Canopy shares fell 20% on Friday after reporting an FQ4 loss per share of C$3.72. The company recorded impairment and restructuring charges of C$743M (C$710M non-cash), in line with management’s previous guidance. Revenue of C$108M declined 12.8% sequentially and was “well below demonstrated demand,” according to management.
We are taking Canopy off our Best Idea Short-list as management’s strategy is focusing on cost reduction and cash preservation. Restructuring charges, inventory write-downs, and goodwill write-offs are said to be behind the company. Expectations have also been significantly slashed, and the company removed guidance that they would be EBITDA positive in 2020.
Canopy is planning on hosting an analyst day on June 22, when management intends to outline the direction and new strategies for the company. We certainly appreciate the narrower focus and cost reduction, but the number of top-line issues concerns us as well. The new CEO is in a difficult situation, but the new position does not afford a lot of time to learn on the job.
There were a litany of issues behind the revenue shortfall. Medical revenue increased 6% sequentially, driven by international growth, but lagged the pace of initiatives. Canadian medical revenue was flat despite the growth in recreational. The recreational business decreased sequentially in both the B2B and B2C channels. The low-end flower category rapidly gained share in the market from 6% to 20% in ~five months catching management off-guard, yet they said the move to value was predictable.
High THC strains were another area where the company lost share until the next harvest is ready. 2.0 products only represented 2% of sales in the quarter, but are 9% of sales in the current quarter. B2C sales decreased 14% sequentially due to store closures. Management estimates SSS would have been up 4% adjusting for store closures.
The company spending significant time rightsizing the company:
- Reduced Canadian capacity by 40%
- The company wrote down C$132M of inventory.
- A permanent reduction of 200 employees in Canadia, UK, and the US
- Asset-light model internationally
- Management estimates half the production costs are fixed.
The EBITDA loss of C$102M compares unfavorably to a C$97M loss in the previous quarter, while FCF was the use of C$305M. The cash balance was C$2.0B, down C$300M sequentially. On May 1, Constellation Brands exercised warrants for $245M.
In Ontario, cannabis was deemed non-essential from the beginning of April through May 19, causing significant top-line pressure. QTD B2B revenues have declined 15% from the previous half-year run rate. The B2C business is tracking down by half of the prior half-year run rate. Canopy’s other strategic businesses are seeing a 20-40% revenue reduction compared to their six-month run rate.
For Constellation Brands the losses from its minority investment will continue for the foreseeable future, but it is consolidated below the line. Constellation Brands will also not be putting any incremental cash into Canopy for the foreseeable future.
