Canopy Growth Shares Tank After Losses Widen By Over 1000% In Q1 2025
Canopy Growth (TSX: WEED) unveiled its financial results for the first quarter of fiscal year 2025, offering a comprehensive look into its ongoing efforts to navigate a challenging market. For the quarter ended June 30, 2024, the firm reported a net loss of $127.14 million, or $1.60 per share, significantly widening by around 1,122% from the $41.86 million, or $0.69 per share, loss reported in the same period the previous year.
The adjusted loss per share was $1.63, far exceeding the FactSet consensus estimate of a loss of $0.46 per share. Despite these losses, Canopy Growth managed to slightly outperform expectations on its adjusted core loss, reporting a loss of $5.3 million compared to the average analyst estimate of $7.1 million, according to LSEG data.
The decline can be attributed to the huge other expense line item in the financials, amounting to $93.9 million.
Revenue also fell short of expectations. Canopy reported net revenue of $66.2 million, a 13% decline from the $76.26 million recorded in the same quarter last year. This figure also missed the analyst estimate of $70.1 million. The decline in revenue was primarily attributed to the company’s exit from certain non-core businesses, as well as ongoing pressures in its core Canadian market.
David Klein, Canopy Growth’s CEO, noted that the company’s focus on exiting low-margin businesses and reducing operating costs was a deliberate strategy to streamline operations and refocus on higher-margin opportunities.
“The fundamentals of our business continue to strengthen,” Klein stated, emphasizing the company’s shift toward profitability. He highlighted that Canopy’s efforts to reduce its cost structure are beginning to yield tangible results, with gross margins improving and operating losses narrowing.
The firm’s shares have dropped more than 9% following the news.
Cost-cutting measures
One of the most significant developments this quarter was the firm’s success in reducing its operating expenses and improving its gross margins. The company reported a 31% reduction in the cost of goods sold (COGS) and a 24% decrease in selling, general, and administrative (SG&A) expenses. These cost-cutting measures played a crucial role in the company’s ability to narrow its operating loss from continuing operations to $29 million, down 47% from $54.7 million in the same period last year.
Canopy Growth’s gross profit saw a substantial 67% year-over-year increase, reaching $23 million. This improvement was largely driven by the company’s strategic focus on higher-margin medical cannabis products and the ongoing benefits of its cost reduction initiatives. The gross margin for the quarter stood at 35%, up from 18% a year ago.
The consolidated adjusted EBITDA loss narrowed to $5 million in Q1 marking a 77% improvement compared to last year, primarily due to the cost reduction measures already put in place.
Amidst the challenges in its home market, Canopy Growth has been strategically positioning itself for growth in the U.S., where the potential for federal legalization of cannabis represents a significant opportunity.
Pursuing US market
During the quarter, Canopy USA, the company’s American subsidiary, completed the acquisition of approximately 75% of Jetty Extracts and two of three Wana entities, with the full acquisition of Wana expected by the end of summer 2024, pending regulatory approval. Jetty, a leading player in the solventless vape market, maintained its number one share of the national market in this category. Wana Brands, known for its edibles, launched products in Connecticut and New York during the quarter, further strengthening Canopy’s position in key U.S. markets.
Canopy Growth’s push into the U.S. also includes its acquisition of cannabis-dispensary operator Acreage Holdings. The company has exercised its option to acquire all outstanding shares of Acreage, with the transaction expected to close in the first half of calendar year 2025.
“With our core businesses delivering adjusted EBITDA profitability and primed for growth, paired with Canopy USA’s positioning to benefit from near-term market opportunities in the U.S., Canopy Growth is advancing rapidly,” Klein stated.
Canadian market challenges
While Canopy Growth is placing significant bets on the U.S. market, it continues to grapple with challenges in Canada, where the cannabis market has become increasingly saturated and competitive. The company’s Canadian cannabis net revenue declined by 6% year-over-year to $37.7 million, reflecting the ongoing pressure on adult-use sales. The 22% decline in adult-use sales highlights the difficulties Canopy faces in maintaining market share in a crowded and price-sensitive environment.
However, the firm’s Canadian medical cannabis business provided a rare bright spot, with revenue increasing by 20% to $18.8 million. This growth was driven by strong demand for high-margin Spectrum Therapeutics products, as well as an expanded product offering through Canopy’s online platform. The company’s focus on medical cannabis aligns with its broader strategy of targeting higher-margin segments where it can achieve more sustainable profitability.
In addition to its domestic challenges, Canopy’s performance in international markets also faced headwinds. International cannabis revenue fell slightly by 1% year-over-year, primarily due to regulatory changes in Australia and softer sales in other markets. However, Canopy maintained a top-four market share position in Germany’s medical cannabis market, a key area of focus as the company seeks to expand its European footprint.
Outlook
Looking ahead, Canopy Growth remains cautiously optimistic about its prospects for the remainder of the fiscal year. The company expects to achieve positive adjusted EBITDA on a consolidated basis in the second half of fiscal 2025, driven by continued cost reductions, improvements in gross margins, and growth in key segments such as medical cannabis and the U.S. market.
Judy Hong, Canopy Growth’s CFO, noted that the company’s strategic initiatives have led to notable improvements in gross margins and adjusted EBITDA. “We are pleased that all of our business units delivered positive Adjusted EBITDA during Q1 Fiscal 2025 and expect to achieve positive Adjusted EBITDA on a consolidated basis in the second half of the fiscal year,” she said.
Canopy Growth last traded at $9.49 on the TSX.
Information for this briefing was found via Sedar, The Globe And Mail, Market Watch, and the sources and companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
