Canopy Growth Still Three to Five Years Away From Profitability!

Article by Mark Rendell, Globe and Mail

Canopy Growth still three to five years away from profitability, company acknowledges after disappointing results MARK RENDELL CANNABIS INDUSTRY REPORTER

Canopy Growth Corp. is still three to five years away from profitability, the company acknowledged on Thursday, after releasing quarterly financial results showing a decline in revenue, stubbornly low gross margins and a massive net loss due to a one-time accounting change.
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The results fell far short of analyst expectations, sending Canopy’s stock price down 14.5 per cent on Thursday and spurring a broader sell-off in cannabis stocks that brought the Solactive North American Marijuana Index to its lowest level so far this year.
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Canopy’s inability to increase revenue despite being the leader in a growth-stage industry points to operational problems and difficult choices the company faces about what products to focus on. Canopy subtracted $6.4-million from its revenue, for instance, because it expects cannabis oil and softgel products to be returned unsold.
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The lackluster results, the first since Canopy fired its chief executive Bruce Linton, also highlight structural problems across the industry, including the shortage of retail stores in key provincial markets such as Ontario and Quebec. And they point to the haphazard manner in which Canopy, like many other marijuana companies, transitioned from the medical market into the recreational market over the past 10 months.
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Canopy reported Wednesday night that quarterly revenue fell to $90.5-million, down 4 per cent from the previous quarter. It also reported a net loss of $1.28-billion, most of which was attributed to a one-time charge related to revaluing warrants held by Constellation Brands Inc., which holds a significant stake in the company.
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The results received negative coverage from most analysts that follow the company, several of whom suggested Canopy has a long road to profitability. Bank of Montreal analyst Tamy Chen wrote in a note to clients that “margins and cash flows could further deteriorate.”
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“While Canopy is already making upfront capital investments for value-add products, the cost to manufacture these formats are substantially higher than current products, which would result in significant working capital investment and [operational expenditures],” Ms. Chen wrote.
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Ryan Tomkins, an analyst with Jefferies International Ltd., was even more blunt in a note: “While strong harvest figures should allay crop failure worries, elsewhere we see little to reassure investors that significant [sustainable] sales growth and profitability will be visible in the near future.”
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On an analyst call on Thursday, Canopy’s top brass offered candid insight into Canopy’s race to establish a dominant position in the Canadian recreational market, and the ways in which that speed has come back to haunt them, in the form of greenhouse retrofits and an industry-low gross margin of 15 per cent.
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In the fall of 2017, Canopy partnered with a vegetable company in British Columbia to turn 3 million square feet of greenhouse infrastructure in B.C.’s Lower Mainland to cannabis production. The BC Tweed greenhouses, which Canopy acquired outright the following summer, would power the company’s push into the recreational market, once the doors to legal adult use opened in October, 2018.

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