Canopy Growth Corp. warned Wednesday that market headwinds could hamper the cannabis company’s ability to be profitable in Canada, even after it spent months uncovering $85 million in cost savings.
“If consumer preferences continue to shift and the Canadian market structure remains challenged by low barriers to entry and onerous regulations, these cost savings are not enough for us to achieve profitability in Canada,” Judy Hong, Canopy’s interim chief financial officer, told a conference call with financial analysts.
The Smiths Falls-based business behind the Tweed, Tokyo Smoke and Doja brands previously predicted it would be profitable in the second half of its fiscal 2022, but reassessed that goal last November.
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At the time, the company did not provide a new timeline, but announced that reaching its past goals will take longer than expected because of market share challenges and a slower-than-expected U.S. launch of its BioSteel products.
To counter those conditions, Canopy Growth reduced its footprint and looked to leverage a series of companies it acquired, including Supreme Cannabis Co. Inc., AV Cannabis Inc. and Wana Brands.
$115.5M net loss
Those efforts still left Canopy with a net loss of $115.5 million in its latest quarter compared with a net loss of $829.3 million a year earlier, while its net revenue fell eight per cent as Canadian cannabis sales fell.
The company said Wednesday its loss amounted to 28 cents per diluted share for the quarter ended Dec. 31 compared with a loss of $2.43 per diluted share a year earlier.
Net revenue for what was Canopy’s third quarter totalled nearly $141 million, down from $152.5 million in the same quarter a year earlier.
Hong conceded that leaves plenty of room for improvement.
“As an organization, we built the structure and operations that can support a significantly higher revenue base than we are currently generating, and while we remain optimistic about the long-term prospects of this industry as well as Canopy’s position to succeed, we recognize we need to adapt to the realities of our business today,” she said.
Canopy’s global cannabis net revenue amounted to $83 million in the quarter, down from $103.8 million, while other consumer products revenue totalled $58 million, up from $48.7 million a year earlier.
Canadian recreational cannabis sales fell 25 per cent compared with a year earlier, while Canadian medical cannabis sales lost seven per cent, and international and other cannabis sales dropped 16 per cent.
Despite the challenges, Canopy shares were up almost 17 per cent or $1.65 at $11.42 in afternoon trading.
BMO Capital Markets analyst Tamy Chen called the pop a “knee-jerk reaction,” while Bill Kirk, executive director of research firm MKM Partners, said investors likely viewed the quarter positively because of downgrades seen across the business community.
Focus on premium products
“The fight over Canadian market share and pressure pricing is likely to continue, but economic reopening, and the accompanying increased store count, should help sector-wide performance,” he wrote in a note to investors.
“We believe Canopy has rationalized its organization (supply chain, logistics, infrastructure) to better capture formerly missed opportunities.”
Canopy chief executive David Klein said he expects to see the Canadian market evolve like the consumer packaged goods sector, with two segments: a growing premium portion and a shrinking value portion.
Klein wants to focus on premium “instead of chasing things all over the market” because of the strength of the premium category’s customer base, higher price points and innovation opportunities.
He also sees promise in craft cannabis.
“Craft will probably end up being … a sizable share of the market over time, like 15 or 20 per cent of the market over time,” he said, noting the company is looking for craft cannabis partnerships.
“I think it’s good for the market, and it’s ultimately going to be good for Canopy.”
