‘As­tound­ing’ loss weighs on Canopy

Stock lost more than 70% since April highs

The Peterborough Examiner - - BUSINESS - KRIS­TINE OWRAM

Canopy Growth Corp. shares fell to the low­est in nearly two years af­ter the pot com­pany re­ported rev­enue that missed the low­est an­a­lyst es­ti­mate and a loss that one an­a­lyst called “as­tound­ing.”

The world’s largest cannabis com­pany by mar­ket value also said it’s un­likely to meet its pre­vi­ous guid­ance of $250 mil­lion in rev­enue by the fis­cal fourth quarter, which ends March 31.

Shares fell as much as 18 per cent Thurs­day to $20.15, the low­est since De­cem­ber 2017. The stock has lost more than 70 per cent since its re­cent highs in April amid broad-based pres­sure on the cannabis sec­tor.

In­vestors are grow­ing in­creas­ingly im­pa­tient with com­pa­nies that don’t show a clear path to prof­itabil­ity, and other fac­tors rang­ing from a va­p­ing-re­lated health cri­sis to reg­u­la­tory con­cerns are also weigh­ing on shares.

Chief ex­ec­u­tive of­fi­cer Mark Zekulin said the com­pany is still on track to achieve its other tar­gets, in­clud­ing pos­i­tive ad­justed earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion in Canada by fis­cal 2021, and full prof­itabil­ity in three to five years.

Its ex­pec­ta­tion for gross mar­gins above 40 per cent by the end of the cur­rent fis­cal year is “un­der pres­sure” but still “achiev­able,” Zekulin said in a phone in­ter­view Thurs­day.

“There are sev­eral known fac­tors caus­ing the mar­ket prob­lems,” he said. “As quickly as we see those get re­solved, then the quicker we can get back on track for that $250 mil­lion, whether it’s a month late or a quarter late, and see all the other things fol­low suit.”

Canopy took a restruc­tur­ing charge of $32.7 mil­lion for re­turns, re­turn pro­vi­sions and pric­ing al­lowances in the quarter. These are pri­mar­ily re­lated to its port­fo­lio of soft­gel and oil prod­ucts, which haven’t been sell­ing as well as ex­pected. It also took an in­ven­tory charge of $15.9 mil­lion to align its port­fo­lio with a new re­tail strat­egy.

“We do not con­sider this type of ad­just­ment to be one-time, as it re­flects re­turns and new pric­ing ar­chi­tec­ture and pack­age as­sort­ment go­ing for­ward,” Bill Kirk, an­a­lyst at MKM Part­ners, said in a note.

He called the mag­ni­tude of the Ebitda loss “as­tound­ing,” and said Canopy’s “ex­ces­sive eq­uity comp pol­icy” was re­spon­si­ble for much of it.

How­ever, Zekulin said he’s con­fi­dent the charges are one-time items.

Canopy re­ported fis­cal sec­ond-quarter net rev­enue of $76.6 mil­lion, well be­low the con­sen­sus es­ti­mate of $102.3 mil­lion, and an Ebitda loss of $155.7 mil­lion. An­a­lysts had ex­pected an Ebitda loss of $96.1 mil­lion.

The com­pany is search­ing for a new leader af­ter co-CEO Bruce Lin­ton was fired in July, and Zekulin said he’d step down once a re­place­ment is found. Its short­list of can­di­dates has nar­rowed to a num­ber “you can count on one hand,” said Zekulin, who hopes to make an an­nounce­ment be­fore year’s end.

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