Canopy Growth Reports Another Weak Quarter

Canopy Growth Reports Another Weak Quarter
Canopy Growth Reports Another Weak Quarter

Canadian cannabis heavyweight, Canopy Growth Corp (US:CGC / CAN:WEED) reported its Q2 fiscal 2020 results today. Investors hoping to see a turn-around in the pot giant will be disappointed.
 
  • Consolidated Q2 2020 gross revenue rose by only 6% to CAD$118.3 million
  • Cannabis gross revenues for Q2 2020 increased by only 2% from Q1, to CAD$94.7 million

The Company (and its shareholders) took a further hit in Q2 with respect to significant “restructuring” charges that Canopy Growth absorbed in the quarter. These charges totaled CAD$40.4 million. Consequently, net revenues actually decreased in Q2, down from CAD$90.5 million to CAD$76.6 million.

More than enough bad news. Are there any mitigating circumstances? Yes.

Revenue weakness is currently focused on Canopy’s cultivation operations. Here the steady build-up in overall Canadian cannabis inventories is having an impact. CEO Mark Zekulin commented:
 
“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 Cannabis2.0 products are yet to come to market.”

This accurately summarizes the current picture for retail cannabis in Canada. Zekulin then put this into context.

“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.”

It is a fair appraisal to characterize current weakness in provincial purchases as “a short-term headwind”. Overall cannabis retail sales are now consistently rising monthly at a double-digit rate. Cannabis retail store-openings are accelerating (in most provinces).

Phase 2 of legalization in Canada (Cannabis 2.0) will bring in a substantial incremental increase in cannabis retail demand (a projected 50% increase in cannabis consumers). Cannabis purchases from Canadian LP’s can be expected to quickly rebound going forward.

Operational performance looked better for Canopy on the retail side of its operations.
 
  • Revenues for Company-owned recreational same-store sales rose by 17%
  • “global medical organic growth” increased by 23%

Overall, Canopy’s net loss narrowed considerably, but still exceeded CAD$374 million. Adjusted EBITDA actually worsened dramatically (from the restructuring charges). Perhaps most disturbingly, gross margins plummeted from 19% to -13%.

Any real turn-around for Canopy Growth will have to come from its positioning for Cannabis 2.0. Here the picture looks more positive.
 
  • More than 30 SKUs submitted to Health Canada for Cannabis 2.0 products

In specific terms, the Company’s acquisition of BioSteel Sports Nutrition and its recent cannabis joint venture with music superstar, Drake, both offer enormous upside potential.

Finally, investors can’t forget about Canopy’s balance sheet clout. The Company ended Q2 with CAD$2.7 billion in cash, cash equivalents, and marketable securities. With cannabis valuations at rock-bottom levels across the sector, Canopy has the greatest financial capacity to shop for bargains.

At present, there is no relief for CGC’s shareholders.