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Varcoe: Calgary company rides cannabis roller-coaster as sector endures brutal reckoning – Calgary Herald

The company formerly known as Sundial Growers has emerged as Canada’s largest private sector cannabis retailer
Cannabis producer and expanding retailer.

Canada’s largest private-sector liquor store operator.
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Meme stock.

There are plenty of labels placed on SNDL Inc., the Calgary-based firm formerly known as Sundial Growers until it changed its name last month.

But such simple descriptions don’t capture an entire company and the wild journey it’s been on — along with the Canadian cannabis sector — since pot sales were legalized almost four years ago, nor the transformation now rippling across the industry.

“They have had a really fascinating (time) from being one of Canada’s emerging licensed producers to being caught up in the meme-stock phenomenon … and seeing incredible success managing that moment in time,” said consultant Nathan Mison, co-chair of the Canadian Chamber of Commerce’s national cannabis working group.

“Sundial is a microcosm of the roller-coaster: the downs, the unique ups, the transition that is coming.”

Earlier this week, SNDL announced its latest in a series of deals, acquiring Kelowna-based cannabis extraction and distribution firm Valens Co. in a transaction valued at $138 million.

The combined company will have 550,000 square feet of cultivation and manufacturing space in the country, along with SNDL’s existing chain of retail cannabis shops and network of liquor stores.

SNDL chief executive Zach George noted the company is moving ahead with its vertical integration strategy, operating cannabis production facilities and an expanding retail footprint.

In May 2021, Sundial announced the acquisition of Inner Spirit Holdings — and its Spiritleaf retail network — for about $131 million.

Last October, it unveiled the purchase of Edmonton-based liquor and cannabis retailer Alcanna Inc. for $320 million. The deal included Alcanna’s majority-owned subsidiary, Nova Cannabis Inc., and its fleet of Value Buds stores.

Today, SNDL is the country’s biggest private liquor retailer, with 170 stores in British Columbia and Alberta, and a 17.6 per cent market share in the province. It operates stores under the Wine and Beyond, Liquor Depot and Ace Liquor banners.

It is also Canada’s largest private sector cannabis retailer with 185 locations from B.C. to Ontario. In total, SNDL has more than 2,500 employees, including 270 workers at its Calgary headquarters and at Alcanna’s office in Edmonton.

“We actually need scale in order to run a sustainably profitable business. And so to be vertically integrated, that meant we needed to get more exposure to retail,” George said in an interview.

“Sixteen months ago, we had no retail exposure whatsoever. We are now the dominant retailer of regulated products in Canada.”

It hasn’t been a simple path to get to this point.

As the CEO wrote in a letter to shareholders earlier this year, Sundial had been “to the brink of failure, looked into the abyss, and then recovered.”

Back in the fall of 2018, Sundial made headlines in Alberta when it opened a large flagship production facility in the town of Olds. As the Canadian cannabis industry expanded, Sundial went public on the Nasdaq exchange in August 2019 at US$13 a share.

Since then, Sundial and the broader cannabis sector have faced intense growing pains, marked by too much production, too many stores and not enough sales.

Just before the pandemic hit, Sundial announced the departure of former chief executive Torsten Kuenzlen, who was replaced by George. Its share price hovered around $1.20.

Sundial laid off staff, later saying hundreds of employees had exited the business.

“The company went through a deep and painful restructuring in 2020,” George said this week.

“We had a peak debt of almost a quarter-billion dollars with double-digit costs. We were trying to operate in half a dozen countries. We weren’t hitting the mark in terms of our cultivation efforts.”

The direction had to change.

In late 2020, something else was unfolding that would alter Sundial’s trajectory; retail investors began to take note of the stock through online forums.

The Canadian company “started to get an enormous amount of social media attention and effectively became a meme stock,” George said.

“We ended up on three days, between the end of 2020 and the beginning of 2021, becoming the highest-traded name on Nasdaq … the highest day of volume was north of three billion shares in a single day.”

Its popularity with retail investors ballooned, turning it into a meme stock (similar to the noise that surrounded trading in GameStop), which Investopedia neatly characterizes as “shares of a company that have gained a cult-like following online and through social media platforms.”

In the first quarter of 2021, Sundial traded 34 billion shares on the Nasdaq.

“The turnover and that liquidity and that attention mainly from the rise of this new generation of retail investors enabled us to repair our balance sheet and raise approximately $1.2 billion,” he said.

“There are positives and negatives. You know, we asked ourselves, ‘Well, how did this happen? Why did this happen to us? We didn’t seek out this attention. We did not court it. But we certainly took advantage of it …

“The retail investor has played a critical role in the survival of SNDL.”

By December 2020, the company announced it had completed a financial restructuring and was debt-free, citing a combination of moves: selling assets, raising capital, completing debt-for-equity swaps and cash repayments.

It’s also been a rough-and-tumble journey for investors and operators in the Canadian sector since the debut of legalized cannabis sales in October 2018.

An ATB Capital Markets report by analyst Frederico Gomes said Canadian cannabis sales in the second quarter were expected to increase by 22 per cent from a year earlier to $1.1 billion, but it noted the growth rate has been slowing.

Annual recreational cannabis sales in Canada will hit $4.6 billion this year, expanding to more than $11 billion by the end of this decade, he projected, but down from its earlier forecasts.

“You have a very unsustainable market from an economic standpoint. No one is really making money,” Gomes said in an interview.

“There’s going to be a decent amount of industry consolidation ahead,” added analyst Shaan Mir of Canaccord Genuity. 

Two key segments of the sector — licensed producers and retailers — have major challenges ahead, said Brad Poulos, an expert in the cannabis business and lecturer at the Ted Rogers School of Management at Toronto Metropolitan University.

Too much production capacity was built in the industry, highlighted by growers destroying record amounts of unsold product last year, he noted. At the same time, provinces with private retailers are seeing a sector that is overbuilt.

In Alberta alone, 761 cannabis retailers are operating across the province.

“Prior to legalization, there was a massive amount of capital deployed in this industry and it got foolishly spent in many cases,” Poulos said.

“Because there was so much money raised, companies are taking a long time to die. It’s that’s simple …the requisite number of them will, and we will have a right-sized industry in a handful of years.”

Sundial changed its name in July, saying the shift reflects a new operating model. Shares in SNDL closed Thursday at $2.96.

During the April-to-June period, SNDL’s revenues jumped to $224 million — up from $9 million a year earlier — but the company lost $74 million in the quarter.

After a series of ups and downs for the Canadian cannabis sector — and the company — tough lessons have been learned and more change is ahead, said Mison.

“Sundial has been a great example of the evolving situation that Canadian cannabis has gone through,” he concluded.

“What we thought we knew, in the beginning, wasn’t what we knew two years later.”

Chris Varcoe is a Calgary Herald columnist.


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