Your opinion of Cresco Labs (CRLBF +0.17%) these days could hinge on how you look at the proverbial glass of water. If you're a half-full kind of person, you'll focus on the fact that Cresco's shares have jumped more than 40% since early July. If you see the glass as half-empty, you'll place more emphasis on the equally true statement that the stock is still down more than 45% year to date.
Cresco announced its second-quarter results on Wednesday. CEO Charles Bachtell acknowledged that the cannabis operator faces "an unprecedented macro environment." However, the company's second-quarter update also underscored a good reason to buy Cresco Labs stock sooner rather than later.
OTC: CRLBF
Key Data Points
Cresco's biggest problem area
Some investors might have been disappointed by Cresco's Q2 results. However, they really weren't all that bad considering those macro headwinds Bachtell referenced. The company's Q2 revenue of $218 million was just a little shy of the consensus estimate of $218.4 million. Cresco posted a net loss of $8.3 million, but that's not anything to panic about.
Importantly, Cresco's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 11% year over year to $51 million. The company also ended the quarter with a cash position of $90 million.
The best news for Cresco was that its retail revenue jumped 22% year over year to $123 million. Same-store sales rose 6%. Both numbers were higher than the company's overall revenue growth of 4%.
That leads us to Cresco's biggest problem area -- its wholesale business. The company reported wholesale revenue of $95 million in Q2. While Cresco noted this "maintained the company's position as No. 1 U.S. seller of branded cannabis products," it reflected a 17% decline from the prior-year period. The reality is that Cresco's wholesale business is dragging down its overall performance.
A solution on the way
But Cresco has a solution on the way. The company plans to acquire Columbia Care in an all-stock transaction valued at approximately $2 billion. Columbia Care shareholders approved the deal in July.
Acquisitions aren't always as good as they seem on paper. In this case, though, the transaction appears to make a lot of sense.
In 2021, Cresco's revenue mix between retail and wholesale was close to 50-50. The addition of Columbia Care will boost the percentage of annual revenue from retail to around 62%. Cresco's biggest problem area (wholesale) will automatically become less of a problem.
The transaction will also more than double Cresco's retail footprint. Cresco will have a presence in all of the top 10 markets, with a market-leading position in seven of those markets by 2025.
Even better, the acquisition of Columbia Care will diversify Cresco's revenue. In 2021, Cresco generated 70% of its revenue in two states. Once its buyout of Columbia closes, that figure will drop to below 50%.
Sooner rather than later
Cresco expects to close the Columbia Care transaction sometime around the end of the year. Its shares currently trade at only 1.15 times sales. The company's annual revenue should increase by around $500 million with the acquisition of Columbia Care.
We've already seen that increasing retail revenue should work to Cresco's advantage. The market headwinds the company faces won't remain forever. When they subside, Cresco's growth will kick into an even higher gear.
My Motley Fool colleague Sean Williams recently wrote that Cresco Labs stands as one of two marijuana stocks to buy hand over fist right now. I think Sean's view is right for investors willing to take on the inherent risk associated with these stocks. And buying sooner rather than later appears to be prudent with the Columbia Care deal likely to wrap up within a few months.
