Sundial Growers $SNDL Acquisitions and Growth

I am not a big fan of Sundial Growers, much to the chagrin of some investors and followers. Sundial is sitting on a mountain of cash – $750M – and has begun the process of deploying that cash to expand its footprint.  However, revenue growth is paltry during a time when the rest of the country is seeing increased retail sales for cannabis products.  The excuse: COVID; everybody’s excuse for failure.  However, and as I just mentioned, Canada is seeing ever-rising increases in retail sales of cannabis… during COVID; the excuse is simply that and holds no sway with me.

Despite that, recent acquisitions, and the potential for more, are adding to an element of possibility and intrigue.  Whereas Sundial’s core business just saw a decline in revenue and have some of the worst margins in all of cannabis, -33%… as in negative 33 percent gross margins, they recently acquired Inner Spirit Holdings, a dispensary chain in Canada which will have some +100 stores by the end of this year and likely far more beyond that in years to come.  I was bullish on Inner Spirit; they were one of my Top Picks.

SNDL
$SNDL

Also, Sundial just pushed their investment in The Valens Group up from 7% to 10% of the company.  The Valens Group is a white-label manufacturer with very large potential.  Their guidance will push the stock upwards significantly; I recently reviewed them here on this site.

There is also another company that I like that now has an introduction to Sundial via their partnership with Inner Spirit; The Auxly Group, another company that I recently reviewed.  Auxly has a distribution deal with the Inner Spirit corporate-owned dispensaries (About 10 in total of the +100).  Auxly has about 14% of the market share of all Cannabis 2.0 in Canada.  I would think that Sundial would want to own a company that has 14% of market share in all of Canada and then expand its offerings in Inner Spirit holdings dispensaries.

I highlighted all three of these stocks and their potential with a video of Cannabis Stocks To Watch:

Good Moves For Sundial

While I do not know of any pending moves by Sundial Growers, these seem like a natural progression for the massive pile of cash on hand.  Should they employ that capital in this manner, this would be massive.  For the record, I believe the three aforementioned stocks are significantly undervalued.  At the very least, Sundial is employing its capital in a smart manner and buying undervalued stocks.

But, it does nothing for the core Sundial Growers business.  That is my bone to pick with this cannabis company.  And, while they could be building themselves an excellent foundation that will be a powerhouse company, cannabis retail sales continue to increase.  Sundial Growers’ core business revenue does not.  To me, although these companies that are being acquired – or, could be – are undervalued, they would be supporting Sundial’s own business ventures instead of adding to a growing and prosperous company.

Let’s look at the most recent financial numbers

Revenues

Revenues were a sore spot:

Sundial Revenues
Sundial Revenues

Revenues have been declining instead of climbing.  Whereas the rest of Canada is seeing increasing gains in retail sales, Sundial is still retooling itself towards more premium and profitable branding.  This was already accomplished by other companies months ago; Sundial is late to the trend.

This is part of the reason why I have never really been a big fan of Sundial.  They got their hands on a mountain of cash and built a massive infrastructure – that costs money to support – without requisite revenues and profits.  The problem is that they needed to deploy a strategy that justified the cash raise.  But, scaling into something like this is difficult… and expensive.

Margins

Gross margins were affected by the decline in marginal products; they are exiting that business.  Margins were also affected by the Grassroots products which are seeing declines:

Gross Margins
Gross Margins

So, yes.  They actually did sell products at prices below what it cost to make said products.  Generally, there would be an adjustment of fair value and this was the case with some write-offs.

Nonetheless, Sundial is starting to exit non-profitable businesses and products.  There will be continued movements out of these sectors.  And, there will be continued losses until Sundial moves in the right direction.

Operating Costs

Operating costs have remained. contained.  However, the drop in revenue had a severe impact on this metric:

Operating Efficiency
Operating Efficiency

Operating costs did edge higher for the quarter.  But, combine that small move upwards with a near 30% decline in revenue, and the mathematics shows how this spike above 100% – all the way to 129% – occurs.  As long as revenues move upwards and operating costs remain contained the eventuality is that Sundial’s numbers fall into line.

But, this is all a long way off.  Revenues, given a constant metric of approximately $10M for operating costs will need to move to about $30M – $40M per quarter to make where the metrics are, make sense.  We have not been given guidance as to when the numbers achieve these levels.  My thinking is that with the recent acquisitions there will be a dilution of what we see in the metrics.

Bottom line: Sundial needs to earn revenues and profits.  They are not.

EBITDA & Net Earnings

Sundial printed its first EBITDA profits.  But, this is not from its operations.  When I first started going through the numbers and saw the revenues, gross margins, and operating costs I could not imagine how Sundial printed EBITDA profitability.  This was due to the value of stock they owned:

EBITDA
EBITDA

Just as the Good Market can giveth, the Good Market can taketh away.  So, this is not a trend I would buy into.  In fact, I dismiss this simply because of revenues and costs.

The idea is that EBITDA is a metric that shows whether the core business is profitable.  In the case of Sundial, it is far from that.  Nonetheless, profits are profits no matter how you garner them.

Net Income

On the other hand, there is net income which took a massive hit of some $107M for the quarter:

Net Income

The loss is due primarily to stock price movement and warrants.  Sundial is on the hook for warrants if they are exercised.  They need to continually adjust for valuations.  The good news is that what the Good Market taketh, the Good Market could give back; if $SNDL stock were to head back lower then the amount needed to cover for warrants will decline; the company could “earn” this amount back. $SNDL has fallen somewhat since this financial report has been filed.

Is Sundial Growers a Good Buy?

This is an interesting question: Is Sundial Growers a good buy?  I have given some thought to this and my basic summary is this: Time is money.  Sundial is going to acquire several more companies with its cahs-on-hand.  They are even acquiring companies at discounted valuations.  But, its core business has always been troubling to me seeing how it has not been able to make a profit.  In fact, they are far from being able to make a profit with a -33% gross margin rate.

While they now have Inner Spirit Holdings to sell their products through, that does not necessarily mean they will instantaneously increase gross margins to a level that will be profitable any time soon.  There will be economies of scale and productivity gains with increased revenues, true.  But, this will take time.

In the meantime, there are other companies that I think provide a far more attractive opportunity right this very minute.  After all, time is money.  These other companies are increasing revenue at a fast clip.  They are at the very least EBITDA profitable.

For me, I will pass on Sundial.  But, eventually, they will become something much larger and more profitable.

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