Canopy Growth (CGC) Burns Out: Facilities Shuttered, 500 Jobs Lost

Legal marijuana is a comparatively new thing in the United States, and beyond; where formerly, even possessing the substance was cause for getting locked up, some places are allowing it to help others overcome illnesses, and some places have simply given up on it being a crime altogether. This has fueled a new gold rush into growing and selling the plant, and some companies are faring better than others on that front. Canopy Growth (NYSE: CGC) is one of the “others” in that equation, as it recently announced the closing of several facilities and an accompanying loss of jobs.

Losses Substantial At Canopy Growth

The recent trading picture has been a disaster for Canopy Growth. Not only did it announce the loss of facilities, and around 500 jobs to go with them, but a planned facility for Ontario was also mothballed.

The news comes after Canopy Growth noted that it expected a charge of between $700 million and $800 million Canadian—about $521.73 million to $596.26 million US as of this writing—related not only to this news, but also to other changes expected to hit the company. The facilities slated for closure—located in Delta and Aldergrove in British Columbia—were both greenhouses, reports note.

The market took such news poorly, with US-traded shares down over 1.4% in extended trading, and the stock currently trading at $17.18, off its previous close of $17.75.

The Causes, Meanwhile, Are Not All Bad

One of the biggest problems that Canopy Growth faced, reports noted, was a recreational marijuana market that was slowly gaining ground. Much more slowly than the company anticipated, in fact. This was a development that directly impacted cash flow, and also posed difficulties in terms of achieving profit.

While the company did bring out numbers for the third quarter of the 2019 fiscal year that were better than expected, the company's overall outlook is still less than stellar.

However, some noted that the fact that Canopy Growth was closing greenhouses wasn't necessarily a bad thing. The company has the option to grow outdoors as well, and had a substantial indoor growing footprint as well. Reports noted that the two shuttered greenhouses represented three million square feet, and had been operating since February of 2018.

Here, some note that Canopy Growth was a victim of unexpected legal developments; after the company put substantial investment in greenhouse operations, the government rolled out new regulations allowing for outdoor growth that would have made at least some of these greenhouses largely unnecessary.

There's Just Too Much Pot in the System

Canopy Growth, for a while, was uniquely poised to do well in the market. It had recently taken on a capital issue from Constellation Brands that gave it substantial extra working capital. As is commonly the case, though, it also brought new scrutiny of its operations, especially when its losses—like the aforementioned $700-$800 million—started hitting Constellation's own figures. There have even been those to suggest that Canopy Growth might have needed to discount its current supply, news which no one really wants to hear. Just recently, we saw marijuana retailer MedMen (CSX: MMEN) offer its suppliers stock in lieu of cash to address its own issues on this front.

The problems for such businesses are multifarious; not only are they dealing in a product which is still technically illegal in places—in the United States, it's illegal at the federal level (the House introduced reforms back in November, but that's a slow change) but legal for many states, which has posed a challenge in terms of what laws actually get enforced at the local level—but they're also dealing with a product that still has a lot of negative stigma surrounding it.

After decades of “just say no,” and a war on drugs that has produced questionable results at best, the notion of people going down to the corner store for a little weed, so to speak, is still rubbing consumers the wrong way.

Growers are responding as best they're able, but there are still substantial issues in play here. That's likely going to put a downward crimp on the market for some time to come, and mean that greater production probably won't be called for. The marijuana industry will likely survive these downturns, but might well have to survive as operations vastly downscaled from what was originally projected.