It’s been two weeks since Canopy Growth (NYSE:CGC) announced a staggering fourth-quarter loss of 1.3 billion Canadian dollars ($952.1 million). While you never want to lose money, owners of CGC stock might want to look at this as necessary medicine.
Like an alcoholic, if the company wanted to move ahead, it had to recognize a problem that existed with its business model.
CEO David Klein was hired to right the ship, both from an operational and financial point of view. The long-time chief financial officer of its controlling shareholder, Constellation Brands (NYSE:STZ), hasn’t wasted much time addressing the company’s weaknesses.
“I am excited to implement our strategy reset and organization redesign over the course of fiscal 2021. We have a renewed strategic focus and a clear change agenda that is already underway,” Klein said in the company’s May 29 earnings release.
“We are building what we believe is the best cannabis company in the world by putting the consumer at the heart of everything we do and are re-aligning our organization to be faster and more agile.”
You don’t have to be a rocket scientist to know that Canopy tried to be too many things to too many people resulting in a company that had no North Star. In sports terms, Klein’s goal is to simplify and shrink its playbook. I think he’ll be successful. Here’s why.
Do What You Do Best
In the company’s conference call for its fiscal Q4 2020, Klein discussed a lot of the issues that hurt Canopy Growth in the past fiscal year. He was very candid about its performance, both in terms of its troubles and successes.
“Our Q4 performance was mixed,” Klein said. “Our top line performance didn’t meet our expectations, and we lost market share in the Canadian recreational market.”
Fortunately, the market share situation in Canada is still very much up for grabs. Not to mention, Canopy is moving its focus away from dried flowers to vapes, edibles, drinks, etc.
Last October, I suggested that cannabis-infused drinks were one of seven reasons investors should buy CGC stock. Nine months later, my opinion hasn’t changed one bit.
“Fundamentally, you have to take your finite resources and focus them on the biggest slices of the pie, and execute,” Klein said recently. “We’re focused on Canada, Germany, the U.S., and getting our vapes, topicals and drinks right.”
As Klein suggested, Canopy lost market share in the Canadian recreational market. While he didn’t say who grabbed it, value-priced products from Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB) are the likeliest suspects.
The BCMI Report analyst and author Chris Dames discussed the issue recently:
“First of all, they were late getting into the value market, but I don’t think that was the focus of the company. Canopy does not have the cost structure to compete with the large, low-scale producers like Aurora and Aphria. The trend I see is Canopy becoming a more derivative, tech-oriented player, focused on vapes, edibles, drinks. But they’re losing the battle in the dried flower segment of the market.”
Klein has decided that Canopy’s not going to waste its time in markets that aren’t going to be profitable for the company. You’ll notice in its Q4 2020 press release that the company twice used the words “a path to profitability” in describing its corporate execution.
If you own either CGC or STZ stock, you’ve got to be happy with this focus. Even Elon Musk realized Tesla (NASDAQ:TSLA) had to make money if it wanted to survive and thrive. Why go into business if you’re not looking to profit from your efforts?
Klein brought a dose of reality to the 4,000 or so employees that work in 15 markets around the world.
“Canopy grew quickly to achieve a leading position in a rapidly-expanding industry and through that time period being first was clearly rewarded, but being first isn’t a sustainable strategy or a point of differentiation,” Klein said during the conference call.
Anyone who is familiar with Michael Porter’s arguments about strategy knows what Klein is suggesting.
The Bottom Line for CGC Stock
If you’ve followed Canopy Growth since its early days, you shouldn’t be surprised by Klein’s moves to change the company’s strategy and make the company more competitive.
Former co-CEO Bruce Linton was let go June 8 as executive chairman of Vireo Health International (OTCMKTS:VREOF). Clearly, Linton saw a different growth strategy than the rest of the board. They also probably wanted to avoid an out-of-control situation as the one Canopy experienced.
Founders make great visionaries, but they often make poor CEOs.
I’ll be shocked if David Klein doesn’t turn the company into a well-oiled machine. This strategy reset was badly overdue.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
