David George-Cosh

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Canopy Growth Corp. reported fiscal first-quarter results that beat analyst expectations, despite suffering a decline in recreational cannabis sales in Canada due to COVID-19 and increased competition. 

Canopy, the world's largest cannabis company by market valuation, said that its medical cannabis business outperformed in its three-month period ending June 30, while also seeing revenue gains from its German pharmaceutical subsidiary and its topical cream products.  

Meanwhile, the company's recreational cannabis business saw an 11-per-cent decline in revenue to $44.2 million as COVID-19 impacted Canopy's retail operations across the country. Meanwhile, increased competition led to a decline in dried flower market share, the company said. 

The Smiths Falls, Ont.-based company reported first-quarter revenue of $110.4 million, up 22 per cent from the same quarter a year earlier, while posting a loss of $128.3 million, a 34 per cent improvement from last year. 

Analysts expected Canopy to report $98.1 million in revenue in the quarter while posting a loss of $151.3 million, according to Bloomberg.

In a phone interview with BNN Bloomberg, David Klein, Canopy's chief executive officer, described the past year as being rife with change as the company pursued profitability. 

"We're going through a process where we're re-thinking everything," Klein said. "We're thinking how we interact with the consumer, how our products leave our facilities and the kinds of products we produce." 

Canopy's better-than-expected results end a recent streak of disappointing quarters that were overshadowed by the company's recent moves to restructure its operations under the guidance of Klein, who formally took on the CEO role in January. Since then, the company shed hundreds of staff over the past several months while announcing it would shut down cultivation operations in Canada and the U.S. to contain spiraling costs. 

Canopy said Monday it reduced its staff count by about 18 per cent from the beginning of the year. The company said it had 4,434 total employees at the end of March, according to recent filings. 

Initial reports from Ontario's cannabis wholesaler showed Canopy's share of the recreational pot market has faced pressure from its peers such as Aphria Inc. and Aurora Cannabis Inc. Analysts estimate Canopy has about 15 per cent of the Canadian recreational pot market, down from about 20 per cent from the beginning of the year. 

Canopy executives also shared their plans during a presentation to investors in June to trim the number of products it sells to the recreational market by one-third in order to avoid confusing consumers with too many offerings. They also said that sales were hurt from early April to late May by the COVID-19 pandemic preventing customers from shopping in retail stores as well as lower purchase orders from provincial wholesalers. 

Klein said he's focused on recovering lost market share by ensuring the company's products aren't out of stock and are of high quality, while not overproducing more cannabis in a market already swamped with existing inventories. 

"We're doing a good job on those things but it didn't manifest itself in this quarter," he said. 

Canopy also appears to be in the early days of a broad-based U.S. strategy aimed at securing a top spot in the burgeoning CBD market. The company recently signed NFL all-star Patrick Mahomes to an endorsement deal for its Biosteel sports nutrition subsidiary, launched an online sales portal for its U.S. CBD brand, and restructured its deal to acquire U.S. pot producer Acreage Holdings Inc. once it is federally permissible to do so. 

Klein said the company is moving "as quickly as we can" to expand its U.S. operations under the limitations of only being able to compete in the CBD space. The launch of Canopy's CBD partnership with lifestyle icon Martha Stewart is expected to happen next month, he added.  

Despite its various woes, Canopy continues to cast an influential shadow over the cannabis sector. The company maintains the largest cash position in the sector with about $2 billion on its balance sheet, unchanged from the prior quarter. 

"While we are concerned with the estimates for Canopy, we do believe the company’s balance sheet strength warrants a premium in the current environment, especially if further Canadian [licensed producers] go bankrupt," said RBC Capital Markets analyst Douglas Miehm, in a report to clients last month.