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Is Cresco Labs a Risky Buy?

By Jim Halley – Jun 8, 2020 at 2:00PM

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The Chicago company's growth may allow it to be a cannabis survivor. Here's what investors need to know.

Cresco Labs (CRLBF -2.32%) is looking to be one of the larger survivors in a cannabis industry that is going through a tumultuous phase.

The Chicago company's stock is down roughly 50% from where it was a year ago, and it has yet to turn a profit. However, Cresco saw significant revenue growth last quarter. With $68.6 million in cash, can the company last until it starts making money? 

A marijuana plant at sunset.


Growing its footprint in Illinois, Ohio, and Pennsylvania

Cresco Labs is one of the early players in cannabis. The company, founded in 2013, is now in nine states with 29 retail licenses and 17 operational dispensaries. The good news is there's little question about the company's growth. In the first quarter, Cresco had revenues of $66.4 million, 60% over the same quarter last year.

The company is doing particularly well in its home state, where it has the biggest share of the state's retail sales, at roughly 25%. On June 4, Cresco opened the first recreational-use marijuana dispensary in downtown Chicago. That gives Cresco seven operational dispensaries in the state: Wrigleyville Chicago; Elmwood Park; Buffalo Grove; Rockford; Champaign; Danville; and the downtown location. Three more are in the works in the central business district, South Beloit, and Schaumburg.

"In Illinois, our order fulfillment is up by nearly [40%] since the pandemic started," said Cresco Labs CEO Charlie Bachtell in his company's first-quarter earnings call. "We quickly learned how to adapt to the new normal of a modified retail environment and build better tools to support omni-channel ordering."

Cresco has adopted social-distancing procedures during the pandemic. For example, at the new downtown Chicago location, customers order online. When they get a text that their order is ready, they can check in at a nearby guest experience center, about five minutes away, to be put into a virtual pickup queue.

Cresco also has big plans for Ohio where statewide cannabis sales have grown this year despite the pandemic. Sales were $14.2 million in April, compared to $9.6 million in January.

Cresco is working to be the biggest player in Ohio. A planned deal with Verdant Creations and its affiliates would give Cresco the option to purchase four additional Ohio dispensaries operated by Verdant. If the deal is approved by the Ohio Board of Pharmacy, Cresco will have five dispensaries in Ohio, the maximum allowed. 

Last month, the company quadrupled the size of its Brookville, Pennsylvania facility, northeast of Pittsburgh, giving it 88,000 square feet of cultivation space. The company has three dispensaries in the state with plans for three more. 

It's not just about dispensaries

One of Cresco's strengths is its branding. The company's products are in 700 dispensaries across the country. In April, it launched High Supply for cost-conscious consumers, with products in cardboard-colored boxes and smaller-portion products, including half-gram pre-rolled joints and smokable popcorn nuggets, smaller than typical buds. The company's other three brands are Mindy's artisanal edibles, pain-relieving Remidi, and its high-end brand, Reserve.

Cresco is working to curb losses

The company lost $65.3 million last year after making $3.1 million in 2018. While ramping up production, it is struggling to contain costs. The company lost $13.4 million in the first quarter compared to a deficit of $7.5 million in the same quarter in 2019. However, it does seem to be slowing the tide a bit, as the $13.4 million was substantially lower than the $45.2 million it lost in the fourth quarter.

At the company's cash burn rate last year of an average $6.85 million a month, it has only until early next year to either start turning a profit or come up with more cash, either by selling more stock or through more financing in what is already a tight financing market. 

The company seems to have little trouble raising money, however, landing financing of $100 million in late January to help expand its operations in Illinois, with an option for an additional $100 million.

In the cannabis space, Cresco isn't that big of a risk

The company's growth rate is a positive sign for investors and for its creditors. The company's stock, while well below what it was selling for last year, has nearly doubled since mid-March. Like any cannabis company trying to thread myriad and changing state regulations, Cresco is a risky play. However, it does have plenty of long-term potential. If it can survive this year, it will be in a strong position to be one of the top cannabis companies for years to come.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc. The Motley Fool has a disclosure policy.

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