Cresco Labs is still a buy, Beacon says

A more modest outlook for business in Illinois and New York has Beacon Securities analyst Russell Stanley trimming his price target on Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL)

On August 16, CL reported its Q2, 2023 results. The company posted Adjusted EBITDA of $40-million on revenue of $198-million. Both numbers bested the street’s expectations and were up significantly over the same period a year prior.

“Our year-of-the-core commitment to rationalizing and optimizing our core markets, core stores, core brands and core products is reflected in our Q2 results with growth in our top line, gross margin, adjusted EBITDA and operating cash flow, Cresco CEO Charles Bachtell said. “With our focus on driving scale and efficiencies across the entire organization, we’ve been accomplishing more with less — leading to a 38-per-cent sequential improvement in adjusted EBITDA. We maintained our industry leadership with the No. 1 portfolio of both branded flower and branded concentrates, No. 3 portfolio of branded vapes, and No. 4 portfolio of branded edibles. We’re pleased to see improved profitability and cash flow in our core markets, which positions us well for the capital-efficient growth and expansion opportunities that lie ahead. Our results are just starting to reflect the decisions we made earlier this year to support our year-of-the-core priorities, with much more to come.”

Stanley characterized the quarter, which beat his and the street’s expectations.

“Cresco reported Q2/23 revenue/adjusted EBITDA of $198M/$40M v. our forecast of $194M/$28M and consensus at $195M/$31M. Adjusted EBITDA beat even the street-high estimate of $33M. Overall revenue was slightly ahead of our forecast and consensus, while being down 9% y/y and up 2%
q/q, with sequential growth in retail offsetting a flat top line for wholesale. The adjusted gross margin was 210 bps stronger than expected, and up 111 bps q/q, with management highlighting the exits of margin dilutive operations for the sequential improvement. While the GM outperformance was impressive, the bulk of the EBITDA beat came from OPEX. Raw SG&A expense came in under $71M in the quarter vs. our forecast of $72M, and down from $72M in Q1. Management reported adjusted SG&A of $61M in Q2, down from $68M in Q1 and $71M in Q2/22, with the adjusted SG&A margin improving 405 bps q/q and 150 bps y/y. The resulting adjusted EBITDA margins were 604 bps stronger than we expected, up 538 bps q/q, and reached their highest level since Q2/22. Taking a step back, CL produced 38% q/q adjusted EBITDA growth on a 2% revenue lift. Cresco also produced operating cash flow (CFO) of $18M, beating our forecast for negative $19M and the only other estimate at positive $5M.

In a research update to clients August 16, Stanley maintained his “Buy” rating on the stock but lowered his one-year price target on Cresco from $5.75 to $4.25, implying a return of 181 per cent at the time of publication.

The analyst explained his reasoning.

“– We have reduced our F2024 adjusted EBITDA forecast from $230M to $186M following revenue estimate revisions, driven primarily by more modest outlooks for Illinois (slow development of the addressable wholesale market) and New York (continued uncertainty as to how/when incumbent medical operators will be allowed to enter the adult-use market),” he said.

Stanley thinks Cresco Labs will post Adjusted EBITDA of $150-million on revenue of $747-million in fiscal 2023. He expects those numbers will improve to EBITDA of $186-million on a topline of $786-million the following year