Canadian Cannabis Earnings Are A Bloodbath

MONTREAL — Weed may not be the product that sells itself after all. It’s turning out to be a bit tricky to make a profit on the green stuff — legally — in Canada these days.

Some of Canada’s largest cannabis manufacturers have reported dismal sales and weakening revenue this week, with Smiths Falls, Ont.-based Canopy Growth, the largest public cannabis company in the world, reporting a nearly $375-million loss for the second quarter of the fiscal year.

A worker collects cuttings from a marijuana plant at the Canopy Growth facility in Smiths Falls, Ont., Jan. 4, 2018. (Photo: Chris Wattie / Reuters)

Revenue for the period was just under $77 million, well short of analysts’ expectations of $107 million, and the company is no longer offering projections on future revenue.

Shares in the company fell 18 per cent after it released its earnings.

Though the numbers were a surprise, the downward trend was not. Investors have been experiencing disillusionment with Canada’s cannabis industry for at least the past half year, as revenues and profits rolled in much more slowly than hoped.

The North American Marijuana Index — a basket of cannabis stocks dominated by Canadian producers — has lost nearly two-thirds of its value since peaking this past spring.

The North American Marijuana Index has lost two-thirds of its value since peaking in the spring of 2019. (Photo: North American Marijuana Index)

One part of the problem is declining retail prices. Legalization has been pushing down prices in the illicit market for at least the past year, forcing legal producers to follow suit, reducing their bottom lines.

But industry insiders say the rollout of legal cannabis retail infrastructure has been too slow, especially in Ontario and Quebec.

The country’s cannabis market “is simply not living up to expectations,” said Mark Zekulin, Canopy’s interim CEO, in a conference call with analysts this week.

Zekulin took aim at Ontario’s slow rollout of privately-run cannabis stores, of which only 24 have been authorized to open. By comparison, there are roughly 300 stores open in Alberta, which has less than a third of Ontario’s population. 

“The inability of the Ontario government to license retail stores, right off the bat, has resulted in half of the expected market in Canada simply not existing,″ Zekulin said.

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Some estimates suggest that the legal cannabis industry hasn’t even managed to take half of the illicit industry’s business. Statistics Canada says the black market shrank by just 21 per cent in the first year of legal pot.

Ontario’s previous Liberal government set up a provincially-run cannabis retail monopoly, but the Progressive Conservative government of Doug Ford scaled back those plans last year and began offering licences to private retailers.

Zekulin said he is happy to see that Ontario is expanding the province’s lottery system for awarding pot retail licences so that there is an unlimited number available, limited only by market demand.

“This is a big deal but it cannot come soon enough,” he said.

Aurora Cannabis sees big sales drop

Canopy isn’t the only company disappointing investors these days. Shares in Aurora Cannabis, the second-largest weed grower in the world, tanked 10 per cent as of mid-day Friday after the company revealed recreational sales dropped by 33 per cent in the most recent quarter.

Aurora made $75.3 million in revenue in the most recent quarter, down sharply from $94.6 million one quarter earlier, and well below analysts’ expectations of $105 million.

Like some other producers, Aurora is cutting back on launching new production facilities, to get a better handle on its spending.

Analysts at Desjardins dropped their price target for the company’s shares to $6.50, from $14.00, but maintained its “buy” rating on the stock.

Retailers may not be spared financial problems, either. Cannabis NB, the provincially-run pot retailer in New Brunswick, announced this week it had stacked up a $12-million loss in its first six months. The province is now looking for a private contractor to take over the operation.

Meanwhile, the provincially-run Ontario Cannabis Store — which under the Conservative government has been scaled back from being the monopoly retailer to being a wholesale and online operation — is on track to lose $25 million this year, according to government projections, which see the OCS becoming profitable next year.

In the long run, most market observers expect the industry to get its act together.

“We still believe there remains tremendous growth in the sector,” Desjardins analysts John Chu and Amrit Sidhu wrote in a client note.

With a file from The Canadian Press

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