Canopy Growth Corp. Reports Second Billion-Dollar Loss

Canopy Growth Corp. reported its second billion-dollar loss early Friday, as the company remains mired in a turnaround effort that it started in December.

29 May 2020

On the company’s earnings call with analysts Friday Canopy Chief Financial Officer Mike Lee said that C$715 million was non cash — of which most was tied to the cultivation assets it shut down, with roughly C$193 million of impairment charges resulting from its exit from international markets. Canopy wrote off C$132 million for “obsolete” packaging, flower and biomass inventory.

Unlike several of Canopy’s rivals such as Aurora Cannabis Inc. ACB, -8.21% ACB, -9.10% and Organigram Holdings Inc. OGI, -6.95% , OGI, -0.43% executives acknowledged Friday that the company had missed opportunities in selling cheap weed. Executives said that roughly five months ago, inexpensive pot held a 6% market share, but now accounts for around 20% of the market.

In August 2019 MarketWatch identified billions in goodwill and other intangible assets sitting on the books of Canada’s largest pot companies. Goodwill is the amount allocated to acquisitions beyond the value of their physical assets.

See also:The $4 billion time bomb ticking away inside the biggest marijuana companies

Canopy’s fourth-quarter revenue net of excise tax rose to C$107.9 million from C$94.1 million a year ago. The FactSet consensus was for a loss per share of 59 cents and revenue of C$128.9 million. Canopy said it was pulling its guidance due to the pandemic.

On the conference call, Lee said that Canopy saw less traffic to its physical retail stores because of social-distancing requirements. Provinces such as British Columbia, Alberta and Ontario have also re-balanced inventory and were ordering less weed from Canopy.

“But in stress testing our business, let me remind investors that we have a very strong balance sheet with nearly C$2 billion in cash at the end of the fourth quarter and we have an additional C$245 million of cash inflow on May first from Constellation Brands STZ, -1.56% exercise of its November 2017 warrants,” Lee said. “So, with these actions, we believe our company will weather COVID-19 and emerge stronger on the other side.”

Canopy Growth has not released its full financial statements Friday, which would offer more information about the specifics of the company’s billion-dollar net loss and other aspects of the fourth-quarter financial performance. The company told analysts it expects to file its first 10-K form Monday with the Securities and Exchange Commission. The company, which is listed in the U.S. and Canada, has started to use Generally Accepted Accounting Principles, or GAAP, the U.S. accounting standard.

Read:Aurora Cannabis and Tilray set to detail hoarding of marijuana during COVID-19

In a note to clients Friday, Jefferies analyst Owen Bennett wrote that Canopy’s fourth-quarter recreational pot sales were “very weak,” as the company continues to lose market share for cannabis flower. Bennett has a hold on the name with a C$22 target price.

“… What really concerned us was commentary around needing to ‘understand what consumers want,’ and ‘servicing different segments’,” Bennett wrote. “This is just basics and an issue we flagged over 12 months ago when initiating (Canopy having a catch-all brand with no segmentation) and is something that in our view should be addressed prior to legalization, not over a year into it, and especially from a market share leader.”

MKM Partners analyst Bill Kirk called the results “disappointing” and pointed to the company’s sequential revenue slowdown, while its rivals grew sales and lost less money. Kirk has a $21 target price with the equivalent of a hold rating on the stock.

Canopy stock fell 19.1% in Friday trading. U.S.-traded shares have gained 3% this year as the Cannabis ETF THCX, -5.10% fell 11%. The benchmark S&P 500 index SPX, +0.48% has dropped 6%.

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