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Why Aurora Cannabis Should Reduce Its Global Footprint, Too

By David Jagielski – May 2, 2020 at 8:39AM

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The company needs to shed a lot more expenses if it wants to get close to breaking even this year.

Aurora Cannabis (ACB 4.31%) needs to improve its performance this year. There's just no way around that. The stock is down more than 65% in the first four months of 2020; it's performing much worse than the Horizons Marijuana Life Sciences ETF (HMLSF -11.90%), which has declined by just 28%.

The company needs a way to rally investors, and there's no better way to do so than by improving on its financials; the pot producer's recorded an operating loss in every one of its past 10 quarterly results. And with little -- if any -- sales growth expected next quarter, it'll need to be more aggressive on the cost-cutting side of things in order to do that. That could mean taking a page out of Canopy Growth's (CGC 4.38%) playbook and cutting back on its international operations.

Slashing costs is the only option this year

Canopy Growth is in a much better position than Aurora Cannabis. Not only does it have a key investor, Constellation Brands (STZ 0.03%), at its disposal -- the beverage giant invested $4 billion in the company back in 2018 -- but the Ontario-based pot producer's also sitting on 1.6 billion Canadian dollars in cash and cash equivalents as of Dec. 31. In contrast, Aurora's failed to find a partner of its own, and as of March 31, it said its cash balance was CA$205 million.

But a big cash balance isn't sufficient for Canopy Growth's new CEO, David Klein, who's come over from Constellation Brands. The new boss is slashing costs left and right. This year, management has announced that it will be exiting some markets, scaling back operations in others, and continuing to lay off staff. In April, Canopy Growth announced 200 layoffs at locations in North America and the United Kingdom; in the previous month, it announced layoffs totaling 500 employees.

Hands trimming cannabis plants

Image source: Getty Images.

Aurora announced its own cuts in February, when it said it would cut 500 positions (revealing at the same time that its CEO, Terry Booth, would be retiring as well). But given that Aurora may only have a few months of cash flow left according to investment bank Ello Capital, deeper cuts are likely warranted. While cannabis sales in Canada have been strong during the coronavirus pandemic, it's not a trend that may be sustainable, especially as job losses continue to mount.

That's why in order for Aurora to improve its financials and give new investors a reason to invest in the company this year, it's going to need to be a lot leaner and more efficient. And that means scaling back on operations, especially those that aren't critical.

Why the company's international operations should be fair game for cutbacks

Aurora's prided itself on its large global footprint, and it does have a presence in more than two dozen countries. But markets outside Canada, its home, are just not that developed. Canada and Uruguay are still the only countries where recreational marijuana is legal at the federal level. Divesting and cutting back overhead and costs associated with its international operations could help the company simplify its operations while making strides in bringing its expenses down.

During the six-month period ending Dec. 31, Aurora generated CA$131.3 million in net revenue. Of that total, CA$122.4 million, or 93% of sales, came from Canada. The European market contributed just CA$8 million in revenue, while other markets added CA$0.9 million. While international markets may play a key role in the company's long-term growth and future, Aurora may not be around long enough to see that growth come to fruition if it continues to churn out losses and burn through cash flow along the way.

Why investors should care

Aurora announced in April that it would be looking to raise more capital in order to "provide further balance sheet strength and preserve flexibility." In short, this means investors can expect more shares issued and more dilution in the company's future. And that's going to send the stock even lower. Until Aurora makes deep cuts to its operations to help it generate positive cash flow, investors could be facing a lot more pain in 2020.

Following in the footsteps of rival pot stock Canopy Growth may not be such a bad idea. Making more aggressive moves could win back investors, because at this point, there's not a whole lot of reason to be bullish on Aurora.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.21 (4.31%) $0.05
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$232.73 (0.03%) $0.07
Canopy Growth Stock Quote
Canopy Growth
$2.86 (4.38%) $0.12
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$4.00 (-11.90%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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