UPDATE: Canopy Growth Dips on Disappointing Quarterly Results

Canopy Growth (NYSE:CGC,TSX:WEED) blamed a too-small retail sector in Ontario and an excess of soft gel inventory for its significant quarter-over-quarter drop in revenue for Q2 2020.

The firm released results for the quarter on Thursday (November 14) ahead of a steep 15.6 percent drop during the trading day to C$20.63 as of 12:50 p.m. EST in Toronto.

Net revenue fell 15 percent to C$76.6 million this quarter. The loss was attributed, in part, to a restructuring charge of C$32.7 million for returns, returns provisions and pricing allowance in relation to the company’s portfolio of oils and soft gels.

The Ontario-based cannabis producer also racked up an inventory charge of C$15.9 million due to an overflow of finished recreational cannabis stock, while net losses were at C$374.6 million.

During an earnings call with analysts and investors, Canopy Growth CEO Mark Zekulin said the lack of infrastructure in Ontario’s cannabis retail landscape contributed to the disheartening results.

“It’s been a challenging couple quarters in the cannabis sector,” Zekulin said, adding that Ontario’s failure to build a retail framework has effectively halved the market size.

Zekulin told analysts the firm is now past its inventory issues and product numbers are within “an appropriate range” moving forward.

The executive also walked back the company’s projection of achieving C$250 million in Q4 2020 with a gross margin of 20 percent, saying it was “increasingly unlikely” the milestone would be reached.

“We do not believe at this time that there will be sufficient points of retail sales in the near term to unlock the necessary Q4 demand,” said Zekulin.

During an interview with TD Ameritrade Network on Friday (November 15), Zekulin confirmed the company had overestimated the magnitude of soft gel and oil interest, saying they’d originally projected they would account for 15 percent of sales but the actual number is closer to five percent.

“One of the reasons why soft gels and oils had some challenge getting consumer resonance is nobody really thought there was an edible market because those were the only products that were available,” he said. “And now as we launch (edibles) next month, you’ll have a whole variety of products. You’ll have vape products, you’ll have beverages, you’ll have chocolates, you’ll still have soft gels.”

He justified the company’s miss, saying there was a lack of data on customer behaviour before cannabis was legalized in Canada.

When asked about an adjusted direction following the withdrawal of the firm’s previously stated revenue goal, CFO Mike Lee said current market conditions have resulted in too many variables to give accurate guidance on the coming quarters.

The company plans to transition to US generally accepted accounting principles for its earning reports moving forward, Lee said, joining fellow producer Cronos Group (NASDAQ:CRON,TSX:CRON) in doing so. By April 2020, Canopy will become a domestic issuer with the US Securities and Exchange Commission and a large accelerated filer.

When it comes to leadership, Zekulin told analysts the company still hasn’t found its next CEO after the surprising termination of co-founder and former CEO Bruce Linton. It plans to update investors by the end of the year.

The cannabis firm is projecting Ontario will begin opening 40 retail cannabis stores a month starting in January 2020 to better serve the province’s marijuana retail space.

Zekulin was one of several cannabis executives who contributed to an open letter sent to Ontario Premier Doug Ford asking the government for a more open retail space. Other firms, including Organigram Holdings (NASDAQ:OGI,TSX:OGI) and Delta 9 Cannabis (TSX:DN,OTCQX:VRNDF), have also blamed their slower growth on the lack of brick-and-mortar locations.

“The lack of a sufficient retail network and slower than expected store openings in Ontario continued to impact sales in Q4 2019 and were further exacerbated by increased industry supply,” Organigram said on Monday (November 11).

The company did see a small increase of 9 percent in sales of dried cannabis to 7,497 kilograms this quarter from 6,881 in Q1 2020. Zekulin said the company continues to reign over the recreational market in Canada and was bullish on Canopy Growth’s position to take on a considerable market share of edible products in Canada.

At the onset of product roll out, the company plans to unveil over 30 new items, with more than 20 coming up in the six to 12 months after the initial launch.

Editor’s note: This story was updated to include new comments from Canopy Growth CEO Mark Zekulin.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.