The enormous promise of the legal cannabis industry is still matched by political and regulatory uncertainty due to the ongoing federal ban and patchwork of state laws. This precarious situation is illustrated by recent developments at Curaleaf (CURLF +2.10%), which is recording net losses despite revenue growth.
The company postponed announcing its fourth quarter and full-year 2022 results in late March due to a major accounting change from international financial reporting standards (IFRS) to the generally accepted accounting principles (GAAP) used in the United States. As of Wednesday, April 19, the company still had not released those results.
In Q3 2022, the company reported revenues of $339 million, up about 7% from the third quarter of 2021, but with net losses of $51 million attributable to Curaleaf or $0.07 per share. However, this slightly improved compared to the $55 million or $0.08 per share net loss in the third quarter of 2021.
OTC: CURLF
Key Data Points
California dream is tarnished
Curaleaf owns and operates 150 dispensaries in 19 states, including Arizona, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania. But in January, the company announced it had laid off 10% of its workforce and was shuttering most of its operations in California, Colorado and Oregon, besides closing one Massachusetts facility, "to streamline its business."
The company will detail the resulting non-cash restructuring and impairment charges resulting from these decisions when it announces its fourth-quarter results sometime later in April. Curaleaf management expects to save $60 million from the layoffs and "other cost savings initiatives" in 2023.
The exit from California may be the result of a weakening retail cannabis market in the Golden State, which observers blame on fierce competition from illegal marijuana growers and distributors, as well as price compression. Wholesale cannabis prices have declined more than 50% since 2017, the year before legalization in the state, according to New Leaf Data Services. The downturn in legal retail cannabis sales can be seen in figures from the California Department of Tax and Fee Administration, which reported that taxable sales of the product in the state totaled $1.27 billion in the final quarter of 2022, down more than 12% from the corresponding quarter of 2021.
In its Jan. 26 statement announcing the pullout from California, Colorado, and Oregon, Curaleaf offered no specific reason for leaving the latter two states, citing only the "difficult operating environment."
High hopes for big state markets
But the three-state pullout does not seem to signal a general pullback in Curaleaf's geographical reach since on April 10, it announced it had finished buying Deseret Wellness, the largest cannabis retailer in Utah with four dispensaries, for $20 million in cash and stock. Medical marijuana is legal in Utah, and the state reported $118.7 million in sales last year. It seems a good sign that the company isn't simply pulling into its shell.
What does the near future hold? Analysts' expectations for the 2022 net loss Curaleaf will announce by the end of April average $0.18 per share, improving to a net loss of $0.05 per share in 2023.
Will the layoffs and cost-cutting do the trick and put the company in the black? The most pessimistic analyst estimate for 2023 is a net loss of $0.21 per share, while the most optimistic estimate is a net profit of $0.56 per share, so opinion is divided on this point.
The most recent information on Curaleaf's 2023 outlook comes from a Nov. 7 earnings call. At that time, Boris Jordan, executive chairman, said the company was expecting to gain market share in Connecticut in the first half of 2023 and New York state in the second half of the year, on top of the 25% it already has in the former and the almost 50% share it has in the latter.
The company also was looking to its stronghold in New Jersey, particularly at an outlet in Belmar, near Atlantic City, which "is probably one of the highest grossing, if not the highest grossing store in the country today. And it's the oldest store in New Jersey," Jordan said, adding that "probably 30% of that store's business comes from Philadelphia." Situated between the latter city and the New York metropolitan area to the north, tourists and New Jersey residents offer a large market for Curaleaf's products.
Curaleaf had a short-lived but significant scare over its plans for the Garden State on April 13, when the New Jersey Cannabis Regulatory Commission's (CRC) Board overrode its staff's recommendation and refused to renew the company's cultivation and retail licenses for adult use. This regulatory body reversed itself and renewed the licenses four days later after Curaleaf agreed to provide the CRC with additional information on its labor practices and confirm its ongoing compliance with New Jersey law. But the incident underscored the strength of the political and regulatory headwinds that confront the industry.
An investment covered in uncertainty
A company that hangs so much hope on individual states and even individual stores, and is possibly at a tipping point from red to black, is going to remain a high-risk investment for the near term, with the tantalizing prospect of high returns for those investors who can hold on for the ride.
But note that Curaleaf previously invested a lot of effort in California and Colorado, only to pull the plug once those markets started to sour. The same could happen in the future in New Jersey, as the mid-April regulatory scare there dramatically illustrated. In order to pivot to profitability in 2023, Curaleaf must successfully manage expenses and continue growing revenue while hoping there are no significant adverse market developments. Whichever way it turns out this year for the company could be a sign of things to come.
