Aurora Cannabis (TSX:ACB)(NYSE:ACB) has become a poster-child for profitability issues in the cannabis industry. Following several quarters of losses and a suspension of sales in Germany, the company’s shares went on a major downward spiral last year, as shareholders lost faith in its ability to deliver value.
Aurora, like many other cannabis producers, has long faced questions about the value of acquisitions it pursued in the lead up to legalization in 2018. This past Thursday, those concerns were validated, as the company announced it was writing down $800 million of its goodwill and pursuing various cost-cutting initiatives.
The announcement, which also revealed that the company’s CEO Terry Booth was stepping down, broadly indicated that the company will be restructuring to move toward profitability. The question is, will it be enough?
The company is laying off 15% of its staff
The biggest story out of Aurora’s recent announcement is that the company plans on laying off 500 workers. With 3,400 workers in total, that represents about 15% of the company’s payroll. Most of the cuts will be corporate positions, so the layoffs shouldn’t immediately impact Aurora’s ability to grow and sell cannabis.
However, depending on which positions are being cut, the company could lose considerable talent in marketing, sales, and other crucial departments. Further, there are serious questions about whether the money saved through layoffs will even be enough to turn Aurora’s financial ship around.
Why the layoffs may not cut it
For Aurora’s layoffs to improve its profit picture, they’ll need to put a serious dent in the company’s losses. Unfortunately, that may not come to pass. For the 2019 fiscal year, Aurora posted a net loss of $297 million. Assuming that the 500 employees Aurora is laying off are earning $100,000 on average, then the company will realize $50 million in savings from the layoffs, which wouldn’t have been enough to swing 2019’s loss to a profit.
Further, when it comes to things like layoffs, the devil is always in the details. If the company is laying off crucial marketing staff, it may suffer from lower sales. If it’s cutting the legal department, it may be more vulnerable to regulatory and compliance risks, that could cost it money down the line.
So far, Aurora hasn’t released exact details on which jobs are being cut, apart from the vague statement that these will be “corporate positions.” That doesn’t tell us much, but it’s enough to indicate that the company feels it needs to trim the fat to become profitable, which usually isn’t a great position to be in.
In 2019, Aurora Cannabis was one of the worst-performing cannabis stocks, falling far more than the industry-tracking Horizons Medical Marijuana Life Science ETF. This year, it looks like the company realizes the seriousness of its predicament and is getting desperate to turn things around. As we saw from Bruce Linton’s departure from Canopy Growth, big management and staff shakeups at cannabis companies often precede bad news. If that holds true for Aurora, expect more pain in 2020.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Button has no position in any of the stocks mentioned.