Cutting Costs Boosts Canopy Growth Stock

Canada-based Canopy Growth Corp. (NYSE: CGC) reported third-quarter fiscal 2020 results before markets opened Friday. The marijuana grower and distributor reported a net loss per share of C$0.35 (about US$0.26) on revenues of C$123.76 million (about US$93.6 million), net of excise taxes. In the same period a year ago, the company reported a net loss of C$0.22 on revenue of C$83.01 million. Analysts had estimated a net loss of C$0.49 (US$0.37) on sales of C$105.1 million (US$79.49 million). The Canadian company is also listed on the Toronto Stock Exchange under the ticker symbol WEED.

Gross margin rose year over year by 800 basis points to 34%, while adjusted EBITDA dropped by 23% to a loss of $91.7 million. Sequentially, adjusted EBITDA rose by 41%. Free cash flow was a negative $359.6 million, a 16% improvement sequentially but 20% worse year over year.

The company’s gross cash balance at the end of the quarter was $2.3 billion, down from $2.7 billion in the second quarter of 2020, reflecting the EBITDA loss, capital investments, and costs related to mergers and acquisitions.

Canopy Growth also lowered its share-based compensation from $92.9 million in the second quarter to $56.8 million. For the year to date, share-based compensation costs total $241.9 million, up from $194.7 million for the same period in the previous fiscal year.

CEO David Klein commented:

In Q3 we executed across Canada, in our international markets and in our strategic acquisitions to drive revenue growth. We have a lot of work to do. We are eager to capitalize on the opportunity to create an unassailable position through a tight focus on the consumer and on critical markets.

Mike Lee, the company’s chief financial officer, added:

We delivered significant gross improvement in the third quarter driven by stronger revenues and higher capacity utilization. Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization. We plan to take further steps to reduce our costs and right-size our business to ensure that we can generate a healthy margin profile and cash generation in the coming years.

Former CEO and company co-founder Bruce Linton promoted a policy of granting stock options equal in value to 1.5 times the annual salary of new employees, who were paid less than C$200,000 annually. Now that Linton is gone, the company is walking that policy back from the land of Oz.

CEO David Klein, who had been CFO at beer and wine maker Constellation Brands Inc. (NYSE: STZ), took over the top job in January. In August of 2018, Constellation paid $4 billion to raise its stake in Canopy Growth to 38%. That transaction included warrants that, if exercised, could put the company under Constellation’s control.

In calendar year 2019, Canopy Growth stock fell by almost 22%, slightly better than the 26% drop in shares of Cronos Group Inc. (NYSE: CRON) and about half as much as the loss posted by Aurora Cannabis Inc. (NYSE: ACB).

As of September 30, 2019, Canopy Growth no longer met the criteria for qualification as a foreign private issuer because (1) more than 50% of the outstanding voting securities are held by residents of the United States, and (2) the majority of Canopy Growth’s directors are United States citizens. As a result, beginning on April 1, the company will begin reporting results as a U.S. domestic company, using U.S. GAAP rules.

Canopy Growth did not provide guidance for the fourth fiscal quarter, but analysts have estimated a net loss per share of C$0.45 (US$0.34) on sales of C$130.77 million (US$98.9 million). For the full year, the consensus estimates call for a net loss per share of C$5.70 (US$4.31) and revenues of C$400.75 million (US$303.09 million).

The company’s stock has soared more than 14% in premarket trading Friday morning to $22.32, in a 52-week range of $13.81 to $52.74. The consensus price target on the stock is C$29.93 (US$22.64).

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