OrganiGram Plunges 9% On Soft Top Line; Weak Gross Margins

Shares in cannabis stock OrganiGram (OGI) plunged 9% in Tuesday’s trading after the company reported disappointing earning results for the fiscal third quarter.

Specifically, Q3 GAAP EPS of -$0.51 fell short of Street estimates by $0.48. Revenue of $18.02M represented a 27% drop year-over-year, but beat consensus expectations by $2.64M.

For the quarter, OGI reported negative gross margin of $26.4 million compared to positive $12.3 million in Q3 2019 citing lower net revenue and higher cost of sales.

Meanwhile the company announced that it reduced its workforce by ~25% or ~220 employees in June 2020 in order to ‘better align with the needs of the business and prevailing market conditions’.

“The priority for us has been protecting the health and safety of our employees,” said Greg Engel, CEO. “This prioritization led to a significantly reduced workforce which contributed to a number of product launch delays, including our initial large format value offering, which affected opportunities to potentially capture significant market share and sales in dried flower, the largest product segment of the recreational market.

However he continued on a more positive note, saying: “we believe we have right-sized our workforce and even before doing so, we were able to generate positive cash flow from operations in Q3 2020.”

OGI generated positive cash flow from operations of $8.5M as a result of monetization and optimization of working capital and ended the quarter with cash and short-term investments of $44.8 M.

Oppenheimer analyst Rupesh Parikh wasn’t surprised by the earnings report, telling investors “We expected challenges given the recent pre-announcement and coronavirus-related headwinds.” He noted that management is taking aggressive actions to right-size costs and position the business for an increasingly challenging backdrop.

“We still believe OGI could emerge as a leading player longer-term, but it could take a few more quarters before we see meaningful improvement in financial delivery” the analyst concluded. Parikh has a hold rating on the stock, writing: “We remain on the sidelines with our entire cannabis coverage.”

Overall analysts have a cautiously optimistic Moderate Buy consensus on the stock with an average analyst price target of $3.25. With shares down 44% year-to-date, this now indicates 136% upside potential from the current share price. (See OGI stock analysis on TipRanks)

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