2023-04-26 05:45:37 ET
Summary
- SNDL delayed the release of its Q4 2022 and PY2022 financial results.
- The reports are now available and show a significant increase in revenues and margins.
- The company’s recent acquisitions are now apparent in its financial results.
- SNDL reports negative earnings from operations; one cause is loss on cannabis investments.
- The company’s stock has been perpetually down and I rate the company as a hold for now.
SNDL Inc. ( SNDL ) over the last year has solidified into four operating segments: liquor retail, cannabis retail, cannabis manufacture, and cannabis investments. When I last covered the company, it was still in the process of completing the acquisition of Alcanna and Nova. I rated SNDL as a buy, but the outcome has gone tragically in the other direction. The company's stock, as well as all cannabis stocks, have been on a perpetual downtrend.
Over-saturated cannabis markets are part of the blame, as well as greater market volatility. SNDL's financial performance has gained a lot of criticism and sell ratings . While other cannabis companies have undergone restructuring, SNDL claims in its recent reports that it will remain a robust operation despite market conditions. The company has a plethora of assets and revenues to stay in the game and outlast the others. Until the company can report positive operating income, I rate it as a hold.
Financial Performance by Segment
SNDL experienced rapid growth over 2022, beginning in 2021. The company began providing capital to cannabis companies through it SunStream venture and it acquired Spiritleaf, a franchise of cannabis dispensaries. Then SNDL merged with Alcanna, a massive footprint of liquor and beer stores, and its subsidiary Nova Cannabis, another set of cannabis dispensaries. The company also acquired Zenabis and Valens, both cannabis operations with global distribution.
Liquor Retail
The company has significantly increased its revenues and margins with its acquisitions. Through Alcanna and its liquor retail segment, SNDL operates 169 retail locations in Alberta. The breakdown of its banner stores is as follows: Ace Liquor (137 stores), Liquor Depot (20 stores), and Wine and Beyond (12 stores). The company reported CA$159.7 million in revenues for its liquor retail segment for Q4-2022. The margins on the sales were 23% or CA$36.9 million. SNDL will expand its liquor retail segment into Regina and Sakatoon where it has won the government lottery for two retail liquor licenses.
Cannabis Retail
Through its majority ownership of Nova Cannabis and acquisition of Spiritleaf, SNDL is accountable for 197 cannabis retail locations under four banners : Value Buds, Spiritleaf, Superette, and Firesale Cannabis. The breakdown of stores is as follows: Spiritleaf 99 (22 corporate, 77 franchise), Value Brands 91, Superettee 5 (recently acquired); Firesale 2. These dispensaries range from high retail to bargain discount and allow SNDL to reach a larger share of the market. The company has a cannabis retail footprint in five Canadian provinces, reaching nearly 10% of the market (according to its recent investor presentation ).
The company reported cannabis retail revenue of CA$68.4 million for Q4-2022 and a gross margin of 23% or CA$15.7 million. Through a new strategic partnership with Nova Cannabis, SNDL has tasked Nova with overseeing all cannabis retail operations.
SNDL continues expansion of its cannabis retail operations. It recently acquired four Dutch Love cannabis dispensaries, three in British Columbia and one in Ontario. The company foresees the addition of CA$11.5 million per year in revenues from the addition.
Cannabis Production and Manufacture Operations
Gross revenue for cannabis growing and product sales in Q4-2022 was CA$18.7 million, representing an increase of 19% YoY (CA$15.7 million). Revenue for cannabis grow operations for PY2022 was CA$61.9 million, a 21% increase from 2021 (CA$51.2 million). Gross margins remain negative YoY and for the year with cannabis production and manufacture. Q4-2022 gross margin was negative CA$9.0 million compared to negative CA$7.4 million YoY.
SNDL made two acquisitions to improve and increase production and distribution. In 2022, the company acquired a new grow and processing facility through its merger with Zenabis Global. Zenabis already benefits from international distribution to Malta, Israel, and Australia. Zenabis brings a 380,000 sq ft grow facility in New Brunswick which was previously EU GMP certified.
The company recently acquired Valens in January 2023. Valens operates a cannabis extraction and product manufacturing facility. Its products are sold throughout Canada and the company benefits from global exports. Valens exports medical cannabis to Australia.
SNDL has increased its global distribution through a partnership with IM Cannabis (IMCC). The two companies share an ongoing agreement to supply medical cannabis to Israel. SNDL has successfully exported 167 kilograms of cannabis flower to Israel. The two companies have committed to supply 1,000 kilograms to the Israeli medical cannabis market within a contracted time frame.
SNDL's cannabis products are available in all ten Canadian provinces. Global cannabis markets have become the new appeal as sources of untapped opportunities. The European and global markets are slowly developing, leaving a long game for revenue growth. The Canadian cannabis markets have undergone a long trend of product oversaturation coupled with price compression. One of SNDL's strategies for the conditions is to sell discount cannabis at discount dispensaries.
