Canopy Growth Stock Falls On Earnings Miss, Restructuring Charges

Canopy Growth Corporation (TSX: WEED) (NYSE: CGC) fell over 9% on news that the company’s second-quarter earnings missed analysts’ estimates. The Canadian-based cannabis company reported (in Canadian dollars) gross revenue of $118 million, a 6% increase sequentially and a 408% increase over last year’s $23 million for the same time period ending in September. The net revenue of $76 million fell 15% sequentially and missed estimates by $29 million. It did increase by 229% over last year’s $23 million. The stock was lately trading at USD$16.68.

The net loss decreased sequentially from $1.2 billion in the first quarter to $374 million in the second quarter. It also increased by 13% from last year’s net loss of $330 million.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” said Mark Zekulin, CEO, Canopy Growth. “However, we believe these conditions are a short-term headwind in what is a brand-new industry, and Canopy continues to be best positioned with cash-on-hand, a world-class infrastructure, and a portfolio of intellectual property to deliver sustained long-term market leadership.”

Restructuring Charge

Canopy Growth said it has “taken a restructuring charge of $32.7 million for returns, return provisions, and pricing allowances primarily related to its softgel & oil portfolio. Additionally, management has recorded an inventory charge of $15.9 million to align the portfolio with the new strategy.” The company said that the new strategy included new retail pricing architecture, a rationalized package assortment, and a focused marketing/educational strategy to further develop this category. The second-quarter gross margin impact of the portfolio restructuring costs is $40.4 million.

Added Zekulin: “We took the necessary steps to address inventory levels on our oils and softgels; looking beyond this, the fundamentals are strong: our retail store sales are growing on an overall and same-store basis, our Canadian medical revenues are up, and international medical sales are growing on both an organic and inorganic basis.  And, even though revenue is muted during the quarter due to the restructuring charge, actual cannabis shipments grew quarter-over-quarter, which is a great accomplishment in light of the inventory reset that’s occurring at the provinces.   We believe our fundamentals are strong and are confident we’re moving in the right direction.”

Cash Burn

The company is still sitting on a healthy war chest 0f $2.7 billion, but that is after a drop of $404.7 million from June 30, 2019.  The primary uses of cash were operations and capital spending of $228.3 million as the company finishes its build-out in Canada by constructing manufacturing and beverage production facilities. Operating expenses for the quarter were $269 million, a 48% increase year over year and a 15% increase sequentially. Consider that this is 100% over the revenue coming in.

Research and development costs increased 526% year over year, G&A increased 137% year over year and sales and marketing increased 50% over last year.

“After five years of investment in market research, product development, product marketing, production engineering, as well as production facility design, construction and qualification, we are ready to bring our Cannabis 2.0 product offerings to market,” said Zekulin.  “This marks the end of significant expansion investments in Canada and we are confident that the high quality, differentiated beverage, vape and edible products that we are bringing to market combined with a retail channel that we expect to grow significantly next fiscal year, will drive the next leg of growth for our business.”

Sales Mix

The revenue was a mixed bag between increases and decreases. Medical marijuana sales were up across the board sequentially. The only drop was a year over year decline in dry cannabis revenue. With recreational cannabis, the consumer side mostly saw sequential increases, with oil and softgels declining slightly by 1%. The B2B recreational sales saw sequential declines in each category except dry cannabis sales.

“International medical cannabis gross revenue was $18.1 million in Q2 2020, with the 72% growth driven primarily by the acquisition in May 2019 of C3, which contributed a full quarter of revenue in the amount of $14.0 million to our results in Q2 2020.”

 

 

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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