Canopy Growth Investment Isn’t Paying Off Quite Yet for Constellation Brands

Constellation Brands, the alcohol beverage giant that invested a whopping $4 billion into Canadian marijuana producer Canopy Growth, may not be feeling too assured about this investment.

The company reported second quarter financial results that did not impress Wall Street as shares tumbled over 8% after the report.

Constellation Brands revealed that it had lost $484.4 million during the quarter on its investment in the Canadian marijuana company. Constellations has a 38% stake in the company which it took in late 2018.

Fortunately beer sales for the company were strong during the second quarter, showing a growth of 7% from
the prior year quarter to $1.64 billion. Its Wine and Spirits segment however fell 9% from a year ago to $611.1 million.

Constellation reported $2.34 billion in sales; which beat estimates and reported earnings of $2.72 per share that beat the Zack’s estimate by 4.21%.

CEO Bill Newlands said on the earnings call, “We delivered an excellent quarter driven by strong performance of our beer business. And while our wine and spirits portfolio continues to be impacted by transition activities related to the Gallo transaction, I am pleased with the pace of progress and the strategic transformation of this business. Now that we are at the halfway point in the year, I would like you to focus on two key points as the second half of the year unfolds. Number one, Constellation and Gallo are working in full cooperation with the FTC, while they continue to review our wine and spirits deal. We are confident in our ability to close the transaction, which we now expect will occur by fiscal year end 2020.”

He added, “For now, we have updated our fiscal 2020 EPS guidance to assume that we close at the end of the third quarter, but we will adjust accordingly as we get more clarity on exact timing. Meanwhile, we are fully committed to supporting our entire portfolio throughout the transition. Number two, during the second quarter, Constellation’s beer business remained the number one market share leader in the high-end of the U.S. beer market, representing 25% of high-end growth with Constellation growing share in every summer holiday. This is the 38th consecutive quarter of growth for our beer business and I remain confident in the prospects for this collection of iconic consumer-loved brands well into the future.”

He also said, “Now, a few comments about our investment in Canopy Growth, which continues to be the global leader in total cannabis sales. During the quarter Canopy Growth and Acreage Holdings received overwhelming shareholder approval for the agreement that grants Canopy the right to acquire Acreage and enter the US cannabis market once federally permissible.”

“As you know, this opportunity provides a path for Canopy to have a leading position in the US upon federal cannabis reform. And speaking of that reform, I was excited to see that the US House of Representatives recently passed the SAFE Act by a wide majority. While this bill also need Senate approval, it would deliver access to traditional banking services for thousands of legal cannabis businesses in the US and shows positive momentum in the legalization debate moving forward,” he continued.

He added, “We’re also looking forward to the launch of Rec 2.0 in Canada when Canopy will unveil their portfolio of value-added higher margin products in various form factors, including drinks, edibles and bake. In the US, the Canopy team has been actively developing a range of high quality CBD products and related marketing plans as well as securing the production resources necessary to bring these products to the US market by the end of their fiscal year. New CBD product offerings include skincare and cosmetics, therapeutic creams, beverages, edibles, oils and softgels. Overall, we’re pleased with the progress of the Canopy team and what they have done in the last few months. In closing, I am extremely pleased with the progress of our business at the halfway mark in the year.”

Disclaimer: We have no position in any of the companies mentioned and have not been compensated for this
article.