While Canopy’s latest layoffs are another big blow to Smiths Falls and its residents, Bruce Linton says he thinks things could get worse for the cannabis producer before they get better.
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Bruce Linton didn’t mince words about Canopy Growth’s plans to shut down its headquarters at 1 Hershey Dr. in Smiths Falls later this year as part of a new round of cost-cutting.
“I was sick,” the firm’s co-founder and former CEO told OBJ on Thursday morning when asked for his reaction to the news. “(Canopy Growth) created something that was world-leading, both in the valuation and the science, and Smiths Falls was kind of the core to that narrative.”
The Eastern Ontario-based cannabis company that Linton helped launch more than a decade ago dropped a bombshell during its latest earnings report Thursday, announcing it will shutter its flagship 650,000-square-foot facility in Smiths Falls and lay off 800 workers – or about 35 per cent of its workforce – in a bid to trim more than $100 million in expenses.
It’s the latest in a series of job cuts at Canopy Growth as the company behind brands such as Tweed, Quatreau, Doja and Ace Valley seeks to reach profitability and remain a viable long-term entity.
When the dust settles, the company will employ about 400 people in Smiths Falls, down from about 750 before the new round of layoffs and 1,500 just a few years ago. While it will be another big blow to the town and its residents, Linton says he thinks things could get worse at Canopy before they get better.
“They’ve put out at least half a dozen press releases talking about how they’re going to become profitable, but all they do is keep cutting costs,” he said. “This is a very terrible cut. Regrettably, it’s not the first, nor do I suspect it is the last.”
Canopy said Thursday its revenues for the third quarter ended Dec. 31 were $101.2 million, down from $141 million the previous year. The firm posted a net loss of $266.7 million or 54 cents per diluted share, compared with a net loss of $115.5 million or 28 cents per diluted share in the same quarter a year earlier.
Canopy’s shares were down more than 16 per cent to $3.06 on the Toronto Stock Exchange late Thursday afternoon. Its stock price has fallen nearly 73 per cent in the past year as its quarterly losses continue to mount.
Analysts had expected Canopy’s sales to be about $117 million for the quarter, a note from CIBC Capital Markets said Thursday.
As the pot producer struggles to compete with the illicit market, which still captures about 40 per cent of all Canadian sales, it hopes its latest efforts to find savings – which include consolidating some of its cultivation sites and relying on third parties when sourcing vapes, beverages, edibles and extracts – will help it turn the corner.
But analysts suggested Thursday they’re not convinced Canopy’s latest moves will be enough for it to reach its goal.
“Even given the severity of Canopy’s losses and cash burn over the past several years, the magnitude of today’s restructuring plan is remarkable,” CIBC’s John Zamparo and Monica Lutz said in their note to investors. “As remarkable, in our view, is that unless sales growth returns, the plan still may not be sufficient for Canopy to reach profitability.”
Linton, who was ousted as Canopy’s CEO in July 2019, said the firm that was once Canada’s largest cannabis producer has lost its leadership role in the medical pot space.
As prices for pot and products like vape cartridges have plummeted amid stiff competition from the black market, Canopy has shifted its focus to the premium recreational cannabis sector, which typically commands higher prices and generates a more loyal consumer base than value items.
But those efforts haven’t yet proven effective, Linton noted.
“Sales minus expenses equals profit or loss,” he said. “If sales keep falling, that means you have to keep cutting. So the question is, do they have any strategy to increase revenue rather than continually seeing a decrease? Because if they don’t, that is a problem that has an end point.”
Like many Canadian pot producers, Canopy is also banking on federal legalization of cannabis south of the border to help spur new sales. The firm is still awaiting shareholder approval for Canopy USA, a separate entity that will combine U.S. pot company Acreage Holdings Inc. with edibles businesses Wana Brands and Jetty Extracts.
But Linton said the U.S. market remains fraught with uncertainty.
“They keep talking about America, but America is not organized for legally sold cannabis at a federal level now, and no one knows if and when it will be,” he said.
CIBC’s Zamparo and Lutz also questioned whether Canopy’s U.S. play will pay dividends.
“Although U.S. regulatory reform would be extraordinarily positive for (Canopy), we currently see this as unlikely, and we believe investors should gain exposure to stocks closer to profitability or with stronger balance sheets,” they said.
– With files from the Canadian Press
