The entire cannabis industry has been under pressure this last year and that is no secret. Companies once bent on explosive growth are now scrambling for cash in an effort to shore up their balance sheets. No few of them are closing in on bankruptcy. Aurora (ACB
) just released a weak report that included billions in writedowns and a shakeup in the C-Suite
that put this reality in sharp focus; it's time to get serious about the business or disappear.
The news is not all bad, though. Canopy Growth Corporation (CGC) began to make its transformation months before Aurora and those efforts are paying off. The Q3 results came in much better than expected despite ongoing headwinds in the Canadian market and point to profitability within the next 12 to 24 months. The most notable efforts include tapping Constellation Brands (STZ) CFO David Klein for the role of CEO and renegotiated contracts with processing companies that reflect the realities of Canada’s market.
Revenue Beats, Cash Burn Is Slowing, Loss Narrows
Canopy Growth Corporation’s earnings report is surprisingly good in many ways. There is no single metric that did not beat expectations. Topline growth came in at 49% YOY and well above the 18% to 20% predicted by the analysts.
Revenue growth was seen across the company’s operating segments with notable strength in recreational sales. B2B recreational sales rose 8.0% on a sequential basis due to the opening of 120 new stores and higher sales of premium flowers and pre-rolled joints. B2C sales rose 16% with an 11% rise in same-store comp sales.
GAAP earnings also came in well above expectations as revenue and margins improved. GAAP EPS of -C$0.35 beat by C$0.14 with margins rising to 34%. Operating expenses fell -14%, helping to drive the beat, bringing the total cash-burn down to $548.3 million, a decline of -86%.
The company still has work to do but these figures are encouraging. While Canopy execs work to bring the company’s metrics in line, Canada’s market is slowing expanding. Eventually, the two trends will intersect and Canopy Growth will be able to generate profits.
Plenty of Cash On Hand
One of the problems facing the cannabis industry is cash and cash-burn but Canopy doesn’t share it. Canopy Growth reports over $2.3 billion of cash on hand, enough to keep the company going for at least five quarters assuming costs don’t continue to fall. The 3rd quarter report cites capital investment and M&A as significant drives of cash burn and we already know M&A activity has slowed.
"We delivered a significant gross improvement in the third quarter driven by stronger revenues and higher capacity utilization. Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization," said Mike Lee, EVP & CFO. "We plan to take further steps to reduce our costs and right-size our business to ensure that we can generate a healthy margin profile and cash generation in the coming years."
Canopy Growth Corporation, Taking The Lead In Canadian Cannabis
With a market share of 22% and that growing, Canopy Growth Corporation is emerging as a leader in the Canadian market. The company not only commands the lion share of sales it is leading the fight to tighten cost controls and reign in spending while still driving growth. Today’s news has the entire cannabis industry moving higher, the Alternative Harvest ETF (MJ) is up over 3.0%, but this industry is not out of the woods yet.
Canopy Growth Corporation’s 17% gain in share price looks good on paper but the chart is less than spectacular. Today’s gains bring the price of CGC up to a significant line of resistance that could easily keep the market in check. This resistance target is consistent with a low set last year that has provided resistance ever since. The indicators suggest upward price movement is likely but momentum is still bearish so caution is due until the market breaks back above $25. Until then I expect to see price action move sideways within the range of $25 to $17.50.