Aphria Catches COVID-19, Revenue Down On Lockdowns

Another Shock For Aphria Investors 

Aphria (NASDAQ: APHA) reported its FQ3 results and revealed an issue that will likely plague the entire Canadian cannabis industry this earnings cycle. Lockdowns in key markets across the country and globally took a big bite out of revenue. The news has the market down about 10% in early trading because Aphria investors were expecting so much more. With shares down so hard on overblown expectations, we can't help but think about what happened with the cannabis market two years ago but there is a difference.

The first time the cannabis bubble popped it was because the pre-legalization hype had the market so overcrowded it was pricing in 100% of the wildest forecasts for a fully mature cannabis market. The difference now is that investors have a more realistic view of what to expect and the COVID-19 impact will be fleeting. Aphria is one of the best cannabis companies on the market and one that is still expected to grow. In that light, we view today's pullback in Aphria as a buying opportunity. 

Aphria, You Can't Sell Cannabis When The Stores Are Closed 

Aphria did not have a horribly bad quarter but it did perform well below the consensus expectations. The lockdowns in Ontario and Germany led revenue to a 430 basis point contraction from the previous month. Ontario itself was on lockdown almost the entire reporting period. The $153.64 million in net consolidated revenue is up 6.4% from FQ3 2020, however, the problem is that it missed the consensus by 600 basis points. Breaking out the cannabis revenue net cannabis sales fell 7.8% sequentially and nearly 24% YOY primarily due to a contraction in adjust-use. Adult-use sales, while up a strong 33.4% YOY, fell 17.3% sequentially. 

Moving down the report, the margin data and earnings are also disappointing. The contraction in revenue led to deleveraging of fixed costs and a 670 basis point decline in adjusted gross margin. Margins were also impacted by an increase in the cost to produce each gram. Looking forward, there is a potential problem brewing here in terms of the inventory as well. With KGs sold down 30% sequentially there is a risk of oversupply and writedowns of lost inventory later in the calendar year. Bringing it back to the present, the company's bottom line results are what really hurts. The company lost far more than was expected with GAAP and adjusted EPS both missing their consensus targets. The GAAP -$1.14 missed by $1.09 while the adjusted -$0.15 missed by $0.09. 

Aphria-Tilray Merger To Be Approved By Shareholders 

Aphria announced an intended merger with Canadian cannabis producer Tilray (NASDAQ: TLRY) during the Q3 period. The merger would create the largest cannabis company globally with estimated F2021 sales in the range of $800 million. The deal is still waiting on approval from Aphria shareholders but the vote, scheduled for later this week, is expected to pass with ease. 

 "We remain excited with the opportunities created for both Aphria shareholders and Tilray stockholders in completing our proposed business combination with Tilray, and believe that together, we will create one of the strongest global cannabis and consumer packaged goods companies in the world.  We expect to have a tremendous runway for long-term sustainable growth as we build upon our existing foundation in Canada and internationally by increasing the scale of our global operations," said CEO Irwin D. Simon. 

The Technical Outlook: Aphria Falls Back To Key Support 

Shares of Aphria took a big hit in the wake of the Q3 report and are down about 10% in premarket action. The move has price action down near a potentially strong support level we view as an attractive entry point. Support has been strong at the $15 since the February break out and should maintain that level unless there is a resurgence in COVID and shutdowns within Canada. Assuming price action confirms support at this level we see this stock moving back into the $28 by the next reporting season. If not then this stock may be headed to the $12 level where support is also expected to be strong.