When Aurora Cannabis Inc. announced last week that co-founder and Chief Executive Terry Booth would retire, it also revealed another loss to come: A quarterly deficit of roughly a billion dollars.
Aurora ACB, -1.28% ACB, -1.44% is scheduled to report fiscal second-quarter results Thursday morning, and it is expected to reveal a loss of about C$1 billion ($750 million) thanks to goodwill and asset-impairment charges that it disclosed amid a big shakeup for the Canadian cannabis company. Aurora said it planned write-downs of C$740 million to C$775 million in goodwill as well as C$190 million to C$225 million worth of intangible property, plant and equipment charges.
As MarketWatch has previously reported, Aurora — and other Canadian weed companies — made a batch of acquisitions in the heyday of pot-stock mania, buying assets at values that now appear to be inflated. Aurora was the king of such deals, accruing about $2.4 billion in goodwill on its balance sheet, a large portion of which was from its acquisition of Medreleaf.
In a conference call last Thursday, Chief Financial Officer Glen Ibbott said that the impairment charges were related to operations in South America and Denmark and that its core Canadian assets weren’t affected by the write-downs. Beyond the non-cash impairment charges, Aurora also said that it was expecting to record a C$12 million write-off for future product returns and price reductions related to products that were sold in prior quarters, mostly in the first half of calendar 2019.
Aurora also announced a 500-person layoff, capital expenditure reductions to roughly C$100 million and restructuring of its debt. Executive Chairman Michael Singer will take the helm as interim CEO until a permanent replacement can be found.
In Thursday’s earnings conference call, investors should expect to hear executives discuss how the company plans to forge ahead in spite of financing challenges and management turmoil, as well as get more details on the company’s plans and forecast for the remainder of the fiscal year.
What to expect
Earnings: The FactSet consensus calls for losses of C$0.08 a share, versus a loss of C$0.25 a share in the year-ago period. Aurora said it expects its cash costs per gram of dried pot will remain below C$1.
Revenue: Analysts polled by FactSet expect Aurora to report fiscal second-quarter revenue of C$61.7 million, versus C$54.2 million a year ago. But the company’s second-quarter sales are expected to decline sequentially from first-quarter revenue of C$75.2 million. The vast majority of the company’s sales are from Canadian recreational and medical cannabis.
Aurora said Thursday it expects net cannabis revenue of $C50 million and C$54 million for the fiscal second quarter and cannabis revenues of C$62 million to C$66 million. Singer said that the company expected little or no sequential sales growth in the fiscal third quarter.
Stock movement: U.S.-traded shares of Aurora lost a little more than half their value in the past three months, while the S&P 500 index SPX, +0.17% notched a gain of 8.6%. In the past three months, the ETFMG Alternative Harvest ETF MJ, +1.33% , which tracks a basket of pot stocks, fell 19.4% as the Cannabis ETF THCX, +1.66% fell 26%.
What analysts are saying
Analysts haven’t had much nice to say following the announcement last week. Stifel analyst W. Andrew Carter wrote in a Feb. 7 note that, “We believe Aurora’s status as a going concern is now in question, and we believe that even if the company navigates through the challenging environment, there will be limited value for the equity holders.”
Carter, who has a sell rating on Aurora with a C$1 target price, wrote that Aurora won’t be able to keep pace with the “demands of a dynamic market” and that the company’s outlook leaves “little room for error.”
Jefferies analyst Owen Bennett wrote in a note to clients last week that Terry Booth stepping down was “not a major surprise” because he faced criticism over his “lack of publicity” and that the company needed a “leadership profile” geared toward execution versus entrepreneurship and promotion. Bennett said that the new CEO is expected to have significant CPG (consumer packaged goods) experience in line with the two new board members also announced Thursday.
Jefferies has a C$1.90 price target on the name and rates the stock a hold.
In a January note to clients, MKM Partners analyst Bill Kirk wrote that Aurora’s executives had a 50% chance of getting their predictions correct. Aurora was right all of the time when making negative predictions, but only 46.2% of the time when making positive forecasts, according to an analysis.
“Aurora management, led by Terry Booth and Cam Battley, offered some of the most optimistic and ultimately incorrect predictions,” Kirk wrote in a second note just after Aurora’s announcement last week. “We believe this optimism, particularly around growth and profitability created an organization with a bloated cost structure and a capital structure with burdensome convertibles and a heavily diluted equity base.”
Kirk rates the name a sell with a C$2 target price.
Of the 19 sell-side analysts who cover Aurora, four have the equivalent of a buy, 11 rate the stock a hold and four have the equivalent of a sell on the name. The average price target is $2.08, which represents a 33% gain from Monday’s close of $1.56.