Last week, Canopy Growth reported Q2 2020 earnings for the period ending September 30, 2019. The company reported an adjusted EBITDA loss of $155.7 million versus $96.1 million that was expected by analysts. However, revenue came in at just $76.6 million versus the expected $102.3 million. The company also reported a $32.7 million charge from returned products and a $15.9 million write-down for excess inventory.
To simply put it, these numbers weren’t good, and as a result shares slid 15% the day of earnings to fresh 52-week lows.
So, what caused this decline in revenues? And is this going to be permanent or temporary?
Canopy Growth’s CEO Mark Zekulin blamed the Canadian government for some of their issues. He strongly urged the Ontario government to take action and support retail store openings across the province immediately. “The fact of the matter is there are not enough stores and enough supply. The Ontario government has made it clear their desire to have more stores, but why wait three months? Fix it now,” Zekulin told the Financial Post in an interview.
Overall the industry has seen declining revenues, weak sales, falling prices and an inventory pile-up due to the Canadian government’s lack of commitment to support retail and allow these companies to grow revenues from retail.
In addition, Canopy Growth took a $32.7 million hit from product returns and pricing changes linked to the sales of its oil and soft-gel capsules. Sales of Canopy Growth’s soft-gel capsule have been lackluster last quarter, as cannabis retailers and provincial boards have had a very hard time selling the Tweed-branded products. This resulted in a surplus of unsold inventory that was returned to Canopy Growth.
Yet, on the conference call for this past quarter, Canopy Growth’s CFO Mike Lee said to analysts that the soft gels “issue” was “fully behind” the company. He also stated that there remained less than $10 million left of unsold product in provincial warehouses as of the end of last quarter.
Though the quarter was disappointing, I am optimistic about Canopy Growth’s future. To use a metaphor to explain how I’m thinking about the current situation that Canopy Growth and other Canadian cannabis companies, imagine there is a blockage in a garden hose. Water pressure builds-up and when that blockage is cleared, the water shoots out at a rapid pace and eventually returns back to normal. I believe the sector is bottlenecked and when the Canadian government allows the rollout of hundreds of more retail stores across Canada, Canopy Growth and its competitors will be able to grow revenues dramatically.
I believe 2020 should be a good year for Canopy Growth. The company has a large amount of cash to deploy from its deal with Constellation Brands. With that money, Canopy Growth can acquire other companies and grow revenues on the global front. Also, I think that the Canadian government will get its act together and remove the bottleneck thats hurting the industry.
Though, there is no doubt that Canopy Growth needs to focus further on its direction and strategy as they move towards profitability, I believe in the company’s future and their stock price at these lower levels is attractive.
(Disclosure: The author owns shares of Canopy Growth)
CGC shares were trading at $14.47 per share on Monday afternoon, down $0.86 (-5.61%). Year-to-date, CGC has declined -46.15%, versus a 26.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...