Investments segment
According to the company's Q4-2022 report , SNDL has loaned CA$638.4 million in capital, with CA$519.3 million to SunStream. The company reported revenue of CA$6.0 million from interest payments on capital loaned to cannabis companies. Part of the SNDL's capital funding means holding the stocks of the companies in which it invests. Loss on these investments amounted to CA$18.3 million compared to a profit of CA$19.3 million YoY.
The company reported losses in marketable securities of CA$5.9 million, including positions in Village Farms ( VFF ) and Valens. The current SunStream portfolio of cannabis companies contain Jushi Holdings, SKYMINT brands, Ascend Wellness Holdings, Parallel, Inc, Colombia Care, and AFC Gamma. Volatile stock markets and cannabis retail markets have caused SNDL's investment segment to experience losses.
Q4-2022 and PY2022 Financial Results
Overall PY2022 revenue was CA$712.2 million, representing a 1170% increase versus 2021. The increase should not be considered a surprise, since it comes as a result of the Alcanna and Nova acquisitions. Revenue for Q4-2022 was CA$240.4 million, representing a 4% increase from Q3-2022. Future estimated revenue is expected to increase slightly quarter to quarter in 2023, according to market consensus.
Gross margin for PY2022 was CA$140.4 million, representing a 1,660% increase from the previous year. The increase again is due to the acquisitions of new companies. During 2021, SNDL reported negative gross margins. SNDL reported Q4-2022 gross margins of CA$43.6 million versus CA$50.3 million during Q3-2022. The company credits inventory markdowns and impairments for the decrease.
The company reported a net loss of $372.4 million for PY2022, compared to a net loss of CA$226.8 million in the previous year. The company cites "non-cash inventory and asset impairments" totaling CA$203.0 million in 2022 versus CA$77.0 million in 2021. The company reported a net loss of CA$161.6 million for Q4-2022 versus CA$98.8 million for Q3-2022.
The company addresses the net losses for the year in its SEC filing :
The net loss for 2022 was largely driven by fourth quarter non-cash charges including the impairment of goodwill related to the Alcanna Inc. ("Alcanna") transaction, including Nova. Despite improving fundamentals for Nova, the share price decline of 53% since the acquisition date warranted a $88.0 million non-cash adjustment.
The main culprit seems to be product markdowns, asset impairments, and volatile market conditions. It is not clear when it will get better for SNDL or the rest of the cannabis companies.
The company reports CA$918.0 million in cash and long-term investments and still has no debt. SNDL reports its own book value per share at $5.02. The company has CA$207 million in cash on-hand as of April 2023. Market consensus for revenues for Q1-2023 is currently CA$221.40 million. Revenues are estimated according to market consensus to increase each quarter in 2023 by about CA$20 million.
Income Statement | TIKR.com | Millions of Dollars | Q4-2022 | Q3-2022 | Q2-2022 | Q1-2022 | Q4-2021 |
Revenues | 240.41 | 230.50 | 223.70 | 17.60 | 22.72 |
Cost of Goods Sold | (196.84) | (180.19) | (180.62) | (14.18) | (27.23) |
Gross Profit | 43.57 | 50.31 | 43.08 | 3.42 | (4.51) |
Total Operating Expenses | (71.46) | (60.30) | (53.05) | (16.83) | (16.66) |
Operating Income | (27.89) | (10.00) | (9.97) | (13.41) | (21.17) |
Earnings From Continuing Operations | (161.57) | (98.84) | (73.97) | (38.04) | (56.76) |
The company's revenues have significantly increased and gross profit has grown. Alongside this trend, operating expenses are increasing and the company consistently reports a net loss from operations. It may take more than a year for the company to report a net income versus a loss.
Stock Price Movements and Valuation
SNDL's stock price has been down 74% over the last twelve months. The company's stock underwent a reverse split, then proceeded to down trend further. The stock may seem undervalued at 0.39x NTM Total EV / Revenues. It is also undervalued according to its book value per share. These metrics may tempt a new investment, but I would hold off for now. The negative income from operations and larger market volatility indicate that a new uptrend may not come anytime soon. I rate the company as a hold and consider 2023 an important time to watch the company's performance.
Conclusion
SNDL has rapidly grown through its acquisitions over the last twelve months. It has significantly increased its revenues and margins by entering new markets, including the liquor and cannabis retail markets. Although the company reports stellar financial performance with its new business segments, it still operates on negative income and net loss. It is hoped that the company's financial performance continues to improve during 2023 and that these losses turn into gains. The company's stock price has been on a long and perpetual downtrend. Until these conditions improve, I will rate the company as a hold.
For further details see:
SNDL Releases Q4 2022 And PY2022 Financial Results; Remains Positive On Intoxicants