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Canopy Growth earnings: Market share falls in Q1, profit hopes rest on U.S. CBD

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Canopy Growth (WEED.TO)(CGC) continues to see profit on the horizon this fiscal year as the pot giant's sales fell short of analyst expectations in its latest quarter. The Smiths Falls, Ont.-based company blames "internal supply and execution challenges" for missed revenue opportunities, as well as a drop in its share of Canada's recreational market.

Chief executive officer David Klein hopes to boost Canopy's non-medical sales in Canada by improving the quality of its cannabis while rolling out a host of new products. They're set to include new gummies and vapes, as well as a broader line of pot-infused drinks. However, Klein currently sees the company's CBD business in the United States, including Martha Stewart's product line, as one of the most critical near-term profit drivers.

"I think we have a pretty solid path that's based upon the growth of our U.S. CBD business, which is doing really well at this point," he told Yahoo Finance Canada in an interview on Friday.

"With Martha Stewart, we're now in over 4,000 brick-and-mortar stores, versus last year, when they were only available online. That, along with continued recovery in Canada, helps us get to profitability."

Klein continues to expect U.S. federal legalization of cannabis in 2022, which will allow Canopy to enter the American market with THC-based products through its deals with Acreage Holdings (ACRGF) and TerrAscend (TER.CN).

However, Cantor Fitzgerald analyst Pablo Zuanic expressed doubts about the company's U.S.-centric growth plans in a note to clients on Friday.

"Canopy Growth still has to prove that it has the skills and capabilities to excel in the U.S. and overseas," he wrote. "Given mixed results in Canada so far, this is not obvious to us yet."

Canopy reported $136 million in revenue for the quarter ended June 30, up 23 per cent year-over-year, but down about eight per cent from the previous three-month period. The company reported an adjusted earnings with interest, taxes, depreciation, and amortization (EBITDA) loss of $64 million, compared to a loss of $93 million in the same period last year. Analysts polled by Bloomberg expected revenue of $149.2 million, and an adjusted EBITDA loss of $66.9 million. Canopy continues to target positive adjusted EBITDA by the end of fiscal 2022.

"In Q1, we know we had missed revenue opportunities on [order] fill rates. We know that we had missed revenue opportunities on high-THC or strain specific supply. And we know that we had missed revenue opportunities on [the] timing of activation in the U.S. on certain products," chief financial officer Mike Lee told analysts on a post-earnings conference call. "It all comes down to execution . . . that is the largest driver behind our share loss in Canada."

Net income for the quarter was $392.4 million, compared to a $108.5 million loss in Q1 2021, thanks to more than $600 million in non-cash fair value changes in some of its holdings.

Canopy claims to lead the Canadian recreational pot market with a 15.2 per cent share of sales, according to its internal proprietary data.

The company booked $93 million in total cannabis revenue in its latest quarter, up 17 per cent year-over-year. The company says sales in its "other products" category, which includes the Storz & Bickel vaporizer brand and the This Works skincare line, topped $43 million, a 39 per cent jump over this period last year.

Canopy plans to leverage its recent acquisitions, Ace Valley and Supreme Cannabis, as it rolls out a host of new products for the recreational market. The company said its latest edibles will feature "gourmand flavours, higher THC levels, and advanced 'human effects.'" Canopy also looks to double the number of pot-infused drinks it offers, and introduce new premium vape products, including live resin cartridges.

The plan for new products comes as Canopy parts ways with Houseplant, the company's venture with pot-loving comedian Seth Rogen featuring a popular line of infused-beverages.

"It was an amicable separation," Klein said. "We knew that Seth and the team were looking to build out their business in the U.S. under the Houseplant name. We felt like it would better suit their business objectives and our business objectives if we did our own thing."

He said he's not aware of any significant financial charges for Canopy as a result of the split. According to regulatory filings, Canopy took a $10.3 million impairment charge when it ended its cannabis collaboration with the Canadian rapper Drake.

Toronto-listed Canopy Growth shares were virtually flat on Friday, up 0.46 per cent to $24.07 at 1:12 p.m. ET.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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