Profits Prove Elusive in Quarter Full of Misses: Cannabis Weekly
Profits Prove Elusive in Quarter Full of Misses: Cannabis Weekly
(Bloomberg) -- Most pot analysts had tempered their expectations heading into last week’s earnings bonanza, yet all of the big companies that reported results still missed estimates.
Third-quarter results from the likes of Canopy Growth Corp., Tilray Inc., Aurora Cannabis Inc. and Cronos Group Inc. provided a stark reminder of just how difficult the operating environment is for Canadian cannabis companies. All of them blamed the slow rollout of retail stores, which has certainly been a major headwind for the sector, but there were other problems too.
“At a macro level, we do not expect a worse quarter for the group,” wrote Pablo Zuanic, analyst at Cantor Fitzgerald, who believes stocks have hit bottom.
Here are a few of the things we learned:
Elusive Ebitda
Even the strongest companies are struggling to turn a profit.
Organigram Holdings Inc., which was a rare standout in the industry for reporting four consecutive quarters of positive earnings before interest, taxes, depreciation and amortization, said last week it will slide to a loss in the quarter ended Aug. 31.
“We previously considered the company to be a relatively stronger operator,” said BMO analyst Tamy Chen. “We now believe Organigram is also experiencing the challenges that have impacted some of its peers, and which could take a number of quarters to resolve.”
Like Organigram, Aurora Cannabis Inc. is a low-cost producer with strong margins. But it’s been forced to repeatedly delay its promise of reaching positive Ebitda, and lost C$39.7 million in the quarter ended Sept. 30.
Chairman Michael Singer said he wants to “reach that milestone as quick as we can,” but declined to say exactly when that will happen. Aurora previously said it would get there by June 30.
Guidance Revisions
Like Aurora, many pot companies gave optimistic guidance that they later had to walk back. Canopy said Thursday it’s unlikely to meet its long-stated goal of hitting C$250 million in revenue by the quarter ended March 31, and its expectation for gross margins above 40% is also “under pressure.”
“Broadly, we think that skittish cannabis investors are placing limited trust and faith in forward industry expectations today,” said Seaport Global analyst Brett Hundley. “Thus, focus on quarter quality becomes heightened as a result.”
Many in the industry say they’re now taking a more conservative approach to forecasting, and those that aren’t may want to rethink their approach.
Canopy Chief Financial Officer Mike Lee said on the company’s earnings call that its demand projections assume Ontario will open 40 new stores per month beginning in January -- an optimistic forecast given that the province has only opened 24 stores to date. This prompted analyst questions about how realistic that outlook is.
“We already regret a little bit” putting that number out there, CEO Mark Zekulin said in an interview following the call.
Consumer Confusion
It’s hard to guess what consumers are going to want to buy in a brand-new market. Some companies are paying the price for that.
Canopy, Organigram and Hexo Corp. have all taken provisions for returns and price adjustments, indicating their product mix didn’t match demand. For Canopy, the problem was its portfolio of oils and softgels, which sold well in the medical market but aren’t as popular with recreational consumers.
Canopy had “no market data upon which to base the decisions, so ultimately we overproduced those products and oversold those products into provinces,” Zekulin said. “We’ve learned a few things in terms of the volume of demand.”
Upcoming Events This Week
MONDAY 11/18
- Trulieve Cannabis Corp. will report earnings post-market
TUESDAY 11/19
- Ayr Strategics Inc. reports pre-market
- Curaleaf Holdings Inc. reports post-market
WEDNESDAY 11/20
- Harvest Health & Recreation Inc. reports pre-market
- Green Thumb Industries Inc., iAnthus Capital Holdings Inc. and TILT Holdings Inc. report post-market
FRIDAY 11/22
- The Cannabis Consumer & Business Expo runs in Toronto through Nov. 24
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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, Will Daley
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