Will it be a Happy St. Patrick's Day for Sundial Growers (SNDL +9.93%) investors? The Canadian cannabis company reports its fourth-quarter results on Wednesday, and how the numbers look could have a huge impact on where its already volatile stock will go in the weeks and months ahead -- not to mention whether or not Sundial investors will be celebrating afterwards.
The business is transitioning from wholesale to retail, and management may be on the hunt for a deal, giving investors plenty of things to watch for this week. Here are six of the most important things to keep an eye on when the company releases its Q4 numbers.
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1. Cash, cash, and cash
Sundial is sitting on a lot of money right now -- it reported 610 million Canadian dollars in unrestricted cash after the closing of its most recent offering in early February. That is enough to buy some attractive cannabis companies today. And although Sundial is burning through lots of money, it doesn't need all that cash to keep the lights on. Over the previous three quarters, the company burned through a combined CA$45.3 million to fund its day-to-day operating activities, nowhere near its current stockpile.
Investors will want to keep a close eye on the statement of cash flow this quarter to see if the company has spent much of the money it has raised, and if so, where it has gone.
2. Cost per gram
When Sundial reported its third-quarter earnings on Nov. 11, 2020, its dried bulk cost per gram sold was CA$1.18 for the period ending Sept. 30, 2020. That was a decrease of 12% from the previous period. The company is trying to get its costs down even further, targeting a cash cost per gram of CA$0.69. That would be a significant accomplishment and go a long way in not only improving its cash burn but also strengthening its bottom line, which was negative CA$71.4 million last quarter.
3. Impairment charges
Cannabis investors are no doubt familiar with impairment charges popping up on company financial statements, given the writedowns the plague the industry. And although they are non-cash items, they can still be a sign of problems within a business. They can serve as evidence that inventory isn't moving or assets are overvalued. Last quarter, Sundial recorded not one but two impairment charges. One was for CA$60 million to write down one of its facilities while another was a CA$19.9 million inventory provision.
The company previously said it will be transitioning away from wholesale and more toward branded retail sales. And as it deploys this change in strategy, it may move to deplete and purge more products, resulting in further writedowns in Q4.
4. SG&A
In Q3, Sundial made progress in bringing down its selling, general, and administrative (SG&A) expenses. General and admin costs of CA$7.2 million were down 42.3% from the prior-year period while sales and marketing costs of CA$1.1 million were 45.7% lower than a year ago. The company has reduced its workforce and paid close attention to its spending to help bring its expenses down. This will be another key area for investors to watch, to see if Sundial can continue to make progress in lowering its SG&A costs. With an adjusted EBITDA loss of CA$4.4 million last quarter, Sundial still needs to find more ways to trim these expenses if it wants to break even.
5. Net revenue
One of the most disappointing numbers in Q3 was Sundial's top line. In a growth industry, investors don't want to see sales falling but that's what happened last quarter. The company's net revenue of CA$12.9 million declined an incredible 54% from the same period last year, and 36% from the previous quarter.
Investors will want to monitor if the company's transition to branded retail sales is showing some progress and translating to higher sales than in Q3, or if the change is proving to be more challenging for Sundial.
6. M&A
Perhaps the most intriguing item to watch for in Q4 has nothing to do with numbers at all. In Q3, Sundial said its management is undergoing a "strategic alternatives review," which may or may not lead to a transaction. Given the company's cash accumulation and this being the all-important year-end quarter when a business normally announces any significant developments in the works, investors should look for an update on mergers and acquisitions. This item is last on this list because it is probably the most obvious one for Sundial investors -- speculation of a possible deal is likely why shares of the pot stock have already tripled year to date while the Horizons Marijuana Life Sciences ETF is up by a more modest 70%.
Factor in all these items before making a decision
It will be easy to get excited about the progress on any of the aforementioned items, but investors should consider them all before making an investment decision after results are released on Wednesday. An increase in revenue may not be all that impressive if the company's costs per gram soared through the roof this past quarter. And positive news surrounding an acquisition may also be underwhelming if Sundial is burning through more cash and has less money to spend on a possible deal. By looking at all of these factors, you'll have a well-rounded picture of where the business is today and whether it is worth investing in. Focusing on just one or two of these areas could result in a bad decision.
