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Cresco Labs gets target reduction by Haywood

CL stock

Haywood Capital Markets analyst Neal Gilmer is taking a more cautious outlook on Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL) after reviewing first quarter financials from the US cannabis company. In a Tuesday update to clients, Gilmer reiterated a “Buy” rating while lowering his target price from C$4.50 to C$3.75 per share, which at press time represented a projected one-year return of 53 per cent.

Chicago-headquartered multi-state operator Cresco released its Q1 results on May 24, showing revenue of $194.2 million compared to $214.4 million a year earlier and down from $200.0 million for the previous quarter. (All figures in US dollars except where noted otherwise.)

Cresco CEO Charles Bachtell said a softening of the Illinois market led to the revenue drop along with margin pressure, where adjusted EBITDA was $29.3 million compared to $50.4 million a year earlier. The guidance was for flat revenue for the Q2, with competition and pricing pressures factoring into the stalled topline growth.

“Our team’s relentless prioritization of providing the highest perceived value to the consumer is paying off, evidenced by Cresco Labs maintaining industry wholesale leadership with the number one selling portfolio of branded products and an incredibly productive retail platform. Our branded products reached the shelves of 1,600 dispensaries across our ten-state wholesale footprint and our Sunnyside dispensaries rang up almost 1.2 million orders,” said Bachtell in a press release.

Gilmer said the $194.2 million topline was better than expected, however, with Gilmer having forecasted $190.4 million and the consensus estimate at $192.5 million. Adjusted EBITDA at $29.3 million was a miss of Gilmer’s $31.4 million estimate and the Street at $32.4 million.

Gilmer said Cresco has taken steps to reduce costs and strengthen margins by exiting the less profitable states of California and Arizona, but the end result will likely be less near-term revenue growth, although longer term those actions should help with profitability and cash flow generation.

“The company expects to increase its market share for its branded portfolio of products by expanding its offering in new states and in segments they are currently under-indexed in,” Gilmer wrote.

“Cresco opened eight new stores in Q1 with a couple more expected to open in Q2 prior to a slowdown of new openings in H2 of 2023. Ramping of recently opened stores including those in Q4 2022 will be a focus of driving new revenue growth,” he said.

Gilmer projects that Cresco’s revenue will go from $842.7 million in 2022 to $792.2 million in 2023 and then to $842.6 million in 2024, while on EBITDA the call is to go from $173.6 million in 2022 to $134.5 million in 2023 and to $178.4 million in 2024.

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