No one was happy with Canopy Growth's (NASDAQ:CGC) fiscal 2019 fourth-quarter results announced in June. The Canadian cannabis producer's big partner, Constellation Brands, expressed its unhappiness forthrightly in its Q1 conference call a week later. Soon thereafter, Canopy Growth founder and longtime CEO Bruce Linton received his walking papers.
Canopy reports its fiscal 2020 first-quarter results after the market closes on Wednesday. I suspect that investors will be at least somewhat happier this time around. Here's what you can expect with Canopy Growth's Q1 results.
1. Stronger sales growth
This prediction is pretty much a no-brainer. The main question is just how much stronger Canopy Growth's sales growth will be in Q1.
Canopy's overall revenue increased in the fourth quarter despite the company reporting lower quarter-over-quarter adult-use recreational marijuana sales and lower medical cannabis sales. The company's acquisition of German vaporizer device maker Storz & Bickel came to the rescue, generating enough additional sales to push Canopy's total revenue higher.
The big problem for Canopy in Q4 was supply constraints. For the most part, the crop that a cannabis producer harvests in one quarter is sold in the following quarter. Canopy's harvest was basically halved from the second quarter of fiscal 2019 to the third quarter due to retrofitting of its grow houses. This resulted in the company having less product to sell in fiscal Q4.
However, Canopy's Q4 harvest bounced back to close to the level it had in the second quarter. The company also projected in June that its fiscal 2020 Q1 harvest would be around 34,000 kilograms -- more than double its harvest in Q2. A small portion of this much larger crop could have been sold in the first quarter.
Analysts are looking for Canopy to report 17% quarter-over-quarter revenue growth on Wednesday. I wouldn't be surprised if the company beat that estimate.
2. Incrementally improving gross margin
Canopy Growth's gross margin of 16% in fiscal Q4 was atrocious. The company's issue was that it had a lot of cost with bringing production assets online but no revenue yet being generated by those assets.
Analysts think that Canopy will show incremental improvement in the first quarter with a gross margin of a little under 23%. I suspect that the company's actual margin will be in that ballpark.
Mike Lee, Canopy Growth's new CFO, said in June that it could take a few quarters for margins to bounce back after the company's retrofitting of its facilities. By the end of fiscal 2020 (which ends on March 31, 2020), Canopy should be back to a 40% or greater gross margin.
3. Another frustrating bottom line
Aphria announced a surprise profit in its latest quarterly results. But don't get your hopes up that Canopy will follow in Aphria's footsteps. I fully expect yet another bottom line that causes frustration for investors anxiously awaiting Canopy to show that it's on a path to profitability.
The relatively low gross margin will certainly be a major issue in holding back Canopy's bottom line. However, it's a safe bet that the company didn't cut back dramatically on its spending before Bruce Linton's departure in July.
Canopy Growth also had modifications to the warrants held by Constellation Brands as a result of the pending acquisition of Acreage Holdings. The company will likely record a significant charge in the first quarter related to those adjustments, making its bottom line look even worse than it would have otherwise.
Beyond the first quarter
Most of the problems that have plagued Canopy Growth appear to be only temporary in nature. I think that investors will find plenty of reasons to be optimistic about the company's long-term growth prospects in Canopy's first-quarter update.
In particular, Canopy should be in great shape to launch multiple new products later this year when the cannabis derivatives market opens. Canopy will almost certainly rank among the market leaders in cannabis-infused beverages, edibles, and vapes. Perhaps the biggest takeaway from Canopy Growth's Q1 results will be that even better days should lie ahead.