SNDL (SNDL) Q3 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Tuesday, November 4, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Zachary George

Chief Financial Officer — Alberto Paredero-Quiros

Operator

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

An $11.9 million unfavorable impact from non-cash items—including share-based compensation, inventory write-offs, and fixed asset impairments—resulted in a reported operating loss of $11 million in Q3 2025.

The liquor retail segment experienced a 3.6% net revenue decline to $139.4 million due to ongoing market headwinds in Q3 2025.

Share-based compensation liability increased by $6.8 million due to a 121% rise in the company's share price, negatively impacting operating income.

The cannabis operations segment posted a negative $4.8 million in adjusted operating income, primarily due to $3.9 million in inventory valuation adjustments and a $2.7 million impairment at the Stellarton facility in Q3 2025.

TAKEAWAYS

Net Revenue -- $244 million net revenue for 2025, up 3.1%, driven by growth in the cannabis segments despite softness in liquor retail.

Gross Profit -- $64.2 million, up 1.9% year-over-year in Q3 2025, with a $3.9 million non-cash inventory adjustment reducing gross margin by 160 basis points.

Operating Loss -- $11 million operating loss for Q3 2025, caused by $11.9 million in unfavorable non-cash items tied to share price gains, inventory, and asset impairments.

Free Cash Flow -- Positive free cash flow (non-GAAP) of $16.7 million in Q3 2025, representing a record and a $7.5 million improvement; cumulative nine-month free cash flow (non-GAAP) now at $7.7 million for 9M 2025, marking the company's first positive year-to-date result.

Liquidity Position -- Over $240 million in unrestricted cash and no debt as of Q3 2025, supporting investments in store openings and strategic initiatives.

SG&A Expenses -- Decreased by $4 million versus the prior year, reflecting $5 million in productivity savings in Q3 2025.

Liquor Retail Segment -- Net revenue fell by 3.6% to $139.4 million, while gross margin rose by 80 basis points to a record 26.3% in Q3 2025.

Cannabis Retail Segment -- Net revenue reached a record $85 million, up 4.8% year-over-year, with same-store sales growing 3.6% and gross profit climbing 8.5% to $22.5 million in Q3 2025.

Cannabis Operations Segment -- Net revenue increased 50% to a segment record of $37.4 million, driven by growth in edibles and $4.2 million in international sales; gross margin was 13.4%, impacted by inventory adjustments in Q3 2025.

Capital Expenditures -- CapEx and lease payments increased versus prior quarters to support anticipated store openings in the fourth quarter.

Regulatory Milestone -- Ontario regulatory review for the acquisition of 32 One Centimeters stores remains pending, with timing for completion still undetermined.

Outlook on Gross Margin (Cannabis Operations) -- CFO Paredero-Quiros stated that, excluding non-recurring items, gross margin for the segment would have been around 25% in Q3 2025, a level expected to serve as the lower bound going forward.

International Sales -- International sales increased to $4.2 million in Q3 2025, with indications of strong orders and an optimistic outlook for 2026.

Atholville Facility Ramp-Up -- CEO George noted ramping production targets above 15,000 kilograms per month in 2026, with much of the output expected for international markets.

Market Share -- The cannabis retail segment posted a 12 basis point gain in market share, outpacing market peers in same-store sales growth in Q3 2025.

Data Licensing Revenue -- $4.6 million in data licensing revenue contributed in Q3 2025, supporting margin expansion.

RISE Rewards -- Loyalty program in early stages with "extremely strong" member engagement, and a similar pilot planned for the liquor segment.

SUMMARY

Management emphasized record free cash flow (non-GAAP) and positive cumulative year-to-date free cash flow (non-GAAP) for the first time in company history, driven by cannabis segment growth, margin expansion, and operational efficiency in 9M 2025. The quarter's reported losses stemmed predominantly from non-cash items triggered by share price appreciation and facility impairments, which management highlighted as masking ongoing improvements in core profitability. Investments in new store openings and infrastructure continued, with pending regulatory approval in Ontario representing the final step in a significant retail acquisition. Substantial progress in international cannabis sales and the ramp-up of the Atholville facility point to a focus on further expansion in dynamic markets. Strategic human resources initiatives and the launch of customer loyalty programs signal increased investment in building both internal capabilities and consumer engagement.

