Aphria’s released it’s financial statements yesterday, and much celebration ensued. This sector needed some good news, and a large outfit reporting EBITDA positive results (a full quarter before GoBlue’s expectations) looks like it was the shot in the arm the industry needed. One quarter on its own means very little in long term investing. But in terms of sector potential for profitability, it means a lot. Especially now. 

Since last fall, our sub-reddit has been loitered in by people happy to refer to last fall’s short as proof we have little on the ball (and to call us a host of names). That’s the challenge about a public forum: you get the good with the bad.

I’m sure as hell not going to say anything triumphant about our analysis. That’d be dumb. Nobody can predict the future. All we can do is take apart the financials, analyze them, and combine them with fundamentals to hopefully tease out the most likely path forward of asset valuations. All we’ve seen is a company positioned with relatively good cost structures, a focus on going low with them, and the potential to do it.

I’m writing this about the impact of Aphria’s financials on peers in-sector. Because what they’ve done is proven that scale can be EBITDA positive. That’s a huge milestone. Some have assumed it’ll happen (hey, everyone smokes dope right?), but until it does, nobody really knew for sure. Now it’s here.

Those assets declared ‘worthless’ some 8 months ago have proven to have some value after all. But far beyond that, these results have created a new benchmark. And that has potential to change the current landscape of the industry. 

Conventional thinking is that Canopy, that first moving monolith that shocked-and-awed it’s way into being a capital market darling, now has a new water mark with which to be measured against. Given what TheCannalysts have seen within their inventory write downs & SKU bulges and initial signs that hint to declining market share – the market could view it in a different light. Particularly if price competition becomes emergent.

Scaling’s promise was to bring lower cost. If APHA’s trend continues, it means that this promise is now becoming realized. I have little doubt Aurora is closing in as well, if not already there. If Canopy isn’t in a position to track with it, quality being held constant, there will be far more needed than accelerated write downs of goodwill and shifts in product strategy. It will mean less profitability for the retailer handling their goods. And the thing that’s burned into my retinas running around retail and talking to owners and CEO’s running it: they hold an amazing power to guide consumer purchases.

We interacted with a small independent store in Edmonton back in May. I was talking to the owner, and he said to me: “Forget the producers. We (retail) will own this business in a couple of years”. At the time, I thought that might have been a flippant remark, perhaps driven by bravado. Instead, I’ve begun to see how retailers can either hustle or kill a SKU – right at the point of purchase. 

I’m not trying to overstate this. But if their margin is at stake (META, F&F, ISH, HITI, NOVA etc. with them now having some 100+ stores in operation and more planned and opening over the next quarter), they’ll drop a SKU faster than a rotten sandwich. And they’ll go for and push the higher margin products that makes their customers happy.

Which, supports sales by those producers who can go lower. 

As stated, I’m not pulling a ‘911’ on anything right now. But if all of the leverage and costs embedded within Canopy is relatively static, there’s going to be a reckoning at some point. My models have never shown Canopy’s stock price above $29.80. Ever. Not even once since the $400MM injection by Constellation. I don’t profess to be anything more than an analyst who does asset valuations. And I sure as heck make mistakes. But we will find out on August 14th (when Canopy’s latest financials are released) more about where Canopy is at. If they underwhelm (again); if they aren’t showing improvement in core metrics; and if they kick the can again on addressing the core issues within their capital structure; you may feel the earth move a little. 

Aphria’s going EBITDA positive has started a new timer. And I’m not so sure that a surprise press release a few days before August 14th will prove to be enough of a distraction this time.

If so, a macro level realignment of capital could well begin.

The preceding is the opinion of the author, and is in no way a recommendation to buy or sell any security or derivative. The author holds a position in Aphria, and has no position in Canopy.