The Canadian cannabis products company, Sundial Growers Inc. (SNDL) came out with its quarterly earnings yesterday after the market close. While SNDL faced soaring hype prior to the earnings, at present the stock is falling down in the pre-market today on May 17, 2022. At the time of writing, the stock had lost 8.71% in the pre-market and was trading at $0.4245 apiece. This downfall came after the stock garnered the interest of investors yesterday and soared by over 21% in the regular session.
Before the earnings release yesterday, SNDL saw a nice uptick as investors were looking forward to a beat report. The company had previously said in its Q4 2021 earnings call that it is starting to witness positive momentum across all of its key segments. It then announced a plan of becoming free cash flow positive within 2022 and the latest acquisition of Alcanna on March 31, was probably why investors were so cheerful before the Q1 earnings. But the current downtrend following the earnings release suggests investors were not impressed with the results and thus have now sparked a sell-off.
However, let’s look at the earnings report and the threats and opportunities surrounding SNDL.
SNDL’s Q1 Earnings Snapshot
On the ending day of the March quarter, SNDL completed its Alcanna acquisition. Adding just the single-day revenue from the acquisition, the company’s Q1 revenue hit $17.6 million, marking a YOY growth of 78%. Had the acquisition been completed in January, Alcanna’s $162.5 million revenues (from January 1 to March 30, 2022) would also have been consolidated to the company’s results.
Moreover, the quarterly gross margin improved by a huge 199% YOY to $3.4 million against a loss of $3.5 million in the year-earlier period.
On the improving front was also the net loss which shrunk to $38.0 million against $134.4 million in the prior-year period. Thus, it marked a stark improvement of 72% YOY.
However, owing to central bank interest rate changes and fair value adjustments in relation to the SunStream joint venture, the adjusted EBITDA was a loss of $0.7 million in Q1 2022. The comparable figure was positive $3.3 million in Q1 2021.
SNDL ended the quarter with cash, marketable securities, and long-term investments of $1.0 billion and no outstanding debt while the unrestricted cash was $361 million on May 13.
Possible Threats
The legalized medical and recreational cannabis market, while expected to remain bullish between 2019 to 2026, has an attributed CAGR of just 4.6% in the period. Furthermore, it faces many challenges as the legalization of cannabis is still vastly debated in most countries, including the U.S. Another risk to the market comes from the cannabis products on the black market. Given that black market producers don’t have any legal responsibility and costs like the legalized SNDL and others, they offer their products at much lower prices, which is a huge competition as well as a threat to legal cannabis providers. The black market imposes a relentless rivalry on the legal players in the industry. Many companies, including Sundial, have been struggling to keep up with the black market products as the rising inflationary pressure is further instigating consumers to go for the lower-priced products.
The soaring inflation rates which are expected to continue rising are surely going to further discourage consumers from purchasing legalized cannabis products.
Market Opportunity
On the other hand, the cannabis market saw a boom after Canada legalized the products, and legalization efforts continue in various states of the U.S. as well. Americans are overwhelmingly supporting cannabis legalization as its demand continues to rise on part of its numerous medical and psychological benefits, in addition to being a stress reliever.
For SNDL, the latest acquisition of Alcanna also brings a vast opportunity as it has now become the largest private-sector distributor of both cannabis and liquor in Canada with 354 retail locations. In addition to cannabis, its expansion into liquor retails will also improve its cash flow and revenues.
The company is also working on reducing its operating costs by CAD150 million-CAD170 million annually by the fiscal first half of 2023. While adjusted EBITDA profitability in the near-term still remains questionable, if it can sustain the current positive momentum, SNDL will likely trend higher.
Conclusion
There are as many threats as there are opportunities in the market ad in times where geopolitical and economic stability is deteriorating by the day. Even cannabis legalization might not bring any good news for companies like SNDL. The real threat continues from the black market as inflationary pressure will continue enticing consumers to obtain the products at relatively small costs. However, the company does have a strong cash position to help it expand and grow both organically and inorganically on top of the Alcanna acquisition to further its revenue and profits.