SG&A cost reductions and productivity improvements more than offset inflationary pressures, providing additional operating leverage at the company level.

Seasonal patterns in free cash flow remained evident, but a consistent upward trend was cited across Q1–Q3 2025 based on non-GAAP free cash flow metrics.

The company's lack of debt and high liquidity were referenced as key to supporting investments and weathering industry volatility.

Management described the cannabis retail market as maturing, with a shift away from aggressive promotional strategies and a greater emphasis on optimizing gross margin and customer relationships.

The pending Sunstream restructurings were expected to eventually give shareholders exposure to U.S. medical markets, including Florida and Texas.

INDUSTRY GLOSSARY

Basis Point: One one-hundredth of a percentage point (0.01%), used to express changes in financial metrics such as gross margin.

CapEx: Capital expenditures; funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

SG&A: Selling, general, and administrative expenses; indirect costs unrelated to production, such as corporate salaries, marketing, and office expenses.

RISE Rewards: SNDL’s proprietary loyalty program for retail cannabis customers designed to enhance customer engagement and gather consumer data.

Non-Cash Items: Accounting charges or credits that affect earnings but do not involve an actual cash payment, such as impairments and share-based compensation adjustments.

Full Conference Call Transcript

Zachary George: Welcome to SNDL's Third Quarter 2025 Financial and Operational Results Conference Call. The 2025 marks another milestone for SNDL as we report record quarterly free cash flow and for the first time in our history, positive cumulative free cash flow for the first nine months of the year. We also continue to report sustained double-digit revenue growth in our combined cannabis segment, underscoring the strength of our ongoing operational and profitability improvements. Beyond our ability to generate cash, which in our view is the ultimate measure of a business' fundamentals, we are also seeing numerous bright spots in our income statement. These include robust growth in our cannabis segments, margin expansion across our retail operations, and reductions in SG&A expenses.

Collectively, these factors translate into continuous improvements in our financial performance. Despite our progress in operations, and our strengthened competitive position, this quarter's P&L reflects the impact of $11.9 million in unfavorable non-cash items. These were triggered by increases in our stock valuation as well as inventory and fixed asset impairments, resulting in a reported operating loss of $11 million. For those who are unfamiliar, our unvested long-term incentive equity grants show up as a liability on our balance sheet. So when our stock price increases, we have to take a negative charge to operating income in order to reflect the increased value of that liability.

These non-cash items and the volatility inherent to our industry should not overshadow the undeniable operational improvements we have achieved. We also continue to leverage the strategic advantage provided by our strong balance sheet, with no debt and over $240 million in unrestricted cash, as we build a resilient, growth-oriented, and profitable business. To this last point, during the third quarter, we continued to support the regulatory review process in Ontario, which is the final step before closing the acquisition of 32 One Centimeters cannabis stores. We also accelerated our investment pace to support the opening of five new cannabis stores and two new Wine and Beyond stores during the fourth quarter.

Additionally, we completed the ramp-up of new Wine stores and we are now making further investments in its infrastructure. Last but not least, beyond strengthening our competitive position in Canada, the company continues to work toward resolving the ongoing litigation required to complete the Sunstream restructurings. These restructurings are expected to provide shareholders with exposure to dynamic medical markets, including Florida and Texas. I'll pass the call to Alberto now for more insights on our third quarter financial performance. Thank you, Saad.

Alberto Paredero-Quiros: I want to remind everyone that the amounts discussed today are denominated in Canadian dollars unless otherwise stated. Certain figures referred to in this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SNDL's management discussion and analysis document. Our third quarter financial results represent another step forward in profitability, particularly in terms of free cash flow generation. Net revenue for 2025 reached $244 million, reflecting a 3.1% increase compared to Q3 of last year. This growth was driven by our cannabis segments, while the liquor segment continues to navigate market headwinds.

