Tilray Brands (TLRY 1.71%) reported its fourth-quarter earnings last week, and the stock has been jumping ever since. The company showed improvement in multiple areas, including on its top and bottom lines, as its cost-cutting appears to be having a positive effect on the financials.
Is this a turning point for the cannabis producer, and is now the time to buy the stock?
What drove the company's strong results
In its fourth quarter, which ended on May 31, Tilray reported a net loss of just $120 million versus its $458 million loss in the same period last year. That's a significant change in the bottom line. Here are the main differences in the company's financials from a year ago that explain the much smaller loss (positive numbers reflect a favorable impact on the bottom line):
Image source: Company filings. Chart by author.
Three items jumped out from the latest earnings report:
- There were no impairment charges in the quarter. That alone was responsible for much of the $338 million after-tax increase in the bottom line.
- Gross results flipped from negative to positive, coming in at a gross profit of $67.2 million versus a gross loss of $6.7 million a year ago.
- Tilray reported a $65 million change in fair value of its convertible notes receivable. This was the largest item that negatively affected earnings.
Impairment and fair value changes should be non-recurring, and they can be difficult if not impossible for investors to forecast. The one item that intrigued me the most, however, was the company's improvement in gross margin, as that is a considerable change for the business. A big part of the reason was that Tilray experienced a big boost in sales.
Revenue jumped by 20%
Tilray's top line grew by 20% in the quarter to $184.2 million. Here's a breakdown of how much growth each one of its major segments generated:
| Segment | Revenue | Growth |
|---|---|---|
| Cannabis | $64.4 million | 21% |
| Distribution | $72.6 million | 19% |
| Beverage (alcohol) | $32.4 million | 43% |
| Wellness | $14.7 million | (9%) |
| Total | $184.1 million | 20% |
Source: Company's Q4 press release. Figures in thousands.
Aside from its wellness segment, Tilray generated good year-over-year growth across the board. What's impressive is that even in cannabis, sales grew 21%. Many cannabis companies have been struggling this year to generate any notable growth.
But one thing investors should note is that acquisitions have played a role in the company's growth, both in cannabis and in other segments. On Tilray's earnings call, management said that the increase in cannabis revenue was "mostly related to the HEXO arrangement."
One of the revenue items boosting sales this past year for Tilray has been advisory service fees that it has earned from its arrangement with HEXO, which it acquired earlier this year. For fiscal 2023, Canadian adult-use pot sales of $214.3 million were up 2% year over year.
But included within that amount is $40.4 million of fees related to advisory services. This is revenue that's not related to the sale of products, and it should be non-recurring. As a result, I wouldn't get too excited about Tilray's revenue growth and even the stronger gross profit.
Is Tilray's stock a buy?
Tilray did post a better bottom line, and its cost-cutting has likely played a key role in that. But acquisitions, advisory fees, and a lack of impairment charges have made its financials look a lot better than they otherwise might be. While there has been a lot of bullishness and excitement surrounding the pot stock since the release of the earnings numbers, investors might want to hold off on investing in Tilray just yet.
There's still risk ahead for the business in a highly competitive cannabis market in Canada. And even though its margins look to be better, I wouldn't be surprised if they were to regress in future quarters as HEXO fully integrates into the business (the acquisition closed on June 22) and the advisory revenue goes away.
