CRLBF is a LONG
For Cresco Labs, 2020 was a transformational year. Several organic growth drivers were announced and they closed acquisitions in strategic markets, all while expanding the presence of the company brands across the U.S., setting up the company to achieve significant growth in 2021. Cresco's strategy is focused on building a strategic geographic footprint by gaining scale in essential states and emphasizing wholesale and retail. As the CEO said, "By adopting a traditional CPG approach to cannabis, we've demonstrated our ability to reach and sustain the #1 market share positions in 2 of the top 5 states. And in 2021, we're gearing up to repeat the success in more markets."
Like others in the industry in 1Q21, the company is transitioning to GAAP and removing previously broken out onetime costs to provide an apples-to-apples comparison to prior quarters. In 1Q21 (under GAAP), the company posted $178.4 million (168.8%) of revenue, $88 million (up 270%) of gross profit, $35 million (up 104%) of adjusted EBITDA, and $13 million operating cash flow. 1Q21 can be characterized by building, staffing, and refining operations across the states that the company operates in. Cresco laid out three specific ways the company will deliver growth and shareholder value in 2021:
M&A/Organic Growth
Cresco is accelerating growth through organic investments and M&A in strategic markets. In April, the company closed the Bluma acquisition entering Florida, making it the 10th state. Cresco now operates in seven of the top ten most populated states with cannabis programs, intending to achieve a top 3 share position in each market. Having strong positions in Illinois and Pennsylvania, the company hopes to add at least two more markets to that list in 2021 with Massachusetts and Ohio.
In Massachusetts, they are nearing completion on expanding the Fall River cultivation facility, which will drive significant organic growth and operating leverage starting in 2H21. With the closing of the Cultivate acquisition in 4Q21, they will operate the maximum number of dispensaries and canopy. They will have a top 3 share position by year-end, making it the third $1 billion-plus market with a top 3 status. In Ohio, they closed the acquisition of Verdant halfway through 1Q21, adding four retail stores to the operations. Also, they are working now to complete the build-out of extraction and manufacturing capabilities to bring the entire house of branded products and forms to a state where they currently only produced and sold flower.
The closing on the Bluma transaction in April represents the entrance into Florida, the third most populated state in the U.S. Success in Florida's vertical regulatory structure is dependent on an operator's ability to execute in all aspects of the value chain, from building and executing a cultivation strategy to servicing the retail customer. That success is rewarded with some of the best margin of any state. The company intends to significantly increase cultivation capacity, introduce new form factors like edibles, and at least double the current store count. The construction of the cultivation facility in Michigan is nearing completion, setting the stage for operating a statewide wholesale platform in 2022. Michigan's adult-use market offers an abundance of opportunities to increase its wholesale business in the Midwest.
BRANDED CPG
The company is looking to maintain a strong position as a wholesaler of branded products in cannabis. In 1Q21, Cresco's net wholesale revenue was $95.6 million (up 150.7%). During the quarter, wholesale penetration of company-owned brands reached 957 retail stores around the country. As the CEO said on the call, "According to BDS and state data for Q1, in Illinois, we maintained the #1 market share position, distributed to 100% of stores, had the best-selling brand overall and the top 2 best selling flower brands in the state with Cresco and High Supply. According to Headset Data for Q1, Cresco maintained its #1 market share position at 100% wholesale penetration in Pennsylvania, and Cresco was the #1 best-selling brand overall. In California, while state sales grew 2% in Q1, Cresco Labs California revenue grew 10%, marking their fifth consecutive quarter of taking share in the largest, most competitive cannabis market in the world. Top-selling flower brands like FloraCal have opened doors for the whole portfolio, and their other own brands are resonating with California consumers. According to Q1 BDS data, their combined portfolio of owned flower brands ranked sixth in the state. Owned brand sales in vape increased 69% sequentially in Q1, and Cresco is now the eighth most popular live resin brand in the state." Commenting on the importance of California, "California is the largest, most competitive cannabis market in the world and must be a part of any strategy that seeks long-term industry leadership." Strong wholesale capabilities and execution are the keys to long-term success in the cannabis industry, and Cresco Labs looks to continue that leadership position.
Retail Growth
Cresco 1Q21 retail revenue was $82.8 million up 193.3%) from 24 stores (16 last year), driven by increasing same-store sales and new stores. Same-store sales grew 9% sequentially from the 19 stores opened during the entirety of Q4, and 60% year-over-year for the 15 stores opened in Q1 of 2020. Average quarterly revenue per store increased to $3.8 million for the 20 stores opened during 1Q21. In Illinois, despite nine new stores opening around the state during the quarter, the Sunnyside stores held Illinois retail market share. And in Ohio, the Verdant stores combined for 11% sequential growth Q1 over Q4. While the company posted strong retail performance in 1Q21, the outlook is bright as more stores are added in Florida, Massachusetts, and Pennsylvania.
BY THE NUMBERS
Cresco reported revenue in the first quarter was $178.4 million, up 10% quarter-over-quarter and 169% year-over-year. In February, they consolidated 40 retail stores through the Verdant acquisition in Ohio. Revenue mix in the first quarter was 54% wholesale and 46% retail. The company got off to a slow Illinois retail opening, with seven store openings in the back half of March and 11 openings in April, driving momentum for 2Q21. Gross profit in Q1 was $87 million or 49% of revenue compared to 46% in Q4. The company is guiding gross margins to be above 50% for the balance of 2021 as they reach scale in Florida, Massachusetts, and Ohio. In 1Q21, the company took $600,000 in tax charges for the fair value market of the inventory acquired from Verdant and guided to a "larger line item "from the consolidation of Bluma in 2Q21.
In 1Q21, SG&A expense, excluding share-based compensation and one-time items, was $58 million or 32% of revenue. The company held SG&A expense flat, while revenue grew 131% in 1H20, then 2H20 spending outpaced revenue to drive growth in 2021. In 2H21, revenue growth will outpace expenses. Adjusted EBITDA for 1Q21 was $35 million, a 17% increase from Q4 under GAAP. The company continues to invest heavily in both CapEx and OpEx to build the operating platform and capacity that will drive growth in 2021 and 2022 and expect substantial improvement in EBITDA margins as the expansion projects bring supply to the market and the integration of Bluma and Cultivate.
First-quarter net CapEx was approximately $16 million, and the company plans to invest more in Florida and New York. The company made a point of saying that there is "an abundance of high ROI opportunities within our footprint, and we will continue to keep our foot on the gas." The company ended the quarter with $256 million in cash on the balance sheet, putting it in a strong position.
Lastly, the company gave guidance that "by the end of the year, Cresco Labs' annualized revenue will be at a run rate of more than $1 billion with gross profit margins north of 50% and an adjusted EBITDA margin of at least 30%."
