Canada’s Canopy Growth Corp. WEED-T posted a $2.1 billion loss in the first quarter of the current fiscal year, another big blow to the former cannabis star as it tries to restructure its business to win back investors.
The lion’s share of the loss stemmed from a $1.7 billion goodwill write-down on Canopy’s cannabis operations, which management attributed to a decline in the company’s market value in the first quarter.
Goodwill is often accrued by paying premiums for acquisition purposes, and Canopy has now written off all of its goodwill accrued in this division. The company now also operates a consumer products division that includes BioSteel energy drinks, which was one of the few bright spots this quarter.
The cannabis sector has been struggling for quite some time, but until recently Canopy’s stock maintained a premium valuation relative to its peers. That changed over the past few months as investors dumped the company’s stock at a rapid pace.
In May, Canopy, once Canada’s top long-term producer (or licensed grower) of cannabis by market share, revealed it wouldn’t make money until the second half of the year, at least after excluding certain costs, as it had previously promised, and insisted that term expire by two years until 2024.
A month later, Canopy announced that it would swap some bonds for stock to reduce its troubling debt burden. The new stock issuance diluted existing shareholders, and as part of the exchange, Canopy agreed to pay $345 million in cash next summer.
Investors revolted. In June alone, Canopy shares fell 42 percent. In the last year, they have more than halved. On Friday, Canopy shares fell 7 percent by midday.
A new goodwill write-down reported Friday morning dominated Canopy’s first-quarter loss, but the company’s core business also struggled with total revenue falling 19 percent to $110 million from a year earlier.
Canopy’s Canadian recreational cannabis operations — once its bread and butter — were the driving force, with revenue from the unit falling 35% to $39 million from the same quarter last year. Canopy attributes much of the decline in competitive prices for non-premium cannabis to the fact that the Canadian market is extremely saturated with this product.
“The Canadian market has played out really differently than expected,” Chief Financial Officer Judy Hong said on a conference call with analysts and investors on Friday.
Canopy’s adjusted earnings before interest, taxes, depreciation and amortization, which exclude certain expenses and are usually a more favorable metric for reporting companies, fell 18 percent from the year before the $75 million loss.
A tough quarter is troubling for Constellation Brands Inc. STZ-N, the US liquor giant, invested a total of $5.2 billion in Canopy when it looked like recreational weed might be the next big thing. Constellation invested in two tranches, the second a $5 billion check that valued Canopy shares at $48.60 each. By midday Friday, Canopy shares were trading around $3.40.
Canopy, now run by select Constellation leaders, is trying to turn a corner, and management laid out a revival plan in May. In Canada, its focus is on premium cannabis, a response to the country’s oversupply of low-quality, mediocre weed. Canopy also plans to cut more costs — especially sales, marketing and general expenses, which it hopes to cut by 25 percent. Roughly half of the cost savings are expected to come from job losses.
However, the current management team is betting big on the US legalizing recreational cannabis at the federal level. After Joe Biden won the presidency and the Democrats took 50 seats in the US Senate, there was great hope that this would happen. But with Republicans seemingly poised to take back the Senate in this fall’s midterm elections, many analysts believe those dreams are all but gone.
On Friday, CEO David Klein reiterated his commitment to US expansion. Canopy currently has a number of brands in the US market, but their growth is limited by rules that require their business not to cross state lines. “We continue to see the US as the largest and most important market in the world,” he said.
However, he acknowledged the challenges. “We bet big on the U.S. and the evolution is taking longer than we would like,” Mr. Klein said.
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