Cresco Labs Earnings release

What I said last Q

Pluses

• Sales increase +6% ok but not great for a holiday quarter.
• Self owned retail was +14% QoQ
• Inventory increased and should be sufficient to fund sales growth.

Minuses:

• Wholesale cannabis sales were flat QoQ. This is a “wholesale” company.
• SGA increased $8 million QoQ

This Q:

Pluses

• Sales increase +10%
• Self owned retail was +15% QoQ while wholesale was +6%
• GM rebounded but remains below record level in Q3F20

Minuses:

• OPEX increases $11 million and +3% of sales to 40%

They add Verdant in Ohio.  PP $27 million.  G/I $28 million.

The MDA does not discuss changes QoQ.  You get YoY comparisons and that is it. Makes it tough for investors to analyze operations.

Income Statement Drivers & Breakeven: Trend

Sales Split and Deltas:

Footprint:

• Illinois: Cultivation 3, Dispensaries 10

• Penn: Cultivation 1, Dispensaries 3
• Ohio: Cultivation 1, Dispensaries 5 (+4 QoQ on Verdant closing Feb 26, 2021)

• Cali: Cultivation 3 Processing 1, Distribution 2
• Arizona: Cultivation 2, Dispensaries 1
• Maryland: Cultivation 1
• NY: Cultivation 1, Dispensaries 4
• Mass: Cultivation 1, Dispensaries 1
• Michigan: 1 cultivation

Adding

• Florida: Cultivation 1, Dispensaries 8 in April 2021

Total

• Dispensary 24 (+4 for Q)

Their sales have increased $16 million to $178 million.  Good to see growth picked back up QoQ after dropping to 6% in a holiday Q in Q4F20.

Wholesale and Retail sales mix changed to 54-46 from 56-44 last Q.  Wrong direction for a self described wholesaler.  The hold up on second 75 stores in Illinois is likely impacting wholesale growth but assisting retail sales.

Same store sales versus new stores would be a welcome metric, as would CL brands sold as a % of retail sales.  The metric I created shows per store revenue for the Q at $3.8 million a +7% increase QoQ. Illinois sales are likely the reason, as Illinois has been growing cannabis sales tremendously this year.

Cresco is the top MSO in per store sales.  They do only have 24 versus much more at CURA, TRUL, and GTII.

Annualized Sales per Property, Plant and Equipment and Goodwill + Intangibles

This is our attempt to try and compare the organic growth companies (eg. TRUL and LHS) with the companies that are going organic plus “roll up” route.  The idea is that when a company purchases another company and instead of getting lots of PPE they are instead paying G/I to get a head start in the market.  That head start should manifest itself in Sales and GM, not necessarily immediately (retail stores yes, a cultivator may take time to launch) but eventually. 

This Q they held steady on the metric to $0.77 revenue per dollar of combined PPE and G/I.  Third highest in the group.  So, the acquisitions and PPE investment have been sales accretive but are flattening out.

BTW… I really like this metric as it focuses on operating efficiency.  Before you can get to positive Net Income to focus on ROI, Sales and GM must materialize.  This is a pre cursor to those events, assuming Opex is kept in check.

USA Retail Revenue: Peer & Trend

Retail wise Cresco is the fourth largest in the above peer set and show consistent growth over the period under review.   Enviable trend line across the industry.

Retail increased +$11 million +15% to $83 million.  Verdant was $3 million of the increase.  Without the acquisition they would have had +11% sales in retail.

USA Wholesale Revenue: Peer & Trend

Wholesale wise Cresco is the largest in the above peer set but plateaued prior Q and showed an uptick this Q.   

Wholesale increased $5.2 million +6% to $96 million.

Income Statement Drivers & Breakeven: Peer

Cresco has the 4th highest sales in US trailing CURA, GTII and Trulieve.

Organic sales growth was better in Q1C21 than Q4C20 for the large players.

Gross Margin: USA Peer & Trend

Gross Margin increased by $14 million to $87 million and from 45% of sales to 49%, bouncing back without the Origin House inventory impairment from Q4F20.  That was a $9 million charge last Q.

Increase in retail mix was likely also the reason for GM improvement.

Gross Margin Annualized per PPE and Goodwill and Intangibles

As per the Annualized Sales version of this graph we are seeing how effective at GM generation the peer set has been. 

Cresco is generating $0.38 of annualized GM for each $1 they have spent on PPE and G/I an improvement from last Q of $0.35 and back up to Q3F20 levels.   

CL is in 4th place in the peer group.

This metric is becoming a favorite of mine, more so than the Sales metric above, as it shows efficiency of operations versus just the ability to increase sales.

Gross Margin: USA Peer

Cresco only exceeds AYR (who had an inventory step up last Q from acquisition) MMEN in this peer group.  They have more wholesale mix than their peers, so it is understandable. They are projecting a 60-40 split wholesale – retail in F2021… they moved further from that mix this Q at 54-46.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Note: I moved impairment credit, and lawsuit provision to Other Expenses to maintain the peer group protocol.

Selling expenses decreased by $0.9 million to $7.3 million for the Q and decreased to 4% as a % of sales.   This expense had doubled since Q1F20, so it is nice to see the reduction QoQ.

