By Steve Gelsi
Canopy Growth Corp. is likely selling its retail stores for much less than it paid for them, but the cannabis company that continues to generate losses said the move will help it achieve the higher end of its cost savings target.
Jefferies analyst Owen Bennett said Wednesday that Canopy Growth Corp.’s /zigman2/quotes/200603886/composite CGC +5.85% /zigman2/quotes/202205609/delayed CA:WEED +4.29% plan to divest 28 retail stores stands out as an example of the “wasted capital” by the cannabis company’s former management.
Canopy Growth’s current CEO David Klein has been in the job since January, 2020. The company is controlled by spirits giant Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ +1.46% .
Canopy Growth said after the closing bell on Tuesday that it’s selling its Tweed and Tokyo Smoke stores for an undisclosed price in a move to exit the retail cannabis business.
Canopy Growth retail licensee OEG Retail Cannabis, part of the Katz Group’s OEG Inc. unit, will buy 23 stores and the remaining five stores in Alberta will be acquired by 420 Investments Ltd. Canopy Growth will also close five stores in Alberta.
“Given deal terms were not disclosed, we do not imagine the multiple was attractive, especially alongside the fact that retail in Canada overall is struggling, and also given the deal more appears to be driven by getting costs off the P&L,” Bennett said Wednesday in a research note. Bennett estimated a sale price of about C$10 million ($7.3 million), based on Canopy’s retail sales of C$50mn and a multiple of 0.2x.
“When considering Canopy paid C$250mln for Tokyo Smoke back in July 2018, and this deal also includes all the Tweed stores, this is another example of the wasted capital that was very common under old leadership,” Bennett said.
Shares of Canopy Growth fell 2% in premarket trades.
Canopy Growth said April 26 it’s laying off about 250 employees to generate cost savings of C$30 million to C$50 million and reduce SG&A expenses by C$70 million to C$100 million within 12 to 18 months, in addition to its previously announced cost savings of C$150 million to C$200 million.
Shares of Canopy Growth have fallen 67.2% in 2022, compared to a 66.2% drop by the Cannabis ETF /zigman2/quotes/213173823/composite THCX +3.92% .
With its business mostly focused on the Canadian market, Canopy Growth and other cannabis companies have yet to generate any profits amid downward price pressure in the country.