At this time last year, marijuana was expected to be one of the fastest-growing industries on the planet. Canada had just opened its doors to legalized recreational sales on Oct. 17, 2018, more and more U.S. states were given the green light for medical or recreational weed, and Canada looked to be on track to have derivative pot products (e.g., edibles, vapes, and infused beverages) on dispensary shelves by no later than October 2019.
However, the past year hasn't gone anything like the initial forecasts. Supply issues have wreaked havoc on the Canadian cannabis market, while high tax rates have subdued growth in select U.S. states. Seemingly one brand-name pot stock after another has cautioned that its sales or profit expectations wouldn't be up to snuff in recent weeks, and Monday, Nov. 11, marked OrganiGram Holdings' (OGI 1.07%) turn.
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Pot stock OrganiGram offers a weaker-than-expected fourth-quarter update
Following the closing bell on Monday, OrganiGram offered guidance on a number of important metrics for the upcoming release of its fiscal fourth-quarter and full-year operating results on Monday, Nov. 25. For the quarter ended Aug. 31, the company expects to report about 20 million Canadian dollars in gross cannabis shipments, as well as CA$3.7 million in "product returns and pricing adjustments." That works out to CA$16.3 million in forecasted net revenue in Q4. By comparison, OrganiGram generated CA$24.8 million in net sales during the sequential third quarter, meaning revenue will have fallen by about 34% from the previous quarter.
Not surprisingly, this decline in sales is expected to lead OrganiGram to report an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss. Even though OrganiGram did lose money in the sequential third quarter, the company generated an operating profit of CA$1.17 million, removing all one-time costs, benefits, and fair-value adjustments from the equation. Suffice it to say that this regression won't be tolerated well by Wall Street.
However, the company's fourth-quarter revenue really isn't the most worrisome aspect of OrganiGram's corporate update. Rather, the following three admissions are much more concerning.
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1. THC oil uptake by recreational users has been weak
In describing why the company took CA$3.7 million in returns and pricing adjustments, OrganiGram's press release notes that it was "largely due to returns and pricing adjustment for two slower selling SKUs sold to the Ontario Cannabis Store (OCS), comprised of a bespoke order of lower THC [tetrahydrocannabinol] dried flower intended to fulfill a supply gap in the market earlier this year and THC oil which has seen less than anticipated demand in the adult-use recreational market." THC is the cannabinoid that gets users high.
It's perfectly understandable for supply issues to be impacting OrganiGram's sales in the early going, but the admission that THC oil sales have been weak in the adult-use market is worrisome. That's because derivatives like oil generate much juicier margins than traditional dried cannabis flower. Understandably, medical patients were always expected to be more willing to use derivatives (like THC oil) relative to recreational consumers, but this is still a surprising and unnerving admission.
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2. "Lack of a sufficient retail network" [in Ontario]
OrganiGram became the latest cannabis stock to blast Canada -- and, more specifically, Ontario -- for not providing a meaningful network with which to sell its products.
Some of you might recall that HEXO (HEXO) went under the guillotine in mid-October, prior to its quarterly earnings release, and announced that the slow rollout of physical dispensaries played a big role in its considerably weaker-than-expected results. HEXO had previously been calling for sales to double on a sequential basis, but instead guided for roughly 19% growth at the midpoint. And HEXO has a point, with Ontario having opened only two dozen retail stores in a province with more than 14 million people.
OrganiGram does note that Ontario's second retail lottery should triple the province's existing retail count, but it -- and other provinces -- is still a ways away from providing an adequate retail footprint for legal-channel sales.
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3. No concrete guidance offered due to "dynamic forces and uncertainty"
It's also telling that, in the outlook section of the company's corporate update, OrganiGram announced that it had more in fiscal first-quarter sales than at this same point in the fourth quarter, and that "The Company believes it is neither possible nor prudent to provide any further guidance given the dynamic forces and uncertainty in the industry today."
In other words, cannabis dynamics are changing so quickly in Canada that one of the more transparent and trusted companies in the industry is unable to offer up better guidance than to essentially say it's on track to generate more in Q1 2020 sales than it did in Q4 2019. That's not exactly reassuring, but it does reinforce that the supply issues Canada is contending with will take numerous quarters to work through.
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It's not all bad news
There's no sugarcoating that OrganiGram's guidance isn't good. But even amid the worries in the company's corporate update, it's important to keep the bigger picture in mind. And when it comes to this longer view, OrganiGram still appears poised for success.
After tinkering with its cultivation setup in the fiscal third quarter, OrganiGram notes that a reversion to previous growing methods has returned yields per gram to normal. In fact, cannabinoid content in harvests continues to hit an all-time high, per the update. Don't forget that the 113,000 kilos of forecasted peak annual output will derive from less than 500,000 square feet of growing space. This makes OrganiGram one of the most efficient cannabis stocks in the world, in terms of grams yielded per square foot.
Unlike many of its peers, OrganiGram also has its eye on expensing. The company operates just the one cultivation campus in Moncton, New Brunswick, and as such has considerably lower recurring operating expenses than many of its peers with multiple growing and processing facilities. When combined with its superior yields, this should make OrganiGram one of the higher-margin cannabis stocks in the industry.
Clearly, there's still some growing up to do for the industry and OrganiGram. But the company certainly looks to have the tools necessary to be head and shoulders above a number of its peers. In short, don't let this downbeat corporate announcement discourage you from giving OrganiGram a closer look.
