Cronos Group Inc. shares slid 2.4% Friday, after the Canadian cannabis company posted a wider-than-expected loss for the fourth quarter, but revenue that beat estimates, buoyed by growth in the Canadian and U.S. adult-use markets.
The Toronto-based company /zigman2/quotes/206842762/composite CRON -0.62% /zigman2/quotes/202715342/delayed CA:CRON -0.59% swung to a net loss of $111.7 million, or 31 cents a share, in the quarter, after income of $61.6 million, or 17 cents a share, in the year-earlier period.
Revenue net of excise taxes came to $17.0 million, up from $7.3 million a year ago. The FactSet consensus was for a loss per share of 8 cents and revenue of $13.3 million.
Revenue gains were driven by continued growth in the Canadian recreational cannabis market, sales in the Israeli medical market and growth in the U.S. segment, the company said in a statement.
That was partly offset by nonrecurring wholesale revenue in the Canadian market in the year-earlier quarter and price cuts on various adult-use products in Canada in the recent quarter.
The company wrote down $15 million of dried cannabis inventory and cannabis extracts, mostly due to price pressure in Canada. “The company may incur further inventory write-downs due to pricing pressures in the marketplace,” said the statement.
Cronos said its Happy Dance brand, a line of vegan, U.S. hemp-derived CBD bath and body products co-founded by actress Kristen Bell, has secured a first U.S. retailer in Ulta Beauty /zigman2/quotes/210513442/composite ULTA +0.37% and expects to launch online and in-store in the coming weeks.
Raymond James analyst Rahul Sarugaser welcomed the big revenue beat and supply agreement, but noted a big adjusted EBITDA miss, referring to adjusted earnings before interest, taxes, depreciation and amortization. That’s an adjustment of an already-adjusted number, but a metric popular with cannabis companies, many of which are far from posting a profit.
Cronos said its adjusted ETBIDA losses came to $53.1 million in the quarter, up $1.5 million from the year-earlier period. The FactSet consensus was for EBITDA loss of $27 million. The loss was driven by a high SG&A line, price cuts and the inventory write-down, driven by price compression in the Canadian market.
“We expect inventory write-downs like this to be common among Canadian LPs given 2020’s intense cannabis flower and distillate pricing reductions across the board, dropping more than 90% YoY in the latter category,” the analyst wrote. “We do acknowledge, however, that inventory management among LPs (licensed producers) is crucial—especially capital-light operators like CRON—given the high volatility in Canadian wholesale cannabis pricing.
“Taken in the context of CRON and its US$1.3 bln balance sheet, however, we view this inventory write-down as a rounding error.”
Sarugaser said Cronos, which he rates as outperform, is one of his top picks in the sector and the one he most expects to benefit from U.S. cannabis reform. That’s because of its commitment to innovation, which he expects will change the cannabinoid product landscape. It helps that Cronos has a $1.8 billion investment from tobacco giant Altria Inc. /zigman2/quotes/208895754/composite MO -2.27% , announced in late 2018.
Cronos is working to commercialize cannabinoids derived from fermentation via an initiative with Ginkgo Bioworks, a Boston-based company focused on organism engineering.
“We await CRON’s receipt of a commercial processing license from Health Canada before the company launches fermented CBG-incorporating products: acatalyst that would unleash biosynthesis operations that we value at US$1.5 billion,” Sarugaser said.
Cronos shares have gained 66% in the last 12 months, while the Cannabis ETF /zigman2/quotes/213173823/composite THCX +0.06% has gained 87% and the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.92% has gained 23%.