This month, Aurora Cannabis (ACB 2.17%) will release earnings for its second quarter in fiscal year 2021 -- the first quarter during which new CEO Miguel Martin was at the helm for the entire time. He's the third person in charge of the company within the past year, following the departures of Terry Booth and Michael Singer. This report will offer some indications as to whether investors are dealing with the same old Aurora, or if it's finally making some real progress.
Arguably, Aurora's biggest problem has been its own inability to stay out of the red. And in recent quarters, even its top line hasn't been looking all that great, either. Here's a closer look at both of those items and what investors should be watching for when Aurora releases its results.
Positive adjusted EBITDA -- often promised, never delivered
The key thing investors will be looking at in the results for the quarter, which ended on Dec. 31, is the bottom line -- adjusted EBITDA, specifically. Aurora Cannabis has consistently struggled with profitability.
During the earnings call for fiscal 2019's third quarter, management said the company was on track to post a positive EBITDA for the fiscal fourth quarter. That didn't end up happening. Then, in June of last year, the company again said it was on track to achieve positive adjusted EBITDA for fiscal 2020's Q1, but just a few months later, it pushed the goal again to fiscal Q2.
On Dec. 16, the company said that while it expects to report an improvement on the adjusted EBITDA metric in fiscal Q2, due to a change in strategy to focus more on consumer packaged goods, it would once again be a negative number. And management did not provide a new forecast about when it might achieve the goal of positive adjusted EBITDA.
Investors will still be looking for some significant improvements in adjusted EBITDA, especially since the company is focusing more on selling its higher-priced, premium brands. This is a change in direction; under previous leadership, the company launched Daily Special, a value brand that focused on a low price point, seeking to be more competitive with the black market. While it's not abandoning the value brand, by pivoting toward higher-margin products including vapes and edibles, the company's bottom line should improve.
When the Alberta-based company released its first-quarter fiscal 2021 results on Nov. 9, it recorded an adjusted EBITDA loss of 57.9 million Canadian dollars for the period, which ended Sept. 30. That was a worse result than the previous quarter's CA$34.6 million loss.
The bottom line isn't the only issue
Another problem is that Aurora is struggling to grow its sales. In fiscal Q1, net sales of CA$67.8 million were down 1.3% sequentially. And that slide came despite its strength in the Canadian market. As Martin noted at the time, "we remain the leader by revenue in the high-margin Canadian medical market, our international medical business experienced more than 40% net revenue growth this quarter, and our CBD brand Reliva is No. 1 ranked by Nielsen in the U.S. CBD sector."
The company's poor sales numbers are also surprising given that the Canadian pot market has fared well on the whole during the pandemic. Data from Statistics Canada show that retail cannabis sales rose from CA$154.1 million in January 2020 to as high as CA$270 million in October.
The ability to act on growth potential is what attracts (and reattracts) many investors to the marijuana sector, and Aurora simply hasn't been delivering on that of late.
Is Aurora worth the risk?
Since Nov. 1, just before U.S. election that resulted in four more states legalizing recreational marijuana, Aurora's stock has been flying. It's up by around 225%, and performing far better than sector-tracking Horizons Marijuana Life Sciences ETF, which is up by 130% over that period. That surge could set the pot stock up for yet another sell-off, especially if the company disappoints investors with its upcoming earnings report, and its new CEO isn't able to give investors a reason to remain optimistic.
But it may be too soon to expect some of the changes management has been making to significantly impact financial results. In December, Aurora announced it would be laying off 214 workers reducing operations at its Aurora Sky greenhouse by 75%. That move came after its November decision to pause operations at its Aurora Sun facility.
However, that still shouldn't excuse the company from showing some improvements in the upcoming report, as struggling sales numbers and a weak bottom line aren't new problems for Aurora, and they're issues Martin would have been well aware of when taking over as CEO.
For now, Aurora Cannabis should be viewed as too risky of a buy for the average investor. Until the company posts results that indicate otherwise, you're better off avoiding the stock and investigating other cannabis sector picks instead.