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Nov. 19, 2019, 6:59 a.m. EST

All the excuses cannabis companies are making for an ugly crop of earnings

Slow rollout of new pot stores in Canada overwhelmingly blamed for lackluster sales, but don’t forget about Europe!

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By Max A. Cherney


Bloomberg News/Landov
He probably bought that joint on the black market.

Cannabis companies just suffered through possibly the ugliest week of an ugly year, but they all have excuses.

In a flood of earnings reports that pot companies released just ahead of the mandated deadline for quarterly updates, companies proved that they have not been very good at figuring out how to grow, package, distribute and sell the long-illegal plant. Investors punished pot stocks in response: In the past week, the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ +0.17%  declined 14.5%, the Horizons Marijuana Life Sciences Index ETF /zigman2/quotes/208856346/delayed CA:HMMJ +0.32%  fell 17.2% and the Cannabis ETF /zigman2/quotes/213173823/composite THCX +1.21%  fell 15.8%.

Much more was expected amid the anniversary of weed being legalized for adult recreational use in Canada, the first industrialized nation to do so, and ahead of the coming launch of legal edible and vaping products, commonly referred to as “Cannabis 2.0” in the industry. Executives who had promised much more were forced to say on earnings conference calls this week why they were struggling to sell a product that is obviously popular, and they mostly focused on four reasons for their poor performance.

Not enough retail stores, especially in Canada’s most populous province

Bricks-and-mortar retail locations have been far slower than expected, with Ontario — the country’s most populous province, with roughly 14.6 million residents — opening a total of 25 private stores so far. While Ontario isn’t the only province to have an inadequate number of retail shops (Quebec’s government-run stores, too, aren’t as numerous as executives would like), other provinces such as Alberta have allowed several hundred private locations to open.

• “[T]he market opportunity today is simply not living up to expectations and at the risk of oversimplifying, the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing,” Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -2.13%   /zigman2/quotes/202205609/delayed CA:WEED -2.05%  Chief Executive Mark Zekulin said. “Ontario represents 40% of the country’s population yet has one retail cannabis store per 600,000 people. When one year into the market the addressable market is nearly half what is expected, there is going to be meaningful short-term problems.”

Read: Canopy Growth CEO defends ugly quarter as one-time event

• “Looking at our business geographically, the challenges in the Canadian market are ongoing with a limited number of retail locations and a supply-demand imbalance,” Tilray Inc. /zigman2/quotes/209129655/composite TLRY -1.74%  Chief Executive Officer Brendan Kennedy said.

“There are still a lot of retailers in the U.S. that will not — they will not buy or they won’t sell. They won’t stock products that contain CBD and are edible, digestible, and so nutritional supplements, dietary supplements. They are waiting for some clarification from the [U.S. Food and Drug Administration]. And that’s where a large part of the market in the U.S. is right now in terms of digestible products.”

• “Now, you say that there have been indications that the retail infrastructure would not be there. Well, yeah, but that’s true, and we’ll take our lumps on that,” Aurora Cannabis Inc. /zigman2/quotes/210559470/composite ACB +1.15%   /zigman2/quotes/203734337/delayed CA:ACB +0.87%  Chief Corporate Officer Cam Battley said. “As long as everybody else does too. And I don’t just mean other producers, analysts and observers across the board, I think, anticipated that there would be more retail infrastructure available by now than there is.”

• “In terms of profitability, and as Cam mentioned earlier, I don’t think there’s any of us on this call that we’re expecting Ontario a year after legalization to be sitting on 24 stores,” Aurora Chief Financial Officer Glen Ibbott said in the earnings call.

Don’t miss: Aurora scales back expansion amid declining revenue

• “The infrastructure for the adult-use cannabis market is still in its infancy and is slowly being developed,” Cronos Group Inc. /zigman2/quotes/206842762/composite CRON -0.27%   /zigman2/quotes/202715342/delayed CA:CRON -0.21%  CEO Mike Gorenstein said. “The number of retail stores, as well as warehousing and logistic needs are in the process of catching up to meet the demand of consumers. As a result, we are still not able to fully reach the long term total addressable market represented by this population.”

Too much weed, too little weed, nobody wants the weed we grew

As recreational legalization has rolled forward, supply problems have lessened to some extent. According to Tilray’s Kennedy, high-quality marijuana flower is still relatively difficult to acquire in bulk on the open market, and there are shortages of strains and products in high demand. That isn’t always the case: Sundial Growers Inc. /zigman2/quotes/213489825/composite SNDL +3.70%  said during its third-quarter earnings that it processed roughly 3 tons of one strain into oil because it had grown too much for what was demanded. And cannabis oil products aren’t selling anywhere near the amount some companies thought consumers would buy.

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