What happened
Shares of Aphria (APHA) were down 12.9% as of 11:30 a.m. EDT Monday after the Canadian marijuana producer announced its fiscal 2019 third-quarter earnings results before the bell. Aphria reported revenue of 73.6 million Canadian dollars ($55.3 million), reflecting quarter-over-quarter growth of 240% and year-over-year growth of 617%.
With that kind of strong sales growth, why were investors disappointed? For one thing, Aphria posted a big net loss of CA$108.2 million ($81.3 million), or CA$0.43 per share ($0.32) after achieving a profit in the prior-year period. The company also badly missed analysts' consensus estimates for revenue of CA$85.2 million ($64 million) and earnings per share of CA$0.03 ($0.02).
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So what
Typically, a single quarter's failure to hit analysts' estimates isn't anything for investors to worry about. That's especially true when the reasons for the miss were temporary in nature. And that's the case for Aphria with its Q3 performance.
The company definitely wasn't operating at full throttle from a capacity standpoint in Q3, and it also struggled to update its packaging to meet the new requirements imposed by the Canadian government for adult-use recreational marijuana products. Both factors contributed to Aphria's revenue coming in lower than expected.
Aphria also boosted spending significantly to add production capacity and deal with those new packaging requirements. In addition, the company reported a non-cash impairment charge of CA$50 million ($37.6 million) related to its acquisition of LATAM Holdings.
However, it received a license for its Aphria One expansion in March, which more than tripled its annual production capacity. The company is implementing automation, and sourcing packaging from new suppliers, moves that should lead to reduced costs later this year.
Now what
Aphria is still in the early stages of its life cycle as a competitor in Canada's legal cannabis market and in the international medical cannabis business. The company's Q2 results only included a couple of weeks of adult-use recreational sales in Canada; Q3 was the first full quarter of unrestricted sales in this important market.
The company's added capacity should help it tremendously later this year. Aphria was one of only three producers to receive approval by the German government to cultivate cannabis in that country. So despite its disappointing Q3 results, it still appears to have significant upside potential over the long run.
