Rightsizing in Cannabis Ultimately a Positive Move, Expert Says

Canada’s cannabis sector — once a hub for investors looking to take advantage of a budding market — is now under pressure thanks to ongoing waves of volatility.

Recent executives departures, staff cuts and unsatisfactory results have come as a result of that volatility, but one expert says the current trend toward rightsizing will ultimately be to the industry’s benefit.

“Most of these cuts for costs will actually turn out to be positive and help the lifespan of these companies,” said Nawan Butt, a portfolio manager at Purpose Investments.

In an interview with the Investing News Network (INN), Butt noted that now is the time for companies in the crowded sector to execute efficiently, which will help ease the overall downturn cannabis is facing.

Rightsizing has been an increasingly popular move on the part of some Canadian marijuana firms.

On Tuesday (February 11), The Supreme Cannabis Company (TSX:FIRE,OTCQX:SPRWF) let a total of 15 percent of its staff go in an effort to focus on “near-term revenue generating opportunities and creating a more nimble and effective corporate structure,” as per a press release.

Last week, both Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB,TSX:ACB) made staff cuts. They followed Sundial Growers (NASDAQ:SNDL), which reduced its workforce in late January due to slow store rollouts and difficult market conditions.

Butt said that now the industry is working out the remnants of the “hysteria and hype” that propelled the space early on. That zeal led to producers spending too much money ahead of the launch of the market, he explained, instead of focusing on the consumer angle of the business.

A resilient black market and stunted retail segment have also pushed down on the legal cannabis landscape, but the recent move towards tighter operations signals a better understanding of the consumer segment, Butt told INN.

He said, “(Companies now understand) they have to have tight operations (and) cost-effective operations to compete in this market where there’s a plethora of producers and really not as many consumers have switched over from the black market.”

Along with the cost-cutting measures, some of the more notable leaders in the sector have left.

Aurora, for one, lost its longtime CEO Terry Booth after the executive announced his retirement last week alongside the news of some major changes to the company’s capital spending and operations.

The CEOs of Sundial, TerrAscend (CSE:TER,OTCQX:TRSSF) and Supreme shared similar fates and have left their respective companies in the last few weeks as well.

The executive exodus isn’t entirely new, however. In Butt’s view, the firing of Canopy Growth’s (NYSE:CGC,TSX:WEED) former co-CEO Bruce Linton following disappointing quarterly results last July foreshadowed the need to change the approach to generating profit.

Linton was ultimately replaced by Constellation Brands (NYSE:STZ) executive David Klein in December.

The alcohol maker made a C$5 billion investment into Canopy in 2018, and in an interview with Squawk Box, Linton said the investment came with a condition to reconfigure the board of directors at Canopy.

“I think the board had decided they wanted a different chair and a different co-CEO,” Linton said previously.

Butt said friction at the top between CEOs and boards of directors at some Canadian marijuana companies has revealed a need to adjust the outlook for the sector overall.

Linton’s termination helped push Canadian producers to understand that “there isn’t a blue sky scenario,” Butt explained, and with general rightsizing the sector will be in a much more stable position.

“This is actually a big positive move because it aligns everybody’s interests, from the shareholders to the stakeholders to the licensed producers (LPs) themselves,” Butt told INN.

But not everything about the changes in the marijuana space has been good.

Last month, Evolve Funds Group decided to shutter its two cannabis-focused funds, the Evolve Marijuana Fund (TSX:SEED) and the Evolve US Marijuana ETF (NEO:USMJ). The funds will be closed by late March.

SEED, Evolve’s globally focused cannabis fund, has a majority of its holdings in Canadian companies and has lost over half of its value in the past six months.

Elliot Johnson, chief investment officer at Evolve, told INN the decision to close down the funds was ultimately done in view of the market’s difficulties.

“In Canada, we really feel that there’s been a significant over-regulation and mismanagement of the rollout of legalized cannabis in this country,” said Johnson.

“We think that there’s a lot more hurdles in front of these businesses than people may have been expecting back … (when) legalization day happened in October 2018,” Johnson added.

As for the job cuts, Butt said that overall, they don’t account for a significant portion of the total workforce in cannabis.

And with the trend towards streamlining operations, Butt told INN that marijuana firms are now on a better path toward optimization.

“This really sets up Canada and Canadian LPs to now start distinguishing themselves on operations, where you’ll start seeing the winners and the losers, the winning strategies and losing strategies, really start moving away from each other (in) a decoupling, essentially.”

Butt said Canadian firms now have the next few quarters to prove their business models as they move towards profitability or at least losing less money.

“I think this is the sort of soft catalyst that you need for these LPs to refocus their efforts to become profitable and make this industry sustainable and viable in the long term, rather than just being an accumulation of assets at wild valuations.”

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.