Canopy Slumps After ‘Astounding’ Loss, Restructuring Charge

(Bloomberg) -- 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 C$250 million ($189 million) in revenue by the fiscal fourth quarter, which ends March 31.

Shares fell as much as 18% Thursday to C$20.15, the lowest since December 2017. The stock has lost more than 70% 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% 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 C$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 C$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 C$15.9 million to align its portfolio with a new retailing 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.

Overall, Canopy reported fiscal second-quarter net revenue of C$76.6 million, well below the consensus estimate of C$102.3 million, and an Ebitda loss of C$155.7 million. Analysts had expected an Ebitda loss of C$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. The company has narrowed down its shortlist of candidates to a number “you can count on one hand,” Zekulin said, and hopes to make an announcement before the end of 2019.

To contact the reporter on this story: Kristine Owram in New York at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Courtney Dentch, Divya Balji

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