All eyes were on Canopy Growth's (CGC -2.11%) fourth-quarter fiscal 2020 results -- especially after Aurora Cannabis (ACB -0.92%) raised the stake with impressive revenue growth in its third quarter. But Canopy's results were not up to par, now making investors skeptical.
What went wrong?
Various things went wrong in Canopy's Q4 results. For starters, it missed analyst's revenue estimates by a huge margin. The bottom line losses were also higher than expected. Adjusted earnings before income, tax, depreciation, and amortization (EBITDA) losses for the quarter came in at 102 million Canadian dollars. Lower sales and rising operating expenses contributed to the losses.
Lower Canadian recreational marijuana sales called for a 13% fall in net revenue from Q3 2020. On the positive side, revenue for the quarter grew 15% year-over-year to CA$107.9 million and grew 76% for the full year.
Management said in the earnings call supply was disrupted as few complex products and production systems couldn't cope with the dynamic market demand and evolving consumer preferences.
Canopy's decision of shutting down 22 of its corporate-owned Tokyo Smoke and Tweed retail locations across Canada in mid-March is affecting revenue. Those stores have reopened now, but what I fear is Canopy might have missed out slightly on the surge in cannabis demand amid the pandemic. Canada already has a shortage of legal stores -- and closures, as demand is rolling, could affect sales.
Strategies to reduce cash burn
If a company misses consensus estimates and reports below-par results, you might overlook all that is happening behind-the-scenes. It might interest you to know that Canopy is working on reducing its cash burn and rightsizing its cost structure. For instance, it exited its operations in South Africa and Lesotho and closed one of it indoor facility in Yorkton, Canada -- as it is confident its production capacity in Canada is more than enough to meet the demand.
To move to an asset-light approach, it also ceased operations at its cultivation facility in Colombia and farming operations in New York -- instead, it will utilize its existing supply of hemp to produce hemp-derived CBD products for the U.S. market. The U.S. CBD space, as we know it, is a growing market once the Food and Drug Administration (FDA) approvals ease up.
These strategies can help Canopy reduce costs. After all, an asset-light approach is helping Cronos Group (CRON -1.49%) survive the pandemic with a strong balance sheet.
IMAGE SOURCE: GETTY IMAGES.
Transition year
Management said fiscal 2021 could be a transition year that disappointed investors. Under the leadership of David Klein, Canopy is expected to see a new organizational design and operational and supply chain productivity programs. I see a silver lining here! A new leadership team is expected to make organizational changes and it could be beneficial.
Look at how Aphria's (APHA) CEO Irwin Simon turned around the company and why I vouch for it as a strong cannabis pick for 2020. That said I know why it could have spooked investors who expected Canopy to be a market leader in the cannabis space by now. Despite the challenges, cannabis stocks did well last month, and if demand continues the long-term prospects could be fruitful. Shares of Canopy Growth, Aurora Cannabis, Aphria, and Cronos have gained 14%, 67%, 28%, and 16%, while the SPDR S&P 500 ETF (SPY -1.05%) has gained 7.6% in May.
Evolving but volatile industry
Note that marijuana is still an evolving yet volatile industry -- and ups and downs are evident. Canopy Growth still has strong financial support from Constellation Brands (STZ -0.70%), with an excellent innovative product portfolio.
It recently launched its next phase of cannabis 2.0 products that include vapes, chocolates, and cannabis-infused beverages. It just has to strategize well and fast to roll-out its new products -- that still have tremendous potential to capture the market, now that demand is strong. Management received good feedback for already launched cannabis-infused beverages and expects to capture a whole new customer base with these innovative products. Now, with research indicating that some cannabis strains can help fight COVID-19, the potential for marijuana sector is more than ever.
