What happened
Shares of Canopy Growth Corporation (CGC -0.66%) fell 12.1% during the month of August, according to data from S&P Global Market Intelligence. The Canadian cannabis company reported earnings during the month, which wasn't enough to sustain the company's late July surge, when it announced its direct-to-consumer e-commerce shop in the U.S. Continued struggles in the brick-and-mortar retail business in Canada revealed themselves in relatively low growth numbers and a worrisome decline in gross margins.
Image source: Getty Images.
So what
Part of the reason for the August decline was Canopy stock's strong performance at the end of July, after the launch of ShopCanopy.com, its new U.S.-based e-commerce site, on July 27. Given that cannabis is still illegal in the U.S., the site only features Canopy's hemp-derived CBD products; most notably, its new Martha Stewart CBD product line.
On the May conference call from the previous quarter, new CEO David Klein, who came from Canopy investor Constellation Brands (STZ -0.04%), noted that the U.S. CBD market is forecast to reach $10 billion in the next few years, so the company's aggressive moves in e-commerce with recognized celebrities backing its brands got investors enthusiastic.
That enthusiasm fell back to earth, however, when the company reported earnings in early August. Revenue grew 22%, somewhat underwhelming for a company in a high-growth industry. More concerning is that adjusted gross margin fell to just 7% from 20% in the year-ago quarter. According to Klein, the reason for the low margin is that Canopy has high fixed costs in anticipation of more growth -- enough to support $2.5 billion to $3 billion in revenue versus just CA$110 million in the quarter.
Now what
With continuing losses from its heavy infrastructure investments and demand still a question mark, Canopy's ample cash hoard has decreased by about CA$1.1 billion, from CA$3.1 billion to CA$2 billion in just one year. The company continues to struggle with demand in Canada, due to both regulatory delays for retail rollouts and COVID-19.
In addition, the cheaper black market continues to be a problem. Canopy has been able to lower its EBITDA and cash burn losses by cutting selling, general, and administrative expenses, but that can only go so far.
As such, I would still steer clear of Canopy -- or any other Canadian cannabis producer, for that matter -- until the various problems around Canadian retail distribution, black market sales, and U.S. legalization are clarified further, or until these companies show evidence they can turn a profit. Until then, the entire cannabis industry remains a no-go for me, and should be for all but the most speculative investors.
