Tilray Brands lowered its guidance significantly. Is the stock a buy?

It’s generally not a good sign when a company announces that its annual earnings outlook has to be lowered to: Tilray Brand (TLRY 1.09%) However, there have been several important developments since then that may reduce some of the distress shareholders may experience.

Despite the setbacks in progress compared to management’s past guidance, there is still reason to believe that the multinational marijuana and alcohol company can achieve its ambitions. So, let’s take a look at what’s happening with financial performance and why it’s too early to lose all hope.

The situation is a little more bearish than it appears.

When a company reports earnings, it’s always possible for investors to see what they want to see – that conditions are ripe for the stock price to rise – and avoid seeing blemishes or dark clouds looming on the horizon. And if you read Tilray’s latest fiscal third quarter earnings report, there are plenty of green flags to focus on.

Perhaps the biggest positive sign was that sales rose 30% to more than $188 million, with strong sales performance in two key segments: cannabis and alcohol. It’s already seeing growth thanks to the recent acquisition of several US craft beer brands, with alcohol sales soaring 165% to $55 million. Now alcohol is as big a sector as marijuana, bringing in about $63 million in the quarter.

So it’s no exaggeration to say that the company’s revenue base is much more diverse than it was just a few years ago.

Another bright spot was cannabis market share in the company’s home market in Canada. Although its market share fell to the high single digits for a while, it currently holds a market share of 11.6%. Therefore, the business is now well positioned against smaller local competitors than Tilray.

Then there are the ongoing changes to U.S. marijuana policy announced in mid-May, which could work to the company’s advantage in the long run. The Department of Justice is working to change the schedule for marijuana from Schedule I to Schedule III. This is a more permissive schedule for the industry’s drug market participants.

But this is where the latest real good news starts to give way to the problems management wants to avoid.

The company’s management no longer expects to report positive adjusted free cash flow (FCF) in fiscal 2024, its current final phase. The reason for the lack is that ‘cash recovery due to the sale of various assets was delayed.’ There was no word on what would happen in fiscal 2025.

Let’s analyze this information.

At some point, Tilray decided to sell some of its assets. The asset cannot be sold more than once as it is not held by the company after the sale. You cannot create value by operating assets.

Therefore, even if our plan to produce adjusted FCF for the year had worked as intended, it is unlikely that it would have essentially led to a sustained state of cash generation. Operating losses were over $82 million, meaning it was nowhere near consistent cash generation. And once again, management didn’t try to reassure investors by claiming better times were ahead.

The implications here are not optimistic, to say the least.

Wait until the dust settles

Considering the above, there is currently no urgent reason to buy shares of Tilray. Reporting consistently positive cash flow does not appear to be without obstacles.

Investors shouldn’t be discouraged by the sales growth, at least for now. The fact that market share is recovering compared to past years is actually a good sign, but for now, each additional market share is just going to make this business burn through money faster. Reaching operational profitability has been a problem for a long time, and seemingly will be a problem for much longer than management originally anticipated.

The possibility of realizing its strategic ambition to have the largest cannabis footprint in the world is still possible, and in the event of marijuana legalization, it may find a way to salvage its plans to enter the U.S. cannabis market, but now it needs investors. It’s more than the occasional hint of green shoots and a promise from management before investing capital. Plans to launch an on-market (ATM) stock offering program totaling $250 million would provide some of the liquidity needed to make entry into the U.S. market more seamless, but would also dilute shareholders.

Likewise, the company’s EU operations could take a leadership position there if regulations become more permissive, but there is currently not enough evidence to suggest that future upside is actually within reach.

Check back in a few quarters to see if Tilray’s operations have improved. Remember, if you can’t generate enough cash, it’s your shareholders who will take the blame – by issuing new shares and using debt financing that reduces returns. Until then, don’t buy unless you have a very high tolerance for risk and are afraid of losing money.