During the last three years, shares of Cresco Labs (CRLBF +7.92%) lost 76% of their value. Shareholders are doubtlessly hoping that the next three years will be a lot better.
Is that a realistic hope? Let's map out the Chicago-based vertically integrated cannabis and medical marijuana company's near-term future and make some reasonable guesses about where it'll be in late 2026 to find out.
Will it have the resources to implement its plans?
Following the path of many large marijuana businesses in North America, Cresco's task this year is to optimize its operations and, in the words of CEO Charles Bachtell, "accomplish more with less." It closed low-performing cultivation and distribution facilities in California and Arizona, and it sold one of its buildings in Maryland. At the same time, it's deepening its penetration of Pennsylvania and Florida by opening a total of 13 new retail locations, with a handful more on the way before the end of the year.
The company also anticipates expansions of its operations in New York and Ohio as the cannabis laws in those two states enable recreational use (instead of only medicinal use) over the next couple of years. But at the moment, it only has four dispensary licenses in New York and five in Ohio. That means its retail footprint will need to expand massively to capture much growth during the gold rush coinciding with the opening of the recreational portion of the market. Local regulations governing the control of dispensary licensing may be problematic. Regardless, by 2025, it hopes to be working in nine states, which, as a group, should grant it access to roughly 65% of the addressable market in the U.S.
OTC: CRLBF
Key Data Points
Over the last three years, Cresco's quarterly revenue only rose by 22%, reaching $198 million, and its quarterly gross margin actually worsened slightly to reach 44% in Q2. Moving forward, the company will need to focus on boosting profitability and growth. Cannabis legalization in the U.S. could be a significant catalyst on that front if it happens. But it won't solve the fundamental issue of Cresco spending a lot more money than it makes, and that's a problem which will need to be solved before 2026. In 2022, it reported net losses of $212 million.
The business currently has more than $666 million in debt. In the trailing-12-month (TTM) period, it paid $65 million in interest on that debt. It only has $73 million in cash remaining. It probably can't borrow more at an attractive rate, and more of its debt will be coming due. Management's freedom of action in chasing both growth and efficiency will thus be tightly constrained. Even if cannabis legalization occurs soon, Cresco might not be able to deliver the growth that it needs to be a good investment in the medium term.
Developing brand loyalty could save the day
As knotty of a problem as Cresco is facing with its high debt load, unprofitability, and weak growth, it could already have the ingredients it needs to cook up a turnaround. Its wholesaling operations give its branded cannabis products an incredibly wide reach beyond its wholly owned stores. So, consumers across the country likely have access to its most popular marijuana brands, like Mindy's, Hexies, and High Supply.
With the benefit of a few more years, consumers will have time to develop preferences for some brands over others. While there isn't yet enough evidence to suggest that any of Cresco's brands are strongly preferred, that could change. Brand loyalty could be a major competitive advantage. But it's difficult to predict one way or the other whether brand loyalty is something that will actually happen. Still, having a wide distribution network and brands in every product and value segment means that the company's chances of building a loyal following with at least one of its offerings are decent.
If Cresco can protect its market share with customer loyalty, by 2026 its gross margin should be much higher, as it won't need to spend as much on marketing to retain its sales. On the other hand, it's also possible that the business will need to scale down a lot to survive that long. The most likely scenario is that it continues to struggle along, as hard-earned efficiency gains are offset by rising interest payments, leaving it with a lackluster pace of growth despite management's best-laid plans.
