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Pot producer Cronos Group warns of COVID-19 sales impact

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BROOKLYN, NEW YORK  - APRIL 14: A recreational marijuana smoker indulges in smoking weed on April 14, 2020 in the Bushwick section of the Brooklyn borough of New York City. As some smokers turn to smoking weed to ease their stress during the coronavirus pandemic, some doctors are warning that cannabis can cause airway inflammation that could cause complications should a user become a victim of COVID-19. (Photo by Bruce Bennett/Getty Images)

Cronos Group (CRON.TO)(CRON) expects Canada’s cannabis market will be “choppy” for the next six months to a year as COVID-19 impacts sales channels.

However, the ongoing pandemic could prove more disruptive to the Toronto-based company’s U.S. CBD business, which relies in part on brick-and-mortar retailers forced to close their doors for the foreseeable future.

“We do have many retail partners, over 900. A lot of those are closed right now,” chief executive officer Mike Gorenstein said on the company’s first quarter earnings call on Friday morning. “While some of that has shifted to online platforms, a lot of these are boutiques that don’t have an online platform. So there could definitely be pressure in Q2.”

Cronos’ American revenue totalled US$2.2 million in Q1, compared to US$6.2 from outside the U.S.

The company sells its high-end Lord Jones CBD line through premium outlets in the U.S., including SoulCycle, Neiman Marcus, and Sephora. The upscale line has gained traction through celebrity endorsements. Products span CBD oil, as well as skincare, bath items and edibles.

“Despite our readiness to adapt to the changing landscape, both near and long-term, consumer behaviour does not always shift as easily,” Gorenstein said. “We believe the beauty category could have lingering impacts in regard to product trials and purchasing as consumers in the skincare category typically like to try it in retail before they buy.”

In Canada, the company said while its long-term view of the market remains unchanged, COVID-19 is expected to present challenges in the coming months that will vary across the provinces due to differing policies.

“In the next six months to a year, I think things will be choppy,” Gorenstein said. “We have begun to see a contraction in demand as cannabis stores in various provinces have been either closed or going through changes in how they are forced to operate.”

The Toronto-based company reported net sales of US$8.4 million in its first quarter of 2020, up from US$3.0 million a year ago. Cronos booked a loss of US$6.5 million, versus a profit of US$1.6 million in the prior-year period. The company also booked an adjusted loss of US$40.7 million in the quarter ending March 31, compared to a US$10.1 million loss a year earlier.

Cronos incurred an US$8 million writedown of dried flower and extracts that it blamed on fixed prices negotiated prior to price compression in the Canadian market. The impairment follows a US$24 million inventory writedown in the prior quarter. The company said it expects additional writedowns, but declined to give further guidance.

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

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