Cresco Labs Earnings release

The MDA discussion of changes QoQ is very weak.

Income Statement Drivers & Breakeven: Trend

Sales Split and Deltas:

Unlike last Q where Sales growth was largely driven from self-owned stores, this Q was driven by wholesale cannabis.  They did open 5 dispensaries in the Q, bringing their total to 15: four dispensaries were opened in NY and 1 in California.  They also added one more cultivation facility (New York) bringing their total to 10.

Total sales grew to $36 million an increase of +21% or $6 million.  Per store sales dropped, but this could be timing related, as I take an average number of stores opened during the month.  Sales per cultivation site increase 8%.

Like last Q, I do want to point out that the combination of IFRS added back on inventory sold and cost of goods sold of $46 million exceeds sales of $36 million.  The June 30, 2019 and March 31, 2019 Qs this was also evidenced with:

• June 30, 2019: $35 million exceeds sales of $30 million
• March 31, 2019:  $31 million versus $21 million in sales. 

This is very aggressive pulling forward of profitability to harvest and speaks to management assumptions.

Income Statement Drivers & Breakeven: Peer

Cresco has the 5^th highest sales in US.

Gross Margin: USA Peer & Trend

Cresco’s GM decreased to 36% from 42% QoQ.  No reason was given.

Gross Margin: USA Peer

Cresco has the second worst GM% in the US MSO peer group at 35%

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Selling remained consistent QoQ.  G&A experienced a +$4.6 million increase to $18.3 million, which led to an increase of +4% to 58% as a percentage of sales.

SBC has been consistent.

Total Opex was $26 million +$5 million QoQ and comes in at 73% of sales.

SGA & SBC as a % of Sales: Peer

Cresco is in the middle of the pack on combined SGA SBC.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

NOP before IFRS voodoo was -$14 million versus -$8 million last Q as expenses outpaced GM$ growth.

Cresco needs incremental sales of +36% at current GM% and OPEX $’s to be +NOP.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

+EBITDA Quarterly Breakeven Sales: USA Peer

Cresco requires incremental sales of 46%, at current GM% and OPEX$’s, to record +EBITDA.

+EBITDA Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer:

I note that Cresco does not follow industry peer reporting with Adj EBITDA electing NOT to remove IFRS on Bios and inventory. 

They report Adjusted EBITDA of $3 million whereas I report negative $5.9 million versus negative $2.3 million last Q.  Again, this is a result of improvement in absolute gross margin outstripping cash related Opex.

“Gas in the Tank” – Trend

Cresco has been able to increase FG Delta while maintaining a positive Sales Delta which bodes well for fueling sales next Q.

“Gas in the Tank” Peer

Cresco has 4^th highest inventory level of its peer group.

Cresco has $74 million in cash an increase of $13 million from last Q.

Cresco just put in place a shelf prospectus of $55 million.  So, they might be on the “ask” as they stealth raise capital.

I am still getting to know Cresco.  Operationally they are growing without massive increases in Goodwill and Intangibles.  However, they keep back sliding in EBITDA and GM is worst of peer group.

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.