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Canadian Cannabis Company Warns of Major Store Closures

Canadian Cannabis Company Warns of Major Store Closures

Storm clouds have hovered over Sundial Growers following the Canadian cannabis company’s 2021 earnings report released last week, with the CEO suggesting that store closures are on the horizon and an analyst cutting his price target for the stock.

Zach George, the chief executive officer of Sundial, said in a statement that “2021 was a transformational year for Sundial.”

“We increased the sustainability of our business model, establishing a strong balance sheet, positive Adjusted EBITDA results, and significant improvements in gross margin,” said George. “We continue to focus on improvements to our supply chain and manufacturing processes, against a competitive and challenging operating environment in Canada. Sundial is working to become a leading regulated product platform through leveraging consumer insights and innovation to deliver best-in-class products. We are beginning to see positive momentum across all of our key operating segments and remain committed to our goal of becoming free cash flow positive within the 2022 calendar year.”

But in a letter to shareholders, George offered up a dire forecast for cannabis retailers in Canada.

“Retail distribution is critical to licensed producers. Today, we are seeing bizarre behavior at the margin where licensed producers use compliant means to purchase shelf space to sell products at a loss,” George said. “This is presumably because LPs are still prioritizing market share and revenue over capital preservation and profits. Most retailers are struggling to be profitable, and we are starting to observe a trickle of closures on a weekly basis. I expect to see massive store closures in Canada, with the toll likely closer to 1,000 than 100.”

George said that the company has “closed 11 stores and will continue to evaluate our retail portfolio to optimize quality and profitability.”

“Sundial’s retail network creates an opportunity to own the relationship with cannabis consumers and showcase both Sundial’s branded products and the best offerings from other Canadian licensed producers,” George shared in the letter. 

George also said that Sundial will undergo a major change to its brand identity.

“Over the last two years, rapid and material change has resulted in our original ‘Sundial Growers’ identity becoming less relevant given our broader business activities. As we reevaluate our company’s vision and realign our values, the time has come for Sundial to rebrand. We intend to rebrand the company with investor support at our upcoming annual meeting,” George said. “This new brand will better reflect our activities as a company and the undeniable impact that investor support has had on the business.”      

Sundial’s stock responded poorly to last Wednesday’s earnings report, which covered the fourth quarter and full year for 2021. According to Yahoo, in the two days following the earnings report, “shares of the Canadian cannabis company have wilted about 10%.”

The impetus for the slump, according to the financial news site The Motley Fool, was “Canaccord Genuity analyst Shaan Mir, who chopped his Sundial price target by a deep 25%.”

Mir, per The Motley Fool, believes “the shares are now worth $0.60 apiece from the previous $0.80,” though he also does not believe that investors should sell the stock yet. 

In March, Sundial Growers announced that it had acquired the North American alcohol retailer Alcanna.

The deal, George said in the letter to shareholders, has made Sundial a giant in both alcohol and cannabis.

“With the recent completion of our acquisition of Alcanna, Sundial has become the largest private sector distributor of alcohol and cannabis in Canada,” George said. “The Alcanna acquisition enables us to further leverage retail opportunities and become a trusted partner in the regulated products industry. Alcanna has a phenomenal Edmonton-based team that has improved our talent density and added to our leadership ranks. We are now Canada’s largest private liquor retailer, operating 171 locations predominantly in Alberta, under the three retail banners Wine and Beyond, Liquor Depot and Ace Liquor.”

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