Yesterday Aurora Cannabis (ACB) provided a corporate update. As a result, in the morning the stock rallied to over $15 per share, representing a 10% gain.  Yet, as the market digested this news, shares lost momentum and closed in the red, down just over 1%. 

ACB’s corporate update focused on its business transformation plan that was announced to investors back in February. Some of the highlights of their update include:

• Continuing to Execute on Corporate Restructuring & Facility Rationalization Plan Aimed at Margin Improvement and Profitability
• Exiting Fiscal Q4 2020 at an SG&A Run Rate of Approximately $42 Million
• Remains on Track for Positive Adjusted EBITDA in Fiscal Q1 2021
• ACB will also reduce its selling, general, and administrative workforce by 25 percent immediately and another 30 percent of production staff will be laid off from the company over the next two quarters.
• ACB will also shut down 5 locations over the next two quarters including Aurora Prairie in Saskatchewan, Aurora Mountain in Alberta, Aurora Ridge in Ontario, and Aurora Vie and Aurora Eau in Quebec.

Michael Singer, Executive Chairman and Interim CEO of Aurora, said, “Across our organization we continue to take decisive action and execute on our previously announced Business Transformation Plan. With today’s announcement, we have achieved our stated SG&A run-rate target and expect to operate at approximately $42 million for the first quarter of fiscal 2021. The further cost savings and margin improvement to be realized from our facility rationalization plan is another example of our commitment to deliver greater efficiency throughout the business. This has not simply been a cost-cutting exercise. We have undertaken a strategic realignment of our operations to protect Aurora’s position as a leader in key global cannabinoid markets, most notably Canada. Both the Canadian facility rationalization and inventory revaluation are expected to improve gross margins and accelerate our ability to generate positive cash flow.” 

Along with his emphasis on the fact that this was not just simply a cost-cutting exercise, Singer also said, “We believe that we now have the right balance for the long-term success of Aurora – market leadership, financial discipline, operational excellence, and strong execution. We remain focused on making Aurora a profitable and robust global cannabinoid company.”

After ACB’s update Cantor Fitzgerald analyst Pablo Zuanic raised his price target on the stock from C$27 to C$29 and reiterated his overweight rating. 

Zuanic said, “The cuts should allow the company to work with $40-45Mn SGA (sales, general and administrative costs) per quarter in FY21 (less than half the Sep-Mar quarter averages) and improve gross margins by as much as 8 points,” Zuanic wrote in a note to clients. He also stated that “Cash flow targets were also confirmed (stable inventories; CAPEX of $25 million for 4Q20 and $10 million per quarter in FY21).” 

Like Zuanic, we are optimistic about ACB.  If ACB can prove themselves over the next two quarters and manage to post positive EBITDA by Q1 2021 then we believe the company has a solid chance at a substantial recovery. 

(Disclosure: The author is long ACB)

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ACB shares were trading at $13.82 per share on Wednesday afternoon, up $0.24 (+1.77%). Year-to-date, ACB has declined -46.68%, versus a -4.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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