Home Cannabis Why Did Canopy Growth's Margins Fall in Q3?

Why Did Canopy Growth’s Margins Fall in Q3?


During the third quarter, Canopy Growth (WEED) (CGC) reported a gross margin of ~12.4 million Canadian dollars, which was lower compared to 16.5 million Canadian dollars in the third quarter of 2017. As a percentage of sales, the gross margins fell to 13% from 76% during the same period. The company’s gross margins were impacted due to expensing the inventory production costs, which accounted for 78% of the sales—compared to 45% a year ago.

CGC's Gross Income 2019-02-14

What caused the drop?

In the third quarter, the company’s margins fell year-over-year due to cost impacts from subsidiaries, the excise tax, costs related to research and development of edibles and beverages, and lower selling prices, which we discussed previously in this series.

The excise tax was related to the Medical segment, which also impacted other cannabis companies (HMMJ) including Aurora Cannabis (ACB). The excise tax will likely have a similar impact on Tilray (TLRY) and HEXO (HEXO).

Margin improvement

In the third-quarter management discussion and analysis, the company stated that it continued to invest in research and development to produce high margin value-added products. The company added that its future margins could improve from vertical integration if regulations allow the integration to take place.

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Canopy Growth stated that retail margins would be incremental to wholesale margins. The company is actively pursuing a retail strategy to earn the premium.

Next, we’ll discuss Canopy Growth’s bottom-line performance.

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