Distribution, supply woes could hit cannabis firm earnings, analyst says
Big producers’ forecasts get downgrade after early reports suggest bumpy start
The distribution issues that have plagued the cannabis industry in the first 12 days of legalization are threatening to significantly impact the financial performance of major licensed producers, predicts GMP Securities analyst Martin Landry.
“The extremely limited distribution network in many provinces, fulfilment challenges in Ontario, inventory shortage in Quebec and LPs coping with limited availability of excise stamps may take several months to be resolved,” Landry wrote in a Monday morning note. “It becomes increasingly clear that recreational cannabis sales in 2018 will be much lower than previously expected.”
Many licensed producers, including Canopy Growth, CannTrust, and Aurora, are set to report quarterly earnings in the second week of November. Although those numbers will not yet reflect post-legalization sales, they will include recreational product shipments sent out by the producers to the various provinces.
But across the country, early reports suggest things have not gone as smoothly as hoped. Quebec’s provincial cannabis retailer, for example, announced last week that it would be closing all 12 of its stores between Monday and Wednesday this week due to “chronic shortages of product.” The Ontario Cannabis Store has a backlog of unfulfilled orders, and in Alberta and B.C. there are only a total of 18 stores in operation, far fewer than what was expected at this time of the year.
Because of these logistical hiccups, GMP has downgraded its forecast of four major cannabis companies — Canopy Growth, Emblem Corp., Cronos Group and CannTrust Holdings.
Canopy Growth in particular, according to Landry, could see its FY19 sales affected not just because of distribution issues, but also because of a market strategy that involved only selling one strain of product on the OCS website.
“Canopy has adopted a product depth strategy to ensure the company always has in stock the strains listed as opposed to a product breadth strategy of listing several strains and let the shopper choose the preferred one. In our view, this will impair Canopy’s ability to capture expected market share,” he wrote.
Landry expects Canopy to now only capture about 20 per cent of market share, from the previously forecast 33 per cent.
Vaughan, Ont.-based CannTrust Holdings shipped a minimal amount of cannabis in September, instead pushing those orders back into October. According to Landry this was due to the usual growing pains of ramping up packaging capacity, but also because some provinces put in their orders to CannTrust later than expected. “As a result of all this, we have decreased our sales expectations to 100 kg versus 1000 kg previously. We have also lowered our selling price to reflect CannTrust’s positioning as a value player with low price points,” Landry wrote, in reference to the quarter ending Sept. 30.
The narrative was almost identical with Cronos, which currently sells two recreational brands. Cronos’s dried flowers, said Landry, are currently sold out in Ontario, although still available in B.C. “We expect Cronos made only a small portion of its initial recreational shipments in September, partly due to delays in receiving necessary excise stamps.”
Landry expects Cronos’s Q3 revenues to dip significantly, from $11 million to $3.6 million, forecasting that the company would have only shipped 100 kilograms of cannabis, instead of 1.8 tonnes.
On a separate note, analysts were generally optimistic about Quebecbased HEXO, which reported its 2018 fourth-quarter results, as well as its full-year results, Monday. HEXO’s revenue for the quarter came in at $1.4 million, reflecting a sale of 152 kg of cannabis, which was generally in line with Canaccord Genuity’s estimate of $1.5 million.
“Perhaps more important than its FQ4 top line are the company ’s industry-leading financial metrics. HEXO reported an average sales price per equivalent gram of $9.26, among the highest in the industry. Further, its FQ4 cash cost of $0.90 per gram produced places HEXO consistently as one of the lowestcost producers in Canada,” wrote Canaccord Genuity analyst Matt Bottomley.
“HEXO’s selling price per gram has remained stable over time, with a general upward trend since FQ317. We also note that HEXO commands the highest blended average price per gram of all the LPs that we track,” wrote Rob Goff at Echelon Wealth Partners.
It becomes increasingly clear that recreational cannabis sales in 2018 will be much lower than previously expected.