Canopy Growth Will Close Facilities and Cut Jobs

On Wednesday, Canopy Growth (NYSE:CGC)(TSE:WEED) announced that it’s optimizing its operations to align its supply based on demand. The company conducted a strategic review of its production capacity and forecasted demand. The results from the strategic review indicated that the two cultivation facilities located in British Columbia and the yet-to-open greenhouse facility in Ontario weren’t essential. So, management decided to close its facilities in British Columbia. Also, the company won’t open its greenhouse facility in Ontario. The initiatives led to a loss of approximately 500 jobs. Also, management announced that the initiatives could cause pre-tax charges of approximately $700 million–$800 million in the fourth quarter of fiscal 2020.

In British Columbia, Canopy Growth developed approximately 3 million square feet of licensed greenhouses production space to meet the needs of the recreational cannabis market. However, the cannabis recreational market grew at a slower pace than earlier estimates, which resulted in working capital issues and lower profitability. The company’s management blamed federal regulations for allowing outdoor cultivation after it invested significantly in its greenhouse production. Currently, Canopy Growth operates a cost-effective outdoor production, which supplies cannabis extracts for specific products.

In the press release, Canopy Growth’s CEO, David Klein, said that he’s focusing on channelizing Canopy Growth’s business and resources to meet consumers’ needs. He also said, “Today’s decision moves us in this direction, and although the decision to close these facilities was not taken lightly, we know this is a necessary step to ensure that we maintain our leadership position for the long-term. Along with the rest of the management team, I want to sincerely thank the members of the team affected by this decision for their work and commitment to building Canopy Growth.”

Canopy Growth isn’t alone in closing facilities

Canopy Growth isn’t the only cannabis company that announced facility closures and layoffs. In November 2019, Aurora Cannabis’ (NYSE:ACB) management announced that it would delay the construction of its facilities. Last month, the company announced that it will cut 500 full-time jobs and write down 1 billion Canadian dollars worth of assets. In October 2019, HEXO (TSE:HEXO) trimmed its workforce by removing approximately 200 positions.

Stock performance

Despite reporting impressive third-quarter earnings, Canopy Growth has lost 13.0% of its stock price this year. Weakness in the cannabis sector and broader equity market dragged the company’s stock down. Due to concerns about the coronavirus outbreak, the S&P 500 Index has fallen by 3.1% YTD. Meanwhile, the ETFMG Alternative Harvest ETF (NYSE:MJ) has fallen by 16.2% during the same period. Pricing pressure and thriving black market cannabis sales put pressure on the cannabis sector. However, Canopy Growth has outperformed its peers this year. Aurora Cannabis, Aphria, and Cronos Group have fallen by 33.3%, 28.8%, and 20.3% YTD, respectively.

Despite the near-term challenges, I’m optimistic about Canopy Growth. Read Should You Consider Buying Canopy Growth? to learn more.