Sundial Growers (SNDL 1.51%) released its fourth-quarter earnings report on March 17 last week. Investors saw many positives in the report, including a reduction in certain expenses due to a reduction in force plus a big improvement in its cash position. But for a stock as volatile as Sundial, the response was fairly muted -- over the past five days, its shares were up a relatively modest 5% (while the S&P 500 was down 1%).
Investors were likely looking for much more from the company's Q4 numbers. While Sundial did show improvement in some areas, it wasn't enough to offset the negatives. Here are three of the most troubling numbers from the earnings report that should have you thinking twice about investing in the stock.
1. Sales growth of just 7.8%
In Q4, Sundial reported net sales of 13.9 million Canadian dollars for the period ending Dec. 31, 2020. That was only 7.8% higher than the CA$12.9 million it posted in the previous period. Not only is that a relatively modest rate of growth for a company in what is supposed to be a high-growth industry, but it is even more concerning given that Q3's numbers were abysmal for Sundial. Its sales for the period ending Sept. 30, 2020, were down a staggering 54% year over year as it was transitioning from a wholesale business to one that is focused more on branded retail sales.
It isn't clear if that transition is complete but given just how bad Q3 was, the company should have performed much better given how well the industry is doing. In the last three months of 2020, Canadian retail pot sales totaled CA$830.7 million, which was a 12% improvement from the previous period. Without much sales growth, Sundial isn't giving investors a compelling reason to invest in its business, especially compared to pot stocks that are producing much stronger revenue numbers. And low margins only exacerbate the company's problems.
2. Sundial's gross margin was negative, again
Cannabis companies often report fair value adjustments on their assets that can wildly impact their overall earnings performance. But in Q4, Sundial's gross margin before those adjustments was already a negative CA$5.1 million. In the prior-year period, the company also incurred a negative CA$0.5 million on its gross margin. Sundial blames the worse performance this past quarter on lower revenue and inventory obsolescence. The only positive here was that its total impairment charges of CA$21.8 million were less than one-third of the CA$79.9 million the company incurred in the previous period.
But even without factoring in impairment, Sundial's margins still don't look good. On CA$13.9 million in revenue, its cost of sales was CA$10.6 million -- 76.8% of its top line. That means a little over 23% of its sales are making it through to cover impairment charges, any losses relating to fair value plus its fixed costs and other operating expenses. Sundial says its gross margins are lower because it has shifted to "a higher cost product mix" while also reducing its pricing. And that means even if the company were growing its sales at a high rate, it wouldn't guarantee Sundial would get anywhere near breakeven.
3. Adjusted EBITDA was worse than in Q3
For Q4, Sundial's adjusted EBITDA loss from continuing operations was CA$5.6 million, which was 27.3% higher than the CA$4.4 million loss it reported in the previous period. What's disappointing here is that although Sundial reported a smaller net loss this past quarter (CA$64.1 million versus CA$71.4 million), when factoring out non-cash items, including impairment, its adjusted bottom line wasn't any better than what was already a disappointing quarter in Q3. Sundial said this was due to an increase in changes in foreign exchange as well as an increase in sales and marketing expenses.
Although the company is in great shape to cover these expenses with an unrestricted cash balance of CA$719 million as of March 15, that only ensures that the business stays afloat -- not that it is a good one to invest in.
Should you buy shares of Sundial Growers?
In light of these results, investors should take a hard pass on Sundial Growers. The above numbers raise many questions about the company's future, and it is unclear how it will turn things around. While having ample cash could give it the opportunity to transform its business via a potential acquisition, that may not necessarily make things better and there is no guarantee a good deal is out there. Sundial has a lot of work to do before it becomes an investable company. Not only do the impairment charges need to stop but Sundial has to improve its margins while also finding a way to generate more sales growth. Until all of these things happen, this is a pot stock I would stay far away from.