Canopy calls for more stores as revenue gets pummelled
Ontario government urged to ‘fix it now’; pot rival Aurora also sees massive decline
TORONTO Canopy Growth Corp.’s CEO Mark Zekulin is calling on the Ontario government to immediately commit to opening up more retail stores across the province, as the industry reels from declining revenues, weak sales, falling prices and an inventory pileup.
“The fact of the matter is there are not enough stores, and enough supply. The Ontario government has made it clear their desire to have more stores, but why wait three months? Fix it now,” he said in an interview.
Both Canopy and Aurora Cannabis Inc., two of the country’s largest licensed producers, saw major declines in revenue for the quarter ending Sept. 30.
Canopy took a $32.7 million hit from product returns and pricing changes linked primarily to the sales of its oil and softgel capsule products, resulting in the company’s net revenue plummeting by 15 per cent to $76.6 million for the quarter ending Sept. 30.
Aurora’s total revenue declined 24 per cent from last quarter to $75.2 million, which it attributed to the “slow pace” of retail store licensing.
Canopy shares tumbled 15 per cent, as investors reacted strongly to the biggest revenue decline the company has seen since legalization.
The Smiths Falls, Ont.-based licensed producer has struggled to meet its earnings goals over the past few quarters, as industry-wide price declines chip away at revenues and a lack of accessibility to legal weed in the country’s largest market stifles demand.
“There is still a $6 billion market out there in Canada to be converted. That conversion takes a whole bunch of things, but if convenient access is not there, you can only do so much,” Zekulin said, reiterating comments he made on a conference call with analysts Thursday morning.
Canopy’s softgel capsule sales have been a bane for the company — cannabis retailers and provincial boards across the country have been struggling to sell the Tweed-branded products, resulting in a glut of unsold inventory that was ultimately returned to Canopy. The company took an $8-million return charge last quarter from unsold oils and gel caps.
On the conference call, Canopy’s chief financial officer Mike Lee told analysts that the soft gels “issue” was “fully behind” the company, and there remained less than $10 million left of unsold product in provincial warehouses as of the end of last quarter.
The $32.7-million figure included actual returns from provincial wholesalers which amounted to $20.5 million, with an additional $6.4 million to be returned in the coming weeks, according to Lee.
But Zekulin argues that it is the lack of stores, and not the quality of his company’s products, that is eating into revenue. “There is still interest in soft gels and oils. Demand has not been what it could have been. If there are more stores, we will see whatever volume that is selling, multiply by the number of stores,” he said.
While Canopy’s international medical revenue increased by 72 per cent on a quarter-over-quarter basis, buoyed by its acquisition of the German CBD pharmaceutical company C3, its domestic revenue — both medical and recreational — declined by seven per cent.
Although the company reportedly increased its share of the market in Alberta, where there are over 300 private retail stores, its adult-use revenue across the country declined by almost 10 per cent from the previous quarter.
“As Cannabis 2.0 takes place, people will gravitate toward chocolates, beverages, gummies. Softgels are a type of edible, so we think we will actually see increased demand for these products as people get used to consuming that way,” Zekulin said.
While Aurora’s cash cost to produce per gram declined significantly to just $0.85, one of the lowest in the industry, its quarter-over-quarter cannabis revenue fell by an alarming 25 per cent. Although the company’s medical patient base expanded slightly, it was not enough to offset major declines in wholesale and consumer cannabis revenues.
And, earlier this week, Organigram Holdings Inc. pre-released its earnings for the period ending Aug. 31, which also showed a 34-per-cent decline in revenue, attributed in part to a $3.7-million charge on product returns and lower pricing. Organigram too cited a lack of retail stores in Ontario as one of the factors contributing to weak results.
There are just 25 private cannabis stores in operation across the province, with an additional 50 slated to begin operating early next year.