Health Canada has released cannabis market data for February, and it's not a pretty sight for cannabis bulls. We now have four full months of data after legalization in mid-October, so we can start to see some trends. Here are numbers, divided between dried cannabis and oils, with medicinal and recreational aggregated together as total sales.
Charts by author using data from Health Canada site.
Sales and Inventory Data
There are a number of key observations:
1. Sales levels remain generally flat throughout all months. Although there is a dip in February, I don't think this marks a trend downward. February is only 28 days, so that likely accounts for a good bit of the decline. But clearly we are not, as of yet, seeing a sustained increase in demand.
Flat sales numbers in the Health Canada data is consistent with the disappointing results so far from the large Canadian LPs. In particular, recent results from Aphria (APHA) for the quarter ending February 28th were disappointing with Aphria reporting a 23% decline in cannabis sales volumes to 2,637 kg equivalents from 3,409 kg equivalents in the prior quarter. Aphria management didn't provide much optimism for next quarter (ending May 2019) when they said that they expected the current quarter cannabis sales to be similar to the February 2019 quarter.
These are frankly shocking figures for an industry that everyone believed was just about to explode.
2. Inventory levels are more than sufficient to meet demand, and are rising. For dried cannabis, there is over 3.5x monthly demand in finished inventory in the system. For oils, it's even more; there is 8.2x monthly demand in finished inventory in the system. These figures do not suggest much in the way of a shortage. These figures simply do not suggest any significant shortage in terms of overall demand and supply.
Moreover, supply is increasing, with unfinished inventory (cannabis held in stock by a cultivator or processor that is not packaged, labelled, and ready for sale) growing rapidly, even while sales are flat. Unfinished inventory is a massive 18x monthly dried cannabis demand. This unfinished inventory will eventually make its way to the stores.
With a flood of new capacity coming online, these trends could become much worse over the summer.
3. Cannabis oils inventory continues to rise. Cannabis oils finished inventory continues its steady rise. Because oils are not as susceptible to spoilage or mold, they can store for longer periods of time than dried cannabis. This simply means that the excess of oils production over demand is going to continue to stockpile in finished goods inventory. This is exactly what we've seen as the chart goes up and to the right. Eventually the laws of supply and demand will catch up and pricing will have to be adjusted or new supply curtailed. The latter is unlikely given that the LPs are incentivized by the market to make use of their expensive new growing and extraction facilities.
Where is the Demand?
Why are so few people actually buying legal cannabis in Canada? A lot of reporting has been made on the difference in price between the legal and illegal markets. That is a large factor, particularly for heavy users (who constitute the bulk of demand). It is also true that there are not enough stores in large regions like Ontario. These will suck up some of the supply as they open up over the course of the year.
But the backdrop is that there is an explosion of additional supply coming online this year where most LPs expect to double their production capacity or more. If the cannabis market is already oversupplied even before that new production capacity comes online, holders of stock in the major Canadian LPs are in for a rude awakening. Particularly if most market participants still believe that there are shortages in the Canadian cannabis market. Given all the puffery from the CEOs of the major cannabis LPs (in particular, CGC, ACB, APHA) on their recent conference calls, it's not surprising that many investors would have such a view of the market. I expect substantial downside ahead for all Canadian LPs as the market becomes aware of the growing Canadian cannabis oversupply.
Disclosure: I am/we are short APHA, ACB, TLRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.