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Canada’s Slow Retail Rollout Heightens Challenges For Canopy Growth, Other Key Players

November 19, 2019

Numerous cannabis companies, including Canopy Growth, Aurora, Tilray, and Cronos, among others, reported earnings in recent days for the quarter ended September 30. Across the board, the conditions were described as challenging, with the Canadian market suffering from oversupply and a protracted retail rollout. Several companies fell short, not only on their predictions but also on their revenues for the preceding quarter. Still others that managed to eke out growth found costs rising in tandem.

Canopy Growth, for example, posted quarterly net revenue of C$76.6 million ($58m). While better than any of its competitors, the figure is a substantial step down from the previous quarter, during which net revenue totaled C$90.5 million ($68.5m). Canopy said medical cannabis gross revenue increased 37% quarter-to-quarter to C$32.2 million ($24.4m), with 72% growth in international business, mainly attributable to its acquisition of Germany-based C3 Cannabinoid Compound Company last May.

Canopy continues to rack up significant operating expenses, which ballooned to C$265.8 million ($201.2m) in the three months through September. “Retail store openings have fallen short of expectations and Cannabis 2.0 products are yet to come to market,” Canopy CEO Mark Zekulin explained, calling the conditions “a short-term headwind in what is a brand-new industry.”

Part of the problem hindering Canopy and other Canadian companies is oversupply. Canopy flagged storage costs of excess inventory and inventory repricing owing to “risk of oversupply of certain oil and softgel formats due, in part, to underdeveloped retail markets in several provinces … particularly Ontario.”

Aurora took a similar line, blaming “the slow pace of retail store licensing” for a 24% sequential decline in net revenue to C$75.2 million ($56.9m) for the quarter ended in September. Medical sales were stable at C$30.5 million ($23.1m), but recreational sales dropped 33% to C$30 million ($22.7m), down from C$44.9 million ($34m) three months earlier. Aurora’s adjusted loss totaled C$39.7 million ($30.1m). On the brighter side, the company announced that it had reduced the cost of producing a gram of cannabis to C$0.85 ($0.64). Breaking the one-dollar threshold in Canada has been a major goal for Aurora and other producers.

Aurora is scaling back some capacity investments as cost-saving measure, including deferment of final construction on the Aurora Sun facility in Alberta to save C$110 million ($83.3m). Aurora Sun was planned to be 1.6 million square feet in size, but will instead begin operation next year using just 238,000 square feet. In announcing its results, Aurora also noted that it’s exploring opportunities to enter the U.S. market.

Elsewhere, Tilray had a solid quarter, as revenue grew to C$51.1 million ($38.7m), up from C$45.9 million ($34.8m) in the previous quarter. C$15.8 million ($12m) of revenue came from recreational sales. Tilray’s EBITDA loss grew slightly to C$23.5 million ($17.8m), attributed to growth initiatives including the expansion of international teams.

Cronos, meanwhile, continues to operate from a much smaller base. It generated C$12.7 million ($9.6m) in the quarter, up from C$10.2 million ($7.7m) three months earlier, selling 3,142 kg of cannabis on an EBITDA loss of C$23.9 million ($18.1m). Cronos, part-owned by Ste. Michelle Wine Estates parent Altria, has adult-use brands including Cove and Spinach. Cronos also recently acquired the Lord Jones CBD brand from Redwood Holding in the U.S.—Danny Sullivan

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