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This Could Be a Huge Problem for Sundial Growers

Sundial Growers (NASDAQ: SNDL) has struggled to generate much in the way of consistent growth in recent years. Meanwhile, it has diluted shareholders heavily, with the company now having more than 2 billion shares on its books, which is more than nine times what it had at the end of 2020.

In an attempt to generate some growth, Sundial has been investing in the retail pot sector. But it may not be smooth sailing for those businesses, either. There’s a potentially big rival waiting in the wings, one that has already invested in the sector: retail giant Alimentation Couche-Tard (OTC: ANCT.F).

Who is Couche-Tard?

Couche-Tard is a Canadian company based out of Quebec. It’s a convenience store operator that has a huge presence around the globe, with more than 14,000 stores spanning 26 countries. Its stores operate under multiple banners, including Circle K, Mac’s, and Ingo.

Even before Canada legalized marijuana in 2018, Couche-Tard wanted to sell pot in its stores. And so it wasn’t a huge surprise to learn that the company invested in pot retailer Fire & Flower in 2019. What Sundial investors should know that Couche-Tard is continuing to increase its position in Fire & Flower. From a 9.9% stake a few years ago, the company has used warrants to increase its position in the business to 35%.

And this month, Fire & Flower appointed Stéphane Trudel as its new CEO. Trudel was the senior vice president of operations at Couche-Tard at the time of the announcement. With a growing stake in the business and now having its own executive running Fire & Flower, the stage could be set for Couche-Tard to eventually take a controlling stake in the business and pump more money into its growth. 

This is bad news for Sundial

Fire & Flower has more than 100 pot shops in Canada, and with Couche-Tard potentially putting more money in the business and focusing on its growth, that would likely intensify competition for Sundial Growers.

Sundial acquired pot retailer Inner Spirit last year, which also has 100-plus locations within Canada. More recently, it also acquired liquor store operator Alcanna, which through a majority-owned subsidiary in Nova Cannabis, has close to 80 pot shops in its portfolio. 

A battle for market share in the retail pot sector looks inevitable between Couche-Tard and Sundial Growers, and it could be an uneven one.

Couche-Tard normally generates more than $50 billion in annual revenue. In its most recent fiscal year (which ended in April 2021), its sales dipped to below $46 billion as a decline in travel during the pandemic led to a sharp 24% reduction in road transportation fuel revenue, its largest segment. But amid a return to normal, the business has been looking stronger of late; in the trailing 12 months, its sales have totaled $58.6 billion.

Couche-Tard also routinely posts a profit and also brings in tons of money. Over the past year, it has generated $2.3 billion in free cash flow. Suffice to say, Couche-Tard would provide tough competition to any retailer and would have ample money to put into a marijuana business.

Investors should be cautious with Sundial Growers

Sundial Growers has been a sinking ship over the past year, falling a whopping 72% in 12 months. That’s slightly worse than the Horizons Marijuana Life Sciences ETF, which has declined by 69%. Shares of Couche-Tard, meanwhile, have risen by 16%.

Even though Sundial is likely to post record-setting numbers next quarter thanks to its acquisitions, the business remains incredibly risky. With a cash burn of more than 150 million Canadian dollars over the trailing 12 months, the business needs to be a lot stronger if it’s going to succeed against Fire & Flower and other cannabis retailers.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard Inc. The Motley Fool has a disclosure policy.

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