Cannabis Watch: Canopy Growth’s earnings disappointment delivers fresh pain in brutal stretch for cannabis stocks

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Canopy Growth Corp. shares slid more than 17% Thursday and pulled rivals lower after the company posted weaker-than-expected earnings for its fiscal second quarter in the latest blow for the troubled cannabis sector.

The ETFMG Alternative Harvest ETF MJ, -4.67%  was down 5.4% with 26 of its 36 constituents trading lower, led by Canopy. The Horizons Marijuana Life Sciences ETF HMMJ, -5.94%  was down 6.3%, with 44 of its 54 member stocks lower.

The S&P 500 SPX, -0.23%  and the Dow Jones Industrial Average DJIA, -0.23%  were flat to slightly lower.

Smith Falls, Ontario-based Canopy CGC, -16.92% WEED, -16.07%  posted a loss of C$374.6 million ($282.4 million), or C$1.08 a share, in the quarter, wider than the C$330.6 million loss, or C$1.52 a share, posted in the year-earlier period. Net revenue rose to C$76.6 million from C$23.3 million. The FactSet consensus was for a loss of just 41 cents a share and revenue of C$100 million.

The company, the cannabis market leader thanks to a $4 billion investment from drinks company Constellation Brands STZ, -0.52%, said it took a restructuring charge of C$32.7 million for returns, return provisions, and pricing allowances primarily related to its softgel & oil portfolio. It also recorded an inventory charge of C$15.9 million to adjust retail pricing and packaging and to fund a marketing and educational strategy.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” said Mark Zekulin, CEO, Canopy Growth.

Canopy is expecting those conditions to be a “short-term headwind in what is a brand-new industry,” he added. Canopy is at the end of a period of investment and expects to benefit in the coming year as the retail channel expands, he said.

Read: Canada tells cannabis companies to improve disclosures of cross-holdings

On a conference call with analysts, Zekulin said the addressable market is only about half of what was originally expected, while Ontario, home to 40% of Canada’s population, has one store per 600,000 people.

“This is and always has been a long-term game and there is no company better positioned to win it today than Canopy,” he told analysts, according to a transcript from FactSet.

Read now: Cronos turns lower after kicking off cannabis earnings with revenue miss

MKM analyst Bill Kirk highlighted in a Friday note that Canopy paid more in share-based compensation in its fiscal second quarter than it generated in revenue.

“Separately, General & Administrative costs (C$87.9mn) were also greater than period revenue,” said Kirk. “This disappointing quarter, and with Canopy production levels still far greater than sell-through, becomes an industry issue that does not resolve quickly.”

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Other items the analyst noted from the report; Canopy’s revenue of C$76.6 million was lower than the C$90.5 million generated in the first quarter. The analyst also said the charge for returns and pricing adjustments is likely not a one-time one, “as it reflects returns and new pricing architecture and package assortment going forward,” the MKM analyst wrote. “We have long been concerned about Canopy’s production levels relative to sell-through and the quality/age of inventory. We believe the returns and pricing adjustments, as well as a C$15.9mn inventory charge in the period, demonstrate this issue.”

The analyst rates the stock as neutral.

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Green Organic Dutchman shares TGODF, -5.44% TGOD, -6.52%  fell 5.8%, even after the company said it has signed deals to raise up to C$103 million in funding. The company said in October it was planning to cut costs after failing to find funding to complete the construction of some of its facilities at an affordable price. Like Canopy, Green Organic Dutchman has struggled with the smaller-than-expected Canadian legal market.

The company now has a financing package composed of a sale-leaseback of its Ancaster Energy Centre; a construction mortgage loan term sheet; and a convertible equity term sheet.

Cresco Labs CL, -7.35% fell 7% and CannaRoyalty Corp. slid 9%, after Cresco amended the terms of its takeover of the former, which does business as Origin House. The companies agreed to merge last year in a deal valued at the time at about $820 million, but now after the steep selloff in the sector this year, the value has more than halved and is now closer to $370 million, according to GMP analyst Robert Fagan.

Fagan said the amended terms are an overall positive and that Origin shareholders should be happy as the revised price is still a 30% premium over Wednesday’s closing price.

“On balance, we consider the amended terms for the OH transaction as favorable for both companies and despite a slightly longer closing timeline than previously expected, we view the increased visibility offered for this strategic acquisition as providing an overall positive read-through for Cresco Labs,” he wrote.

Cresco Labs isn’t the first to revise deal terms after the market rout. In October, MedMen Enterprises MMNFF, +0.46%  terminated a plan to buy PharmaCann LLC, a stock deal that was valued at $682 million when it was first announced in 2018. MedMen was down 0.5%.

Elsewhere in the sector, market leader Tilray Inc. TLRY, -6.19%  was down 4%, Cronos CRON, -5.65% CRON, -5.20%  was down 6%, Aphria Inc. APHA, -5.49% APHA, -5.41%  was trading 7% lower and Aurora Cannabis ACB, -10.14% ACB, -9.49%  was sliding by 11%.

Aleafia Health shares ALEAF, +2.16% ALEF, +2.82%  were headed 10% lower, and Hexo’s stock was down 8%.

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