Tilray Brands Slashed Its Guidance. Is the Stock a Buy?

This worse-than-expected news is not necessarily a sign to buy the dip. Read More...

This worse-than-expected news is not necessarily a sign to buy the dip.

It usually isn’t a good sign when businesses announce that their projection for their annual earnings needs to be adjusted downward, like Tilray Brands (TLRY 1.09%) did with its third-quarter earnings on April 9. Since then, however, there have been a couple of important developments that could cut some of the bitterness that shareholders may be experiencing.

Despite the setback with its progress relative to management’s past guidance, there’s still reason to believe that this multinational marijuana and alcohol player could live up to its ambitions. So let’s explore what’s going on with its financial performance and why it’s probably a bit too early to lose all hope.

The situation is slightly more bearish than it may appear

When companies report their earnings, it’s always possible for investors to see what they want to see — that the conditions are ripe for the stock to go up — and avoid seeing blemishes or storm clouds on the horizon. And if you read Tilray’s latest earnings report from its fiscal Q3, there are plenty of green flags to focus on.

Perhaps the biggest positive sign is that its revenue climbed by 30% to reach more than $188 million, with strong sales performance in its two core segments: cannabis and booze. Its recent acquisition of a handful of American craft beer brands is already leading to growth, with alcohol sales bringing in $55 million after jumping by 165%. Now, alcohol is nearly as big a segment as marijuana, which brought in roughly $63 million in the quarter.

So it’s safe to say that the company’s base of revenue is far more diversified than it was just a couple of years ago.

Another bright spot was cannabis market share in the business’ home market of Canada. While its share had slipped to a high single-digit percentage for a time, it now owns 11.6% of the market. Therefore, the business is gaining ground against its local competitors, all of whom are now smaller than Tilray.

Then there are the ongoing changes to marijuana policy in the U.S. announced in mid-May, which could work in the company’s favor in the long term. The Justice Department is working to reschedule marijuana from Schedule I to Schedule III, a somewhat more permissive scheduling for the industry’s medicinal market players.

But that’s where the recent substantive good news starts to give way to the issues that management would probably prefer to avoid.

Company leaders no longer anticipate that it’ll report positive adjusted free cash flow (FCF) for its 2024 fiscal year, which is now in the final stretch. The stated reason for coming up short is “delayed timing for collecting cash on various asset sales.” No comments were made about what could happen in its fiscal 2025.

Let’s parse this information.

At some point, Tilray opted to sell some assets. Those assets can’t be sold more than once, as the company won’t possess them after the sale. Nor can the assets be operated to produce value.

So it seems as though the plan to produce adjusted FCF for the year would not inherently have led to a state of ongoing cash generation even if it had worked as intended. Its operating losses were more than $82 million, which means it’s nowhere close to reaching consistent cash generation. And to reiterate, management didn’t try to reassure investors by claiming that better times were ahead.

The takeaway here is not bullish, to say the least.

Wait for the dust to settle

Given the above, there is not any pressing reason to buy shares of Tilray today. It does not appear as though the road to consistently reporting positive cash flow is free of obstacles.

Nor should investors take heart in increased sales figures, at least for now. Though the bit about recovering market share relative to past years is indeed a good sign, at the moment every additional bite of market share simply leads to this business burning money faster. Reaching operational profitability has been a long-standing bugbear, and by the looks of it, it will remain one for even longer than leadership was originally anticipating.

While it’s still possible that it’ll make good on its strategic ambitions to have the world’s largest cannabis footprint, and it could still potentially find a way to salvage its plans to enter the U.S. cannabis market in the event of marijuana legalization, investors now need more than just an occasional hint of green shoots and promises from management before committing their capital. Its plan to launch an at-the-market (ATM) stock offering program for up to $250 million in aggregate will provide some of the liquidity it needs to make the U.S. market entry a bit smoother, but it’ll dilute shareholders too.

Likewise, while the company’s E.U. operations could make it a leader there if the regulations become more permissive, for now there is not enough evidence that the prospective upside is actually within reach.

Check back in a couple of quarters to see if Tilray’s operational picture has improved. Remember, if it can’t generate enough cash, it’s shareholders who will pick up the tab via new share issuance and returns-eroding debt financing. Until then, don’t buy it unless you have a very high tolerance for risk and you are not afraid of losing your money.

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