Aurora Cannabis (ACB 1.43%) is attempting to turn around its business, again. Having seen three different CEOs over the past 15 months, it has undergone a lot of changes, including laying off more than 1,400 people during that time. What seemed like a great growth-focused strategy at first now looks to be backfiring as sales are stagnant and the company tries to dig itself out of the red.
There is no doubt the company is the architect of its own problems. And investors have not been amused by seeing the Horizons Marijuana Life Sciences ETF climb more than 30% over the past year while shares of Aurora are down close to 40%. Aurora has a tough road ahead to win investors back, but the good news is that CEO Miguel Martin recognizes the issue and has acknowledged what many inside the business have likely known for a long time.
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"Aurora has a lot of redundancies"
Those six words, which Martin said in a recent interview with MJBizDaily, summarize the key problem with Aurora. And although the company's focus remains on producing high-quality products, there will be more cuts coming. When Aurora released its third-quarter results on May 13, Martin said the company had identified up to 80 million Canadian dollars of additional annual cost savings that it can attain over the next 18 months. Those are new cuts and cost savings on top of the CA$300 million he estimates the company has already shed from its books.
Redundancies shouldn't be a surprise given how aggressively Aurora has been pursuing growth over the years. In 2018, the company acquired CanniMed Therapeutics for CA$1.1 billion in what was the largest cannabis deal in Canada at the time. Aurora followed that up with an even larger CA$3.2 billion acquisition of MedReleaf. Also that year, it invested CA$138 million in cannabis retailer Alcanna, only to end up selling it for a fraction of the price (CA$27.6 million) in 2020.
With so many large deals and the company's footprint spanning 25 countries, its operations have grown significantly over the years. Some of the challenges with that much change include keeping on top of it all, managing it efficiently, and removing inefficiencies, which Aurora has likely had little time to do amid a rapidly changing industry and a focus on sales growth. But now that the Canadian pot market is no longer in its infancy and revenue growth isn't automatic anymore, investors have started to focus more on the bottom line. And that hasn't been Aurora's strong point; over the trailing 12 months, the company has incurred CA$2.4 billion in losses on revenue of just CA$267 million. While the bulk of that is due to impairment-related expenses, even its operating loss of CA$409 million represents 153% of its top line.
How far away is breakeven?
Profitability on an accounting basis likely isn't going to happen anytime soon. Cannabis companies typically focus on adjusted EBITDA numbers, which more closely represent the health of their operations and factor out noncash items. In the third quarter, Aurora reported an adjusted EBITDA loss of CA$24 million for the period ending March 31. While that was half the size of the CA$49.6 million loss from the same period last year, it was nowhere near its previous goal of breakeven.
Previously, the company was aiming to hit breakeven by the second quarter. But by the time Q2 rolled around, Martin pushed away from that target, saying that it wouldn't be right for the business or for the consumer if Aurora were to solely focus on EBITDA. The company is moving toward higher-quality products, and management believes that in conjunction with the additional cost-cutting moves it is planning, it will hit positive adjusted EBITDA "in the coming quarters" even if it doesn't generate much in the way of revenue growth.
Is it too little, too late?
It would be great news for investors if Aurora were to finally break even, but many of its peers are already there. HEXO reported positive adjusted EBITDA in its latest results for the period ending Jan. 31. Sundial Growers also achieved that mark when it released its first-quarter results in May for the first three months of the year. Tilray posted positive adjusted EBITDA in its last quarterly report before merging with Aphria, which is a low-cost producer that has been in the black for eight straight periods.
While Aurora's stock would likely get a boost from posting any kind of a profit, that doesn't mean investors are going to start buying up shares of the company. The CEO's focus on slashing costs is great to remove some of the inefficiencies that still exist in the business, but without much of a bullish outlook for sales growth, there's not a whole lot of reason for growth investors to buy the stock. And it's surely not on the radar of any serious value investors. Unless management can get the WallStreetBets crowd to rally around its stock, I wouldn't expect shares of Aurora to outperform its rivals over the next 12 months.
