What happened

Marijuana stocks got pummeled in Wednesday trading, with shares of industry giant Canopy Growth (CGC 15.03%) closing down 5.6% after the company announced some "changes" to its Canadian operations.

Fellow cannabis companies followed Canopy down, among them:

  • Hexo Corp (HEXO) -- down 4%.
  • Aphria (APHA) -- down 4.4%.
  • Aurora Cannabis (ACB 18.15%) -- down 6.8%.
  • Charlotte's Web (CWBHF -0.32%) -- losing 8.1% by the closing bell.
Black and white skull with smoke coming out of its mouth

Image source: Getty Images.

So what

But in the absence of any other bad news to explain the sector's sudden decline, I have to figure that it's Canopy Growth and its news that's to blame for all the cannabis commotion. So what exactly did Canopy say to spook the market?  

So here it is in a nutshell: To "streamline its operations and further improve margins" -- which are negative, by the way; Canopy posted an operating "profit" margin of negative-170% over the past 12 months -- Canopy will "cease operations" at five of its locations ranging from Alberta in the west all the way to Newfoundland and Labrador in the east, laying off 220 employees in the process.

The company noted that the closures affect 17% of the company's "enclosed Canadian footprint" and all 100% of its outdoor production.

Now what

Canopy noted that it expects closing these locations will help it save $150 million to $200 million annually, in hopes of "accelerating [its] path to profitability." But here's the thing: According to data from S&P Global Market Intelligence, Canopy's operating costs last year were a staggering $695 million, on top of $271 million spent on producing its marijuana. So while $150 million or $200 million in cost savings might "accelerate" the reduction in losses and be a step toward profitability, Canopy Growth still has some giant leaps ahead of it if it's to actually turn a full-year profit from this business.

Moreover, history is arguing against Canopy's chances of success. In seven years of operations, this stock has never earned a GAAP profit, and rather than "accelerating" toward "profitability," the stock's losses have been growing higher and higher for five straight years.

If you're wondering, none of Hexo, Aphria, Aurora Cannabis, or Charlotte's Web are much better off. Each and every one of these cannabis companies is losing money and burning cash. Canopy Growth's Canadian "changes" announced today highlight the urgency of the problem -- but I fear they still won't solve it.