Administration expenses increased by $7.2 million to $44.5 million and increased 2% as % of sales to 25%. Notable changes:

• Salaries and related increased by $7.5 million to $29.8 million
• Might be some spit swapping in the above as Office expenses came down $1.8 million
• Professional fees decreased $1.1 million but Accounting and Legal are now a line item and they $3.1 million between them.
• Other OPEX also increased $2.3 million no mention of what they constitute in financials or MDA.  And given they did the earnings CC before publishing financials on Sedar, I doubt anyone asked about any of these increases.

Combined SGA is $51 million a QoQ increase of $6.3 million.  They had a nice trendline until Q4F20.

SBC increased $0.5 million to $6.2 million and represents 4% of sales.

Depreciation of $5.6 million rounds off Opex, no change QoQ.

Total Opex was $71 million +$11 million QoQ and comes in at 40% of sales an increase from 37% last Q.

SGA & SBC as a % of Sales: Peer

Last Q, Cresco was in the middle of the pack on combined SGA SBC.  

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

NOP before IFRS Voodoo was $13 million last Q and increased to $16 million this Q on GAAP basis.  The increase in sales levered the better GM and offset the increase in Opex.

At current GM% and OPEX$, Cresco requires 81% of existing sales to be +NOP.

Other expenses totaled $25 million versus expenses of $45 million the Q prior:

• Provision for lawsuit of $13.6 million vs nil this Q.
• Interest expense increased from $10.4 million to $11.3 million this Q. 
• Other Expenses of $12.3 million decreased from $19.8 million last Q.   Loss on derivative warrants and instruments of $18 million is the largest items in the mix. Offset partially by a $9.2 million gain on investment.

Taxes were $15.5 million versus previous Q of $14.3 million.  280e at work.

Net Income Was -$24 million versus -$23 million last Q.  Interestingly, Net income attributable to CL was negative $29 million while Non-Controlling Interest had a +$5.2 million.  NCI’s did better than CL shareholders. And I noticed this note in the financials that I have Molly considering:

• During April 2021, the Company made approximately $41.2 million in tax distribution payments to, or on behalf of, non-controlling interest and Cresco Labs, LLC owners.

Cresco Lab, LLC owners include the founders that still hold 47% of Cresco Labs, LLC.  Last quarter I wondered if the shareholders of CL were “leaking” EBITDA or payments to the NCI. Funding the tax burden of the NCI owners could be happening.  This makes me suspicious. It is likely documented somewhere but …

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer:

My Adj EBITDA for them increase $5 million QoQ to $35 million.  They picked up only $5 million despite Origin House last Q impairing $9 million.  The creep in G&A crimped that.

If you look at their Opex Burn for the Q they are at $8.5 million of source of cash versus +$15 million last Q.   Positive but it has declined the last two Q’s. 

+EBITDA Quarterly Breakeven Sales: USA Peer

At current GM% and OPEX$’s, Cresco requires 60% of existing sales to generate +EBITDA. Back slid in the Q by 1%.

+EBITDA Quarterly Breakeven Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

Here is our new metric.  It is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

CL improved in the Q but did not approach the record in Q3F20. Aggregate interest and taxes were $27 million versus $25 million last Q.  The improved GM generation was offset by the cash OPEX increase and this $2 million difference.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

CL remains 6^th in this metric QoQ.  They improved from 3% last Q. 

“Waterfall” – Trend

Cresco’s changed to US GAAP in the Q.   Inventory is $75 million with FG backing up QoQ by $1.5 million to $27 million.  Second Q in a row where FG reduced.  

CoGS were $91 million which gives CL 0.82:1 inventory turnover for the Q.  They do have ability to purchase 3^rd party in some states to fill shelves.

“Waterfall” Peer

CURA and TER remain the last two IFRS hold outs.

Cresco has $256 million in cash, an increase of $119 million from last Q.  They raised $124 million via equity sale and received $15 million in warrant funds.  They have $147 million in A/P and Accrued Liabilities a $61 million increase QoQ.  That seems high.

PPE saw an increase of $55 million to $250 million and Right of Use Assets dropped $25 million to $67 million, for a net +$30 million. IFRS to GAAP no doubt.

G/I increased to $675 million from $646 million. $8 million goodwill and $11 million licenses.  Likely Verdant in Ohio.

Income tax was paid down $13 million to $28 million.

Long Term loans payable increased by $89 million while lease liabilities dropped $78 million.  I think it is GAAP reclassification of operating versus finance leases.

Share capital increased $230 million.

What I said last Q:

Last Q was a very tough Q to follow.  We will see next Q if this was a one Q pause or something more. 

2020 had a strong growth from Illinois rec and PA medical.  They are capped at max Illinois stores and they need the next slate of 75 stores to open in order to generate increased wholesale in Illinois.

They certainly had a growing inventory to feed operations, assuming inventory is correctly match to each state for future growth.  Ohio should start generating more revenue soon with Verdant in for a partial QF21. Bluma and then later in the year Cultivate should contribute.

They have checked off Florida and will increase Massachusetts presence with post Q announcements.

This Q:

It is good to sales increase +10%.  While they are wholesale focused the retail is what is carrying the water for them this quarter.  Illinois likely the driver.

Good to see GM bounce back after the impairment last Q.  Not quite all the way but sufficiently.

SGA creep was large this Q.  I will go and review the CC transcript and see if they discussed it.  I will add an edit if they did. 

They have a good cash position, but that A/P and Accrued Liability does not look sustainable at that level. 

They get a full Q from Ohio next Q and a partial Q from Bluma in FLA. MA acquisition still on deck for Q3f21.

That’s all I got.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in Cresco Labs and will not start one in the next five days.