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A sign featuring Canopy Growth Corporation's logo is pictured at their facility in Smiths Falls, Ontario, Canada. File photo: REUTERS/CHRIS WATTIE
A sign featuring Canopy Growth Corporation's logo is pictured at their facility in Smiths Falls, Ontario, Canada. File photo: REUTERS/CHRIS WATTIE

Canopy Growth 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, CEO 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 towards 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$87m ($69.8m) 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 September 30, the company reported Friday.

The company recorded a loss of C$163m in adjusted earnings before interest, taxes, depreciation and amortisation. Analysts expected a loss of C$50.2m, 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 US store shelves. 

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

The shares tumbled 8.8% at 10.44am in New York. The stock had declined 46% in 2021 to the end of Thursday. 

Bloomberg News. More stories like this are available on bloomberg.com

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