Way back in January, you wouldn’t be blamed for thinking 2020 might just be the year of Canopy Growth Corporation (TSX:WEED) (NYSE:CGC). In the first two weeks, the stock rose 13%, and optimism was high for the cannabis giant.
Since then, however, Canopy has slumped just like it did throughout most of 2019. WEED is now down 15% for the year-to-date and 65.5% from this time last year.
Now, unfortunately, the company has more bad news to announce. Will this push the share price even lower, perhaps to a new 52-week low? Or is this part of an important rebuilding strategy, similar to the ones we’ve seen from Tilray (NASDAQ:TLRY) and The Valens Company (TSXV:VLNS) (OTCQX:VLNCF)?
Canopy Growth Announces Greenhouse Closures and Employee Layoffs
As part of a product optimization plan for its Canadian operations, Canopy announced its plans to close two greenhouse facilities in British Columbia.
These facilities, in Aldergrove and Delta, span approximately 3 million square feet. Their shuttering will result in the elimination of approximately 500 employee positions.
Canopy is also scrapping plans to open a new greenhouse in Ontario. These actions, it says, are part of an effort to “align supply and demand while improving production efficiencies over time.”
Explaining its move, the company went on to state:
“Nearly 17 months after the creation of the legal adult-use market, the Canadian recreational market has developed slower than anticipated, creating working capital and profitability challenges across the industry. Additionally, federal regulations permitting outdoor cultivation were introduced after the Company made significant investments in greenhouse production.”
Canopy Growth CEO David Klein also called the decision “a necessary step” to ensure that the company maintains its leadership position in the cannabis industry for the long-term.
The move comes after Canopy Growth posted better-than-expected Q3 returns. It also remains cash-rich but notably unprofitable. Going forward, the company will make further use of its outdoor cultivation site, which it says is more cost-effective than greenhouses.
The closures are expected to result in a $700-$800 million pre-tax charge on Canopy earnings in the next quarter. The company said it will likely incur other charges as a result of its ongoing organizational and strategic review.
Effect on Stock and Future
“This is probably a good thing because their cost-per-gram is way too high,” says Rich. “But honestly, I don’t know what to think of this. This is a bad press release.”
He goes on to say that the legal cannabis industry is still struggling to compete with black market prices and products. This means bigger companies like Canopy must do anything they can to bring the cost of production down.
CGC on the New York Stock Exchange fell 5% from $17.74 to $16.80 in the immediate aftermath of the announcement. On top of that, the company is bound to be hit by bad press, as the layoffs will negatively affect the public’s perception of Canopy.
What do you think? Is this a bad move for Canopy Growth? Or is it a short-term problem that will lead to long-term growth and efficiency? Let us know how you plan to play the cannabis industry going forward.
Featured image: Canva