Canopy Growth shares fall as fourth-quarter revenues rise, loss deepens

Published Jun 21, 2019 01:53 p.m. ET
Staff work in a marijuana grow room that can be viewed by at the new visitors centre at Canopy Growths Tweed facility in Smiths Falls, Ont. on August 23, 2018. THE CANADIAN PRESS/Sean Kilpatrick

Shares of Canopy Growth Corp. slipped on Friday after the cannabis company reported an uptick in fourth−quarter net revenues but a wider−than−expected fourth−quarter loss as operating expenses ballooned.

During the three−month period ended March 31, Canopy reported net revenue of $94.1 million, up from $22.8 million a year earlier and more than the $92.6 million expected by analysts.

But Canopy’s net loss attributable to shareholders jumped to $335.6 million or 98 cents per share for the quarter, compared with a loss of $61.5 million or 31 cents per share during the same period a year ago.

That is three times the net loss of 30 per cents per share expected by analysts, according to Thomson Reuters Eikon.

Canopy’s co−chief executive Bruce Linton said it has been investing heavily for longer−term growth, such as ramping up production capacity and preparing for the launch of edibles and other next−generation cannabis products when legal later this year.

"You need to use that capital to build scale. And we did," Linton said on a conference call on Friday, noting that those investments have resulted in assets that are not yet benefiting the bottom line.

Canopy’s stock slipped to $52.99 on the Toronto Stock Exchange in early afternoon Friday, down more than eight per cent.

On an adjusted basis, Canopy’s loss before interest, taxes, depreciation and amortization (EBITDA) amounted to $98 million, compared with its $21.7−million loss a year ago, as its operating expenses grew by more than 300 per cent.

Quarterly operating expenses totalled $242.9 million, up from $56.2 million during its financial fourth quarter in 2018.

"Lack of profitability should be no surprise given recent company commentary on investment commitments," said Jefferies analyst Ryan Tomkins in a note to clients. "But, given the degree of the losses and the fact that profitability is becoming more of an investor focus, it is likely to cause concern."

Canopy’s recreational cannabis revenues for the quarter, both wholesale and retail, amounted to $68.9 million, after Canada legalized adult−use pot in October.

Medical cannabis gross revenue in Canada for the quarter totalled $11.6 million, down from $19.5 million a year earlier.

RBC Capital Markets analyst Douglas Miehm said he is "somewhat concerned by medical sales that fell" from Canopy’s financial third quarter.

"While near−term financial results have generally been shrugged off, we believe the market may pay closer attention to Canopy’s margin profile, which continues to tracker lower than consensus, and the company’s 2020 outlook," he said in a note to clients.

Canopy’s gross margin during the quarter was roughly 16 per cent, down from 22 per cent in the previous quarter, he added.

Linton said Friday that the cannabis company has reached the "bottom of our margin trough."

"By the time we exit this year, we’re moving up the margin model back to where we were, and we’d like to do that well or better," he told analysts, pointing to its investments and the potential from the sale of higher−margin edibles and other ingestible products as early as December.

He noted that at the end of 2017, Canopy had a gross margin of more than 50 per cent.

"We could have stayed there, and we would have been a nice, tidy little company, probably quite profitable."

Companies in this story (TSX:WEED)

Armina Ligaya, The Canadian Press

Note to readers: This is a corrected story. A previous version said Canopy had a gross margin of more than 50 per cent in the previous quarter.


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