Canopy Growth cites `growing pains' to explain lacklustre first quarter
“This is a complicated business.”
Those words, uttered Friday by Canopy Growth CEO David Klein towards the end of an hour-long conference call, summed up his company's ongoing challenges very well.
While the Smiths Falls, Ont., cannabis giant generated net revenues of $136 million for its first fiscal quarter ended June 30 — up 23 per cent year over year — it lost $64 million on an adjusted basis and shed some market share. The fault, Klein said, lay within — “growing pains,” he explained. He and his colleague, chief financial officer Mike Lee, spent part of the call talking about the various challenges of running a new business.
In particular, the executives promised to do a better job of planning operations, forecasting demand for products and moving them through manufacturing.
To be fair, this is not an easy business to get right, not least because it's still very new and heavily and unevenly regulated. Canada legalized recreational marijuana in October 2018 and followed up a year later by legalizing the sale of cannabis-infused drinks and foods. Dozens of U.S. states have since followed suit, but the U.S. federal government hasn't yet.
To achieve economies of scale in a competitive business, Klein needs plenty of heft. Although Canopy Growth is posting revenues at the annual rate of more than $540 million, the company doesn't expect to produce profits until its fourth quarter ending next March 31. And that projection hangs on two very large assumptions: first, that revenues will grow strongly in both Canada and the United States during the next three quarters; and, second, that relatively more of Canopy Growth's sales involve premium products with fatter profit margins.
Momentum also depends on the economy continuing to reopen. During the pandemic, when sales were mostly online, the company found it difficult to market its premium products. People go with what they know, the executives observed. It takes in-store persuasion to create a shift.
In the nearly 20 months since Klein took over as top gun at Canopy Growth, he has profoundly changed the physical shape of the firm. Klein, a former executive with wine, beer and spirits giant Constellation Brands, has sacked one-quarter of Canopy Growth's workforce and launched dozens of new cannabis and related products.