When I first heard about the nearly 11,000-square foot Aurora Cannabis (NASDAQ:ACB) flagship store opened in Calgary last month, my first instinct was to think of a clever, “what were they smoking” metaphor. My second and more pressing concern was on the timing and cost of this endeavor for holders of Aurora stock.
I get that ACB is trying to create “an experience” for customers, particularly millennials whom experts say are particularly keen on that sort of thing. Even so, I find it curious that the pot company also plans to sell Aurora clothing, coloring books, and natural soap along with cannabis and the paraphernalia people need to consume it. Maybe they’re just fulfilling the promise of being vertically integrated and horizontally diversified across various segments of the cannabis value chain, Then again, are the margins on legal weed that bad?
Profits Remain Elusive
Remember that Aurora Cannabis isn’t profitable and probably won’t be in the black anytime soon. Investors were livid last month when the company announced a dilutive convertible bond deal along with plans to scale back its heavily promoted expansion plans. Let’s not forget that earnings lagged expectations, broadly disappointing ACB stock holders.
Furthermore, Aurora has $3.17 billion of goodwill on its balance sheet, which for a company with a market capitalization of $2.6 billion, is not a good sign. ACB stock has plunged more than 50% amid questions of whether the company will need to raise additional capital. Indeed, the last thing that ACB needs to do is take a significant risk on a multi-million dollar bet on what it “modestly” calls a “Retail Destination and Global Centre for Cannabis Education, Discovery and Community Engagement.” It also doesn’t make sense, given the broader macroeconomic trends.
Cannabis Supply And Demand
One lesson that U.S. investors can learn from their neighbors to the north is that legalization doesn’t guarantee profits. Indeed, as Canada’s National Post newspaper recently noted, government data shows that the legal pot market has only displaced 14% of the black market in the year. One reason for this phenomenon is that illegal weed is way cheaper than the legal stuff. According to the Post, the average price for legal cannabis was 10.23 CAD ($7.76) per gram in the third quarter compared with 5.59 CAD for the black market stuff.
To be sure, the development of Canada’s pot market is being hindered by government red tape. There is a shortage of retail stores in Ontario, the country’s most populous province. Unfortunately for ACB shareholders, the situation is different in Alberta, the far Western province where Calgary is located. Officials there are expecting 500 cannabis stores in the province to be opened by the end of 2021. Calgary already has 66 pot shops, the most of any Canadian city by far. Alberta has roughly 4.3 million people, approximately the same size as the U.S. state of Oregon, which has about 565 dispensaries.
Not surprisingly, competition has driven down prices in Oregon to the lowest levels in the U.S. The same thing will happen in Canada, which will make it harder for ACB’s flagship store to turn a profit. It is yet another reason to avoid ACB stock.
As of this writing, Jonathan Berr doesn’t own any shares of the stocks mentioned above.
