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Canopy books $1.3B loss, sales weak amid COVID-19 buying spree

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Canopy Growth’s (WEED.TO)(CGC) dominant share of Canada’s recreational pot market shrunk as consumers stockpiled legal cannabis due to COVID-19. The latest financial results from the world’s most valuable cannabis company also include a $1.3 billion net loss, weaker-than-expected revenue and higher operating expenses.

Chief executive officer David Klein told investors to expect volatility as he continues to lead Canopy through the “deep dive” restructuring process that started shortly after he took on the top job at the Smiths Falls, Ont.-based company in January. 

Klein has shut down millions of square feet of production space and eliminated about 800 jobs as part of his effort to streamline the company’s rapidly expansive global footprint built under previous management. Canopy's net loss included about $843 million in restructuring and impairment charges.

"As we all know, Canopy grew quickly to achieve a leading position in a rapidly expanding industry,” said Klein told analysts on a post-earnings conference call on Friday. "In that time period, being first was clearly rewarded. But being first isn't a sustainable strategy or a point of differentiation, nor is it necessarily tied to creating value.” 

Sales were a weaker-than-expected $108 million fiscal fourth quarter ended March 31, a 13 per cent decline versus the previous quarter. Canopy booked an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss of $102 million, a $5 million wider profitability miss than its third quarter. Analysts polled by Bloomberg expected $128.8 million in revenue in the quarter, and an EBITDA loss of $87.7 million.

Canadian recreational revenue, including business-to-business sales, plunged 28 per cent quarter-over-quarter to $49 million. 

The decline follows a surge in cannabis retail spending in March recorded by Statistics Canada. The agency found sales climbed 19 per cent versus February as consumers stocked up ahead COVID-19 stay-at-home orders. 

Canopy said in February that it has a 22 per cent share of the recreational market. However, the company closed 23 corporately-owned stores in mid-March due to the pandemic. Klein said they transitioned to click-and-collect, and 20 locations have reopened their doors.

“We believe Canopy has lost share in various markets, particularly Ontario, though the magnitude of this appears far greater than expected, and the offset from new product categories (beverages and vapes) is clearly taking longer than anticipated,” CIBC analyst John Zamparo wrote in a research note on Friday.

Chief financial officer Mike Lee said Canopy’s Canadian recreational market share has fallen to about 15 per cent. He noted the long-awaited lineup of 2.0 products like vapes, edibles and drinks amounted to less that two per cent of revenue in the quarter. 

“Our phased rollout of 2.0 products hindered our Q4 sales performance,” Lee said, noting 2.0 products have risen to nine per cent of sales in Q1 2021. The company’s infused drinks launch, for example, was months behind schedule due to difficulties producing beverages at scale.

Klein referred to the next fiscal year as “transitional.” Fitting with the company’s new mantra of not first, but best, he said Canopy will focus on core markets in Canada, the U.S. and Germany. Operations in South Africa and Colombia were targets of recent downsizing

Canopy withdrew its previously announced net income and profitability targets, citing the impacts of the COVID-19 pandemic and changes within the company. New performance targets could be released in the second half of fiscal 2021.

"We designed a new operating model that will focus on the consumer and will increase our speed and agility as an organization," Klein said. "This is not a quick transition but the beginning of a journey that will put us firmly in the ranks with the top consumer product companies in the world."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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