Gross profit of $64.2 million represents a $1.2 million increase or 1.9% growth year over year, despite being impacted by $3.9 million in non-cash inventory-related adjustments within cannabis operations. These inventory adjustments reduced gross margin by 160 basis points, more than offsetting the strong margin expansion in both liquor and cannabis retail segments. As a result, consolidated gross margin declined 30 basis points compared to the prior year. Operating income was affected by non-cash adjustments totaling $11.9 million. In addition to the $3.9 million inventory adjustment mentioned earlier, the 121% share price increase during the third quarter triggered a $6.8 million increase in share-based compensation liability.

Finally, we recorded a net of $1.6 million fixed asset impairment mostly driven by the idle Stellarton facility. These three factors fully explain the reported operating loss of $11 million. When excluding a $1.5 million restructuring charge, adjusted operating income ended at a loss of $9.5 million. Yet this represents a $7.1 million improvement or 42.7% compared to last year. Free cash flow is the main highlight of the quarter, with a positive $16.7 million.

In addition to the $7.5 million improvement compared to the same period last year, this strong Q3 result enabled us for the first time in our history to achieve positive cumulative free cash flow for the first nine months of the year, totaling $7.7 million year to date. We continue to demonstrate a clear upward trajectory, reflecting our sustained focus on growth and improved operational efficiency. Additionally, we can observe the seasonality of free cash flow within the first and second half of the year, with a consistent upward trend over time.

When analyzing the contributions from each segment across our main financial KPIs, we can clearly see that net revenue growth was driven by our cannabis segments, partly offset by liquor retail. The revenue elimination for cannabis is related to the sales from the cannabis operations segment into our own retail. As in previous quarters, this elimination is increasing as a result of our cannabis business growth. Adjusted operating income shows a solid improvement compared to the prior year, although there is some noise related to non-cash adjustments in both periods.

Liquor retail posted a small decline of $600,000 as gross margin and SG&A improvements were offset by revenue declines and the lapping of a $1.2 million favorable fixed asset impairment, recorded in 2024. Cannabis retail delivered strong operating income growth, driven by revenue gains, gross margin expansion, and SG&A efficiencies. Additionally, this quarter included a $1 million reversal for impairments recorded several years ago. Cannabis operations reported negative operating growth, primarily due to the $3.9 million inventory valuation adjustments and the $2.7 million fixed asset impairment related to the idle Stellarton facility. The investment segment shows significant favorability year over year, as last year included an unfavorable valuation adjustment from the Sunstream investment portfolio.

Finally, despite meaningful cost reductions in the corporate segment, the $6.8 million increase in share-based compensation triggered by the 121% rise in our share price in the third quarter resulted in a $2.2 million unfavorable movement year over year. Clearly, there are numerous atypical adjustments impacting the third quarter in both years. When we strip away this noise, the underlying improvement in operating income becomes evident. Both the third quarter and the year-to-date free cash flow results are the key highlights, each representing historic records for the company. In the third quarter, the negative income of $13.3 million was driven by the different non-cash adjustments previously mentioned. Inventory and other working capital follow the regular seasonality.

We're also seeing the higher amount of CapEx and lease payments in the third quarter compared to the previous two quarters, driven by the incremental capital investments for the anticipated store openings in the fourth quarter. This strong Q3 free cash flow result is allowing us to report for the first time in our history positive cumulative free cash flow in the first nine months of the year, with a total of $7.7 million. Looking closer at the three operating segments, starting with liquor retail, we see that the segment delivered net revenue of $139.4 million in the third quarter, a 3.6% year-over-year decline as it continues to face market headwinds.

Gross profit of $36.7 million represents a modest reduction of $200,000 compared to the prior year. The revenue decline was almost fully offset by 80 basis points in improvement in gross margin, which reached 26.3%, a new historic record for the segment. Operating income came in at $11.2 million, a decrease of $600,000 compared to last year. Record gross margin and further reduction in SG&A spending provided support. These gains were offset by the lapping of a $1.2 million fixed asset impairment reversals recorded in 2024. Cannabis retail delivered outstanding results in the quarter.

