Can Cannabis Save Sequential Brands Group?

On Thursday, small cap Sequential Brands Group (NASDAQ: SQBG) along with diversified cannabis and hemp stock Canopy Growth Corporation (TSX: WEED; NYSE: CGC) announced that Martha Stewart had joined the Company in an advisory role to assist with developing and positioning a broad new line of product offerings across multiple categories. The news promptly sent shares of Sequential Brands Group up by 40% while Canopy Growth Corporation’s shares did not move much:

Sequential Brands Group owns, promotes, markets, and licenses a portfolio of consumer brands in the fashion, active and home categories, which includes the Martha Stewart media and merchandising properties (As the Company acquired Martha Stewart Living Omnimedia at the end of 2015). The Company seeks to ensure that its brands continue to thrive and grow by employing strong brand management, design and marketing teams. Sequential has licensed and intends to license its brands in a variety of consumer categories to retailers, wholesalers and distributors in the United States and around the world.

Meanwhile, Canopy Growth Corporation is a diversified cannabis and hemp company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms. The Company has established partnerships with leading sector names including cannabis icon Snoop Dogg, breeding legends DNA Genetics and Green House seeds, Battelle, the world’s largest nonprofit research and development organization, and Fortune 500 alcohol leader Constellation Brands.

The press release announcing collaboration had also mentioned Martha Stewart’s love for animals which had people speculating she would be involved in cannabis products being developed for animals (as Canopy Growth is looking to develop CBD-based products to treat anxiety in animals). In addition, Canopy partner Snoop Dogg and Stewart already star in a show together entitled “Martha & Snoop’s Potluck Dinner Party.” Otherwise, no financial terms of the deal or collaboration were disclosed. 

Sequential Brands Group was transforming itself from a traditional wholesaler and retailer of branded apparel into a company solely focused on licensing – which turned the stock into a highflyer. However, shares have since lost much of their value on concerns about growth fueled by debt and the need to pay interest on it:

However and with or without cannabis / Canopy deal, Sequential Brands Group’s results or rather losses and its balance sheet (debt) situation are slowly improving – a trend that will be far more important once the hoopla subsides. In early November, the Company reported that Q3 revenue was $41.2 million versus $39.0 million in Q3 2017 while the net loss was $9.3 million versus a net loss of $24.2 million. The CEO commented:

“Our third quarter results reflect the progress we’ve made against our strategic initiatives to position our brands for long-term growth. We’ve recently signed several exciting partnerships across our portfolio including a new fashion license for the Martha Stewart brand, and a long-term extension for Jessica Simpson’s core footwear business. We are encouraged by the momentum across our business as we head into the new year, and our strong pipeline of new licenses.”    

Sequential Brands Group will issue financial results for the Q4 and full year ended December 31, 2018 before the market opens on Wednesday, March 6, 2019.  

Note that on August 7, 2018, the Company had also entered into amended credit agreements with its existing lenders, led by Bank of America and certain funds managed by FS/KKR Advisor, LLC. According to the Q2 earnings: “This refinancing extends the first lien debt maturities to 2023 and the second lien to 2024, and improves our capital structure by shifting over $100 million of debt into the first lien credit facility, thereby, meaningfully reducing our weighted average interest rate.”

Its also worth adding that yesterday’s announcement and subsequent share surge probably unround much of the short interest on shares.  

Leave a Reply

Your email address will not be published. Required fields are marked *