During tough times, Tilray (TLRY) looks overseas to achieve growth targets

Cannabis was recognized as an essential business in several markets when the shutdown came into effect, including Canada and some US states, at a time when its legalization is getting a mixed response. It seems the shelter-in-place order and store closures did not deter customers from buying cannabis products. Leading pot companies like Tilray, Inc. (NASDAQ: TLRY) witnessed an increase in online sales in recent months.

To the disappointment of Tilray’s shareholders, the strong sales did not translate into margins in the most recent quarter, mainly due to one-time costs. The company lost significant market value in the past few years and estimates show the downturn is far from over. Market watchers see a further dip in the stock price in the coming months. The bleak outlook might discourage potential investors.

Getting House in Order

The company might need to take more steps to streamline inventory and eliminate non-performing products, after closing the High Park Gardens greenhouse. Meanwhile, it is not clear to what extent the reduction in internal cultivation would impact production, especially after the management terminated a major supply contract. One possible solution is to import supplies from the Portuguese cultivation facility.

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The company’s growth initiatives, combined with the continuing overseas push, should help it achieve the goal of ‘adjusted EBITDA breakeven or profitability’ before the end of 2020, thereby creating value for the disillusioned shareholders. The turnaround strategy includes international expansion, with focus on the development of the Portuguese facility and penetration into the German market.

As we’ve believed from the beginning, the steady increase in the number of legal cannabis market supports our thesis that there is a significant global growth opportunity. This recognition validates our thinking that cannabis is a mainstream product consumed like other consumer staples. Turning the page to what has changed for Tilray; beginning in January 2020, we successfully refocused our business, right-sized our cost structures and have narrowed our focus to three strategic priorities.”

Brendan Kennedy, chief executive officer of Tilray

Cost Reduction

The management is betting on its ongoing cost-cutting drive that involves aggressive rightsizing and efforts to strengthen the balance sheet to improve margins in the second half of the year. However, heavy investments in high-performing facilities to increase capacity might offset those benefits. Also, the headcount reduction will likely affect efficiency in the coming months. Tilray will have to go a long way before achieving consistent profitability, thanks to the high expenses.

It is estimated that cannabis sales would grow going forward as more buyers shift from the illicit market to the legal market to ensure the safety and authenticity of products. In addition, more US states and some foreign countries are considering legalization of recreational marijuana. In the near term, however, the prospects of the industry will depend a lot on how the COVID situation emerges. 

Loss Widens

Latest data show that the demand for cannabis products was not affected much in the past few months, despite markets going into shutdown mode. Tilray’s cannabis sales more than doubled in the June quarter, driving up total revenues by 10% to $50.4 million. However, margins came under pressure and the company’s loss widened to $0.66 per share in the second quarter from $0.37 per share last year.

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Read Tilray’s second-quarter 2020 earnings call transcript

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“We fully expect Tilray to have a substantial and profitable presence in our existing and future markets for cannabis and hemp and we believe we have taken significant actions to position Tilray to achieve this goal and be recognized as the most trusted cannabis and hemp company,” said Michael Kruteck, chief financial officer of Tilray, while talking to analysts.

Elusive Recovery

Tilray’s shares plunged to an all-time low in mid-March when investor sentiment was hurt by the dismal market conditions. The stock is yet to make any meaningful recovery since then and mostly traded close to the $10-mark. It has been languishing below the long-term average, underperforming the market. The stock suffered another setback on Monday after the weak quarterly report.