Cannabis firm Canopy Growth reshapes strategy after reporting CA$1.3 billion loss

Image of lobby of Canopy Growth's Tweed facility

The lobby of Canopy Growth's Tweed facility in Smiths Falls, Ontario. (Photo by Justin Tang)

International cannabis giant Canopy Growth Corp. lost ground in Canada’s growing recreational marijuana market in its fourth quarter, with net revenue dropping 13% compared to the previous quarter.

Canopy posted a fourth-quarter net loss of 1.3 billion Canadian dollars ($944 million) and an adjusted EBITDA loss of CA$102 million.

Recreational marijuana revenue tumbled 28% from the previous quarter to CA$49.8 million for the last quarter of its 2020 fiscal year, which ended March 31 – a time when overall recreational cannabis sales were growing in Canada amid the COVID-19 pandemic.

“Simply put, we missed opportunities,” Chief Financial Officer Mike Lee said during a Friday morning call with investors.

Lee estimated that Canopy’s Canadian recreational market share declined “from the low 20s to the high teens,” which he attributed partly to lower sales of flower and pre-rolls.

He also said Canopy didn’t react quickly enough as the Canadian recreational market shifted toward value offerings.

Fourth-quarter recreational sales were also hit by what Lee described as a phased rollout of so-called “cannabis 2.0” products such as vapes, edibles and beverages, which began hitting the market throughout the quarter.

Lee said those products combined represented less than 2% of Canopy’s sales.

“And although we recognize this significant headwind to our performance, we are committed to phasing these products into the market, to ensure that we maintain the quality that our consumers demand while being able to produce enough product to fill the pipeline.”

Sales at Canopy-owned recreational cannabis stores were also hit by temporary store closures in mid-March because of COVID-19, Lee said.

Twenty of those 22 stores have since reopened, with the remaining two to open June 1, CEO David Klein said.

Canopy’s Canadian medical marijuana revenue grew by only 1% over the previous quarter to CA$14.9 million.

Net revenue hit CA$107.9 million in the fourth quarter. Total net revenue for the 2020 fiscal year was CA$399 million.

International outlook

Canopy Growth fared better outside Canada in the fourth quarter, with international medical cannabis revenue growing 11% on a quarterly basis to CA$20.7 million, including a 14% quarter-over-quarter increase in German sales.

The company has finally achieved “supply continuity” to the German market, CFO Lee said on the conference call.

“And that’s been a challenge, really, since I started at Canopy 16 months ago, is that all of (Germany’s) supply was really coming from Canada and the regulatory steps to get product out of Canada and into Germany can be quite challenging.”

International cannabis revenue made up 24% of Canopy’s total cannabis revenues in the quarter, and oils and softgels accounted for more than 70% of the company’s global medical marijuana product mix.

Canopy previously announced plans to pull back from some of its international cannabis cultivation.

Going forward, CEO Klein said the company would focus on three core markets with “the largest and most tangible profit opportunities in the near term”: Canada, the United States and Germany.

“Our resources will be focused against these three markets, while we operate with asset-light models in places like (the Asia-Pacific region) or Latin America. This means we will not be seeking geographic expansion.”

New strategy

Canopy’s efforts to reshape its business have included closing Canadian cultivation facilities.

The company said those closures have reduced its Canadian production capacity by more than 40%.

Klein said a strategic analysis of the business is now complete and is supported by the board of directors and key investor Constellation Brands, the U.S. liquor giant.

“As we all know, Canopy grew quickly to achieve a leading position in a rapidly expanding industry, and through that time period, being first was clearly rewarded,” he said.

“But being first isn’t a sustainable strategy, or a plan of differentiation, nor is it necessarily tied to creating value.”

Canopy’s blindingly fast growth in recent years had its downsides, Klein continued.

“The company became less agile, siloed, and was burning too much cash.”

Klein said Canopy’s new operating model will focus on consumers and improved corporate agility.

But those changes will take time, he warned.

“Coupled with a five-month grow-and-production cycle, it will take time for our results to become apparent.

“Over the past few quarters, we’ve been slow to react to changing market dynamics and consumer preference shifts in the developing markets in which we participate. It’s my intent to ensure that we don’t repeat those mistakes going forward.”

Canopy said fiscal year 2021 will be a “transition year,” and the company will reveal new financial targets during the second half of the year.

Canopy will hold a virtual investor meeting on June 22 to give more details of its new strategy.

The company’s shares trade on the New York Stock Exchange under the ticker symbol CGC and on the Toronto Stock Exchange as WEED.

Solomon Israel can be reached at solomon.israel@mjbizdaily.com