CURLF (Hot Mess); TRSSF - NJ & PA Slowing
We are moving CURLF to the bottom of the long list. CURLF is so big can it ever fire on all cylinders? On one level, it feels like the company is an "overcapitalized roll-up." The company referred to markets like California and Colorado as "new markets" that the company is investing in. Yet, those are some of the two most mature markets in the country. More to the point, California is facing a supply/demand imbalance and increased competition from illicit players, similar to what transpired in Colorado and Oregon, and will play out over the next 12 to 18 months. In Colorado, the company closed on the Los Suenos Farms acquisition in October 2021, adding over 2.5 million square feet of outdoor cultivation capacity and two retail dispensaries. CURLF is now one of the largest wholesalers and has 4.4 million sq feet of cultivation in CO, and that is good news given the current demand environment?
Yes, this will support near-term growth (nest 12-months), but not organic growth will slow after lapping the acquisition as the market in CO is not growing. What the CO acquisition gives the company is a right to claim that "Los Suenos provides us with a platform to serve the U.S. market on a national scale once interstate commerce is allowed" and to say things like "even though I'm not opposed to interstate commerce, there are many that are."
On interstate commerce, Boris Jordan, Curaleaf Holdings, Executive Chairman, said, "it would take years to implement. They're going to have to write the rules. They're going to have to come up with how they're going to do it. And I personally think the compromise is going to be where -- I think if one thing that gets compromised on will probably be in the short-term interstate commerce because of pressure from the states, governors, and attorney generals to keep it isolated in the states. So I believe we have a better chance now of getting a bill by April of next year than we did a week ago because of this. But I still think interstate commerce is the one thing that's probably going to get negotiated out of the bill."
The Hedgeye working assumption is that Interstate commerce is 5+ years away.
Curaleaf missed Q3 earnings reporting Revenues of $317 Million Vs. Factset $365 Million. Revenues increased 2% sequentially and 74% YoY. The company reported (a)EBITDA of $71 Million, a decrease of 15% sequentially, and an increase of 69% YoY. Gross profit margin decreased sequentially by 4% and decreased YoY by 4.1% to 45.6%. The company maintained its guidance of 2021 revenues of $1.2-1.3 Billion, although it will be on the lower end of the range. Curaleaf blamed the poor top-line performance on the slowing of sales in certain recreational states. The Hedgeye Sales Trackers has shown this slowdown into Q3, especially in markets such as Pennsylvania.
The idea of an overcapitalized roll-up came with the acquisition announced yesterday right on top of the EMMAC Life Sciences in April 2021, recently closed Los Suenos acquisition in October. The last acquisition totaling over $400 million "checkboxes for investors" (international & Interstate commerce) rather than add enormous value. Now the company announced the acquisition of Tryke companies for a total of $286 Million. Curaleaf will pay $40 Million in cash at closing with $75 Million in cash to be paid on the closing's first, second, and third anniversaries. Tryke is a vertically integrated MSO operating in Nevada, Arizona, and Utah. Tryke offers a variety of products, including flower, concentrates, vapes, edibles, and CBD products. Curaleaf expects to increase the company's cultivation capacity from 30,000 Sq. Ft. to 80,000 Sq. Ft. over the next three years. The company operates six dispensaries under the Reef brand, with two stores in Arizona and four in Nevada. The stores are in heavily trafficked metropolitan areas, including Phoenix and Las Vegas. Tryke is expected to have $110 Million in 2021 revenues. The deal is expected to be immediately accretive to Curaleaf's EBITDA margins and FCF generation. The NV and AZ markets are essential, but CURLF is late to the game in those markets.
We are also moving TRSSF down the list as the company will report what can be construed as a very sloppy quarter. In addition, CURLF referred to several market calls where there is a slowdown in sales and New Jersey and PA, two critical markets for TRSSF. While NJ is still expected to start adult use in early 2022, TRSSF has a few hurdles to clear before we see a line of sight to accelerate its financial performance.
SAFE Banking Status W/US Rep.
Ed Perlmutter sat down with MJBizDaily for a Q&A on the Safe Banking Act. Ed is a House representative from the 7th district of Colorado. In September, Ed succeeded in getting the cannabis banking legislation attached to the NDAA, which is currently waiting for passage in the senate. Perlmutter's thoughts are that the joint conference committee will ultimately choose to keep the Safe Act on the final version of the NDAA, which will ultimately bring Safe to Biden's desk. Even if this falls through, he believes that he will get Safe attached to other similar, must-pass bills. This may be wishful thinking as our consensus is that Safe will be stripped from the NDAA before it passes through congress. In addition to the NDAA, SAFE also sits as a standalone bill in the Senate Banking Committee. There, it has not moved, but there is a conversation about the bill.
Regarding concerns about Sen. Booker saying Safe would provide handouts to big companies and banks while putting social justice on the backburner, Ed (D) had this to say: "I just think he's wrong on that, for a variety of reasons. SAFE didn't start with the banks or financial institutions. We had to bring them along. It started because people were getting robbed and killed in dispensaries and other kinds of cannabis businesses. After all, there's so much cash. That's where it started; it started with the little businesses. There's a component in SAFE Banking that allows for access to credit to minority businesses. That doesn't exist today. So this is this, as Sen. Booker has suggested, is a big-bank bill at all. It comes from the industry and a public-safety standpoint. So I don't agree with him on that."
Schumer and Booker are our most significant concerns regarding the Safe Act being passed in the NDAA before the CAOA has a shot on the floor. We believe that Schumer and Booker will strike down SAFE since it is not as far-reaching as the broad bill. However, the Safe Act does have the votes to pass while the CAOA does not in its current state. Ed Perlmutter offers a somewhat optimistic stance on the SAFE Act passage in the NDAA. Still, we also are reasonably confident it will pass in some form before the midterm elections.
Maine Tracker
Maine shows signs of declining sales the state with October sales down 2.4% sequentially. This is the third month in a row the relatively new recreational market showed declining sales numbers. The only subcategory which grew this month was concentrate at 1.1% sequentially. October sales came in at $9.5 Million, equating to a $117 Million run rate based on the past three months of sales.
