Executive Summary / Key Takeaways

• SNDL Inc. has achieved a significant milestone, reporting positive operating income and net earnings for the first time in its history in Q2 2025, driven by growth across all operating segments and robust margin expansion.
• The company's Canadian cannabis business is outperforming the market, expanding at nearly three times the rate of the Canadian recreational market in Q2 2025, bolstered by a value-based retail model and strategic acquisitions like Indiva and 1CM .
• SNDL maintains a strong balance sheet with no debt and over $200 million in unrestricted cash, providing a unique foundation for pursuing high-return organic and inorganic growth opportunities, including a strategic review of its U.S. multi-state cannabis exposure.
• Operational efficiencies, including an end-to-end productivity program in Cannabis Operations and a corporate restructuring, are driving significant gross margin expansion and overhead savings, with management confident in achieving over 30% gross margins in Cannabis Operations.
• While U.S. asset consolidation faces regulatory hurdles and international markets present volatility, SNDL is committed to delivering $100 million in annualized free cash flow within the next three years, underpinned by its disciplined capital allocation and focus on profitable growth.

A Multi-Segment Powerhouse Forges a New Path

SNDL Inc., formerly Sundial Growers Inc., has undergone a profound transformation since its incorporation in 2006, evolving into a diversified Canadian consumer defensive company with significant stakes in liquor retail, cannabis retail, cannabis operations, and strategic investments. This evolution has been marked by a relentless pursuit of operational efficiency and strategic expansion, culminating in a pivotal moment in Q2 2025 with the company's first-ever report of positive operating income and net earnings. This achievement underscores the effectiveness of SNDL's strategic improvement agenda and its disciplined approach to a dynamic industry.

The company's strategic pillars—growth, profitability, and people—guide its long-term vision. SNDL's strong balance sheet, characterized by no debt and over $200 million in unrestricted cash, provides a distinct competitive advantage, enabling it to pursue high-return organic and inorganic growth opportunities. This financial fortitude sets SNDL apart from many peers in the capital-intensive cannabis sector.

Operational Excellence and Technological Edge in Cannabis

SNDL's Cannabis Operations segment has been a key driver of its recent success, demonstrating significant improvements in profitability. The company's "technological differentiation" in this segment is rooted in its sophisticated operational processes and strategic asset management rather than a single, patented hardware. An end-to-end holistic productivity program, implemented since late 2023, has focused on enhancing efficiencies in labor and automation within manufacturing facilities, optimizing cultivation assets, and critically, eliminating exposure to high-cost biomass. This strategic shift, including the closure of the Olds facility, has directly contributed to substantial gross margin expansion.

Management is confident that these ongoing initiatives, coupled with increased capacity utilization and further automation, will drive Cannabis Operations gross margins to "a zone where they have a 3 handle," or over 30%. This focus on process optimization and cost control provides a tangible manufacturing cost advantage. For instance, the Atholville cultivation facility is now fully ramped and committed to both international and domestic supply, representing approximately 15% of the company's total biomass needs. This internal cultivation acts as a strategic hedge in a rising price environment, while SNDL conservatively leverages procurement opportunities in the market rather than investing tens of millions in new cultivation facilities.

Further enhancing its operational capabilities, the acquisition of Indiva in Q4 2024 positioned SNDL as the largest manufacturer of infused edibles in Canada. This acquisition is expected to deliver incremental synergies throughout 2025 and contribute to margin accretion due to the favorable margin profile of the edibles category. The integration of Indiva employees onto SNDL's consolidated HR platform in Q1 2025 further streamlines operations.

Beyond its core cannabis production, SNDL also benefits from data licensing revenue, which contributed $4.7 million in Q2 2025, $4.5 million in Q1 2025, and $4.5 million in Q4 2024. This revenue stream provides additional support to gross margin expansion and represents a unique differentiator in the industry.

Financial Performance: A Historic Turnaround

The second quarter of 2025 marked a historic turning point for SNDL, as it reported positive operating income and net earnings for the first time. Consolidated net revenue reached $245 million, a 7.3% increase compared to Q2 2024, with growth observed across all operating segments. Gross profit surged by 16.2% year-over-year to $67.6 million, resulting in a 210 basis point improvement in gross margin, matching the record 27.6% achieved in Q1 2025. This robust performance underscores the effectiveness of SNDL's strategic focus and continuous improvement agenda.

Adjusted operating income for Q2 2025 was $5.8 million, representing a remarkable 226% increase year-over-year. This was achieved despite an absolute reduction of $5 million in G&A expenses, including share-based compensation, reflecting strong productivity improvements and disciplined cost management. The Corporate segment's positive impact in Q2 2025 further highlights ongoing restructuring and cost optimization initiatives.

The Cannabis Retail segment achieved a new quarterly net revenue record of $84.4 million, growing 11% year-over-year. This performance was driven by an 8.2% increase in same-store sales, significantly outpacing the market and leading to a 30 basis point gain in market share. Operating income for this segment more than doubled compared to the prior year, reaching $8.1 million. The Cannabis Operations segment delivered 43% revenue growth to $35.8 million, propelled by the Indiva acquisition and accelerating international sales, with its gross margin expanding by 13 percentage points to 25.8%.

Even the Liquor Retail segment, which had faced market headwinds, returned to marginal revenue growth in Q2 2025, posting a 1% year-over-year increase to $141.9 million. This was partly supported by a calendar shift in Easter timing, driving a 2.7% growth in same-store sales. The Wine and Beyond banner was a standout performer, growing 7.2%, while private label sales increased by 8.1%. This segment also achieved a record high gross margin of 25.7% and saw its operating income rise by 31% to $11.1 million.

