5 surprising numbers from Cronos’ fourth quarter earnings report

Cronos Group (NASDAQ: CRON) released its fourth quarter results on February 26 for the period ending December 31, 2020. The cannabis producer had mixed results; it generated sales growth, but losses continued to increase. And down 21% over the past month, investors have been bearish on the stock – it has done worse than the Horizons Marijuana Life Sciences ETF, which fell 14% during this period.

But before deciding whether or not to buy stocks from the pot on a downside, it’s important to take a closer look at the earnings report to see how well the company is doing. Here are the five most surprising numbers from Cronos’ recent results.

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1. 193% sales growth in its rest of the world segment but only 30% growth in the United States

Cronos is a Canadian company, but it has a clear focus on the US market. This is no more evident than in his segmented reports, where he places the Canadian market in the “rest of the world” category – even though it currently accounts for the bulk of its sales. In the fourth quarter, the company’s revenue of $ 17 million more than doubled from the period a year earlier, when Cronos reported $ 7.3 million in revenue. Of that total, $ 13.5 million came from its Rest of the World segment, which grew at a rate of 193%. And while that’s a terrific growth percentage, its US sales of $ 3.5 million only increased by 30%.

The company caused a stir in the market in August 2019 when it acquired the US-based Redwood Holding Group, which owned the Lord Jones brand and its popular hemp-based cannabidiol (CBD) products. But so far, Cronos’ sales figures in the United States have been disappointing. While 30% growth is a good thing, it pales in comparison to other markets, and with lower revenue, I would have expected a higher growth rate than the rest of the global segment. . However, as the company invests more in its operations, it is hoped that all of its segments will grow stronger.

2.11 million dollars in capital expenditures

In the fourth quarter, there was a noticeable increase in capital spending compared to a year ago. Cronos has invested $ 11 million in various initiatives, including a new enterprise resource planning (ERP) system, an Israeli facility and a Peace Naturals campus. The company is also investing in its fermentation process. In July 2019, it announced its intention to acquire an 84,000 square foot ‘state of the art’ fermentation and manufacturing facility where it plans to produce cannabinoids on a large scale (two fermentation production areas at the time had combined capacities of 102,000 liters). Earlier this year, Cronos announced plans to launch lab-grown products, which could significantly reduce costs.

A year ago, Cronos only spent $ 757,000 on capital expenditures. Investing in the business is usually a good sign, especially when it comes to expanding operations and making them more efficient. Given the company’s ambitions to bring laboratory-grown products to market and increase production, it is possible that Cronos’ capital spending will only increase in the coming quarters. But with $ 1.1 billion in cash and cash equivalents, it is in a good position to fund these initiatives.

3.15 million dollars in write-downs

Another consistent area for Cronos is that of company write-downs. In the fourth quarter, it suffered inventory write-downs totaling $ 15 million, almost as much as its sales for the period. Cronos attributed the expense to “suppressing the prices of products in the Canadian market”. Cannabis companies in Canada have launched some value brands to compete with the black market, and this is probably at least in part why Cronos has struggled to sell some of its products and has had to adjust its inventory and the price he expects to sell. at.

And while $ 15 million isn’t a huge number considering how much money the company has on its books, the bigger problem is that it remains an ongoing issue for Cronos. In 2020 it reduced its inventory by $ 26.1 million and the year before that figure was $ 29.2 million. It’s positive that the write-downs are going down, but they shouldn’t happen on such a continuous basis to begin with. These additional expenses will not make it easier for the company to stay out of the red.

4. Adjusted EBITDA loss of $ 53 million

Cronos recorded a loss of Adjusted EBITDA of $ 53.1 million in the fourth quarter, which is worse than the loss of $ 51.7 million recorded in the same quarter last year. In general, as companies make more sales, investors would expect their results to improve. But the opposite happens with Cronos. Investors may be willing to forgive this for now, especially if lab-grown produce is on its way, which will keep its costs down. However, as many cannabis producers target adjusted profitability of EBITDA, if Cronos fails to significantly improve its bottom line this year, it could be difficult for investors to justify investing in the stock versus peers.

5.550 Ulta Beauty sites will sell its Happy Dance products

One of the reasons investors are bullish in the near term is that Cronos’ new hemp-based CBD product brand Happy Dance is already making headway with a major retailer – Ulta Beauty. In October 2020, Cronos announced the launch of the CBD skincare brand Happy Dance, in partnership with actress Kristen Bell.

Cronos expects to have products in more than 550 Ulta Beauty stores in the United States in the coming weeks, which represents nearly half of the beauty retailer’s 1,260 stores nationwide. This is a big vote of confidence from the retailer and it will be a big test for Cronos’ new product brand.

Is Cronos share a buy?

Cronos is an intriguing buy, and for me a lot depends on its ability to deliver lab-grown produce. If so, the products could dramatically change the outlook for the business by reducing costs. But until that happens and without knowing how popular these products will be with consumers, Cronos is still a risky buy, as its sales numbers fall far short of other industry leaders today (Aphria generated approximately $ 475 million in revenue over the past 12 months). And that’s why, for now, it’s a title to leave on the watchlist.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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