On Dec. 9, Canopy Growth (CGC 3.67%) announced its new CEO: David Klein. Currently an executive vice president and the chief financial officer of Constellation Brands (STZ +1.89%), Klein will assume the new role with Canopy Growth on Jan. 14, 2020. Canopy Growth has been on the search for a new leader since the company let go of co-CEO Bruce Linton in July, after the company continued to produce disappointing financial results. The company's existing CEO, Mark Zekulin, who was appointed after Linton's firing, is expected to step down now that Klein has been hired.
With a new CEO in place, Canopy Growth has the opportunity to start fresh and focus on improving its bottom line. However, that doesn't mean the company is out of the woods, as Klein is going to be facing three very significant challenges ahead.
1. Cutting costs and improving cash flow
The good news for Canopy Growth's investors is that Klein has a strong financial background. He's been in a financial leadership position with Constellation for more than a decade, serving as CFO of Constellation Europe in 2007 and in his current role since 2015.
Constellation has grown its profits over the years, with the company reporting $3.5 billion in profit in fiscal 2019 -- up from the $1.1 billion Constellation earned in fiscal 2016. It's been a much different story for Canopy Growth, which has reported a loss over the trailing 12 months totaling $1.9 billion Canadian dollars. Free cash flow during that time has also been a negative CA$1.5 billion.
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Klein has his work cut out for him as many cannabis companies struggle to stay out of the red. With the new industry's honeymoon phase long over, a lack of profitability has been in the spotlight. And as competition continues to grow, getting to breakeven and generating positive free cash flow isn't going to get any easier for Canopy Growth, especially since the black market still has a strong grip on the industry in Canada. Taxes, high pot prices, supply constraints, and lots of red tape have driven many consumers to buy marijuana from unlicensed dealers instead of going the legal route.
2. Continuing to find ways to grow
An added wrinkle for Klein is that his new job won't be just about finding ways to cut costs and slash expenses wherever he can. Growth is still going to be an important consideration for the company to stay relevant and draw in investors. Under Linton, Canopy Growth was very aggressive in expanding into different product lines and new parts of the world. The company announced earlier this year that it would be building a production facility in New York to get in on the hemp craze and sell hemp-based cannabidiol (CBD) products in the U.S.
Klein's experience in the beverage industry will help Canopy enter new segments of the market, including cannabis-infused beverages. However, with tight restrictions in the industry relating to marketing and advertising, Klein will face new challenges in attempting to grow the business in Canada.
3. Ensuring that Canopy Growth remains a top pot stock
There has been more competition than ever in the cannabis industry in recent years, and there are many marijuana stocks for investors to choose from. Canopy Growth's position atop the industry is in serious doubt. Rival Aphria posted a profit in two consecutive quarters, and U.S.-based Curaleaf Holdings has become a significant force as well, growing its market share in the lucrative U.S. market with sales of $178 million over the past 12 months.
Aphria has been better at keeping a strong bottom line, and Curaleaf has arguably stronger growth opportunities ahead as marijuana legalization continues to expand in the U.S. -- pot is now legal for recreational use in 11 states, with more likely on the way.
Canopy Growth's stock has fallen around 50% over the past six months, so it needs to turn things around in a hurry. However, if it's not able to make significant progress toward profitability and in growing its business, it's going to be difficult for it to remain a top stock in the industry and for investors to justify buying shares of the company, especially with more options available. And without a stronger share price, that could make raising cash more challenging for Canopy Growth in the future.
Key takeaway for investors
Canopy Growth made a smart move in putting someone with a strong background like Klein in place to lead the company moving forward. However, the cannabis industry has proven to be a challenging one, and it's going to be more difficult to navigate than the beverage industry, which is where the bulk of Klein's experience comes from.
It's still going to be a long, difficult road for Canopy, and investors shouldn't expect that having a new CEO in place will fix all of its problems -- especially not in the short term.
