After reporting its first-quarter earnings on Oct. 4, Tilray Brands (TLRY 1.71%) is as intriguing a company as ever. Between its roots as a marijuana cultivator and its new identity as a major craft beer distributor and brewer, its long-term outlook is quickly changing for the better.
But, as shareholders are probably tired of hearing, it's still beset by a handful of operational efficiency challenges that are preventing its shares from recovering. Those issues are likely to be solved eventually. Here are three of the key metrics to pay attention to with Tilray that will help you to know how it's developing and what's likely to be management's focus over the next few quarters.
1. Its margin on marijuana
Tilray's bread and butter is cannabis, which it grows and sells in North America and the European Union. But it has long struggled to sell cannabis products profitably. During its 2023 fiscal year ended May 31, it brought in $220 million from sales of cannabis, and its gross margin for cannabis was a baleful 26%. In its 2022 fiscal year, its gross margin on marijuana was even worse, at 18%.
So, in Q1 when its marijuana gross margin clocked in at 28%, this signaled a continuation of the same trend of the last couple of years. It still has a long way to go before reaching profitability. Over the last three years, its annual cost of goods sold (COGS) remained at essentially the same proportion of annual revenue: 76%. That will need to fall for this segment to reach profitability anytime soon.
2. Its margin on alcohol
Tilray's alcohol business is quickly shaping up to be a major business rather than merely a second fiddle to its cannabis operations, which makes its performance important for investors to track. Its fiscal year 2023 alcohol gross margin was 49%, meaning that its alcohol sales of $95 million were relatively expensive to generate. In Q1 of its fiscal 2024, it reported a gross margin of 53% on alcohol, which is good news for shareholders.
There is reason to believe its alcohol margin is going to change significantly in the coming quarters, however. Its bid to buy eight craft beer brands from Anheuser-Busch, which closed on Oct. 2, is anticipated by company leaders to yield roughly $250 million in annual revenue. Its volume of cases of beer sold will now likely triple.
Such a significant bolt-on transaction includes major implications for the company's distribution operations, even though it also purchased related assets from Anheuser-Busch. Likewise, the new additions to the brand portfolio, including popular beers like Shock Top, could alter the margin by quite a bit. Therefore, investors would do well to not read too much into Q1's alcohol gross margin figure. It now makes sense to pay attention to the distribution segment's margin over the next couple of quarters too.
3. Its hoard of cash and equivalents
When Tilray matures into a profitable multinational consumer packaged goods (CPG) company, investors will know that it's finally ripe by the steady and rising amount of free cash flow (FCF) it generates each quarter. At that point, it will have no problem accumulating cash to reinvest in growth, entering new markets, developing new products, or acquiring smaller competitors. For now, its liquid capital is a limited resource, and that means investors need to understand how much money it has relative to its obligations and near-term aspirations.
In the most recent quarter, it burned around $27 million of its liquid holdings, leaving it with $179 million in cash and equivalents, along with $287 million in marketable securities. Management expects to generate FCF on an adjusted basis before the end of its 2024 fiscal year. It also expects to surpass $68 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
If it misses those marks, expect it to take out a significant amount of additional debt. After that, it might be time for shareholders to think about the conditions under which they'd be willing to sell, especially if positive cash flow looks like it will remain elusive for longer than a few more quarters.
