What happened
Marijuana stocks continued to rebound from last week's sell-off on Wednesday, with shares of Canopy Growth (CGC 15.03%) gaining 4.2%, Tilray Brands (TLRY 6.98%) up 4.8%, and Aurora Cannabis (ACB 18.15%) leading the whole pack higher with a 5.4% gain as of 1:40 p.m. ET.
Partly, the rebound appears to be a simple side effect of the market in general gaining back some of its losses. The Nasdaq -- to which index all three of these cannabis stocks belong -- is up 1.5% in midafternoon trading. But partly, marijuana stocks may be benefiting from some optimistic news from one of their number.
So what
This morning, Canopy announced that in an effort to progress from losses toward profitability, it will divest its Canadian Tweed and Tokyo Smoke retail operations and focus in the future on producing "premium" branded cannabis as a consumer packaged goods company. Ontario-based OEG Retail Cannabis will take over Canopy's 23 retail operations outside of Alberta; 420 Investments Ltd. will acquire Canopy's five locations within Alberta.
As for what's left of Canopy, management says the transaction will help it to achieve the high end of its previously announced targeted range of cost-savings this year.
Now what
It appears management is now anticipating that it can cut its selling, general, and administrative (SGA) costs by as much as $100 million. This would be in addition to the close to $200 million in cost savings announced prior to April, and a hoped-for $30 million to $50 million in savings on cost of goods sold.
In short, Canopy appears to be promising that its annual costs could fall by as much as $350 million in comparison to the more than $920 million in cost of goods sold and SGA costs incurred in 2021. If it's right about that, then Canopy should emerge as a slimmer, more focused, and closer-to-profitable operation after all this cost-cutting is done.
What does this mean to marijuana investors? Well, a more efficient Canopy Growth might put more pressure -- not less -- on rivals such as Aurora Cannabis and Tilray. That's actually a reason for those stocks to be going down today, not up.
It's worth noting, moreover, that even if Canopy succeeds in cutting its costs by the targeted amount, $350 million in savings still won't be enough cost-cutting to turn Canopy profitable -- given that its operating losses last year exceeded $500 million.
Long story short, this looks to me like a case of "close, but no cigar." Even selling off its sizable retail operation isn't going to be enough to turn Canopy's income statement from red to black. And I doubt this bodes well for the rest of the cannabis industry, either.
