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Canopy Drops as Consumer Pot Preferences Shift Amid Covid

· Nov 5, 2021
The hit comes as consumer preferences shift to higher-end products, including high-THC items and marijuana that comes from a single strain of plant, Chief Executive Officer David Klein said in ...

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Canopy Growth Corp. reported a negative gross margin for its most recent quarter, showing just how far the cannabis company has to go to reach profitability. 

The hit comes as consumer preferences shift to higher-end products, including high-THC items and marijuana that comes from a single strain of plant, Chief Executive Officer David Klein said in a phone interview. The evolution in tastes is due in part to customers spending more time at dispensaries as Covid-19 lockdowns relax, he said.

“We’ve now focused our cultivation to be more premium and more agile so we don’t have those issues going forward,” Klein said. A prior trend toward value-priced offerings has continued, but price competition in that space has become tougher, prompting Canopy to pivot to mid-priced and premium offerings.

The big hit this quarter came from writing down C$87 million ($69.8 million) worth of cannabis inventory after demand was less than expected in Canada, Canopy’s biggest market. That resulted in gross margin of negative 54% for its fiscal second quarter, which ended Sept. 30, the company reported Friday.

The company recorded a loss of C$163 million in adjusted earnings before interest, taxes, depreciation and amortization. Analysts expected a loss of C$50.2 million, according to estimates compiled by Bloomberg.

Canada’s marijuana market has been disrupted by delays in distributing Covid-19 vaccines, which has slowed the reopening of the economy. Now that consumers are back in stores, Klein said they’ve become more sophisticated in their preferences. 

“As consumers experiment, rather than be more generic around sativa or indica types of plants, they want specifics strains with a lineage,” he said. The company is becoming more nimble so that it can quickly scale up its cultivation based on its vast genetic library and is also scouring the market for strains that might interest its consumers, and working with craft growers, Klein added.

Canopy also pushed out its goal to hit positive adjusted Ebitda, without giving an exact timeline. Klein said it’s been taking longer than expected to get the company’s CBD products onto U.S. store shelves. 

On a positive note, the brands it does have in the U.S. are doing well: Canopy’s Martha Stewart CBD line in the U.S. remains one of the fastest growing brands in the industry, the company said. The company also has several options on the U.S. market. 

Read more about its latest deal to buy pot-gummy maker if the U.S. legalizes

The shares tumbled 8.8% at 10:44 a.m. in New York. The stock had declined 46% this year through Thursday.