OrganiGram: Key Takeaways from Its Q4 Earnings

On Monday, OrganiGram Holdings (OGI) reported its fourth-quarter earnings before the market opened. For the quarter ending on August 31, the company reported revenues of 16.29 million Canadian dollars—lower than analysts’ estimate of 21.1 million Canadian dollars. The company’s management said that sales were due to weak retail infrastructure and slower opening of new stores. The company’s adjusted EBITDA was -7.9 million Canadian dollars—lower than analysts’ estimate of 1.31 million Canadian dollars. OrganiGram announced that it will temporarily pause phase 4 construction due to lower demand. The weak fourth-quarter sales and adjusted EBITDA and the announcement about scaling back expansion initiatives dragged the stock down. On Monday, OrganiGram stock fell 3.1% and closed at 3.39 Canadian dollars. Let’s look at the key takeaways from the company’s fourth-quarter performance.

OrganiGram’s revenue growth

The company’s revenues have grown 410.7% YoY from 3.19 million Canadian dollars in the fourth quarter of fiscal 2018. However, OrganiGram’s revenues fell 34.2% sequentially from 24.75 million Canadian dollars in the third quarter. During the quarter, product returns and pricing adjustments lowered the company’s revenues by 3.7 million Canadian dollars. For the quarter, OrganiGram generated 13.4 million Canadian dollars from recreational sales and 2.4 million Canadian dollars from medical sales. The remaining sales were from other sources. In the fourth quarter, the company sold 2,425 kilograms of dried flower and 3,131 liters of cannabis oil.

During the comparable quarter, Aphria (APHA) reported YoY revenue growth of 849%, while its revenues fell 2% sequentially.

Adjusted EBITDA fell

Compared to an adjusted EBITDA of 7.7 million Canadian dollars in the third quarter, OrganiGram’s adjusted EBITDA fell to -7.9 million Canadian dollars in the fourth quarter. Lower gross profits and higher SG&A expenses brought the company’s adjusted EBITDA down. During the same period, OrganiGram’s gross profits fell from 12.3 million Canadian dollars to 0.75 million Canadian dollars. The increased cost of sales and higher indirect production costs lowered the company’s gross margin. In the fourth quarter, OrganiGram incurred 1.6 million Canadian dollars in expenses related to inventory adjustments and write-offs, which hiked its cost of sales. The company’s SG&A expenses increased from 9.1 million Canadian dollars in the third quarter to 13.9 million Canadian dollars. OrganiGram’s adjusted EBITDA fell YoY from 0.3 million Canadian dollars in the fourth quarter of fiscal 2018.

OrganiGram’s outlook

The company’s management hasn’t set any revenue guidance for fiscal 2020. However, management expects its revenues in the first quarter of fiscal 2020 to rise compared to the fourth quarter. The company is optimistic that opening new stores and higher wholesale revenues will drive its revenues. OrganiGram expects Ontario and Quebec to increase their store count significantly in the next few months.

On track to introduce vapes and edibles

On October 17, Canada legalized the sale of cannabis-derived products. Based on data from the US, OrganiGram announced that it would initially focus on the two most popular product types in the cannabis-derived market—vapes and edibles. The company stated that it has already submitted new product notifications for vapes and edibles to Health Canada. Notably, the company received an R&D license to conduct more research on these products.

In the fourth quarter, OrganiGram announced that it will partner with PAX Labs and Feather Company to introduce vapes. The company will produce and fill pods for PAX Era platform vapes. Also, the company has an exclusive license to introduce Feather’s disposable vapes in Canada. OrganiGram’s management announced that the company is on track to introduce some of the vape products in December.

In the edibles category, OrganiGram announced that it completed the construction of its fully automated chocolate production line. The company expects the commissioning and licensing to be completed in the first quarter of 2020. OrganiGram plans to introduce powdered beverage products in the second quarter of fiscal 2020. The company claims that it’s the only company that offers such a product. Customers can add the product to any beverage of their choice.

Analysts’ recommendations

As reported by BNN Bloomberg, Raymond James’s analyst Rahul Sarugaser is optimistic about OrganiGram. He thinks that the worst is over for the company. In a client note, Sarugaser wrote that the company could overcome future industry-wide challenges and emerge as a sector leader.

After OrganiGram reported its fourth-quarter earnings, there wasn’t an immediate rating or target price change from analysts. As of Monday, 13 of the 16 analysts favor a “buy” rating for the stock. The remaining three analysts gave a “hold” rating. Meanwhile, none of the analysts gave a “sell” rating for the stock. Analysts’ consensus target price was 8.25 Canadian dollars, which implies a return potential of 143.4%.

YTD stock performance

So far this year, OrganiGram has lost 30% of its stock value as of Monday. Fear of equity dilution and increased debt and weakness in the cannabis sector dragged the stock down. During the same period, Aphria, Cronos Group (CRON), and Aurora Cannabis (ACB) have fallen 22.3%, 36.2%, and 50.9%, respectively. Earlier this month, Cronos Group and Aurora Cannabis reported lower quarterly sales. Read Cronos Group Stock Rose despite Missing Estimates and Aurora Cannabis: Good or Bad News for Its Q1 Earnings? to learn more.

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