Net revenue of $85 million represents a new record for the segment, supported by a 4.8% year-over-year growth, driven primarily by a 3.6% increase in same-store sales. Gross profit of $22.5 million is also a historic high for the segment, reflecting an 8.5% increase compared to last year, supported by a 90 basis points improvement in gross margin. Finally, both operating income and adjusted operating reached new records for the segment, driven by revenue growth, margin expansion, and SG&A optimization. Operating income of $9.1 million more than doubled compared to last year, further benefiting from a $1 million asset impairment reversals recorded in the quarter.

Our Cannabis Operations segment delivered mixed results as a result of non-cash adjustments impacting the third quarter, masking the underlying improvements. Net revenue for 2025 was $37.4 million, also a new record for the segment, reflecting a $12.4 million or 50% growth compared to the prior year. This growth was driven by edibles following the acquisition of Indiva in 2024, as well as the accelerating international sales that reached $4.2 million in the quarter. Gross profit was impacted by $3.9 million inventory write-offs and valuation adjustments, primarily related to the cultivation ramp-up at our Atholville facility.

Gross margin ended up at 13.4% in the quarter, as the inventory adjustments had a negative impact of 10.4 percentage points to the margin of the segment. Finally, adjusted operating income also reflects a $2.7 million fixed asset impairment related to the Stellarton idle facility. The total of $6.6 million in unfavorable inventory and fixed asset non-cash adjustments resulted in the negative $4.8 million adjusted operating income. Over to you, Zachary, for additional comments related to our strategic priorities.

Zachary George: Looking at the progress we've made towards our three strategic priorities, growth, profitability, and people, there are several highlights I'd like to point out. Let's start with growth. Our cannabis retail segment continues to outperform the market, achieving 3.6% same-store sales growth in the third quarter and contributing to an additional 12 basis point gain in market share. Despite softness in the liquor market, our Wine and Beyond banner continues to demonstrate strength with 2.9% same-store sales growth, supported by double-digit growth in private label sales. As mentioned in previous calls, we have accelerated organic capital investments in new store expansion.

In addition to the two cannabis stores opened during the third quarter, it is also encouraging to see strong 50% revenue growth from our cannabis operations segment driven by market leadership in edibles, following the acquisition of Indiva in the fourth quarter of last year, as well as continued growth in international sales which reached $4.2 million in the third quarter. Shifting to profitability, the most significant highlight is the generation of $17 million in free cash flow during the quarter, enabling us to achieve positive year-to-date free cash flow of $7.7 million at the end of the third quarter for the very first time in our history.

This was accomplished through revenue and margin expansion, coupled with working capital optimization despite incremental CapEx investments to fund future growth. While adjusted operating income remains negative, due to the previously mentioned non-cash items reflected in the quarter, it did grow by 43% compared to the prior year, supported by revenue growth, retail margin expansion, and reductions in SG&A costs. On that point, SG&A expenses in the third quarter were $4 million lower than last year, as our $5 million of productivity savings more than offset inflationary pressures. Additionally, data licensing revenue contributed $4.6 million in the quarter, providing further support for gross margin expansion. Foundational to all of these improvements is our people strategic priority.

During the third quarter, we continued to enhance the deployment of talent cards and development conversations, a key step in our strategic talent review process. We also launched a recruitment efficiencies project to streamline hiring and improve the experience for recruiters, hiring managers, and candidates through automated workflows. Additionally, we introduced a monthly leadership development series, a new networking forum where leaders share personal and professional experiences and discuss our strategic priorities.

As we focus on driving strong execution in the fourth quarter, and a strong finish to the year, we are also encouraged by the many opportunities and execution plans our teams are developing for 2026, taking us step by step closer to our ambition to become a global cannabis leader. Once again, I'd like to thank our entire team for their contributions, and our shareholders for their continued trust. I will now hand the call back to the operator for the analyst Q&A session.