Despite strong P&L performance, free cash flow was negative by $7.9 million in Q2 2025. This was primarily due to working capital investments supporting planned international growth in the second half of the year, seasonal payments for incentive programs and insurance premiums, and capital expenditures for upcoming store openings. However, SNDL achieved positive free cash flow of $8.9 million for the full year 2024, exceeding its guidance and representing a $70 million improvement compared to 2023.

Competitive Landscape and Strategic Positioning

SNDL operates within a highly competitive Canadian cannabis market that management believes is evolving into an oligopoly, with a few dominant players and strong peripheral operators. The company's strategy is not solely focused on market share at any cost, but rather on profitable growth and free cash flow generation. SNDL's cannabis business has consistently outperformed the Canadian recreational market, expanding at nearly three times the market rate in Q2 2025, demonstrating its effective value-based model, particularly through its Value Buds banner.

Compared to larger Canadian licensed producers like Canopy Growth Corporation , Aurora Cannabis Inc. , and Tilray Brands Inc. , SNDL's competitive advantage lies in its integrated retail network and operational efficiencies within Canada. While Canopy Growth (CGC) boasts a broader international footprint and diversified product lines, SNDL's retail focus allows for stronger customer loyalty and faster market responsiveness in its domestic market. SNDL's emphasis on recreational markets contrasts with Aurora's (ACB) historical medical orientation, giving SNDL an edge in consumer engagement through its retail adaptability. Against Tilray , which has diversified into beverages and wellness, SNDL's streamlined Canadian operations and focus on cost control offer a potentially more stable financial profile, despite Tilray's (TLRY) broader market reach.

SNDL's experience in the federally legal Canadian landscape, having weathered cycles of overcapitalization, oversupply, and aggressive discounting, has equipped it with valuable skill sets in labor management, real estate exposure, and manufacturing automation. These learnings are considered a significant asset, applicable to emerging international and U.S. state markets. The company's private label offerings in both liquor and cannabis retail are also a key differentiator, meeting consumer demand for quality and affordability while driving margin accretion.

Outlook and Growth Trajectory

SNDL is committed to delivering $100 million in annualized free cash flow within the next three years, a testament to its confidence in its operational improvements and growth strategies. The company anticipates meaningful growth in international sales in the second half of 2025, with export revenues expected to increase substantially into Q3 2025. International sales margins are currently accretive and are expected to remain higher than the Canadian average for the time being.

In Canadian Cannabis Retail, the acquisition of 32 cannabis retail stores from 1CM (CM), expected to close by the end of Q3 2025, is poised to drive substantial incremental organic growth. SNDL continues to evaluate both organic and inorganic growth opportunities to expand its retail footprint, including new store openings and potential acquisitions of larger portfolios. The Rise Rewards loyalty program, launched in April 2025, is in its early stages but aims to enhance customer loyalty and communication, with plans for expansion across different banners.

For the Liquor Retail segment, revenue is anticipated to be approximately flat for 2025, with a long-term underlying industry growth rate of 1% to 1.5%. While volume may see low single-digit declines, this is expected to be theoretically compensated through pricing. SNDL also anticipates additional rational regulatory reform in Canada in 2025, including a potential shift in milligram limits on edibles from 10 milligrams to 100, which would likely be a boon for that category.

A significant strategic review initiated by the Board in Q1 2025 is evaluating SNDL's exposure to U.S. multi-state licensed cannabis enterprises and its current exchange listing status. This review could lead to a transition to an alternative structure that grants regulatory flexibility to actively manage a broader North American cannabis platform and consolidate U.S. assets. This move is driven by existing capital exposure in U.S. ventures like Parallel and Skymint, where restructuring processes are ongoing and expected to conclude in the coming months.

Risks and Challenges

Despite the positive momentum, SNDL faces several pertinent risks. The consolidation of its U.S. assets, primarily through the SunStream portfolio, has been an elongated and frustrating process due to the inability of U.S. operators to access federal bankruptcy courts, leading to delays in state courts less experienced with complex commercial and distressed files. SNDL is currently restricted from engaging in plant-touching activities in the U.S. to maintain its Nasdaq listing, limiting its direct operational influence over these assets.

The international cannabis markets, while offering high margins, are still emerging and subject to volatility and potential margin compression as more players enter and supply chains mature. In Canada, the persistent impact of the illicit cannabis market remains a challenge, though SNDL's focus on convenience and value in the legal market helps mitigate this. Furthermore, while there is cautious optimism, material changes to Canadian excise tax reform are not expected in the near term. The Investment segment remains susceptible to negative fair value adjustments, as seen in Q1 2025 and Q4 2024, driven by market risk and operational performance of invested companies.

Conclusion

SNDL Inc. stands at a pivotal juncture, having achieved historic profitability in Q2 2025, a testament to its strategic discipline and operational improvements. The company's multi-segment model, anchored by a rapidly growing and increasingly profitable Canadian cannabis business and a resilient liquor retail segment, provides a diversified revenue base. Its strong balance sheet, coupled with a clear capital allocation strategy focused on Canadian retail expansion and potential U.S. market entry, positions it for continued growth.

The company's "technological" edge, manifested through sophisticated operational efficiencies, strategic acquisitions like Indiva (NDVA), and a commitment to data-driven insights, underpins its ability to drive margin expansion and outperform competitors in key segments. While challenges persist, particularly in navigating the complex U.S. regulatory landscape and managing market volatility, SNDL's management has demonstrated a clear vision and execution capability. The commitment to achieving $100 million in annualized free cash flow within three years, alongside the ongoing strategic review of its U.S. platform, signals a company poised to unlock significant long-term value for shareholders, transforming from a turnaround story into a formidable North American cannabis and retail leader.