- Aurora Cannabis should benefit from expanded Canadian cannabis retail store openings in 2020.
- The Canadian market remains very inefficient with key provinces of Ontario and Quebec lacking retail stores.
- Even based on planned store expansions in 2020, the company would only see a 25% boost to consumer cannabis revenues.
- The stock has a $2 billion valuation with analysts only forecasting sales reaching $356 million in FY21.
- This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »
As Aurora Cannabis (NASDAQ:ACB) flounders around $1.50, the negatives surrounding the stock shouldn't completely overshadow the opportunities for the Canadian cannabis market in 2020. The company has substantial catalysts in 2020 including additional retail stores in Canada, the rollout of Cannabis 2.0 products and global expansion including the U.S. CBD market. This article is the first in a series of articles discussing the 2020 catalysts for Aurora Cannabis with a focus on the opportunity for more retail stores in Canada.
Image Source: Aurora Cannabis website
More Stores Needed
The retail store issue in Canada was identified as an issue all the way back with the start of legalized recreational cannabis in October 2018. The market long identified the delayed Ontario stores as a problem for cannabis sales, but the issue was probably larger than expected.
Even back last May, Globe and Mail reported on this detailed analysis by AltaCorp Capital of the retail store issue in Canada. The firm analyzed the amount of retail stores in Colorado compared to the amount in Canada based on the comparison of populations.
The study suggested last May the need for 1,400 store in Ontario and over 800 in Quebec. The largest two provinces based on population in the 2016 Canadian census only have ~60 stores now when the estimate is a need for over 2,200 stores based on Colorado.
Not only are these two provinces the largest based on population, but the combined population of 21.6 million people in 2016 accounts for 61.5% of the population in Canada. A lot of people probably wrongly assume Alberta and British Columbia are more populated provinces, but the reality is that Quebec is a huge part of the problem with slow cannabis store rollouts.
According to estimates for 2019 populations, Ontario and Quebec account for 23.2 million of an estimated population of 37.8 million. When adding in Alberta and British Columbia, these four provinces account for an estimated 32.7 million people or ~86.5% of the population.
The January OrganiGram Holdings (OGI) earnings conference call detailed the current retail store counts suggesting how little Canada had progressed on this front despite the knowledge months ago regarding the lack of stores selling cannabis. Based on the original analysis, Alberta was the only province anywhere close to the targeted store counts.
- Ontario - 27
- Quebec - 33
- Alberta - 375
- British Columbia - 134
According to Market Insiders, an even bigger issue is the market efficiency of existing stores. Based on Q3 store numbers and the estimated number of cannabis users, the top two provinces were very inefficient with fewer than one store per ~14,000 users while most of the smaller provinces had potentially too many stores.
Source: Market Insiders
The impact of more retail sales is visible in the December sales reports. Canadians spent ~C$146 million on legal cannabis during the month placing the annualized rate at C$1.75 billion now.
Cowen analyst Vivien Azer has downgraded the 2020 sales forecast for the Canadian cannabis industry by 32% to C$3.5 billion. The amount is still the equivalent of doubling the December sales level in 2020 suggesting more cuts are needed.
According to Bloomberg Canada, the cannabis store counts have grown by 50% in the last few months to 784 stores with the following totals by province:
- Alberta added +140 (278 to 419)
- British Columbia +70 (82 to 154)
- Quebec +13 (23 to 36)
- Ontario +10 (24 to 34)
The totals again match up with the numbers from OrganiGram back in January. Alberta is now fully efficient while the other three main provinces aren't anywhere close to the needed totals. Going back to last May, BC, Quebec and Ontario need 2,700 cannabis stores to match Colorado and these provinces currently have ~224 for less than 10% of the target.
Ontario will start adding 20 stores per month beginning in April bringing another 180 stores on board by the end of 2020 in addition to the stores selected via the last lottery. One should assume Canada reaches a store count of 1,000 by the end of 2020.
Quebec has a target of only reaching 50 retail stores so the biggest issue with the cannabis trade is that the top two provinces by population are end 2020 nowhere near efficient cannabis store counts.
So if my thesis is correct that only additional stores in Ontario and Quebec after the current quarter will provide a real boost to cannabis sales, investors need to realize the upside is only in the range of 200 store for the rest of 2020. This amounts to about 25% growth from the current levels.
For Aurora Cannabis, the company guided to sequentially flat FQ3 sales of C$63 million. The company doesn't expect any sales growth despite a forecast for up C$7 million worth of sales from Cannabis 2.0 products and the launch of the value brand, The Daily Special.
Based on FQ2 results and guidance, the company generates the majority of sales in the Canadian medial and recreational markets. More retail stores should really only boost the recreational market where one could forecast the 25% growth in key stores pushing quarterly consumer cannabis sales up from C$33.5 million in December to C$41.9 million by this December.
Source: Aurora Cannabis FQ2'20 MD&A
Analysts now forecast the quarterly revenues reaching $69.9 million in the December quarter or the equivalent of C$93.2 million. Based on the store count growth, the market may actually be too aggressive on these revenue numbers.
Source: Seeking Alpha earnings estimates
Aurora Cannabis will need substantial medical cannabis growth in Germany or CBD sales in the U.S. to reach this revenue target.
The key investor takeaway is that investors should obtain a clearly picture now that the Canadian cannabis t=retail store expansion will help in 2020 and beyond, but Aurora Cannabis needs improved sales from other areas to reach targets. The stock has a market valuation approaching $2 billion and analysts only forecast sales reaching $356 million in FY21 ending in June. The stock will need more than just retail store expansion to make it a Buy.
Looking for a portfolio of ideas like this one? Members of DIY Value Investing get exclusive access to our model portfolios plus so much more.
This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.