Canopy Growth Reports Q1 Results on Wednesday: Here’s What You Can Expect

No one was happy with Canopy Growth’s (NYSE:CGC) fiscal 2019 fourth-quarter results announced in June. The Canadian cannabis producer’s big partner, Constellation Brands, expressed its unhappiness forthrightly in its Q1 conference call a week later. Soon thereafter, Canopy Growth founder and longtime CEO Bruce Linton received his walking papers.

Canopy reports its fiscal 2020 first-quarter results after the market closes on Wednesday. I suspect that investors will be at least somewhat happier this time around. Here’s what you can expect with Canopy Growth’s Q1 results…

1. Stronger sales growth

This prediction is pretty much a no-brainer. The main question is just how much stronger Canopy Growth’s sales growth will be in Q1.

Canopy’s overall revenue increased in the fourth quarter despite the company reporting lower quarter-over-quarter adult-use recreational marijuana sales and lower medical cannabis sales. The company’s acquisition of German vaporizer device maker Storz & Bickel came to the rescue, generating enough additional sales to push Canopy’s total revenue higher.

The big problem for Canopy in Q4 was supply constraints. For the most part, the crop that a cannabis producer harvests in one quarter is sold in the following quarter. Canopy’s harvest was basically halved from the second quarter of fiscal 2019 to the third quarter due to retrofitting of its grow houses. This resulted in the company having less product to sell in fiscal Q4.

However, Canopy’s Q4 harvest bounced back to close to the level it had in the second quarter. The company also projected in June that its fiscal 2020 Q1 harvest would be around 34,000 kilograms — more than double its harvest in Q2. A small portion of this much larger crop could have been sold in the first quarter.

Analysts are looking for Canopy to report 17% quarter-over-quarter revenue growth on Wednesday. I wouldn’t be surprised if the company beat that estimate.

2. Incrementally improving gross margin

Canopy Growth’s gross margin of 16% in fiscal Q4 was atrocious. The company’s issue was that it had a lot of cost with bringing production assets online but no revenue yet being generated by those assets.

Analysts think that Canopy will show incremental improvement in the first quarter with a gross margin of a little under 23%. I suspect that the company’s actual margin will be in that ballpark.

Mike Lee, Canopy Growth’s new CFO, said in June that it could take a few quarters for margins to bounce back after the company’s retrofitting of its facilities. By the end of fiscal 2020 (which ends on March 31, 2020), Canopy should be back to a 40% or greater gross margin…

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