Cannabis 2.0COVID-19EarningsStock NewsCanopy Growth shares sink after reporting another billion-dollar loss

Company stock drops 20%, throws out previous profit targets for fiscal 2021
Jared Gnam Jared GnamMay 29, 202012 min

Canopy Growth Corp. (TSX: WEED) disclosed yet another billion-dollar loss, as the world’s largest cannabis company continues its strategy reset in search for profits.

On Friday, the Ontario-based producer reported a net loss of $1.3 billion for its fiscal fourth quarter ending March 31, nearly matching the $1.28 billion loss recorded last year in fiscal Q1.

The latest flood of red ink was expected after Canopy projected in March it would take a $700–800 million charge after shutting down two major British Columbia greenhouses followed by a number facilities across three continents a few weeks later. The two big closures resulted in a reported 585 layoffs.

On Canopy’s earnings call with analysts, Chief Financial Officer Mike Lee said the pre-tax restructuring charge ended up being $743 million, with $335 million coming from property, plant and equipment writedowns related to the “rightsizing” moves.

Read more: Canopy closes international operations, expects up to $800M in charges

“We also recorded $132 million for inventory write-offs related to obsolete packaging, flower and biomass inventory across our North American market,” Lee said.

“Given the COVID-19-related uncertainties, we’re withdrawing our previously communicated milestones for achieving positive EBITDA and net income,” Canopy Growth CEO David Klein said in the companys Q4 earnings call. Press photo

Shares of Canopy fell more than 20 per cent on Friday, closing to $24.21 on the Toronto Stock Exchange and wiping out modest gains for the cannabis stock in 2020.

From an operational standpoint, Canopy reported an adjusted earnings before interest, taxes, depreciation and amortization loss of $102 million in Q4 2020, a $5 million wider EBITDA loss versus the previous quarter. The company said that was driven by lower sales and higher operating expenses.

Reported fourth-quarter net revenues of $107.9 million declined by 13 per cent from the previous three-month period.

Industry giant admits missed opportunities in selling cheap weed

Canopy estimated that its market share for Canadian recreational sales decreased “from the low-20s to the high-teens” as the company failed to adapt quickly enough to the changes in the market.

“Simply put, we missed opportunities,” Lee said.

The executive highlighted that the company was too slow in meeting consumer demand for cheap cannabis.

At the end of the quarter, Canopy started to sell two separate 28-gram bulk products in Quebec that cost $5.53 a gram on average.

Canopy Growth’s Twd 28 Indica value product is listed on Quebec’s digital cannabis portal for $154.80 or $5.53 a gram. Image via Société québécoise du cannabis

But Lee said the company expects to be competitive in the value category and that they will be introducing more low-cost products to more provinces in the coming weeks.

Vivien Azer, an analyst with investment bank Cowen, asked Canopy for more details on where they see the value segment going in the future and how it will affect the company’s margins.

Executives said that not more than four or five months ago, the value product category held 6 per cent of the market share, but it’s now 20 per cent of the market.

“And when you think about what’s going on in the industry, coupled with a pandemic, consumers are seeking value,” Lee said.

The CFO, however, said he doesn’t expect the company will be able to deliver a 40 — 45 per cent margin on value products. But he added because it’s an important category, Canopy will look to outdoor growing in the future to achieve those targets. Canopy reported a gross margin of 43 per cent in the fourth quarter.

Despite rocky road ahead, Canopy will be world’s best cannabis company, CEO says

Even with the latest quarterly set back, CEO David Klein is optimistic Canopy is on the right path with a renewed strategic focus.

“We are building the best cannabis company in the world,” he said on the conference call.

Klein said his company plans to be number one or number two in value share within its core markets: Canada, the U.S. and Germany.

He said they’re still bullish on the U.S. CBD market and project the industry to be worth $10 billion over the next few years.

“We plan to win in this space. With our collaboration with Martha Stewart or with brands like This Works and BioSteel and First & Free,” Klein said.

Canopy Growth CEO David Klein says the company has reduced its production capacity in Canada by 40 per cent. Press photo

But the chief executive admitted Canopy’s Q4 performance was “mixed” with sales not meeting their own expectations while also losing market share in the Canadian recreational market.

The company said the COVID-19 pandemic hurt operations at the end of the quarter, as it temporarily closed down its 22 corporate-owned retail stores in mid-March.

And given the COVID-19-related uncertainties, Canopy said it is withdrawing its previously stated goals of achieving positive EBITDA and net income by the end of fiscal 2021.

On the positive side, the company said as of today 20 of those stores have reopened and the final two will reopen this coming Monday.

Klein noted that Canopy had issues launching its cannabis 2.0 products, which only accounted for 2 per cent of total revenue for the quarter.

However, the company said it will be ramping up deliveries of 2.0 products and adding to the 10 infused drinks, chocolates and vape products it introduced to the market in Q4.

Klein kept preaching caution though and that this is a “transition year,” and hinted that more losses are on the way.

“Canopy went from 400 employees in Canada to more than 4,000 employees in 15 global markets in just a few years,” Klein said. “While this was a great talking point that came with great consequences. The company became less agile, siloed and was burning too much cash.”

But CFO Lee emphasized that the company’s huge cash pile will help it weather further headwinds, including COVID-19.

“In stress testing our business, let me remind investors that we have a very strong balance sheet with nearly $2 billion in cash at the end of the fourth quarter, and we have an additional $245 million of cash inflow on May 1 from Constellation Brands,” Lee said.

Top image via Canopy Growth

 

jared@mugglehead.com

@JaredGnam

One comment

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    “The CFO, however, said he doesn’t expect the company will be able to deliver a 40 — 45 per cent margin on value products. But he added because it’s an important category, Canopy will look to outdoor growing in the future to achieve those targets. Canopy reported a gross margin of 43 per cent in the fourth quarter.”

    While this is indeed a provocative claim, competent growers (e.g. producers who can grow at scale) can produce a 10-cent gram. How is a $5.53 retail gram not representative of 45% margin??? Canopy CFO Mike Lee doesn’t know what he’s talking about. But, then, that isn’t surprising given the company’s abysmal track record.

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