For a supposed growth stock, Sundial Growers (SNDL +1.62%) hasn't been doing much growing. For example, generating consistent sales growth has been a big problem for the Calgary, Canada-based cannabis grower. Last year its revenue declined by 8%, and when compared to 2019, its top line was down by 12%.
But the cannabis company has been expanding through acquisitions of late. Its operations are getting broader, branching out from being just a cultivator to a pot shop operator -- and most recently, even a liquor store owner. And that's why I feel confident in making what should be a straightforward prediction for the company's upcoming quarter: Sundial's revenue will hit a record high.
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Revenue from Alcanna will significantly add to the top line
In the first three months of 2022, Sundial reported CA$17.6 million in net revenue. Depending on what you look at, that number can look very impressive or underwhelming. On a year-over-year basis, that translates into revenue growth of 78%. However, the recent results included CA$7.5 million in retail cannabis revenue that wasn't there in the prior-year period, which was before it closed on its acquisition of retailer Spiritleaf (that happened in July 2021). Meanwhile, Sundial's core operations, its cultivation and production business, generated just CA$8.8 million in Q1 and declined by 11% year-over-year.
NASDAQ: SNDL
Key Data Points
The one notable item that stood out to me in the earnings report was that the new liquor retail segment contributed CA$1.3 million to Sundial's top line in Q1. While that may seem insignificant, that was from the company's recent acquisition of Alcanna, a top liquor retailer in Canada. That transaction closed on March 31 (the day Sundial's Q1 results ended), which means the revenue it contributed in Q1 was just for one day. Alcanna's revenue for the quarter, excluding that one day, was CA$162.5 million. Adding those numbers into Sundial's second-quarter results will instantly send the top line soaring.
The acquisition should improve the company's margins
Another positive for Sundial investors to look forward to is that the company's gross margins will also improve by incorporating Alcanna. The cannabis business reported a negative gross margin last quarter, while Alcanna's gross margin was a positive 24% of its revenue.
The inclusion of that business should go a long way in strengthening Sundial's bottom line. In Q1, the company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were negative CA$0.7 million. With better margins, the company can stay on the right side of profitability, and do so with some consistency. That, in turn, can make the stock a better investment.
Why this still doesn't make Sundial a good buy
Sundial will get a big bump up in revenue in Q2, but that doesn't mean the business is still on the right track. All this does is create a new baseline for the company moving forward. Investors will simply need to be more careful in analyzing the company's results and in deciphering how the different business units did. Acquisition-related growth is a temporary boost, and won't be enough to make up for other business segments that are struggling.
Sundial could also turn off some investors due to this diversification. With Alcanna generating so much revenue for the business, Sundial effectively becomes more of a liquor company than a marijuana business. And that could change how attractive an investment it becomes to people who want to invest in a pure-play marijuana business primarily.
However, Sundial did hint earlier in the year, when it announced the completion of Alcanna, that potential spinoffs were possible. And this is why the wait-and-see approach continues to be the safest one to take with Sundial. The stock has transformed significantly over the past year, and it's still a big question mark as to what its business may look like in another year.
