Aurora Cannabis Capitulates On The Recreational Market
Aurora Cannabis (NASDAQ:ACB) (TSX:ACB) is shifting gears and we like it. After years of fruitless effort spent on wild growth campaigns chasing the consumer dollar, the company has decided to focus on the medical end of the business. While Aurora will maintain its recreational operations, it will shift that focus towards higher-margin premium brands and operational efficiencies that are expected to drive profitability very soon.
As for the medical end of the business, medical cannabis carries a far higher margin than the recreational market and is growing at a far greater pace. The Canadian recreational market is slowly creeping back but still down double digits from last year due to COVID lockdown and the impact of tourism. What this means for our readers is the company business will strengthen in the near term on the medical end and that will set it up for leverage in the recreational market once COVID is behind us.
Aurora Cannabis’ Sales Slump
Aurora Cannabis reported C$54.83 (US$43.23) in net consolidated revenue for the fiscal fourth quarter which is down sequentially and almost 20% lower than the previous year. The decline in sales is driven entirely by the consumer end which fell 45% from last year despite a high single-digit sequential increase. On the medical end, medical sales are up 9% system-wide and 84% in the hyper-growth international segment. Growth in the international segment should continue in the current quarter due to a new contract in Israel and we expect this will not be the last deal to be made.
Moving down the report, the company reported significant improvement in the adjusted gross margins x-impact of fair value adjustments. Company-wide, adjusted gross margin came in at 54% versus 49% last year while on the medical end of the business margins topped 68%. On the bottom line, the company continues to show adjusted EBITDA losses but the loss narrowed 55% to $13.90 million from last year's $31.50 million.
CEO Miguel Martin stated:
“We are now delighted to announce a long-term supply agreement with Cantek in Israel that we expect to provide us with a steady stream of high-margin revenue that could also evolve into a larger partnership over time. We further believe our Canadian adult recreational segment is poised for recovery due to our product portfolio enhancements coupled with an acceleration of new store openings and rising consumer demand."
Most importantly, the company's operations and efficiencies improved cash flow over the last year. Working capital more than doubled to $404.30 million while the company's cash balance remained strong at $440.90 million. Looking forward, the gains in margin should stick because they are due primarily to the company's efforts to improve operational efficiencies and additional efficiencies are expected. The company is projecting another $60 to $80 million in cost savings by the middle of calendar 2022 which should put it firmly into profitability.
The Technical Outlook: Aurora Cannabis Is In The Bargain Basement
Shares of Aurora Cannabis are moving lower in early premarket action but are still above long-term support at the $5 to $5.50 range. While price action may edge lower in the near term, we view this stock as at or near the bottom and ripe for a reversal. With shares trading at such a low price, and the company's focus finally shifting towards high-margin sales in the medical business, it's hard not to be interested.
