Canopy Growth stock falls to 2-year low as company ditches profit target

·3 min read
A worker pushes a cart of marijuana plants at the Canopy Growth Corporation facility in Smiths Falls, Ontario, Canada, January 4, 2018. Picture taken January 4, 2018. To match Insight CANADA-MARIJUANA/INNOVATION   REUTERS/Chris Wattie
Canopy axed its latest profit target on Friday after reporting a weaker-than-expected quarter. REUTERS/Chris Wattie

Canopy Growth (WEED.TO)(CGC) has delayed its target of turning a profit within the next two quarters, blaming supply challenges in Canada, and slower-than-expected sales growth for its CBD-infused products in the United States. The company's chief executive officer says he will need to see a rebound in both businesses before setting a new profit timeline for the pot giant.

Shares of the Smiths Falls, Ont.-based company sank to a two-year low on Friday. The stock is down more than 47 per cent year-to-date.

Canopy says its share of the critical Canadian recreational dried flower market fell in both the premium and value-priced categories in its latest quarter due to a lack of cannabis with "in-demand attributes" like higher potency.  

Canopy reported a net loss of $16 million in its latest quarter, an $80 million improvement year-over-year. The company booked $131 million in total sales, and $95 million in cannabis revenue, for the three months ended Sept. 30. Net sales fell 13 per cent year-over-year, excluding the impact of recent acquisitions. 

"We might have been able to goose the numbers a little bit by leaning further into value [priced cannabis], Canopy CEO David Klein told Yahoo Finance Canada in a virtual interview. "Over time, the business that we want to be in is more premium."

An $87 million writedown on cannabis inventory due to weaker-than-expected demand in Canada resulted in a gross margin of negative 54 per cent, the company says.

Canopy reported $136 million in revenue for the previous quarter ended June 30. The company has estimated that it will need between $225 million and $250 million in quarterly sales in order to turn a profit.

Canopy reported an adjusted earnings with interest, taxes, depreciation, and amortization (EBITDA) loss of $163 million, pushing it further away from its previous profitability target at the end of this fiscal year. The EBITDA loss represents a 90 per cent decline from the same period last year.

"We're now saying that we're not going to be there," Klein said. 

Analysts polled by Bloomberg expected $141 million in revenue, and an adjusted EBITDA loss of $50.2 million. 

Digging into the quarter, Klein says Canopy's U.S. CBD business, which includes Bio Steel sports drinks and Martha Stewart's line of gummies, was hurt by a longer-than-expected wait to get on the shelves of new retailers.

"We're expecting to be in the last shelf reset, and it just didn't happen," Klein said. "We're super bullish on those U.S. brands. It's just taking a bit longer to roll out."

In Canada, the company says its top spot in the premium flower segment weakened as it lost ground overall in the category, which represents the bulk of the legal pot market. 

Like many of its peers, Canopy is working to boost its premium offerings, and sell fewer value-priced, bulk packages of pot. Canopy purchased Supreme Cannabis earlier this year with that goal in mind. However, the company has warned of near-term headwinds as it resets its cultivation strategy.

"That's probably a fully-functioning strategy by the end of the fiscal year," Klein said. "Plants take a while to grow."

Toronto-listed Canopy shares fell 10.22 per cent to $14.85 as at 11:05 a.m. ET.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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