Closing Facility Could Cost Tilray $28 Million in Non-Cash Charges

On May 26, Tilray (NASDAQ:TLRY) announced that it will permanently shut down its High Park Gardens facility located in Leamington, Ontario. Natura Naturals, a wholly-owned subsidiary of Tilray, operated the facility. To expand the production capacity in Canada, Tilray acquired Natura Naturals for 70 million Canadian dollars in January 2019. However, due to changing industry dynamics and evolving business needs, the company decided to close the facility permanently. Tilray expects to save $7.5 million annually. Closing the facility exempts the company from the ongoing capital expenditures. Tilray expects the closure process to take six weeks. The closure should be complete by the end of next month.

Closing the High Park Gardens facility means terminating some jobs. The company expects to pay severance payments of up to $300,000 this year. Also, the company will likely incur impairment charges related to its PPE (plant, property, and equipment), destroying unharvested flowers, and writing down intangible assets. Tilray will likely recognize approximately $18.0 million–$28.0 million in writedowns and impairment charges during the quarter, which ends on June 30.

Tilray’s stock performance

Since the beginning of 2020, Tilray has lost 41.5% of its stock value. The company’s stock price fell due to widening net losses in the last two quarters and weakness in the cannabis sector. Meanwhile, the company plans to lower its expenses by closing its High Park Gardens facility. Last week, the company received the third EU GMP (Good Manufacturing Practice) certification for its manufacturing facility in Cantanhede, Portugal. The certification could boost the company’s medical cannabis production and sales in Europe. To learn more, read Big News for Tilray: EU Campus Gets Third GMP Certification.

So far this year, Tilray has underperformed its peers and cannabis ETFs. Canopy Growth (TSE:WEED), Aurora Cannabis (NYSE:ACB), and Aphria (NYSE:APHA) have fallen by 20.2%, 41.5%, and 10.5% YTD, respectively. The ETFMG Alternative Harvest ETF (NYSE:MJ) has fallen by 14.6% during the same period.

Analysts’ expectations and recommendations

For 2020, analysts expect Tilray to report revenue of $238.0 million. The amount represents a rise of 42.5% from $167.0 million in 2019. Meanwhile, analysts expect the company’s EBITDA to still be negative this fiscal year. They project the company’s EBITDA losses to improve from $89.8 million in 2019 to an EBITDA loss of $56.4 million. The company will likely turn profitable in fiscal 2021.

Since Tilray reported its first-quarter earnings on May 11, Cowen, Benchmark, Eight Capital, and Alliance Global Partners have cut their target prices. However, Stifel, Jefferies, and MKM Partners increased their target prices. As of June 2, analysts’ consensus target price was $8.58. The amount represents a fall of 14.4% from the June closing price. Meanwhile, analysts favor a “hold” rating for the stock. Among the 16 analysts, 75% recommend a “hold,” 12.5% recommend a “buy,” and 12.5% recommend a “sell.”