Tilray Brands (TLRY 1.71%) is undergoing a metamorphosis. Whereas historically its business model was to grow, sell, and distribute marijuana in Canada, today the company's ambitions are larger, as are its capabilities.
Still, investors in the cannabis conglomerate have had high hopes for a transformational catalyst to send their shares soaring for quite some time now, and it's becoming increasingly clear that management didn't think it would take so long to arrive. But there's reason to believe that a breakthrough is quickly approaching, and the implications for the near term are significant.
This logjam is holding up the strategic plan
It's a surprise to nobody that cannabis legalization for recreational adult use is a major catalyst for cannabis companies like Tilray. Without it, competitors can only target the much less desirable and smaller medicinal use and natural wellness products markets. But the huge catalyst that Tilray investors are waiting on isn't legalization in the U.S., as positive as that would ultimately be. They're waiting on the European Union to create the regulatory framework for the legal cannabis industry, and for it to follow through with legalization.
At the moment, a handful of EU countries have medicinal programs, but with a few small exceptions, there's no permission for adult-use sales. The EU is the company's biggest geographical focus area outside of Canada, its home market. It's operating in Portugal, France, Poland, Germany, Italy, and others, with the idea that its pre-positioned medical marijuana cultivation, distribution, and retailing assets will be easily convertible into recreational infrastructure when the legal environment allows.
In recent years, there were a lot of signs that seemed to point to widespread legalization in the EU as being right around the corner. In 2021, Germany, the single-largest market and perhaps the most influential nation in the domestic politics of the EU, claimed that it would soon legalize adult recreational consumption. But the issue has been stalled for some time now. Its parliament will take up the issue this month, with a potential launch of the new law in April. Still, the country won't be able to decide for itself in a vacuum; Germany's legalization framework will need to abide by the regulatory principles for cannabis set out by the EU's governing bodies, which have often taken a less permissive stance than individual member states. That implies that Tilray's investors may need to wait just a bit longer than they'd hoped, again.
The company isn't in stasis while it waits
On the bright side, Tilray is continuing to make inroads in its other global markets while the EU decides what's appropriate regarding legal cannabis. In fact, the biggest growth segment of the company in recent quarters hasn't been marijuana whatsoever, but rather alcohol sales.
On that note, the business is using its collection of existing booze brands and recently acquired craft beer businesses to penetrate what could easily become its single largest market, the U.S. In its fiscal second quarter of 2024, ended Nov. 30, out of its $194 million in total revenue, alcohol sales brought in $47 million, up 117% compared to the same period a year before.
Though it doesn't yet compete in the American recreational cannabis market at scale, preferring instead to wait for legalization and then enter the market via a structured deal with a domestic competitor, building a strong alcohol distribution network will likely help it to prepare for the rush of demand that will accompany legalization, assuming it eventually happens in the U.S. And, of course, selling craft beer and other treats generates steady revenue that could conceivably convert into positive free cash flow (FCF) in the long term.
Plus, thanks to Tilray's marijuana empire in Canada, it has no need to pause with its product development efforts in advance of legalization in either the U.S. or the EU. While it's likely that consumer preferences will differ somewhat from market to market, if it can build up some crowd-pleasing brands in Canada, it will have a strong candidate to use to establish its market share when those other regions open up. So the current period isn't being wasted, and investors should consider it as a preamble rather than the whole show.
