What went wrong?
Various aspects of Canopy’s fourth quarter results were not ideal. For starters, it missed analysts’ revenue estimates by a huge margin. Losses to net earnings were also higher than expected, with losses from adjusted EBITDA (earnings before profit, tax, depreciation and amortization) totaling C $ 102 million. Lower sales and higher operating expenses contributed to the losses.
Lower sales of recreational marijuana in Canada resulted in a 13% decrease in net revenues compared to the third quarter of 2020. On the positive side, revenues for the quarter increased 15% year over year for reach C $ 107.9 million, up 76% for the whole year.
Management said in the statement that its “supply chain is grappling with certain complex products and production systems” [in] a very dynamic market with changing demand and changing consumer preferences “during the quarter.
Management’s decision to close 22 of its Tokyo Smoke and Tweed retail stores across Canada in mid-March also affects revenue. These stores have reopened now, but I’m concerned that Canopy may have missed the surge in demand for cannabis in the midst of the pandemic. Canada already has a shortage of legal stores – and closings during times of increasing demand could affect sales.
Strategies to Reduce Money Consumption
When a company lacks consensus estimates and reports below-normal results, investors can ignore what’s going on behind the scenes. You may be interested to know that Canopy is working to reduce its consumption of cash and to properly size its cost structure. For example, it has left operations in South Africa and Lesotho and closed one of its indoor facilities in Yorkton, Canada – as management believes that its production capacity in Canada is more than sufficient to meet demand.
To move to an asset-based approach, it also ceased operations at its growing facilities in Colombia and its farming operations in New York. Instead, it will use its current supply of hemp to produce hemp-derived CBD products for the U.S. market. The U.S. CBD space is a growing market that is only expected to expand further as the U.S. Food and Drug Administration (FDA) continues to progress in its assessment of CBD.
These strategies could help Canopy reduce costs, which could be essential; after all, an asset-based approach helps Cronos Group (NASDAQ: CRON) survive the pandemic with a solid track record.
A year of change
Management has said that fiscal year 2021 may be a year of transition, which may disappoint investors. Constellation brands (NYSE: STZ) owns almost 40% of Canopy, and under the leadership of former Constellation leader David Klein, Canopy is expected to see new organizational design, new operational programs and improvements in supply chain productivity. These changes could prove to be significantly beneficial.
See how Aphria (NYSE: APHA) CEO Irwin Simon transformed his company – I guarantee it as a solid cannabis choice for 2020. I know why investors who expected Canopy to be a market leader in cannabis could be scared now, but despite the challenges, cannabis stocks did well last month; if demand continues, the long-term outlook may be fruitful. The shares of Canopy Growth, Aurora Cannabis, Aphria and Cronos increased by 14%, 67%, 28% and 16% respectively in May, while the SPDR S&P 500 ETF (NYSEMKT: SPY) gained 7.6%.
Ups and downs in the industry
Note that marijuana is still an evolving and volatile industry, and ups and downs are evident. Canopy Growth continues to benefit from strong financial support from Constellation Brands, as well as an excellent portfolio of innovative products. He recently launched his last phase of cannabis 2.0 products, including vapes, chocolates and cannabis infused drinks.
Management’s task now is to strategize quickly and efficiently when deploying these new products, which still have enormous potential to conquer the market now that demand is higher. Cannabis-infused drinks already launched are receiving good reviews, and these innovative products could end up attracting a whole new customer base. Now with research indicating that some cannabis strains may help fight COVID-19, the potential for marijuana industry is higher than ever.