Why is Canopy Growth (CGC) Trading Down More Than 10% in the Past 2 Days?

Cannabis companies continue to be challenged by the bottleneck that exists in Canada.  The lack of support and inaction by the Canadian federal and provincial governments for a once booming industry is disappointing not only to the Canadian cannabis companies but to investors and retail customers as well.

As a result, Canopy Growth (CGC) is the latest cannabis company to announce that they will be closing down facilities and making job cuts. This follows a trend throughout the cannabis sector as companies like Aurora Cannabis (ACB) and Tilray (TLRY) have just cut jobs. 

There has also been a spree of goodwill write-downs, most recently Aurora Cannabis which wrote down almost $1 billion. Canopy Growth has also informed investors that next quarter they plan to record a $700-800 million pre-tax charge, in other words, writing down more goodwill. 

The cannabis sector has been facing the harsh reality of a much smaller market than originally anticipated along with a lack of government support in regards to retail rollout. At this point in time, thousands of Canadians have lost their jobs due to the over-regulated Canadian cannabis market. Many Canadians and investors are wondering when the situation is going to improve. 

In regards to CGC’s recent update, we do feel that they are taking the necessary steps in order to align themselves with the current market conditions. The company announced that they would be closing two of their Canadian greenhouses. This will better align the company with cultivation capacity and projected demand for this year. The facilities in Aldergrove and Delta, British Columbia will be closed, resulting in the loss of about 500 jobs. Also, CGC no longer plans to open their third greenhouse in Ontario which is located in Niagara-on-the-Lake. 

The two greenhouses in British Columbia account for approximately 3 million square feet of licensed production space. They were put into commission starting in February 2018 when CGC was scaling up to supply the Canadian recreational market. It’s been roughly 17 months since cannabis was legalized recreationally and we now see that the Canadian recreational market has developed much slower than anticipated. The reason for closing down these two facilities comes from an organizational strategic review of production capacity and forecasted demand. CGC determined that these facilities in Aldergrove and Delta, British Columbia are no longer essential to its cultivation footprint.

CGC’s CEO David Klien said, “When I joined Canopy Growth earlier this year, I committed to focusing the business and aligning its resources to meet the needs of our consumers. 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.”

As the company restructures and aligns itself with current demand, the retail landscape should improve, even if it’s at a snail’s pace. We remain optimistic about the long term opportunity but caution investors who are looking for a short-term rebound in the stock.  And we urge the Canadian government to consider changing its regulatory environment for cannabis retail rollout.

Canopy Growth Corp. (CGC) was trading at $16.30 per share on Friday morning, down $0.50 (-2.98%). Year-to-date, CGC has declined N/A%, versus a 11.83% rise in the benchmark S&P 500 index during the same period.