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March 6, 2020, 7:00 a.m. EST

Canopy Growth shares fall 7% on news of job cuts as cannabis sector sells off

Canopy is closing two grow facilities and shelving plans for another as it grapples with oversupply in a market that still lacks stores

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By Ciara Linnane, MarketWatch


MarketWatch photo illustration/Canopy Growth, iStockphoto
Canopy Growth’s new CEO David Klein is working to instill discipline

Canopy Growth Corp. shares fell 4% Thursday after the Canadian cannabis company announced it was cutting 500 jobs as it reduces capacity by closing two greenhouses and shelving plans for another.

Canopy /zigman2/quotes/200603886/composite CGC +1.36%  , /zigman2/quotes/202205609/delayed CA:WEED +5.07%  the cannabis market leader thanks to a $4 billion investment from drinks giant Constellation Brands /zigman2/quotes/207737284/composite STZ -0.92% , is suffering from the same obstacle of oversupply that its rivals are facing. The legal weed sector has had a slower-than-expected start amid a shortage of retail outlets. That has prevented licensed producers from getting their product to consumers and has allowed the black market to continue to thrive.

“It has been clear that Canopy’s vast production space has been far in excess of what’s currently necessary,” said Jefferies analysts Owen Bennett and Ryan Tomkins. The company’s annual production capacity is up to 500,000 kilograms, compared with current industry sales of about 200,000 kilograms, they wrote in a note.

Canopy said it expects to record a pre-tax charge of C$700 million ($521 million) to C$800 million ($596 million) to cover the costs of the closures. It also said that outdoor cultivation is now offering a lower-cost way to grow cannabis than greenhouses and will allow it to meet demand for products that rely on cannabis extracts.

Read: Tilray slides 14% to pressure broader cannabis sector after earnings disappoint

Jefferies said the actions are positive for profitability, which has remained elusive for most companies in the sector. It’s also a positive signal from new Chief Executive David Klein that he “is serious about instilling the financial rigor that many have been hoping for.”

Klein came to the job from Corona beer brewer Constellation Brands, where he was chief financial officer. Constellation has been taking greater control of Canopy in recent months, ousting co-CEO Bruce Linton last summer, and pushing for greater discipline at the company.

See now: Federal prosecutors investigate California marijuana companies in wide-ranging probe

Stifel analysts reiterated their buy rating on the stock and said the news shows Canopy is attempting to differentiate itself from competitors by considering the current and future market. “Ahead of legalization, Canopy invested intensely toward all potential category outcomes, and now the company is taking a thorough review of its assets with better visibility into the category,” analysts led by Andrew Carter wrote in a note.

See: People want cheap weed, and Aurora Cannabis is paying the price

KushCo Holdings Inc. shares /zigman2/quotes/209165034/composite KSHB -3.85% were down 0.7%, amid concerns that the coronavirus that broke out in Wuhan, China late last year is hurting the production of vaporizer hardware, most of which is produced in China. While the pace of infection is slowing in China, travel restrictions and other measures aimed at containment have kept factories running at reduced capacity.

In a normal year, weed companies buying vape hardware from China expect a winter disruption of roughly a month surrounding Lunar New Year, but coronavirus is expected to extend that pause another three to six weeks, according to KushCo Chief Executive Nick Kovacevich. Many companies stocked up ahead of the New Year’s celebrations, Kovacevich told MarketWatch’s Max A. Cherney.

“People will stay in business, but it’s frustrating and a little disruptive,” Kovacevich said over the phone. “The reason it’s taking a long time is the workers couldn’t get back to their factories to restart production.”

Cannabis accessories maker Greenlane Holdings /zigman2/quotes/211319667/composite GNLN -1.06%  was down 3.7% and Turning Point Brands /zigman2/quotes/210126838/composite TPB -2.81%  was down 2.6%.

See: Canopy Growth extends gains, but analyst highlights issue that was overlooked in earnings

Click to Play

How California's 'Weed Nuns' turned CBD into a million-dollar business

California's 'Weed Nuns' are in battle with law enforcement, big banks and right-wing pastors for a place in the lucrative CBD market. Meanwhile, the FDA has deemed CBD a drug, banning its use in food and health products without official approval.

Elsewhere in the sector, stocks fell sharply along with the broader market as coronavirus fears prompted a fresh round of selling. The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36%  was down 2.9% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.62%  was down 3.1% in a continued selloff sparked by fears about the coronavirus.

Read now: Stocks give up much of Wednesday’s gain as coronavirus stalks markets

Cronos /zigman2/quotes/206842762/composite CRON +4.27%   /zigman2/quotes/202715342/delayed CA:CRON +7.29%  was down 1.9%, Tilray /zigman2/quotes/209129655/composite TLRY +17.09%  was down 6.6% and Aurora Cannabis /zigman2/quotes/210559470/composite ACB +2.98%   /zigman2/quotes/203734337/delayed CA:ACB +4.25%  was down 3.6%. Aphria /zigman2/quotes/207425803/composite APHA -0.41%   /zigman2/quotes/205566616/delayed CA:APHA +1.56%  was down 6%, OrganiGram /zigman2/quotes/209289540/composite OGI +1.56%  was down 2.8% and GW Pharma /zigman2/quotes/209686240/composite GWPH +1.88%  was down 1.9%.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ +1.87%  was down 3%, while the Cannabis ETF /zigman2/quotes/213173823/composite THCX +3.57%  was down 2.7%.

Cannabis Watch: For all of MarketWatch’s coverage of cannabis companies: Click here

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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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