As markets opened Thursday, Canopy Growth Corporation’s (TSX: WEED) (NYSE: CGC) stock hit its lowest valuation in two years, responding to quarterly earnings that saw revenues contract by up to 15 per cent.
CEO Mark Zekulin was quick to point the finger at the Ontario government.
“The market opportunity today is simply not living up to expectations, and at the risk of oversimplifying, the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing,” he said in a conference call Thursday morning.
Ontario represents 40 per cent of Canada’s population, Zekulin added, yet only has one store per 600,000 people. This ratio is in stark contrast to Colorado, which Canopy estimates to have around one store per 10,000 people.
“When one year into the market the addressable market is nearly half what is expected, there is going to be meaningful short-term problems,” he said.
However, Zekulin said Ontario’s move to allocate retail licences limited only by consumer demand could not come soon enough.
Canopy’s earnings woes led by returns charges
Canopy’s stock dipped 17 per cent near the top of the day to a new bottom of $20.19 per share, down 71 per cent from its zenith of $69.90 each in the pot stock golden era of late April 2019.
Most notable in the report are charges of $32.7 million for “returns, return provisions, and pricing allowances primarily related to its softgel & oil portfolio” and an inventory charge of $15.9 million “to align the portfolio with the new strategy.”
Due to these charges, Canopy reported revenues of $76.6 million — down 15 per cent from the previous quarter.
The company was forced to eat “a charge for excess finished recreational cannabis inventory of $15.9 million resulting from our assessment of current and forecasted ‘sell-in’ rates of certain oil and softgel products,” indicating poor sales for these types of products.
Excluding the portfolio restructuring costs, the company noted its consolidated gross revenue for the quarter was up 6 per cent to $118.3 million, citing benefits over the full quarter from its acquisitions of C3 and ThisWorks.
Canopy said it ended the quarter with $2.7 billion in cash, cash equivalents and marketable securities available for sale.
Whoa-oh, living on a Cannabis 2.0 prayer
Despite the underperforming sales in these areas, Canopy’s CEO anticipates that the introduction of more ingestible products to the legal market this December will be a boon for his company.
“Jumping ahead to the medium term, we are also very excited for the launch of Cannabis 2.0 products, which we believe will further differentiate our offering and bring new customers into the market,” Zekulin said.
And while the company’s report reads optimistically about production ramping up with new licensed sites coming online, it also states Canopy is holding onto $461.8 million in inventory, representing $131.5 million in finished goods and $280.1 million of work-in-process. These figures leave another $50.2 million in inventory unaccounted for.
Under former CEO Bruce Linton, Canopy was repeatedly criticized for its spending habits. Acquisition-related costs cooled in this quarter by 80 per cent, but overall spending increased by 15 per cent from $233.3 million to $269 million. Much of the increase is due to an $11.3 million increase in its sales and marketing budget.
“The increase in sales and marketing expense in Q2 2020 over the previous quarter was primarily due to pre-revenue investments in brand awareness, product marketing and consumer education initiatives focused on preparation for the launch of our Cannabis 2.0 products in Canada, and the rollout of CBD products in the United States and other international markets in the coming months,” the report reads.
Canopy reported an EBITDA (earnings before depreciation, interest, taxes and amortization) loss of $155.7 million, which the release stated was a reflection of continuing losses in its core Canadian and European operations. It said the losses were related to servicing new markets and building up a strong portfolio of intellectual property for the future.
As per our financial statement, during Q2 2020, our number of patients in the medical market grew by nearly 6,000 to a total of over 76,000.
Details here: https://t.co/mzfUI2crRg
— Canopy Growth (@CanopyGrowth) November 14, 2019