Intake disappointment from Canopy Growth delivers fresh pain in brutal stretches for cannabis stocks

Canopy Growth Corp. shares slipped more than 17% on Thursday, drawing competitors lower after the company posted weaker-than-expected fiscal second-quarter earnings in the troubled cannabis sector.

ETFMG Alternative Harvest ETF

MJ, -4.55%

was down 5.4%, while 26 of its 36 constituents traded lower, led by Canopy. The Horizons Marijuana Life Sciences ETF

HMMJ, -6.25%

was down 6.3%, with 44 of its 54 member shares lower.

S&P 500

SPX, -0.20%

and Dow Jones industrial averages

DJIA, -0.23%

was flat to slightly lower.

Smith Falls, Ontario-based Canopy

CGC, -16.43%

WEED, -16.73%

had a loss of $ 374.6 million ($ 282.4 million), or 1.08 dollars per share in the quarter, wider than the $ 330.6 million loss, or $ 1.52 per share, recorded in the prior year. Net income rose to $ 76.6 million from $ 23.3 million. The FactSet consensus was for a loss of just 41 cents per share and $ 100 million in revenue.

The company, the market leader for cannabis thanks to a $ 4 billion investment from beverage company Constellation Brands

STZ, -0.75% ,

said it incurred a restructuring charge of $ 32.7 million for returns, provisions and pricing primarily related to the softgel & oil portfolio. It also recorded a $ 15.9 million inventory to adjust pricing and packaging in detail and to fund a marketing and education strategy.

"The last two quarters have been challenging for the Canadian cannabis sector, as provinces have reduced purchases to lower inventory levels, store openings have fallen below expectations, and Cannabis 2.0 products are not yet on the market," said Mark Zekulin, Managing Director director, Canopy Growth.

Canopy expects these conditions to be a "short-term headwind in what is a whole new industry," he added. Canopy is at the end of a period of investment and expects to benefit from the coming year as the retail channel expands, he said.

Read: Canada asks cannabis companies to improve cross-disclosure disclosures

In a conference call with analysts, Zekulin said the addressable market is only about half of what was originally expected, while Ontario, home to 40% of Canada's population has one store per 600,000 people.

"This is and always has been a long-term game, and no company is better positioned to win it today than Canopy," he told analysts, according to a transcript from FactSet.

Read now: Cronos gets lower after kicking off cannabis revenue with loss of income

MKM analyst Bill Kirk pointed out in a Friday note that Canopy paid more in stock-based compensation in fiscal second quarter than it did generated in revenue.

"Separate, general and administrative costs ($ 87.9mn) were also greater than revenue for the period," Kirk said. "This disappointing quarter, and with Canopy production levels still far in excess of implementation, is becoming an industry problem that does not resolve quickly."

See now: Tilray sells five times as much pot, thanks to European efforts and acquisition of hemp

Other items the analyst noted from the report; Canopy's $ 76.6 million revenue was lower than the $ 90.5 million generated in the first quarter. The analyst also said that the fee for return and price adjustments is probably not a one-off attack, "as it reflects returns and new pricing architecture and package range going forward," the MKM analyst wrote. "We have long been concerned with Canopy's production level in terms of sales through and the quality / age of the inventory. We believe that the return and price adjustments, as well as a $ 15.9mn inventory over the period, show this problem."

as neutral.

Don't miss: Short sellers increase cannabis stocks even after summer sales

Green Organic Dutchman shares

TGODF, -7.23%

TGOD, -7.61%

fell 5.8%, even after the company said it had entered into agreements to raise $ 103 million in funding. The company said in October that it planned to cut costs after failing to find funding to complete construction of some of its facilities at an affordable price. Like Canopy, Green Organic Dutchman has struggled with the less than expected Canadian legal market.

The company now has a financing package composed of a sales leaseback of its Ancaster Energy Center; a construction loan term loan; and a convertible equity.

Cresco Labs

CL, -7.48%

fell 7% and CannaRoyalty Corp. slipped 9% after Cresco changed the terms of the acquisition of the former, which operates as Origin House. The companies agreed to merge last year in a deal valued at that time to around $ 820 million, but now after the steep sales in the sector this year, the value has more than halved and is now closer to $ 370 million, according to GMP. analyst Robert Fagan.

Fagan said the changed terms are positive and that the shareholders of Origin should be happy as the revised price is still a 30% premium over Wednesday's closing price.

“We consider, on balance, the changed terms of the Transaction as favorable to both companies, and despite a slightly longer closing timeline than previously anticipated, we see the increased visibility offered for this strategic acquisition as an overall positive read for Cresco Labs, ”he wrote.

Cresco Labs is not the first to revise the terms of the agreement according to the market routine. In October, MedMen Enterprises

MMNFF, + 0.45%

finalized a plan to buy PharmaCann LLC, a stock deal valued at $ 682 million when it was first announced in 2018. MedMen was down 0.5%.

Elsewhere in the sector, market leader Tilray Inc.

TLRY, -5.49%

was down 4%, Cronos

CRON, -4.55%

CRON, -5.52%

was down 6%, Aphria Inc.

APHA, -4.19%

APHA, -5.41%

traded 7% lower and Aurora Cannabis

ACB, -10.00%

ACB, -9.81%

slipped by 11%.

Shares in Aleafia Health

ALEAF, + 0.65%

ALEF, + 1.41%

was on the way 10% lower and Hexo's shares were down by 8%.

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