By Ciara Linnane, MarketWatch
Aurora Cannabis shares slid about 6% Thursday, after a report that the company is about to announce plans to lay off 10% of its workforce, becoming the latest company in the sector to move to cut costs.
Aurora /zigman2/quotes/210559470/composite ACB +2.98% , /zigman2/quotes/203734337/delayed CA:ACB +4.25% the most widely held stock of Canada’s licensed cannabis producers, did not immediately respond to a request for comment on the report from BNN Bloomberg that cited a person directly familiar with the matter. Earlier this week, Tilray Inc. /zigman2/quotes/209129655/composite TLRY +17.09% announced that it was cutting 10% of its staff.
“By reducing head count and cost, Tilray will be better positioned to achieve profitability and be one of the clear winners in the cannabis industry,” Chief Executive Brendan Kennedy said in a statement.
Jefferies analysts said they support the moves.
“Both companies have a relatively clouded path to profitability right now, very large operational footprints, a history of aggressive investments, and will likely need to raise capital in the near future (in our view),” analysts Owen Bennett and Ryan Tomkins wrote in a note to clients. “With many factors impacting sales/gross margins arguably less able to be controlled, opex (operating expense) rigor can be a key to profitability.”
Cannabis companies are struggling to achieve profitability more than a year after Canada fully legalized cannabis for adult recreational use, hampered by a shortage of retail outlets as the licensing process has proved onerous. That has allowed the black market to thrive and undercut the legal business.
Companies are now running out of money and finding it expensive to raise new funds and many have resorted to tactics such as the sale and lease-backs of real estate, job and other cost cuts and have canceled or revised the terms of previously-agreed deals.
“If investors are to get comfort that profitability in any form is achievable for these names, actions such as those reported are much-needed, in our view,” the Jefferies analysts wrote. They added that they expect similar action from Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC +1.36% /zigman2/quotes/202205609/delayed CA:WEED +5.07% , the market leader thanks to a $4 billion investment from Corona beer brewer Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ -0.92% , in the near term.
Jefferies rates Tilray and Aurora as hold.
In a sign of just how challenging the Canadian market has become for legal cannabis companies, the Massachusetts recreational market in its first year has grown to reach more than half the legal sales recorded for all of Canada, according to data from law firm Vicente Sederberg LLP.
Data shows that the commonwealth, with a population of 6.9 million, sold about $509 million of legal weed in the period stretching from Nov. 2018 to end Jan. 2020. Data from Canada — population 37 million — shows retailers sold C$908 million ($683 million) of legal weed in the first year, according to news site 420intel.com.
“In both states, black market competition will be a continued challenge for legal operators due to high taxes and heavy regulation in California and a lack of a sizable legal wholesale supply market in Michigan in the near term,” Canaccord analyst Bobby Burleson wrote Thursday.