Cresco Labs Inc. (OTCQX: CRLBF) stock dipped following the company’s solid results for the second quarter ending June 30, 2020. Despite beating analysts’ estimates on revenue and market share gains, traders focused on the company’s earnings miss and the stock slid by over 4% to trade at $6.82. The average price target is $8.59 and the stock has been on a huge run over the summer as it has moved from $2.05 in March to $7.70 on August 17.
After the market closed on Thursday, Cresco reported that its revenue rose sequentially by 42% to $94.3 million. The company also said on its earnings conference call that it achieved positive free cash flow in the month of June. Analysts at Yahoo Finance on average expected revenue of $76 million. So, this was a substantial beat.
The company missed the analyst average estimate for earnings be reporting -$0.09, while the estimate was for -$0.06 per share. The company delivered a net loss of $4.7 million, which was less than last year’s net loss of $13.4 million for the same time period.
Cresco said that its revenue increased sequentially by more than 30% in every U.S. market, with the exception of Massachusetts. The company noted that its wholesale growth was driven by product popularity in California and first harvests from expanded capacity in Illinois and Pennsylvania. Retail growth was driven by strong sequential same-store growth of 31% and two new store openings in Illinois.
Charles Bachtell, Co-founder, and CEO of Cresco Labs said on the company’s earnings call, “In the two states where we have the leading market share, Illinois and Pennsylvania, both have reached a $1 billion in run-rate sales. Illinois is set to issue its next 75 retail licenses, a catalyst to more consumer demand, and increase opportunities for our wholesale business.”
The net losses included unrealized gains and losses on mark-to-market instruments that fluctuate until obligations are settled, changes in fair value of biological assets, interest expense, and tax expense. However, the adjusted EBITDA was $16.5 million, an increase of 419% sequentially. Th e company said this was achieved while integrating Origin House during the quarter and was driven primarily from higher revenues and increased operational gross profit in Illinois and Pennsylvania.
Cresco Labs planted its flag in the state of Illinois and is now reaping the benefits of going hard in the state. Bachtell said on the call that state retail grew by 18% from Q1 to Q2. “Our existing Illinois stores grew sales by 37%. A testament to the effectiveness of our retail leaders and teams, nearly 75% of our retail revenue growth was driven by existing stores with the impact of recently announced store openings still to be seen in Q3 and Q4.”
He noted that the Sunnyside model is producing stronger same-store sales, attracting more customers, and achieving a disproportionate share of the market. “As we recently announced, we just opened our ninth retail location in Illinois, the most stores of any operator in the state. Sunnyside Schaumburg is located adjacent to the largest shopping mall in Illinois and at the heart of one of the densest areas of stores, hotels, and restaurants in the state,” he added.
The company pointed out that even though Pennsylvania is a medical-only state, it is still one of its largest markets. It is currently hitting a billion dollars in run-rate sales. “We have room to grow in Pennsylvania from a retail footprint standpoint. We have currently licenses to open up six stores and you can have licenses to open up 15. So, there’s definitely still headroom there,” said Bachtell. Pennsylvania now has nearly 390,000 people registered in the medical program, roughly the same number as Florida, making it one of the most important medical markets in the country.
Bachtell also said the company was taking market share in California. “California retail sales grew 10% quarter-over-quarter while Cresco Labs total California revenue increased by 41%. We are taking share. Revenue from Continuum distribution was up 35% sequentially, driven by owned brands like Cresco, Mindy’s, Floracal, and High Supply, as well as continued strength from core partner brands,” he said on the company call.
“Wholesale penetration continued to grow in Q2 and we’re now distributing to nearly all of the states tier 1 dispensary’s. While we’re encouraged by the substantial increase in gross margin during the quarter, we’re even more excited about the immense gross profit opportunity offered by the state in 2020 and beyond. With a continued focus on increasing operating leverage, we’ve optimized the portfolio of brands in our platform, appointed new leadership in the state with extensive CPG and distribution experience, and completed a thorough value chain analysis to further improve the efficiency of our distribution business. California remains one of the most important cannabis markets in the world. And with improving regulations and state retail sales projected to reach $7 billion by 2025, California will continue to be a key driver of growth for Cresco Labs.”