre-tax profit of $305,000, up from $142,000 a year ago. 

Visitor volume in Las Vegas was down by 59% in March, so COVID-19 would've already impacted Planet 13's Q1 results, which were up until March 31. But there's no doubt that the second quarter, which will include April through the end of June, will be much worse.

Gov. Steve Sisolak shut down Las Vegas on March 18 and ordered nonessential businesses in the state to close two days later. Pot shops in Nevada were deemed essential and were allowed to continue operating, initially via home delivery and curbside delivery was permitted on May 1.

Nevada's had more than 10,000 cases of COVID-19 thus far and 462 deaths as of June 12. The outbreak in the state's been fairly controlled compared to hot spots like New York, where the state has had more than 400,000 cases of COVID-19.

Whether it can get through this pandemic will depend on Planet 13's ability to effectively manage its cash and how successful the city of Las Vegas is in reopening and preventing a significant outbreak of COVID-19. During the first quarter, Planet 13 generated positive cash flow of $2.4 million from its operating activities, which was more than enough to cover its plant and property purchases of $2.1 million during the period. If the company can continue to stay cash-flow positive and not chip away at its cash balance of $13.9 million, it should be in good shape to get through the pandemic. But that's a big if, as it'll depend on how much traffic is down in future periods.

Planet 13's co-CEO Larry Scheffler isn't too concerned. In the earnings results, he said, "While Q2 has been a challenging period for all Nevada businesses, Planet 13 pivoted quickly to a delivery-based model, which has significantly lessened the impact of lower tourist traffic, while broadening the SuperStore's long-term customer base."

There is reason for some optimism now that the city has reopened -- perhaps June won't be a bad month for the city. Sisolak announced on May 27 that casinos would be able to reopen effective June 4. But if there's a resurgence of COVID-19 cases, all that progress could be for naught.

Should investors buy Planet 13 stock?

If not for COVID-19, Planet 13 would be a great stock to own. Unfortunately, in a new reality of social distancing and where fewer people are traveling, it's become a lot tougher to gauge just how strong Planet 13's business will be in the coming months and even years.

At a minimum, investors should wait until Q2 results are out to see just how well Planet 13 is able to manage the current situation. While management's still optimistic about where the company is today, investors will want to analyze its sales and cash burn before making any investment decision on the pot stock.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Planet 13 Holdings Inc. The Motley Fool has a disclosure policy.

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