Operator: Thank you. And we will now begin our analyst Q&A session. In order to join the queue, you will then hear an automated message advising that your hand is raised. Also, if you are on speakerphone, please pick up the handset before pressing any keys. To withdraw your question, press 11 again. One moment while we poll the Q&A roster.

Alberto Paredero-Quiros: And the first question today will be coming from the line of Aaron Thomas Grey of Alliance Global Partners.

Operator: Please go ahead.

Aaron Thomas Grey: Hi. Good morning, and thank you very much for the questions. And I appreciate some more of the cash flow generation. First question for me, you know, I just want to kind of strip out, you know, some of the one-offs to make sure we have a good understanding of how best to think about the business going forward. So particularly for cannabis operations, you know, included the write-offs for inventory, you know, within that. So I just want to clarify there from the prepared remarks. Was it only the $3.9 million inventory in the gross margin and the $1.6 million fixed asset that's SG&A and not in gross margin? So I want to clarify that point.

And then secondly, you know, how best to think about the gross margins specifically for the cannabis operations going forward? You know, both of those are added back, it gets you back to that 29% gross margin from prior quarter. If just inventory gets you more to the mid-twenties, so I just want to get a better understanding of how to think about that on a go-forward basis. Thank you.

Alberto Paredero-Quiros: Hi. Good morning, and thank you for the question. So yes, I confirm the $3.9 million of inventory adjustment that probably is impacting gross profit. And it has an impact of about 10.6 percentage points in the margin of the segment. The other one-time adjustment that was seen in the quarter is the Stellarton facility impairment. It's a $2.7 million charge. That happened below gross profit. So it's in other income, and it's expenses. So it's part of operating income, but not reflected in the gross margin. So the total of those two things obviously are impacting operating income, but the only impact to gross profit is based on the inventory adjustment.

Without those adjustments, we would have been around 25% margin in the segment, which is what we're expecting. We have seen in around about that number in the last couple of quarters, and we're expecting that to be the low end of the range for the future.

Aaron Thomas Grey: Okay. Great. Thanks for that color. Sales to provincial board saw some nice growth both on a quarter-over-quarter and year-over-year basis. Any specific drivers there? And anything to think about in terms of the mix within that, shipment timing for how we think about that line segment going forward? Because it does seem like that growth outpaced some of what we're seeing from the third-party POS data.

Zachary George: Mhmm. Yes. Indeed, we're seeing the same softness overall in the sales to the provincial board from cannabis operations. We know that it's not driven by our own segment, as we continue to gain momentum there. And we continue to see growth. But we have seen some softness in third-party retail. Obviously, we don't have full visibility to the inventory numbers of the provincial board. So an element of this slowdown could be as well driven by that, but overall, as that we have seen over the last couple of quarters, a slowdown in third-party retail.

That we're working on, obviously, trying to create some additional momentum and the changes in new products and innovation, we believe that we're going to be regaining momentum there.

Zachary George: And just to add to Alberto's comments and good morning. Thanks for the questions. We are seeing great progress in specific categories, including edibles, pre-roll, and vape. And so that's enabled us to keep a great pace relative to the broader market.

Aaron Thomas Grey: Okay, great. Thanks for that. Last one for me. I know you've been increasing your efforts internationally. I think you said $4.2 million in the quarter. So how best to think about international sales going forward? How big of a part of the business do you feel like that could be within the next twelve to eighteen months?

Alberto Paredero-Quiros: It's okay to continue to gain momentum. We have been increasing quarter over quarter since the beginning of the year. We have a strong demand. We have a lot of pre-support orders for the fourth quarter as well. We are bullish as well with the outlook for 2026. A lot of our international partners are exploring options to continue increasing purchases from us. They're struggling with reliability of supply from some of their other partners that they have. And they have been very pleased with our performance so far. So yeah, we believe and we're anticipating that number will continue growing in the future.

Zachary George: Good. Great. Thank you very much. Worth mentioning that we are continuing to ramp production at our Atholville, New Brunswick facility. That benefits from extremely attractive, relative power pricing. And so we should see monthly production based on our targets north of 15,000 kilograms a month in 2026. And so we expect the bulk of that biomass to be directed at international markets. And there's a number of other both 2.0 and other growth opportunities that we're looking at.

