Canadian cannabis company OrganiGram Holdings (OGI -0.63%) hasn't been a great growth investment over the past year. For one thing, growth hasn't been all that strong for the company and there have even been periods in which sales were down from prior quarters. That doesn't go well with a business that's also unprofitable -- which OrganiGram is.
But investors got some good news when the company reported its most recent results on July 13 -- gross sales soared by an incredible 51% from the previous quarter. Has the business finally turned a corner, making now the time to pull the trigger and buy this pot stock?
The sales growth wasn't all that impressive
OrganiGram highlighted impressive quarter-over-quarter revenue growth of 51% when it reported its third-quarter results. However, investors should be careful to note that this was in reference to its gross revenue of 29.1 million Canadian dollars ($23.2 milllion) for the period ending May 31, which comes before excise taxes. Net revenue of CA$20.3 million was up by 39% from the previous quarter. And that is also a whole lot less impressive when you consider how awful a quarter the prior one was -- net revenue of CA$14.6 million for Q2 was down 37% year over year.
Going up against a bad quarter can easily make an average performance look great; on a year-over-year basis, the company's Q3 net revenue increased by only 13%. But even that revenue growth resulted in a gross margin of just CA$2.1 million (and that would have been negative if not for fair-value adjustments). While that's better than the negative CA$17.2 million gross margin that OrganiGram reported in Q2, it's not a whole lot to brag about. But the company does expect to see a further improvement in its gross margins next quarter, noting in a press release that it has "identified a number of additional cost efficiency opportunities focused on enhancing our gross margin profile."
Rising SG&A expenses could make profitability even more of a pipe dream
Even if the company can strengthen its gross margins, that still may not be enough to cover the rest of its expenses, especially as OgraniGram's costs continue to rise. In Q3, the company's selling, general, and administrative (SG&A) expenses totaled CA$13.6 million -- up 22% from the previous period.
OrganiGram blames the increase on a rise in head count and office costs. This includes establishing its Centre of Excellence, where it will work on developing new cannabis products. Earlier this year, British American Tobacco took a 19.9% stake in OrganiGram with a plan to work on next-gen cannabis products, which included the setup of the center. Given the new venture and the development of more products, it doesn't appear likely that OrganiGram's SG&A costs will come down anytime soon. And unless the business can not only generate more revenue but also improve its margins, getting out of the red could be a long shot.
An increase in inventory is another red flag
What troubles me the most about this recent news is that the company is already adding to its products as it is. In its Q3 press release, OrganiGram said that since July 2020 it has launched 84 new products. And before this year is over, it plans to add another 20 stock-keeping units (SKUs) on top of that. While the company may boast that it is ramping up its product offerings, that's going to lead to more costs and wasted space as it's unlikely that all of them will be popular with consumers.
One of the reasons OrganiGram noted an improvement in cost of sales this past quarter compared with the previous year (which helped improve its margins) was that in the prior year it incurred close to CA$30 million in inventory write-offs. More write-offs could again be in OrganiGram's future if it keeps adding SKUs and accumulates inventory at this rate -- especially if that inventory isn't moving. Simply adding more products into the mix isn't going to fix OrganiGram's problems; it may even add to them.
OrganiGram's Q3 results have done little to prove it's a better buy now
The one positive this past quarter was that OrganiGram grew its revenue. But that, too, comes with an asterisk. True, its top line wasn't as bad as last quarter's, but an improvement should have been expected given that the Canadian pot market is coming off the record month of May, when sales hit CA$313.3 million. Revenue from the recreational pot market was up for a third straight month.
Doing better than the previous period just isn't enough of a reason to buy shares of OrganiGram. Marijuana investors don't have to settle for this struggling company and are better off looking at these cannabis stocks instead.