Canopy Growth continues to disappoint, and I’m just as frustrated as you are…
Canopy Growth Corp. (NYSE: CGC) reported its earnings today and the news was bad. In particular, revenue looked like it was down if you weren’t paying close attention.
EBITDA losses were up, and gross margin appeared negative.
So what’s really going on at Canopy?
It’s clear to me that Constellation Brands (NYSE: STZ) is exerting its increased influence over the company. In May, Canopy hired a Constellation executive as Chief Financial Officer. In July, Constellation engineered the firing of long-time CEO Bruce Linton.
And last month, Constellation made its own Chief Financial Officer the Chairman of Canopy’s Board of Directors.
Actual revenues associated with shipments from Canopy were up 6% for the quarter – the decline was because Canopy took a charge for a bunch of old inventory that was never going to sell at a profitable price.
Mostly, what we’re talking about here is cannabis oil, which is a perfectly effective product for medical users but one that offers no sensual enjoyment and was never going to be an important product in the recreational market.
Canopy made the mistake of making too much of this (Tilray Inc. (Nasdaq: TLRY) did, too) and now the company is paying for that mistake.
I’m actually pleased that Canopy is taking these steps, but I also have to be honest and say that the adjustments the company had to make were much larger than I thought and larger than the company intimated the last time it talked to investors.
That’s why the stock is down today and I am not happy about it.
Canopy and Canada
Canopy was affected by falling prices in Canada.
Canopy has some high-quality brands – like DNA Genetics – but most of the company’s combustible cannabis is pretty average in quality and price, and that’s where the pricing pressure has been. Some of that price pressure is on the consumer level and some is because the provincial distributors originally bought too much inventory and are adjusting.
Finally, the lack of stores in Canada, which we’ll look at below, is holding back the size of the legal market for our neighbors up north.
But there were some bright spots in the quarter.
The Good from Canopy
Revenue from dry cannabis sold directly to consumers was up 25%, and that’s bullish for Canopy’s growing portfolio of company-owned stores.
Medical sales were up nicely, though from a small base and into a market which is growing slowly. And international medical cannabis sales were up over 70%. That’s from a small base, but the international exposure is a big part of the growth story and a key advantage that Canadian cannabis companies have over companies based in the United States, so it’s a huge positive that the growth in that market is finally occurring in earnest.
And of course Canopy’s liquidity, the most important asset a company can have in this market, remains strong, with over C$2.7 billion in cash on the balance sheet.
But that cash and the size of the company’s operating losses make Canopy a very large ship, and it needs a captain.
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Canopy fired Bruce Linton over four months ago.
I understand it’s important for Canopy and Constellation to take their time to find exactly the right person, but Canopy’s CEO role is one of the most high-profile jobs on the planet – there should be a very small number of suitable candidates and Canopy should have talked to all of them already.
I was hoping for Canopy to announce a CEO with these earnings.
Its failure to do so is a big failing. It says it is down to a “very short list” of candidates and hopes to have an announcement in the coming weeks, so we can look forward to some good news on that front shortly.
But Canopy needs to make two moves fairly quickly to turn things around.
Canopy needs two things to turn around.
Hiring a CEO is one.
The other is getting more stores to sell cannabis, particularly in Ontario. I’ve written about the pathway to those stores, but the timing is uncertain.
The last piece of good news is that there are catalysts ahead to turn things around for Canopy and the industry as a whole.
The first thing that will help start the turn is Cannabis 2.0. Canopy has already registered 30 products for sales, including chocolates, beverages, and vape products. All but the beverages are approved for production by Health Canada, and Canopy should be ready to ship beginning next month.
Beverages, in particular, are a big part of why Constellation invested in Canopy in the first place – they expect cannabis beverages to take a big part of the alcohol market and, if they’re right, we could be talking about Canopy as primarily a beverage company by this time next year.
And whether the breakout product is beverages, or edibles and vapes the way it has worked in the United States, that shift to better products will increase Canada’s market size significantly.
Research shows that many Canadian consumers have sat out the legal recreational cannabis market entirely so far and are waiting for these new products.
Next, international revenues will become more important as time goes on. Canopy not only exports cannabis, it has built cultivation facilities around the world to meet the emerging demand for medical cannabis products. Those products have higher prices and higher margins than Canadian recreational products.
Finally, those new stores in Ontario will eventually open.
It’s not just the province that wants more stores; cities like Mississauga, which initially refused to allow cannabis stores, is now rethinking that stance.
The mayor of Mississauga recently said she was “startled” by the size of the illicit market in her town. The hundreds of thousands of dollars that neighboring cities are receiving from cannabis stores may also have some influence on her thoughts.
And when those stores open, the Canadian market can start to grow toward its potential, which is over five times as large as the current legal market.
The market is incredibly frustrated with Canopy at this point.
I share that frustration.
It’s going to be a while before this company’s stock starts recovering unless Canopy announces a share buyback or that new CEO is a blockbuster.
But the long-term picture still looks bright for this company.
I’d use weakness over the next few days and weeks to build a position in Canopy if you don’t already have a position.
Executive Director, National Institute for Cannabis Investors
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18 responses to “Putting the Latest Results from Canopy Growth Under the Microscope”
November 14 2019