Canopy Growth Corp.’s shift toward premium cannabis helped the company report a smaller quarterly loss compared with a year ago, but it wasn’t enough to prevent a 25 per cent drop in revenue.
The Smiths Falls, Ont. cannabis company behind brands like Tweed, Doja and Ace Valley said Friday that net revenue in what was Canopy’s fourth quarter totalled $111.8 million, down from $148.4 million in the same quarter last year.
On a year-over-year basis, the company’s global cannabis net revenue fell 35 per cent to $66 million in the quarter. That included a 36 per cent decrease to $39 million from Canadian recreational cannabis and a 33 per cent drop to $27 million from medical cannabis and other products like edibles sold in Canada.
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Revenue from other consumer products revenues including Storz & Bickel (vapes), This Works (skin care), BioSteel (sports drinks and protein powders) and other items fell three per cent to $45.8 million
Judy Hong, the company’s chief financial officer, positioned the results as a consequence of moving toward premium products, which she characterized as necessary in the long-term because the market is seeing price compression and a shift in consumer preferences.
“We deliberately chose to not chase low-margin value flower sales and for a cannabis company transitioning your product mix can be challenging,” she told analysts on a call.
“Had we continued to focus resources on actively pursuing low-margin value flower sales, our Canadian recreational cannabis business would have delivered significantly stronger revenue in fiscal ’22, but at the expense of doing what was right, which was putting our Canadian cannabis business on a path to sustainable growth and profitability.”
The shift comes after cannabis companies spent the years since recreational marijuana was legalized in Canada in October 2018 racing to drop prices in an effort to squeeze out the illicit market and attract new consumers.
In recent months, many like Canopy have been pivoting away from that strategy and focusing more intensely on premium cannabis because it sells for higher prices and often has a more loyal consumer following.
To help Canopy navigate the shift, Hong said the company improved its forecasting processes to ensure it is more agile in adjusting production to reduce inventory writeoffs. Canopy reported inventory writedowns of nearly $120 million in its latest fiscal year.
Some of the savings from better forecasting will be offset by wage inflation and rising supply chain costs, but Hong said Canopy is still confident it can deliver savings between $30 million and $50 million over the next 12 to 18 months.
Many of those savings will come from a cost reduction strategy Canopy implemented recently to make cannabis cultivation more affordable as well as supply chain efficiencies.
The plan includes retooling facilities, reviewing procurement strategies, implementing flexible manufacturing processes and reducing third-party professional and office fees.
It was unveiled just as Canopy laid off 243 workers in Canada, Europe and the U.S. last month.
Pressure to improve the company’s economics has been mounting since Canopy announced it would not reach profitability in the second half of its fiscal 2022, as it once predicted. It has not released a new timeline, but chief executive David Klein said on the same call as Hong that he hopes to reach profitability “as soon as possible.”
Standing in Canopy’s way are a series of net losses. The company had a net loss of $578.6 million or $1.46 per diluted share for the quarter ended March 31 compared with a net loss of $616.7 million or $1.85 per diluted share a year earlier.
Ahead of the results being released, BMO Capital Markets analyst Tamy Chen said she expected management to frame the quarter as a “new strategic reset” and provide “somewhat flexible” timing for achieving a positive EBITDA.
“Given the company’s challenging profits and losses and past difficulties at achieving guidance, it would not surprise us if investors view the new reset plan with initial skepticism,” she said, in a note to investors.
Canopy’s results pushed its share price down 13.6 per cent or 97 cents to $6.15 in late-afternoon trading on the Toronto Stock Exchange.
In a response to a written shareholder question about the “volatile” market, Hong said, “the share price declines (are) really not unique to Canopy.”
“When you look at the share price performance of the U.S. and Canadian licensed producers, many of those names are down pretty substantially from a share price standpoint,” she said.
“Now from Canopy’s standpoint, we are focused on really controlling what we can control, which is really laying the foundation for long-term sustainable growth and really building a premium branded cannabis company as the market goes through these types of cycles.”