Sales of cannabis have increased this year in light of the coronavirus pandemic but Sundial Growers (NASDAQ:SNDL) continues to face numerous challenges. Sundial Growers stock had a series of problems this year, the most recent one being a possible reverse split.
While stock splits are usually great for a company’s bottom line, a reverse split is seen as a sign of weakness. Adding to this is Sundial’s low sales figure in its last earnings report.
Unless the company exerts better control over its sales, it would be best to hold off on Sundial Growers stock.
A Poor Q3 For Sundial Growers Stock
Although sales of cannabis have spiked during the pandemic, the same cannot be said for Sundial Growers stock. In its most recent quarterly earnings, the company reported a dip in sales revenue of $9.85 million.
This was a 61.07% decline in a year-over-year comparison. Net loss for the period was also recorded at $71.4 million. Most of this came from impairment provisions and adjustments as reported by Seeking Alpha. This is adding to the $117 million loss Sundial sustained during the first nine months of 2020.
The poor revenue numbers can be attributed to changing consumer habits in the marijuana industry. According to its CEO, preferences are shifting towards products with a high THC potency. Sundial was not able to meet these required standards in the last six months.
Another underlying issue has to do with inventory. The company underestimated its total on-hand inventory which resulted in a number of smaller reorders through the quarter.
In order to improve its bottom line, the company will be able to work through its problems in the coming months. It’s ability to meet customers’ needs and have better control of its inventory will do wonders for Sundial Growers stock.
But it isn’t all bad news for the company even with low sales revenue. Sundial reported a CAD 23 million decrease in its overall debt and operating expenses. This cost-saving comes from the company’s shift from wholesale marijuana to retail sales. The lower cost of goods sold resulted in an EBITDA of CAD 4.4 million which is higher than its Q2 number of CAD 3.9 million.
Nevertheless, the fundamentals of this stock will continue to remain weak until Sundial is able to improve its position in the market and increase sales.
More Underlying Issues For Sundial
In addition to its low operating revenue, Sundial Growers has a number of issues its needs to resolve in order to regain investor confidence. One of its biggest problems is the risk of delisting from the Nasdaq.
Just eight months after earning its spot on the index, the company has been unable to increase its share price. As of this writing, Sundial stock is trading at just $0.44. In order to qualify for listing on the Nasdaq, the company will need to consider a reverse stock split which could lower investor confidence.
A second issue lies with the company’s need to raise capital. Earlier this month, Sundial Growers stock spiked by 50% and the company said it will use this opportunity to raise more capital. New securities for $200 million will be issued along with an equity program for $150 million common shares.
In addition to this, Sundial also converted some of its debt to equity which has only increased its share count. While these actions will result in a better cash position, they come at the expense of the shareholders. The company’s shares dropped by 21% following the news.
The Bottom Line on Sundial
Sundial’s balance sheet is impressive but the company still has a lot to work on before it can regain investor confidence in its stock.
In its upcoming quarter, the company needs to rework its brand to meet customer expectations and drive sales. Competition in the marijuana industry is heating up and Sundial will need to create a differentiated product to come out on top.
Higher revenue numbers will also allow the company to pay down its debt and raise its share price. But until there is progress on this front, Sundial Growers stock comes with an element of risk. Keep your eye on this stock but hold off on investing right away.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.