Tilray Brands' (TLRY 2.28%) stock is down by 13% this year so far, but up 37% in the past month. Thanks to a major new acquisition announcement that'll see its beer sales soar, the outlook may be a lot better than it has been in the recent past.
If the company can pass these tests in the fall and beyond, its shares will almost certainly rise, and the bull thesis will get a trio of confirmations. On the other hand, if it falls short, it'll be a signal that the seedlings of a turnaround need more time to germinate before the stock is a must-buy.
Let's sketch out the nature of these tests and why they're important.
1. Will alcohol sales prove to be profitable?
Amid a slew of alcohol business acquisitions, most recently with its move to purchase eight beer brands from Anheuser-Busch, Tilray's diversification efforts are still in full swing. Once the deal with Anheuser-Busch closes, it'll be the fifth-largest craft beer company in the U.S. At that point, it should be pulling in around $300 million in annual sales of alcoholic beverages, up from the $95 million it reported for its fiscal 2023.
And right now, it's partnering with sports teams like the Denver Broncos to promote its beer brands nationally, all while expanding its brand presence in the Northeast, entering the Pennsylvania market, and sponsoring a concert series in the fall. Those efforts should raise brand awareness and drive revenue growth.
But for the most recent quarter, its gross margin for alcohol was only 51%, which is slightly lower than the alcohol industry’s average of around 56%. And in the trailing-12-month period, it burned nearly $102 million in cash. The test is quite simple: Prove the alcohol segment can be cash-accretive instead of cash-burning. Anything less will be value-destroying for shareholders.
2. Can cannabis sales make a comeback?
Whereas profitability is the bigger concern with its alcohol segment, Tilray's cannabis segment struggles with both profitability and revenue. In its fiscal fourth quarter, ended May 31, weed sales recovered by 21% to reach $64 million. But its total haul from cannabis of $220 million in 2023 was roughly $17 million less than a year prior.
The reason for its year-over-year decline is doubtlessly the collapse of the Canadian cannabis market, which has been swamped with inexpensive marijuana due to widespread overproduction by businesses. Selling prices per gram of legal cannabis are still a bit lower than a year ago. In such a market, even leading providers like Tilray struggled to hold their top line steady.
For the company to grow amid those saturated conditions, either the cannabis market needs to recover, or management needs to find a way to move its products in higher volumes at slightly lower price points. If Tilray can make the latter path work this fall, it'll be a strong confirmation that its cannabis segment could one day be healthy.
If its sales retreat once again, investors should consider it a sign that it has more work to do with regard to competing for market share in its home market.
3. Can its cannabis legalization efforts in the E.U. succeed?
Despite the CEO's prediction in early 2022 that the European Union would imminently be legalizing cannabis, Tilray's dreams of selling recreational marijuana at mass scale in Europe have remained just out of reach. While it has medicinal operations in a handful of European countries, the plant is illegal for recreational use in most of the member states, and proposed E.U.-level regulations to change that haven't been moving.
But the company could soon catch a break. Last year, its lobbyists met with German regulators at a policy roundtable to help draft legislation mandating standards for the cannabis industry in advance of legalization. As of Aug. 16, Germany is now awaiting a Parliament vote to confirm the legalization of recreational cannabis use. It expects to pick up the bill in early September.
Legalization in Germany would be a big deal for Tilray, and would portend well for the rest of the E.U. to eventually follow. The test is to see whether its close work with regulators actually bears fruit in the form of regulations that will give it an advantage in the German market.
Plus, if the legalization in Germany appears to largely follow the blueprint it proposed last year, it'll be a strong confirmation of its status as a global market leader by way of its soft power. That might not be a major contributor to revenue or drive anything tangible for the next year or two, but in the long term, such influence could be a major competitive advantage that others couldn't replicate.
