Canopy Growth shuts down five Canadian facilities, and global head of beverage departs (CGC, STZ)
CGC is on the Hedgeye Cannabis LONG Bias List.
On the heels of Aurora Cannabis indefinitely halting operations at their Aurora Sun facility, Canopy Growth announced yesterday that it would be ceasing operations at the following sites: St. John's, Newfoundland and Labrador; Fredericton, New Brunswick; Edmonton, Alberta; Bowmanville, Ontario; as well as it's outdoor cannabis grow operations in Saskatchewan. Approximately 220 employees have been laid off as a result of these closures. The company expects to record estimated total pre-tax charges of approximately C$350 – C$400 million in the third and fourth quarters of fiscal 2021. The production sites impacted represent approximately 17% of Canopy's enclosed Canadian footprint and 100% of its Canadian outdoor production footprint.
CEO David Klein commented, “As part of the end-to-end review of our operations that we outlined during our second-quarter earnings call, we have decided to close a number of our production facilities. These actions will be an important step towards achieving our targeted C$150 – C$200 million of cost savings and accelerating our path to profitability.”
Their streamlining of operations is endemic of the overinvestment in production facilities, mismatched with market demand, that has plagued Canadian operators. While there is still a significant amount of pain unfolding in the Canadian cannabis sector, the industry will mature, retail points of distribution are growing, and CGC is positioned to capture significant market share. Looking ahead, we expect more store openings to continue to have a positive impact on industry sales, and we now expect there will be over 1,250 stores in Canada and over 270 stores in Ontario by the end of this calendar year. Ontario looks especially hopeful as the Alcohol and Gaming Commission of Ontario (AGCO) has increased the pace of cannabis retail store authorizations to reach an objective of issuing 20 RSAs per week or upwards of 80 per month.
Besides this significant change in operations, it was announced that Canopy’s global beverage unit's head is departing less than a year after assuming the role. Andrew Rapsey joined Canopy in January and is leaving to return to working with Google. Former S. C. Johnson & Son Inc. executive Tara Rozalowsky will become the new global head of beverages. We remain skeptical of the cannabis-infused space and its opportunities. According to cannabis retail data provider HyFyre, approximately C$23 million of cannabis-infused drinks were sold in the first 11 months of 2020, representing ~1.5% of the total Canadian cannabis market. Canopy has also lost its leading market share position to Truss Beverages, the joint venture between Molson Coors (TAP) and Hexo Corp. (HEXO) – HyFyre's November data indicates Truss has 35% share of the cannabis-infused beverage space while Canopy has 33%.
Harking back to our original Cannabis Industry deck we published on the industry, the move from CGC and other players in the industry were "inevitable." The question now remains what inning of the contraction in supply are we in. We recently put CGC on the LONG bias list, as we think they are closer to having rationalized their assets the fastest. This move is positive; it is just getting them closer to having the right balance of capacity to be profitable.
Mexican Congress delays marijuana bill debate to 2021 (SAMA)
Publications in Mexico are reporting that the Mexican lower house has decided to delay the marijuana bill debate to its next legislative period, which begins in February 2021. The country’s Supreme Court had established a December 15th deadline to legalize recreational sales. The lower house is expected to ask the Supreme Court for yet another deadline extension. It's expected that the lower house will make meaningful modifications to the adult-use legalization bill, which would then require the bill to return to the Senate for another vote. The timeline for adult-use legalization is uncertain.
High Tide applies for uplisting to Nasdaq (HITIF)
High Tide Inc., the largest Canadian retailer of recreational cannabis measured by revenue, has applied to list on the Nasdaq. The company announced the move to enhance its investor profile as a part of its capital markets initiative to enhance shareholder value and to accelerate its business strategy of pursuing M&A opportunities within the US. High Tide already earns approximately 23% of its revenue in the US. It seeks to expand its footprint in the US in businesses that complement the company's business divisions that focus on CBD and accessories. On a TTM basis ending July 31, 2020, the company had revenues of C$67.84 million and gross profits of $25.51 million, suggesting TTM gross margins of 37.6%. For fiscal Q3, or the three months ended July 31, 2020, revenues increased 180% YoY to C$23.2 million. Gross profits grew YoY to C$9.23 million, and gross margins increased 300bps YoY to 40%. The company is profitable, reporting fiscal Q3 net income of C$4.27 million and adjusted EBITDA of C$3.96 million.
High Tide is a retail-focused cannabis company enhanced by the manufacturing and distribution of smoking accessories. The Canadian retailer has 67 current locations spanning Ontario, Alberta, Manitoba, and Saskatchewan. In November, the company completed its acquisition of fellow retailer Meta Growth. High Tide estimates that they will incur the annual cost and operational synergies of approximately CA$8M to CA$9M expected within 12 months of the transaction close. Growth plans include nearly doubling the current footprint to approximately 115 locations by the end of 2021, focusing on Ontario, Canada’s largest cannabis market.
