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Cannabis Has Cost Constellation Brands Over a Billion Dollars

Constellation's $4 billion investment in Canopy Growth hasn't had the positive impact the company hoped for.
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It's been over four years since beer and spirits maker Constellation Brands  (STZ) - Get Free Report announced that it would invest $4 billion in Canadian cannabis company Canopy Growth  (CGC) - Get Free Report

The move made Canopy Constellation a global cannabis partner. Rob Sands, CEO of Constellation at the time, called the cannabis industry "a tremendous growth opportunity."

What a difference a few years can make now that the Canadian cannabis industry is suffering from inventory issues, falling revenue, and other problems. 

Constellation took a $1.1 billion noncash impairment charge on Canopy and a $651 million equity loss. 

Despite the rough results, Constellation isn't giving up on Canopy. 

"While disappointing, we continue to believe that Canopy's focus on premiumizing its cannabis branded portfolio to improve their performance in Canada is appropriate and we also remain supportive of Canopy's efforts in the U.S. to strengthen their emerging CPG brand distribution and build of a competitive THC ecosystem," CFO Garth Hankinson said.

Constellation's Future in Cannabis 

Constellation is willing to swallow some of the pain coming from Canopy due to the company's positive view of the potential U.S. recreational market, which it values at $25 billion currently. Constellation expects the U.S. market to double by 2026.

It also went out of its way to praise the progress Canopy has made in establishing itself in the U.S. market. 

"I think they are positioned to the be a winner in the U.S.," said CEO Bill Newlands. "We still believe that the longer run brands are going to matter, and I think they're positioning themselves to have the right brands that will matter over the long run here in the U.S."

The company says that it is also happy with the "improvements" the company is making in Canada. 

Last week, Canopy announced that it is exiting the retail business in Canada and selling all of its 28 corporate-owned stores in the country. 

"We are taking the next critical step in advancing Canopy as a leading premium brand-focused CPG (consumer packaged goods) cannabis company while furthering the Company's strategy of investing in product innovation and distribution to drive revenue growth in the Canadian recreational market,'' said  Canopy Growth CEO David Klein.

High inventory and falling prices has forced the entire industry into survival mode and Canopy has been cutting costs for months.

In April, the company laid of 8% of its workforce as part of an effort to achieve C$150 million in savings.

Constellation's Quarter 

The company reported net sales of $2.65 billion leading to earnings of $3.17 per share. Analysts were expecting revenue of $2.51 billion with earnings of $2.82 per share. 

Beer sales saw a double digit increase, as did operating income growth thanks to continued strength in its Model Especial and Corona Extra brands. 

Constellation expects beer net sales to grow between 8% and 10% in 2023 with operating income growing between 3% and 5%. 

Apparently boxed wine is making a comeback on kitchen counters across America because Constellation is doubling down on the sector as part of its wine and spirits innovation strategy. 

The company's direct-to-consumer wine and spirits business saw 15% growth year over year.