Canopy Growth’s Q2 Earnings: Top Five Takeaways

Leading cannabis producer Canopy Growth (CGC) (WEED) reported its fiscal 2020 second-quarter earnings results on November 14. Its results were disappointing, as it missed revenue estimates and reported huge losses. Its stock slumped over 15% following the results.

Let’s take a look at the top five takeaways from Canopy Growth’s earnings.

Canopy’s slumping revenue

Canopy Growth reported net revenue of 76.6 million Canadian dollars in the second quarter, a decline of 15% from last quarter’s net revenue of 90.5 million Canadian dollars. This quarter’s revenue was 229% higher than last year’s second-quarter revenue of 23.3 million Canadian dollars. The company missed analysts’ estimates by almost 40%, mainly due to its recreational cannabis sales in Canada falling 15% sequentially and 32.7 million Canadian dollars’ worth of price adjustments related to its softgels and oils.

The company had previously anticipated revenue of 250 million Canadian dollars for the fourth quarter of fiscal 2020 (which ends in March). Management recently confirmed that it would have difficulty achieving the target given the recent slump. It and analysts blame this on a slowdown in supply and a slow retail rollout in Canada. The revenue decline from the last quarter marks the highest decline for the company post-legalization.

Canopy saw huge net losses

Canopy Growth reported a huge net loss of 374.6 million Canadian dollars in the quarter, implying a decline of 140% from analysts’ estimate of a net loss of 155 million Canadian dollars. It also reported a gross margin of -13%.

Canopy Growth’s primary strategy has been to expand internationally. This strategy has always come at the expense of profitability. As per the current estimates of analysts and investors, the company won’t be profitable in the near future.

Unsatisfactory EBITDA

Canopy Growth also reported adjusted EBITDA of -155.75 million Canadian dollars, 67% lower than analysts’ estimate of -92.9 million Canadian dollars. Its operating expenses rose 15% sequentially, mainly due to an increase in marketing expenses and compensation costs for employees.

Inventory management and supply

Even though Canada’s cannabis industry has been facing supply shortages for a long time, the company noted the oversupply of some of its products. Canopy Growth reported an oversupply of softgels and oils in some provinces in August. Reports from retailers suggested that stock was piling up in retail stores. Inventory accumulation resulted in a 15.9 million Canadian dollar charge for the company. It harvested 40,570 kilograms but sold only 10,913 kilograms of cannabis products.

At the end of September, the company reported inventory worth 461.8 million Canadian dollars. It claims to be continuously monitoring and projecting market demand. Its current aggregated inventory can be used for four and a half months.

Future plans

Canopy Growth plans to reduce its portfolio of products considerably to focus on those products that are in demand. The company is currently reviewing which products to retain in its portfolio. It will focus on maintaining a shorter list of products and pricing them more competitively.

Canopy also plans to stop making investments in expansion in Canada. It’s already spent heavily on building its product portfolio. It recently started developing edibles, vapes, and other products for its post–Cannabis 2.0 launch. It’s expected to completely stop capital spending until the end of next year.