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Does Aurora Cannabis' Staff Downsizing Upsize the Pot Stock's Appeal?

By Keith Speights - Feb 7, 2020 at 5:00AM

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Any move toward achieving profitability is good news, right? Maybe, maybe not.

Heads are about to roll at Aurora Cannabis (ACB 8.70%). Bloomberg reported earlier this week that the Canadian cannabis producer plans to slash 10% of its workforce. The report was based on an unnamed source who said that the cuts were intended to help the company in its goal to achieve profitability.

Aurora officially confirmed a staff reduction on Thursday, announcing that it had "eliminated close to 500 full-time equivalent staff across the company, including approximately 25% of corporate positions." This move isn't surprising. Other Canadian cannabis producers have also taken steps to lower their headcount, with Tilray announcing on Tuesday that it's laying off 10% of its workforce as part of a restructuring.

Does Aurora Cannabis' staff downsizing actually upsize the appeal of this beaten-down pot stock?

Hand holding a red marker with drawings of silhouetted people profiles with red X's through many of them.

Image source: Getty Images.

Every penny counts

Few Canadian cannabis producers are consistently profitable. Aurora Cannabis certainly isn't. And every penny counts with the company's effort to reach breakeven and ultimately generate profits.

A significant staff reduction should make a big impact on Aurora's bottom line. The company spent over 81 million Canadian dollars in its fiscal 2020 first quarter on general and administration and sales and marketing costs. It intends to reduce those costs to between CA$40 million and CA$45 million per quarter by the end of the current fiscal year.

Aurora's move would be consistent with the company's previous actions to exercise increased fiscal discipline. Aurora said in its first-quarter update that it plans to hold off on completing construction at its Aurora Nordic 2 and Aurora Sun facilities. The company stated that this will save around CA$190 million in cash over the next few quarters.

Don't expect Aurora's capital expenditures to be dramatically lower when it reports its fiscal 2020 Q2 results, though. Even with the construction delays, the company's capex in Q2 is likely to be in line with the CA$108 million in the first quarter. Over the next few quarters, however, Aurora's capex should gradually decline.

A long way to go

There's no question that investors would find Aurora Cannabis a much more appealing stock if it achieved profitability. But make no mistake: Cutting nearly 500 workers won't make Aurora profitable.

Aurora's operating loss in the first quarter totaled CA$77.4 million. A staff downsizing by the company on the scale of what has been reported could help reduce Aurora's loss, but there would still be a long way to go for Aurora to reach breakeven, much less profitability.

Cantor Fitzgerald analyst Pablo Zuanic is one of the most optimistic analysts in his views about Aurora's prospects. Zuanic predicts that the company will generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of June.

That forecast is even rosier than what Aurora itself will state publicly. CFO Glen Ibbott expects adjusted EBITDA to improve but says that it will be "highly dependent" on the Cannabis 2.0 market and how quickly the retail environment in Ontario improves.

However, the early signs are that the Cannabis 2.0 market might not deliver on lofty expectations, at least not in the first half of 2020. And while Ontario is issuing more retail licenses, the process isn't moving as quickly as cannabis producers would like.

More importantly, positive adjusted EBITDA isn't the same thing as real profitability. In particular, the "I" and the "T" in EBITDA -- interest and taxes -- involve cash paid out that Aurora won't be able to use in other ways.

Down on downsizing

So will Aurora Cannabis be a more attractive marijuana stock to buy with the company reducing its workforce? I don't think so.

My rationale is partially based on the fact that Aurora will still not be anywhere close to profitability even with steep staffing cuts. And I'm also not convinced that slashing jobs helps very much over the long run. A 2017 analysis published in Harvard Business Review cast doubt on the wisdom of downsizing, stating:

While downsizing may be capable of producing positive outcomes, such as saving money in the short term, it puts firms on a negative path that makes bankruptcy more likely. While not always fatal, downsizing does increase the chances that a firm will declare bankruptcy in the future.

Although I'm not more bullish on Aurora as a result of reports that it will restructure its workforce, I'm not nearly as bearish as some are about the beaten-down stock. Aurora has plenty of problems, for sure, but it also has plenty of opportunities.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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