Canopy Growth Corp shares was up 17% Thursday and pulled rivals lower after the company posted weaker-than-expected earnings for its fiscal second quarter on the latest blow for the troubled cannabis sector.
The ETFMG Alternative Harvest ETF
dropped 5.4% with 26 of the 36 constituencies making it lower, Canopy led. Horizons Marijuana Life Sciences ETF
was down 6.3%, with 44 of the member's stocks being 54 lower.
The S&P 500
and Dow Jones Industrial Average
was flat slightly lower.
Smith Falls, Canopy based in Ontario
posted a loss of C $ 374.6 million ($ 282.4 million), or C $ 1.08 a share, in quarter, greater than the C $ 330.6 million loss, or C $ 1.52 a share, posted the year earlier. Net income rose to C $ 76.6 million from C $ 23.3 million. The FactSet consensus is for the loss of just 41 cents a share and revenue of C $ 100 million.
The company, head of the cannabis market thanks to a $ 4 billion investment from the beverage company Constellation
STZ, -0.89% ,
It said it would take a reorganization charge of C $ 32.7 million for returns, return provisions, and price allowances that were primarily associated with its softgel & oil portfolio. It also recorded an inventory charge of C $ 15.9 million to adjust retail price and packing and to finance marketing and education strategy.
"The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases at lower inventory levels, retail store openings have declined, and Cannabis products 2.0 is still coming to market, "said Mark Zekulin, CEO, Canopy Growth.
Canopy expects these conditions to be a "short-term headwind in what is a relatively new industry," he added. Canopy is at the end of an investment period and expects to benefit in the coming year as the retail channel expands, he said.
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In a conference call with analysts, Zekulin said the market could be direct is about half of what was originally expected, while Ontario, home to 40% of Canada's population, has one store per 600,000 people.
"It has been and always will be a long-term game and no company is in a better position to win it now than Canopy," he told analysts, according to a transcript from FactSet.
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MKM analyst Bill Kirk highlighted in a Friday note that Canopy paid more than its share-based dividend payout in the second quarter than it generated in revenue.
"Separate, General and Administration costs (C $ 87.9mn) are also greater than the income of the period," Kirk said. "The quarterly failure, and with Canopy's labor-producing levels greater than sales, is becoming an issue in the industry that cannot be resolved quickly."
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Other items noted by the analyst from the report; Canopy's revenue of C $ 76.6 million was lower than the C $ 90.5 million generated in the first quarter. The analyst also said the charge for returns and price adjustments is unlikely to be one-time, "as it reflects the returns and new pricing and package architecture going forward," wrote the MKM analyst. "We have long been concerned about Canopy's production levels in relation to sale-quality and the quality / age of inventory. We believe that returns and price adjustments, as well as a $ 15.9mn inventory charge over time, this issue shows. "
Analysts have rated the stock as neutral.
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The Green Organic Dutchman shares
fell 5.8%, even after the company said it had signed deals to raise up to $ 103 million in funding. The company said in October that it plans to cut costs after failing to seek funding to complete construction of some of its facilities at an affordable price. Like Canopy, the Green Organic Dutchman has struggled in the smaller-than-expected Canadian legal market.
The company already has a financing package consisting of a sale-leaseback by the Ancaster Energy Center; a construction mortgage loan sheet; and a revised sheet term equity
fell 7% and CannaRoyalty Corp. slipped 9% 9, after Cresco amended the terms of its acquisition of the former, doing business as Origin House. The companies agreed to merge last year with a deal valued at around $ 820 million, but now after sharp sales in the sector this year, the value has more than divided and is now close to $ 370 million, according to GMP analyst Robert Fagan said.
Fagan said the amended terms were generally positive and that Shareholders' shares should be happy as the revised price was still 30% premium at Wednesday's closing price.
"On the balance sheet, we considered the amended terms for the OH transaction as favorable for both companies and despite a longer closing time limit than we had anticipated, we looked at the increased visibility for this strategic acquisition as providing a generally positive read-through for Cresco Labs, "he wrote.
Cresco Labs was not the first to change the terms of the deal after the market route. In October, MedMen Enterprises
finalized a plan to buy PharmaCann LLC, a stock deal worth $ 682 million when it was first announced in 2018. MedMen was down 0.5%.
Elsewhere in the sector, market leader Tilray Inc.
dropped 4%, Cronos
dropped 6%, Aphria Inc.
is trading 7% lower and Aurora Cannabis
The ACB, -8.10%
Distribution of Aleafia Health
ALEF, + 1.41%
was 10% lower, and Hexo's stock was down 8%.
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