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Nov. 14, 2019, 2:20 p.m. EST

Canopy Growth’s earnings disappointment delivers fresh pain in brutal stretch for cannabis stocks

Sector slammed after market leader’s earnings fall short, sending exchange-traded funds down more than 5%

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By Ciara Linnane, MarketWatch


Bloomberg News/Landov
Employees at the Canopy Growth facility in Smith Falls, Ontario

Canopy Growth Corp. shares slid more than 17% Thursday and pulled rivals lower after the company posted weaker-than-expected earnings for its fiscal second quarter in the latest blow for the troubled cannabis sector.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ 0.00%  was down 5.4% with 26 of its 36 constituents trading lower, led by Canopy. The Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ +0.34%  was down 6.3%, with 44 of its 54 member stocks lower.

The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.91%  and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.22%  were flat to slightly lower.

Smith Falls, Ontario-based Canopy /zigman2/quotes/200603886/composite CGC +0.27%   /zigman2/quotes/202205609/delayed CA:WEED +0.86%  posted a loss of C$374.6 million ($282.4 million), or C$1.08 a share, in the quarter, wider than the C$330.6 million loss, or C$1.52 a share, posted in the year-earlier period. Net revenue rose to C$76.6 million from C$23.3 million. The FactSet consensus was for a loss of just 41 cents a share and revenue of C$100 million.

The company, the cannabis market leader thanks to a $4 billion investment from drinks company Constellation Brands /zigman2/quotes/207737284/composite STZ +0.65% , said it took a restructuring charge of C$32.7 million for returns, return provisions, and pricing allowances primarily related to its softgel & oil portfolio. It also recorded an inventory charge of C$15.9 million to adjust retail pricing and packaging and to fund a marketing and educational strategy.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” said Mark Zekulin, CEO, Canopy Growth.

Canopy is expecting those conditions to be a “short-term headwind in what is a brand-new industry,” he added. Canopy is at the end of a period of investment and expects to benefit in the coming year as the retail channel expands, he said.

Read: Canada tells cannabis companies to improve disclosures of cross-holdings

On a conference call with analysts, Zekulin said the addressable market is only about half of what was originally expected, while Ontario, home to 40% of Canada’s population, has one store per 600,000 people.

“This is and always has been a long-term game and there is no company better positioned to win it today than Canopy,” he told analysts, according to a transcript from FactSet.

Read now: Cronos turns lower after kicking off cannabis earnings with revenue miss

MKM analyst Bill Kirk highlighted in a Friday note that Canopy paid more in share-based compensation in its fiscal second quarter than it generated in revenue.

“Separately, General & Administrative costs (C$87.9mn) were also greater than period revenue,” said Kirk. “This disappointing quarter, and with Canopy production levels still far greater than sell-through, becomes an industry issue that does not resolve quickly.”

See now: Tilray sells five times as much pot, thanks to European efforts and hemp acquisition

Other items the analyst noted from the report; Canopy’s revenue of C$76.6 million was lower than the C$90.5 million generated in the first quarter. The analyst also said the charge for returns and pricing adjustments is likely not a one-time one, “as it reflects returns and new pricing architecture and package assortment going forward,” the MKM analyst wrote. “We have long been concerned about Canopy’s production levels relative to sell-through and the quality/age of inventory. We believe the returns and pricing adjustments, as well as a C$15.9mn inventory charge in the period, demonstrate this issue.”

/zigman2/quotes/204332491/composite
US : U.S.: NYSE Arca
$ 16.84
0.00 0.00%
Volume: 356,963
Dec. 6, 2019 8:00p
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/zigman2/quotes/208856346/delayed
CA : Canada: Toronto
$ 8.97
+0.03 +0.34%
Volume: 100,588
Dec. 6, 2019 3:59p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,145.91
+28.48 +0.91%
Volume: 1.70B
Dec. 6, 2019 5:07p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,015.06
+337.27 +1.22%
Volume: 224.83M
Dec. 6, 2019 5:07p
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/zigman2/quotes/200603886/composite
US : U.S.: NYSE
$ 18.65
+0.05 +0.27%
Volume: 2.98M
Dec. 6, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$6.50 billion
Rev. per Employee
$115,039
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/zigman2/quotes/202205609/delayed
CA : Canada: Toronto
$ 24.72
+0.21 +0.86%
Volume: 1.01M
Dec. 6, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$8.62 billion
Rev. per Employee
$150,142
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/zigman2/quotes/207737284/composite
US : U.S.: NYSE
$ 183.65
+1.19 +0.65%
Volume: 722,311
Dec. 6, 2019 6:30p
P/E Ratio
47.62
Dividend Yield
1.63%
Market Cap
$34.77 billion
Rev. per Employee
$842,260
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