2nd-quarter cannabis MSO earnings ‘not terrible,’ analyst says

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The nation’s largest cannabis multistate operators reported a slowdown in revenue growth in the second quarter, which ended June 30, with efforts to cut costs offset by oversupplied state markets.

Wholesale marijuana price compression continues to plague the industry in some states, including Arizona, Florida, New York, Ohio and Pennsylvania.

Also, the slow pace of reform at the federal and state levels is stunting growth opportunities, according to operators and analysts. (Although the recent news that health officials in the Biden administration recommended that marijuana be reclassified from a Schedule 1 substance to Schedule 3 is encouraging for the industry.)

Many MSOs cut costs in recent quarters, promising to “optimize” operations to generate cash and avoid borrowing at high interest rates.

But those efforts could also have slowed growth, said equity analyst Jesse Redmond, the head of the cannabis sector at Florida-based Water Tower Research.

Still, the top six MSOs generated an average of 1.6% quarter-over-quarter revenue growth and 6.5% quarter-over-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) growth, Redmond said.

“So that’s not terrible,” he told MJBizDaily.

“It shows we’re seeing a little bit of growth from new stores in existing states, because not much exciting has turned on and because of some improving prices, especially in California.”

But prices aren’t improving or stabilizing everywhere quite yet - one example of how fragmented state markets make it increasingly difficult to generalize about MSO performance, Redmond warned.

Core market focus, managing challenging states

Chicago-based Cresco Labs and New York-headquartered Columbia Care - whose planned merger was called off in July - both reported less-than-stellar results for the second quarter.

Cresco’s revenue fell by more than 9% in the second quarter year-over-year, and Columbia Care’s year-over-year revenue results were flat.

Cresco’s net loss was $43.5 million, widening from $27.8 million in the first quarter and $8.3 million year-over-year.

Charlie Bachtell, founder and CEO of Cresco Labs, said the company is focused on its core markets, stores, brands and products while winding down poorly performing assets in California and Maryland as well as cutting corporate costs.

"Our commercial team in Illinois is now leaner than it was before adult use began in 2019,” he said on the company's second-quarter earnings call.

“And, yet, the team is generating 10 times the revenue and has maintained our No. 1 market share in the state.”

Executives at Florida-based Trulieve Cannabis, which has a large presence in Arizona, told investors on its second-quarter earnings call that the heat wave in the state this summer could put pressure on its top-line results in the third quarter.

In the second quarter, fierce competition and price compression impacted Trulieve's business in Florida, where more than half of its total presence is concentrated.

The company has donated nearly $40 million toward the state's campaign for adult-use legalization.

“While we see upside on Trulieve - as we do all our U.S. coverage due to current technical factors weighing on multiples - over the longer term, relative to many peers, we struggle to get any real conviction,” Owen Bennett, senior vice president of equity research at New York-based financial services company Jefferies, wrote in an Aug. 15 email newsletter.

According to Bennett, the company’s efforts to expand in Florida aren't gaining traction so far.

Plus, competitors such as Ayr Wellness, Curaleaf Holdings and Verano Holdings are expanding there as well.

Not all doom and gloom

Redmond hosted an informal poll on X, the social media site formerly known as Twitter, asking industry watchers which of the following companies reported the best earnings results:

  • Glass House Brands, based in California.
  • Green Thumb Industries, based in Chicago.
  • TerrAscend Corp., which has offices in Canada and Pennsylvania.
  • Verano Holdings, headquartered in Chicago.

His followers overwhelmingly chose Green Thumb, which he said is likely because the company consistently reports a profit - $13 million this quarter - and respectable growth, though its year-over-year revenue was nearly flat.

Redmond said Verano’s nearly 5% year-over-year revenue growth was notable, particularly because the company has been overlooked stemming from its sizable unpaid tax balance and its restated financial results from converting to generally accepted accounting principles (GAAP).

“But people forgot that they’re really good operators, they have great margins and they’re in the right states,” Redmond said.

On Verano's second-quarter earnings call, Chief Financial Officer Brett Summerer said the company's cash flow from operations was $24 million, even as it decreased its income tax payable balance of $227 million.

TerrAscend’s results were also a highlight, Redmond said, with revenue growing 12.5% year-over-year and more than 4% from the previous quarter.

Results from Glass House (GLASF, over-the-counter markets), a Southern California cultivator, demonstrated how prices are rebounding in that state due in part to companies not renewing their licenses and exiting the industry.

“Exogenous factors have helped, including ongoing extinctions and distress for many of GLASF’s competitors, but solid execution on the ramp of its SoCal cultivation assets remains the principal growth driver,” analyst Bobby Burleson, managing director at Toronto-based investment bank Canaccord Genuity, wrote in an Aug. 15 email newsletter.

As for future opportunities, multiple MSOs cited Maryland and its new adult-use market, which launched in July, as one of the most promising highlights of the year.

Both Green Thumb and Verano also are well-positioned in Ohio, where voters will weigh in on adult-use legalization in November.

Still waiting on federal reform

Marijuana reform at the federal level remains the most significant growth catalyst that could reignite investor interest in the sector and ease the steep federal tax burden of Section 280E.

U.S. cannabis stocks rebounded last Wednesday on the news that Assistant Secretary for Health Rachel Levine sent a letter to the head of the Drug Enforcement Administration recommending that marijuana be rescheduled from Schedule 1 of the Controlled Substances Act to Schedule 3 - a move that would offer wide-ranging tax benefits for MSOs, among other things.

Still, executives at many MSOs said they would continue to operate under the assumption that federal reform of any kind won't happen any time soon.

Kate Robertson can be reached at kate.robertson@mjbizdaily.com.