Canopy Growth Corp. (CGC) disappointed Wall Street yesterday with an earnings report that showed the worst bottom-line performance in the company’s history. CGC shares dropped as much as 14% as the market reacted. To get a better idea of where Canopy Growth could go from here, let’s take a closer look at how it got here.
Why the last quarter hurt
Canopy Growth may be considered the world’s largest cannabis company in terms of market value, but it still reported a fiscal first-quarter net loss of C$1.28 billion (or C$3.70 a share), compared with losses of C$91 million (or 40 cents a share) from the same period last year.
However, $1 billion of that loss came about as a result from expired warrants related to the Constellation Brands Inc. (STZ) investment. And Constellation’s firing of CEO Bruce Linton last quarter didn’t help the near term results either, as the news of his departure sent CGC stock on a downward spiral.
In the report, Canopy Growth Corporation (CGC - Get Rating) also noted that its revenue slid sequentially because sales of cannabis oils and softgels were only a sliver of the revenue recorded from the previous quarter. The lower revenue total for oils and softgels came about as a result of Canopy’s adjusted estimation of product returns.
CGC announced that after completing an inventory throughout Canadian provinces and territories, as well as evaluating recent demand and sales trends, they decided to write off CA$8 million in gross revenue in anticipation of product returns.
Even after factoring in for this adjustment, CGC’s cannabis oil and softgel sales were far lower in Q1 than in the previous quarter.
Canaccord Genuity analyst Matt Bottomley says earnings results were “well under our expectations as the company posted its second quarter of sequentially lower net cannabis revenues.” He added that it appears Canopy Growth lost its first-place share of the Canadian market to Aurora Cannabis.
Glimmers of hope
Last quarter, CGC’s net revenue rose to C$90.5 million from C$25.9 million in the year-ago period, excluding excise taxes. Here’s a breakdown of where that revenue came from:
– C$50.4 million came from Canadian recreational business-to-business
– C$10.6 million was direct-to-consumer
– C$13.1 million was medical marijuana sales
– C$10.5 million came from international cannabis revenue
Canopy Growth reported sales of more than 10 metric tons of cannabis in the fiscal Q1, a 13% sequential increase. And Canopy has investors buzzing with its increased harvest of 183% (up to 41 metric tons for the quarter). This is good news because it could well position CGC as new derivative products such as edibles become legal in Canada later this year.
CGC’s gross margin before the IFRS fair-value impacts was down from 43% from the same period last year, and a bit lower than last quarter’s 16%, coming in at 15% net revenue.
However, the decline is attributed to the same reason as last quarter’s big year-over-year drop: Canopy’s been investing in facilities that aren’t yet producing or at full capacity.
Additionally, there was a move away from higher-margin products (oils and softgels) as inventories shifted.
“First, the company remains focused on laying the foundation for dominance in an emerging global opportunity,” said CEO Mark Zekulin.
“This means investments in developing intellectual property, building brands, building international reach, and ensuring scaled production capability for current and future products.”
“Second, we are fixated on the process of evolving from builders to operators over the remainder of this fiscal year, meaning that as our expansion program comes to a close in Canada, and as new value-add products come to market in Canada, we demonstrate a sustainable, high margin, profitable Canadian business.”
Canopy Growth Corporation (CGC - Get Rating) shares rose $0.04 (+0.15%) in after-hours trading Thursday. Year-to-date, Canopy Growth Corporation (CGC - Get Rating) has gained 1.75%, versus a 14.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Eric Bowler
Eric is an accomplished journalist providing in-depth insights for more than two decades, with a special focus on the cannabis industry. Learn more about Eric’s background, along with links to his most recent articles. More...