Canopy Growth (WEED-T) Klein hoping for stability in Canada's cannabis market following disappointing Q2
Canopy Growth Corp. feels like a company caught between a rock and a hard place.
On one side, it's trying to keep up with the fast-moving Canadian cannabis industry and minimize eroding market share as smaller and more nimble pot producers win more consumer dollars. On the other, it is trying to keep a close watch on the U.S. where it has a burgeoning CBD business while placing its flag with a handful of profitable producers that it can't wholly acquire due to the still-federal illegality of the drug.
The result has been a fickle group of investors which punished Canopy's stock, sending its shares down to a new four-year-low following second-quarter results that missed analyst expectations on both revenue and earnings.
Despite all the bad news, Canopy's Chief Executive Officer David Klein still thinks there's a reason for investors to remain bullish on the company and the cannabis industry as a whole.
"Progress in this sort of industry isn't going to be in a straight line," he said in an interview when asked what his message to his shareholders following Canopy's Q2 results. "So, I think that this is a very good entry point for investors, but you know, they have to be prepared for volatility in investing in a cannabis company at this point."
Klein said Canopy has plans to rebound in Canada's dried flower market by improving the quality of those products through better genetics and hang-drying plants before they're processed. They're also looking to turn products to market much faster and will work with third-party producers to quickly address consumer quality issues, he said.
"As a bigger company, what we have to do is we have to have the agility in our production environment in order to respond to those trends," he said. "You can't see what's happening in the market and then try to catch up. You need to be a bit ahead of that."
It remains to be seen if investors will be impressed by Canopy's moves in the flower segment. BMO Capital Markets Analyst Tamy Chen, who cut her target price on Canopy to $15 from $25 on Friday, questions why the company continues to struggle to meet customer preferences.
"We are left feeling uneasy that after almost two years at the helm, this management team is still being out-competed by smaller [licenced producers]," Chen said.
Despite Canopy's second quarter, the company still has $2 billion in cash to spend, although it burned about $300 million in the last quarter. Those funds don't appear to be earmarked for any further Canadian acquisitions with M&A activity focused on the U.S. market, for now, Klein noted.
However, Klein has stepped back from predicting when the U.S. will legalize cannabis, joking that "anything I say will definitely just be wrong". In the meantime, he hopes investors will focus on the work the company is doing to properly enter the U.S. cannabis market the moment the laws are changed. The company has a sizable CBD presence through its Martha Stewart CBD gummies business, vapes, and Quatreau drinks, but it also is set to acquire Acreage Holdings, a profitable U.S. multi-state operator, once legalization occurs, as well as edibles-maker Wana Brands.
"I do remain optimistic that it's going to happen sooner than later," Klein said. "But given the current logjam, where we can't even get an infrastructure bill that 70 per cent of Americans favour through the Senate, I just don't know how to call timing."
Klein also expects Canopy's chain of Tokyo Smoke stores will remain open over the next year despite a report by Chen that predicts some outlets will close up shop due to a concentrated retail environment. Access to the retail market is key for companies like Canopy to better understand what the customer wants.
"The difficulty in the market that we're in in Canada is consumer preferences are changing, but then also retailers' motivations and preferences are changing. As they're trying to learn how to compete with each other, they're continually moving their assortment, which affects our demand," Klein said.
"It just makes it hard to do business. But we believe that's going to settle down at some point and when it does, I think you'll see a lot more stability out of Canopy and from the other [licenced producers] as well."
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