curlf 4q23 earnings results
How inefficient is a company that has a fiscal year-end of December 31 and can't get 4Q earnings ou until May 1st? Reorg or not! Quarterly organic revenue growth was down YoY. Curaleaf (CURLF) is a Hedgeye Cannabis Best Idea Short.
A few MACRO comments from the call: they are seeing internal data to suggest consumer spending at its stores is stabilizing, and the company is beginning to see early signs that excess capacity in certain markets may be starting to exit in MA. What about the timing of the exit from CA? The streamlining of CURA's business, including the inventory write down and lower cap ex, the company should be able to deliver sustainable FCF; we will not know if this is possible until 4Q23. This quarter further proves that operational execution is an issue for the company.
Curaleaf reported 4Q22 revenue of $352.5M, representing an increase of 14% YoY driven by the acquisition of Trike, and Adjusted EBITDA of $73M or 21% of revenue. Gross profit came in at $78.1M and gross margins of 22%. Net loss attributable to Curaleaf Holdings, Inc. of $260.3M or net loss per share $0.36. They reported full-year 2022 revenue of $1.34B, 12% YoY growth, and Adjusted EBITDA of $305M, representing 17% YoY growth. The company has an operating cash flow of $46M and $163M of cash on its balance sheet. In 2022, the company opened 28 locations, seven by acquisition, and introduced 171 new products. They also completed the acquisition of Bloom Dispensaries in Arizona and took a majority stake in Four20 Pharma out of Germany. In 2023 the company announced a cost-reduction plan and discontinued operations in California, Colorado, and Oregon. The company took further steps to reduce expenses by reducing payroll hours by 10% and other initiatives, which they estimate will result in $60M annual gross run rate expense savings. Management commented that they want to expand their footprint in Florida and Connecticut further. They also completed the acquisition of Deseret Wellness.
Curaleaf is an operator that has shown that it can not compete in competitive markets. They commented that they left Co because of the rampant illicit market. Why did they not know that in October 2021, when they paid $71 million to Los Sueños Farms? While exiting California, Oregon, and Colorado will improve margins, they are also leaving some of the biggest cannabis markets in the world. How can you have national brands and not compete in those markets? Curaleaf closed down operations in these states because they didn't have the operational efficiency to make money or grab market share. Instead, they are doubling down on immature states that have recently gone rec recently and will go through the same maturity cycle as we saw on the West Coast. When a state first opens its doors to cannabis sales, there is a lack of cultivation which means you have a lack of inventory, leading to higher prices. Operators rush into a state, and in a few years, you have too much cultivation, zero operational efficiencies in place, and the prices decline. The irony of this is what CA is currently seeing. Did CURLF bottom-tick the CA market? What we saw in California in the past year was that many operators could not compete with the low prices and did not renew their licenses, resulting in a 70% increase from the lows in 3Q22 wholesale cannabis prices. Now I believe that we are starting to see price normalization in that state right at the time that Curaleaf is leaving the state, which just shows that when price normalization occurs, they don't have the margins to be successful. This is why their management team is pumping up potentially new markets like Florida, which they are expanding into and hoping for adult-use legalization in the coming years, Connecticut, which started adult-use sales in January, and Germany, which they hope will go legal in the coming years. In all these markets, Curaleaf will showcase impressive initial sales but unsustainable margins.
Commentary On SAFE: The management team's tone towards cannabis reform in Washington D.C. was positive, but even they had to comment that no one can be in the business anymore by predicting what will happen on the policy front. They mentioned that they heard the objective of getting SAFE Banking passed was to get it through the Senate in June/July and then get it over to the House by September so the President can sign it by the end of the year.
SAFE has little chance
The MSOS rallied 7% last week on the back of a bipartisan group of lawmakers reintroducing the SAFE Banking Act. The bill has a 0% chance of passing without hearing from Senator Mitch McConnell. In reality, SAFE does not change much for the industry. Other reform elements around 280e taxes, interstate commerce, and an updated COLE memo are more impactful to the industry's fundamentals. Unfortunately, lawmakers in Washington, DC, have had difficulty passing modest cannabis reform for several reasons, including the following:
- Playing Politics: The cannabis reform issue has become highly politicized, with Democrats typically favoring legalization and Republicans generally opposing it. This is because cannabis reform has become a highly controversial topic, with politicians more concerned with political posturing and pleasing their base than with finding common ground; this can make it difficult to pass any meaningful reform measures.
- No consensus: Even among people who favor cannabis reform, there may be differing opinions regarding the strategy that should be utilized. Some people may push for marijuana to be fully legalized, while others may merely favor incremental reform measures such as decriminalization or the legalization of medical marijuana. Because of this, it may be challenging to arrive at a consensus that has the potential to gain enough support to enact legislation.
- A seemingly insurmountable conflict: even though several states have decriminalized cannabis in some form, the drug is still Schedule 1, making it against the law on the federal level. Because of this, there is a potential for legislation at the state and federal levels to contradict one another, making it more challenging to enact effective rules and regulations.
- Lobbying and special interests: The cannabis sector in prohibition is in its infancy and rapidly undergoing change; as a result, a significant number of conflicting interests and stakeholders are involved. Lobbying efforts by these organizations (esp. pharma, tobacco, and alcohol) can sway legislators' attitudes about the matter at hand and make it more challenging to enact reform measures that might not serve the interests of the lobbying organizations.
In general, achieving cannabis reform in D.C. is a complicated subject incorporating various elements, including political, social, and economic considerations. Even while there may be widespread popular support for cannabis law reform, D.C. is unlikely to change the challenging process actually to bring about significant change.
Florida CANNABIS TRENDS.
In March, Florida recorded ~$159M in cannabis sales, representing a sequential increase of 14.8% and a YoY increase of 4.6%. Unit volumes in the month were up 19.5% sequentially and up 23.6% YoY. The average price per unit was down 4% sequentially and down 15.3% YoY.
