Shares of Canada's largest cannabis producer sunk as much as 18 percent on Thursday, after the Canopy Growth reported substantial losses in its quarterly report that pushed it further off track from its revenue and gross margin goals.
"It's fair to say it's been a challenging couple quarters in the cannabis sector," CEO Mark Zekulin said Thursday on a call with analysts.
Canopy ($CGC) missed analyst expectations on revenue, reporting $57.8 million (C$76.6 million), versus the $76.2 million (C$101 million) analysts were expecting. The Canadian cannabis giant also reported negative adjusted EBITDA of $117.4 million (C$155.7 million), down almost 70 percent in the last 12 months. Analysts had expected an EBITDA loss of $69.4 million (C$92 million), according to Stifel.
Canopy attributed its these losses to a variety of factors, not least of which were a $24.7 million (C$32.7 million) revenue adjustment charge, related to product returns and pricing allowances for weak sales of softgels and oils, and a $12 million (C$15.9 million) inventory charge to adjust pricing, and fund marketing and educational efforts for its product portfolio.
"A year and a half ago, we had to make decisions based on no market data of what the recreational market would look like, and, in essence, we forecast that we would see demand for these products representing somewhere near 20 percent of the recreational market. And in reality, it is sitting closer to five," Zekulin told Cheddar. "We've taken the steps this quarter to take inventories back and to look at inventory across not just our company but with the provinces. In our view, this issue is totally behind us now."
Cowen analysts Vivien Azer and Steven Schneiderman called Canopy's need to adjust inventory "disappointing," but seemed optimistic the maneuver would pan out for the best.
"While we view the inventory mismanagement as disappointing, a cleaned up inventory position should provide better future flexibility," Cowen analysts wrote in a note.
The company also reported negative gross margins of 13 percent, down from 19 percent year-over-year. These results push the company further off track from the goals it set for itself of 40 percent margins on about $189 million (C$250 million) in revenue by the end of March.
Although executives readily admitted their revenue projections were overly optimistic, Zekulin told Cheddar he thinks the margin goal is still attainable.
"We do feel we are close to that 40, we do think it's attainable," Zekulin said. "But I think the key point is these are short term issues. This is a reflection of not enough stores in Canada, and we haven't launched cannabis 2.0 products."
Canopy executives, like those at other major companies, were quick to lay blame on Canada's rocky rollout of recreational cannabis, specifically the province of Ontario. Ontario contains roughly 40 percent of the country's population, but only about 10 percent of cannabis retail stores. Zekulin described Canada's situation as a "perfect storm," wherein provinces are working through their inventory, Cannabis 2.0 hasn't yet launched, and still much of Canada's most populous province is underserved.
There were bright spots in Canopy's report. The company claimed about 35 percent market share in Alberta, the province with the most mature cannabis market. Canopy disclosed it has $2 billion (C$2.7 billion) in cash and is nearing the end of years of construction in Canada, which should eventually lead to fewer underuse-related costs. The company also disclosed it is closing in on a CEO replacement for Zekulin, with a transition likely by the end of the year.
Canopy also plans to roll out its first U.S. CBD products later this fiscal year and anticipates new form factors for Cannabis 2.0 — the legalization of vape products, edibles, beverages, and more — will hit shelves in Canada by year's end. Canopy has already begun offering sneak peeks of its products to media. At the end of October, the cannabis giant unveiled new infused and "ready-to-drink" beverages at its headquarters in Smith Falls, Ontario, Yahoo Finance reported.
But when it comes to meeting financial goals in the future, specifically as it relates to product inventory, Canopy is putting a lot of stock on the rapid rollout of recreational stores in Ontario. The company said it anticipates the province will add about 40 stores a month starting in January, a figure based on the precedent set by Alberta's rapid rollout. But if Ontario continues to disappoint, Zekulin warned, it will be problematic, not only for Canopy but for the entire sector.
"If Ontario doesn't open stores for another year we all have a problem," Zekulin said. "There is no reason to expect that will happen."
