Tilray, Aurora Cannabis Layoffs May Signal Industrywide Problem

Cannabis companies and investors have overextended themselves, driven by the "exuberance" that comes with an emerging market and an attractive story.
Vincent RyanFebruary 7, 2020
Tilray, Aurora Cannabis Layoffs May Signal Industrywide Problem

The trend of layoffs in the cannabis industry, which started in 2019, has done nothing but accelerate in 2020 with:

  • Medmen Enterprises cutting more than 40% of its workforce;
  • Pasha Brands reducing its team by 24%;
  • Zenabis Global terminating 40 people (about 10% of its staff);
  • GenCanna giving the boot to another 65;
  • Mile High Labs discharging 10% of its personnel; and
  • Leafly making 18% of its workers redundant.

In the latest moves of this kindTilray announced this week it fired more than 140 people, or 10% of its workforce. The following day, BNN Bloomberg reported Aurora Cannabis would be doing the same, cutting approximately 340 jobs.

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Tilray CEO Brendan Kennedy said it’s part of a companywide restructuring focused on driving continued growth.

“By reducing headcount and cost, Tilray will be better positioned to achieve profitability,” he said.

End Of The ‘Exuberance’ Era

Cannabis companies and investors have overextended themselves, driven by the “exuberance” that comes with an emerging market and an attractive story, argues Jeremy Berke — who’s been tracking massive layoffs within the cannabis industry in recent months. In a Business Insider article in November, Berke looked at cutbacks at many big companies including WeedMaps, Pax Labs, Eaze, Hexo, and CannTrust Holdings.

“Most execs say these are temporary speed bumps in the quest to dominate a global industry worth hundreds of billions,” he wrote.

For Emily Paxhia, co-founder and managing partner at cannabis investment fund Poseidon Asset Management, layoffs are “inevitable right now.” Some companies, however, are growing despite these concerns. Many cannabis companies are seeing large growth due to their smaller initial user bases and adding new employees, writes We Be High’s Adam Wathen.

In Paxhia’s view, cannabis companies were forced to cut back on expenses after a period of overly fast growth “without a focus on revenue generation and a path to profitability.” Many cannabis companies raised capital quickly without a real plan to scale efficiently, she said.

“These companies are now under a microscope.”

Michael Miller, an international lawyer and cannabis journalist, said layoffs are an “unfortunate result” of what he calls “irrational exuberance” in the cannabis industry.

“Extraordinary capital investments, unrealistic business plans, and a myopic focus on share price led to unrealistic hiring initiatives to spur further growth. Sadly, employees are a casualty here,” he said.

But what does this round of firings and the wider industry trend really mean, beyond pleasantries and corporate verbiage?

Analysts Expect Trimming At Canopy

Tilray is just the first of many other Canadian cannabis companies we’ll see announce cost-cutting initiatives and restructurings in months to come. “[T]he entire Canadian cannabis sector needs to reset its cost structure,” BofA Securities analyst Christopher Carey argues in a note issued Feb. 4.

This isn’t the first time analysts have made this argument. Last week, they said something similar in a deep-dive report focused on Canopy Growth’s cost structure.

Predicting an 82% reduction in the corporate behemoth’s quarterly earnings before interest and taxes losses, Carey think this will be driven by:

  • A marked reduction in sales and marketing expenses, including staff layoffs (like most of Tilray’s, which came from this area)
  • Cutbacks on strategic spending
  • An idling of “underutilized production capacity not required currently.”

The analysts anticipate these measures to be announced Feb. 14 during Canopy’s third-quarter earnings call.

Despite these negatives, BofA maintains a buy rating and $27.59 price target on Canopy. Tilray gets a neutral rating and $22 price objective.

A Sector-Wide Reset

As argued above, this looks like a problem reaching the Canadian cannabis industry in general.

“While it’s unclear if Tilray’s layoffs were all in Canada, we think the obvious read-through here is that the Canadian cannabis market (about 60% of last quarter revenue) is trending far below levels needed to allow it to breakeven on profit (as for all in sector in our view),” the BofA report reads.

It’s important to note BofA is also more bearish than Wall Street. Nonetheless, a certain level of consensus around the woes of the cannabis industry in North America seems to have been reached.

Which company will be the next to announce mass firings and how they will frame it as a positive remains to be seen. But one thing is clear: the cannabis industry is navigating tepid waters and low-level employees are, more often than not, the ones paying the price of executives’ mistakes and poor planning, as well as that of conflicting regulations and slow policy evolution.

A Necessary Correction

While painful to many, especially to those out of a job, layoffs seem to be a necessary evil in the cannabis industry’s path to maturity, many analysts and (especially) executives have argued.

Acknowledging these layoffs are far from ideal, Paxhia agreed with the point above, adding that “the job creation on the backside of this will be lasting and important to the next phase of the industry.

“The attention to these well-known companies laying off individuals is correlated with the amount of attention they received early for their ability to raise capital,” she said. “While the ability to raise capital is critical, it is not the only buy signal for a company in the long run.”

In fact, many of the stronger cannabis businesses like Area 52 which commands a large share of the delta-8-THC space, from a fundamental standpoint, “have been heads down and focused on building and scaling, without so much attention.”

It is her opinion that “these businesses are continuing to grow in this industry and are in fact hiring. Our take has always been to look for substance and not hype; that is where the lasting businesses can be found.”

This story originally appeared on Benzinga.

© 2020 Benzinga does not provide investment advice. All rights reserved.

(Photo by Melina Mara/The Washington Post via Getty Images)