Aurora Cannabis (NYSE:ACB) has earned investor attention this year for one tough reason -- it's desperately trying to recover from a disastrous 2019. The stock dropped 56% last year, compared to the industry benchmark Horizons Marijuana Life Sciences ETF's decline of 36%. There were various external headwinds in Canada, such as regulatory delays that led to fewer legal stores, which allowed the black market to thrive. Furthermore, Aurora made rather haphazard spending decisions in a series of acquisitions and expansions, which have increased the company's debt burden. As of March, the company was toting a total debt of CA$593 million.
Cannabis sales have increased this year amid the pandemic, as the product continues to behave more like a consumer staple. Although revenue numbers look promising, profitability is still in question for many marijuana companies, including Aurora Cannabis. Aurora made some operational changes in June, which it calls "facility rationalizations," to reduce costs and improve its overall financial health. To what extent these measures have helped will be clearer when the company reports its fourth-quarter results on Sept. 22.
The company gave a sneak peek of where it is heading with its preliminary Q4 results and some other business updates on Sept. 8. And unfortunately, they weren't exactly appealing. Aurora's market cap has slipped from $812.7 million at the start of the year to $793 million as of Sept. 16. Let's take a look at the company's early updates before deciding whether the stock is a buy during its dip, or if savvy investors should stay far, far away.
Aurora's preliminary Q4 results don't look good
Aurora expects that its net revenue for Q4 will fall in the range of 70 million Canadian dollars to CA$72 million, slightly lower than third-quarter revenue of CA$75.5 million. Aurora also expects adjusted gross margin to ring in between 46% and 50%.
The recent press release also noted Aurora's efforts to reduce its selling, general, and administrative (SG&A) costs in Q4. Management expects SG&A costs to come in between CA$60 and CA$65 million, which is an improvement from CA$100 million in Q2. The company shut down some facilities in June as part of its facility rationalization plans, from which it expects operational cost reductions of up to CA$10 million per quarter starting in the second half of fiscal 2021.
Considering its measures to reduce costs, achieving profitability should, in theory, be easier. But that's not the case for Aurora. In its June business update, Aurora committed to achieving positive EBITDA by Q1 2021. However, now the company says that it will only be able to achieve positive EBITDA by the second quarter of fiscal 2021. EBITDA is a measure of profitability that determines how well the company is handling its operating expenses. The company also estimates it could record a whopping CA$1.8 billion in goodwill impairment charges in the fourth quarter, however, it didn't provide any further details about these charges.
A new CEO is in charge -- what's next?
In a separate press release on the same day, Aurora announced the appointment of Miguel Martin as its new CEO. Martin served as the company's chief commercial officer since July, before which he served as CEO of U.S. cannabidiol (CBD) company Reliva. Aurora acquired the hemp-derived company in March for $40 million of its common stock. Aurora hopes to expand its CBD market in the U.S. through the acquisition.
C-suite leadership changes are nothing new to the marijuana industry. Aurora's CEO Terry Booth stepped down in February, and last year, Canopy Growth (NYSE:CGC) CEO Bruce Linton's termination came after Constellation Brands (NYSE:STZ) made an initial investment of CA$245 million in October 2017. Constellation Brands wasn't happy with Canopy's recurring losses and believed a leadership change was essential. Constellation's CFO David Klein took over the role of Canopy's CEO effective Jan. 14.
Similar to Canopy, hopes are that Aurora's new CEO's experience in consumer goods will be advantageous for the company. There's other industry evidence of success from such a shift. Irwin Simon, who has 25 years of experience in the consumer packaging industry, turned Aphria (NASDAQ:APHA) around after he took the reigns as CEO. Aphria is currently the only profitable Canadian cannabis company -- it reported a consolidated adjusted-EBITDA of CA$8.6 million in its recent fourth quarter, which ended May 31.
It's still important to keep in mind that every CEO is different, and it could take some time for Miguel Martin to help Aurora turn things around.
Is it a buy?
In short -- not yet. First, Aurora pushed its deadline to hit positive EBITDA again, a move which feels eerily familiar. A similar thing happened in May 2019, when management assured investors in its Q3 2019 earnings call that it would report positive EBITDA by Q4 of fiscal 2019. However, it failed to achieve that goal and instead reported an adjusted EBITDA loss of CA$11.7 million in Q4 2019. Losses kept rising afterward. That history makes it difficult for investors to trust the company's guidance again.
Revenue is rising, no doubt, but unless it achieves profitability, Aurora could opt to dilute its stock in order to survive as it did in May. Aurora's stock price dropped below $1, which is against the New York Stock Exchange trading compliance. Once a stock trades below $1, NYSE sends out a listing notification to allow the company some time to get its stock price up. Aurora consolidated its shares in a 1-for-12 reverse stock split to save its stock from getting delisted.
A similar move would be tragic for the stock price, which is already deteriorating. Shares of Aurora are down 73% so far this year, while Canopy and Aphria have also declined by 22% and 11%, respectively. Meanwhile, the Horizons Marijuana Life Sciences ETF is down 6%. Marijuana stock pickers probably shouldn't hold their breath in wait of this company's Q4 results.