Aaron Thomas Grey: Okay, great. Thanks for that color. I'll jump back in the queue.

Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. One moment for the next question. Our next question will be coming from the line of Frederico Gomes of ATB Capital Markets. Your line is open.

Frederico Gomes: First question, just on the One Centimeters transaction that still hasn't closed, said the rating a regulatory approval in Ontario. So is there anything specific that's been an issue with that approval? You know, I'm just thinking about the previous history here back when you had the Innova transaction, and I believe that there was a hold-up there in Ontario. So just any comments on that?

Zachary George: Thanks for the question, Fred, and good morning. We don't have any additional information to share. We thought this would be the review would be completed late October. It's early November. There are a number of retail licenses, both applications that have been submitted by affiliated entities as well as third parties that are still moving through the pipe in Ontario. So we'll update the market as soon as we have greater clarity.

Frederico Gomes: Thank you. Then second question, just on cannabis retail. I guess we saw good same-store sales growth this quarter again, record numbers in gross profit, operating income as well. Just broader comments about what you're seeing in that market right now. Are you seeing opportunities to increase prices and margins? Are you seeing a good pipeline of M&A? Or is it going to be concentrated more on organic growth, obviously, excluding the One Centimeters transaction? Just some broader color on the outlook for cannabis retail in Canada right now. Thanks.

Zachary George: It's a great question. We are seeing maturity. It's really a province-by-province assessment. We've seen extreme saturation start to settle in Alberta. And as you well know, Frederico, Alberta was one of the quickest provinces out of the gate in terms of its pace of door count growth. You're seeing signs emerging of maturity in markets like Ontario as well, although we still think there's opportunity there. And I think that the days of easy kind of double-digit high single-digit same-store sales growth upon opening locations and managing discount retail strategy are going to be in the rearview very quickly.

Execution on the floor, and owning a consumer relationship with a very convenient and attractive experience for customers, is critical at this point. So we are very much focused on our consumer and owning that relationship.

Alberto Paredero-Quiros: Yeah. I would add that, if you compare to the same period of last year, you have probably noticed in the third quarter that our same-store sales have slowed down somewhat compared to the first half of the year. On the other side, we're seeing a significant increase, a 90 basis points improvement in gross margin. The main reason last year as of the third quarter, we started to run more aggressive promotional activities that obviously pushed a little bit the top line but tempered the gross margin. As we are lapping that strong promo activity this year, we'll see the margin progression. Obviously, somehow a little bit of a slowdown in terms of sales revenue growth.

It will probably be a similar dynamic in the fourth quarter, but we just still see some we've seen margins somewhat stabilizing for the long run. There's always an opportunity to increase efficiencies and manage mix a little bit better and gain marginally on the gross margin. But, clearly, yes, as Zach said, on the revenue growth, and the market growth, we're assuming we're expecting would stay in the low single digit going forward.

Frederico Gomes: Thank you. That's very helpful. And then just a final question, just I guess related to that as well, just on the RISE rewards program. You know, now that you have some more time with that, you know, anything you can share in terms of how the rollout's occurring relative to your expectations? And any data points regarding members of the program, economics, etcetera? Thanks.

Zachary George: Thanks for the question, Frederico. We're still early days. We're just several months into this launch. But it is tracking quite well. The engagement we're getting from loyalty members is extremely strong. We're excited to roll out a similar and parallel program for our liquor business in the coming quarters. And think that there'll be an interesting opportunity and some very rich data that we can receive from that. We're going to update the market on this program but wanted to get a couple quarters of performance underneath our belt before sharing more detailed stats.

Frederico Gomes: Thank you very much.

Operator: Thank you. This does conclude the Q&A session for today. I would like to turn the call back over to Zachary George for closing remarks. Please go ahead.

Zachary George: Thanks all for joining us today. I appreciate your support. We look forward to updating you on our progress in the near future. Thank you.

Operator: This concludes today's conference call. You may disconnect your line. Thank you for participating. And have a pleasant day.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy.