Last month, cannabis producer Hexo (HEXO) made news when it announced a change in leadership. It's not an uncommon occurrence in a fast-changing industry like marijuana where companies are always adjusting their strategies. But do moves like this typically pay off?
Two of the biggest cannabis companies in Canada, Canopy Growth (CGC 10.74%) and Aurora Cannabis (ACB 5.48%), have made changes in the CEO position in recent years. The big question is, are they in any better shape today than they were when the changes were made?
The firing that rocked the industry
The one thing former Canopy Growth CEO Bruce Linton made sure people were aware of when he was let go from the top cannabis producer in July 2019 was that it was definitely a firing (Canopy Growth only said he was going to "step down").
Whatever you call it, it was significant, as the industry's figurehead was dethroned just months after announcing he had made a deal with multi-state marijuana operator Acreage Holdings for the two companies to join forces -- once marijuana becomes legal in the U.S. The transaction still isn't closed.
Beverage maker Constellation Brands, which has invested over $4 billion in Canopy Growth, ended up getting its Chief Financial Officer David Klein to replace Linton and serve as the pot producer's CEO as of January 2020.
Constellation was likely growing frustrated with Canopy Growth's mounting losses, which for the fiscal year ending March 31, 2019, topped 670 million Canadian dollars -- more than 12 times the CA$54 million loss it incurred a year earlier. Despite revenue tripling to CA$253 million, the company's gross margin improved by just CA$22 million. The results were released on June 20, just weeks before Linton was let go.
Today, the company continues to struggle with profitability, incurring losses of CA$1.7 billion in fiscal 2021 and CA$1.3 billion in fiscal 2020. Meanwhile, the company's gross margin of $88 million over the trailing 12 months is nearly identical to the CA$89 million margin Canopy Growth reported in fiscal 2019 (even though its revenue is significantly higher at CA$572 million over the past four quarters).
Despite layoffs and cost-cutting efforts, it's hard to say that Canopy Growth is really in a better position today than it was when Linton left. While it has been adding to its list of potential U.S. acquisitions and it has accumulated more revenue, its bottom line remains problematic.
If you were to buy shares of Canopy Growth in July 2019, your investment would be down more than 67% right now. By comparison, the S&P 500 has risen 56%.
Aurora's CEO also "stepped down" months later
In February 2020, Terry Booth referred to himself as "the latest carnage" in an interview with BNN Bloomberg after investors learned that he would also be stepping down from Aurora Cannabis as CEO. Investors also learned that the company would be eliminating approximately 500 positions in an effort to restructure the business. Michael Singer, who was the company's executive chairman, took over as CEO on an interim basis.
Then, in September 2020, the company would announce a permanent replacement in Miguel Martin, who remains in charge today.
News of Booth's departure came as the company reported its second-quarter results for fiscal 2020 (period ending Dec. 31, 2019). In Q2, Aurora had reported only a nominal year-over-year increase in the top line as net sales of CA$56 million were up just 3.4%.
But unlike Canopy Growth, its margins worsened. Aurora reported less in gross profit than a year ago (CA$29.9 million versus CA$32.1 million). The rest of the company's financials looked even worse, with Aurora incurring a CA$1.3 billion loss for a single quarter, driven in large part due to impairment writedowns.
Although the company's losses have shrunk in recent quarters, revenue looks identical. For the period ending June 30, net revenue was just under CA$55 million. And the period before that, it was slightly above CA$55 million.
To Aurora's credit, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss has shrunk to just CA$19.3 million this past quarter (versus CA$80.2 million in Q2 2020). But with no growth, it's hard to get excited about that.
Aurora's stock is down 69% since February 2020 (the S&P 500 has risen 43%) as it has also struggled since replacing its CEO.
Cannabis investors shouldn't read too much into CEO changes
A change in leadership may not necessarily improve a company's fortunes, as is evident from the examples at Aurora Cannabis and Canopy Growth. The problems that existed when the CEOs were replaced still appear to be concerns today. While the businesses may be slightly different, they're arguably not any better buys than they were back then.
Hexo may not necessarily end up being the same way, but it's an important reminder for investors not to read too much into the changing of a CEO, as the problems may run too deep to be addressed with just a change at the top.
Even if a turnaround is possible for a struggling company, it could take a long time for a CEO to make the necessary changes to make that happen. To minimize the risk, cannabis investors are better off going with marijuana businesses that have been delivering solid numbers in the first place, rather than hoping underperforming companies will miraculously become great investments.