An Introduction To Cresco Labs: The Leading Cannabis Wholesaler

Cresco Labs is a dominant multi-state operator (MSO) known for its robust distribution platform and broad footprint. Headquartered in Chicago, the firm employs over 3,500 people and operates in ten states. Cresco has 50 operational retail locations, 28 cultivation and production facilities, and wholesales to over 1,000 dispensaries. Their diversified business and broad footprint allows them to reach 63% of the addressable US population.

History

Cresco was founded in 2013 by current CEO Charlie Bachtell and former president Joe Caltabiano. The pair met while working in the mortgage industry in Chicago. Bachtall wrote the business plan within days of Illinois passing their medical program in 2013. The business was funded with $3.5 million in capital from the two founders and three friends. Interestingly, 6% of the initial equity went to Denver Relief Consulting for help with establishing the initial operations and infrastructure.

Cresco’s first cannabis sales happened in January 2016. At the time, they had three retail stores and and one cultivation facility. Though small, this vertically-integrated structure foreshadowed would what become a much larger plan. By 2018, Cresco expanded to six states and raised $100 million privately for further expansion.

Cresco raised $87 million more on December 3, 2018 by going public on the Canadian Stock Exchange (CSE) via a reverse takeover with Randsburg International Gold Corp. Because cannabis is federally illegal, US plant-touching operators are not allowed to list on major US exchanges. Therefore, most go public in Canada and have a second listing on the US over-the counter (OTC) exchange. Today, the stock trades on CSE under the ticker CL and on CRLBF on the OTC exchange.

A CPG Leadership Team

Studying the leadership can help us understand in which areas the business might perform best. Firms like Terrascend and Ascend Wellness are run by former professional investors and may excel in sourcing capital and allocating assets. George Archos from Verano is a former restauranteur. Verano is very good at managing margins—something critical in the restaurant business. I don’t feel there is one right background for running a cannabis company, instead I prefer to diversify across complementary skill sets.

Charlie Bachtell is the CEO & Co-Founder. An attorney by trade, Charlie is the former Executive Vice President and General Counsel at Guaranteed Rate, a Chicago mortgage company. Legal and finance are an excellent background for most businesses, but when it came time to build the executive team he did not seek to mirror his skillset, and instead went with a CPG-focused approach.

Consumer package goods (CPG) are items that are used and replaced on a regular basis. Common examples are food, beverages and over-the-counter drugs. The marketing, distribution and branding around these products are highly applicable to the cannabis world.

Chief Operating Officer Ty Gent was previously Chief Supply Chain officer at US Foods. He also spent 30 years working for PepsiCo. Greg Butler is Chief Commercial Officer and drove branding for Pfizer, Johnson and Johnson and Molson Coors. The Cannabis Investing Network did an excellent podcast with Greg where he shares his background and perspective on branding with Cresco.

In March 2020, Cresco Labs President Joe Caltabiano announced his departure from the firm. The departure ended in a lawsuit that was settled out of court.

Footprint

Cresco’s footprint is focused on the biggest opportunities. They operate in seven of the ten most populated states and the three they are missing don’t have appropriate cannabis regulations. Cresco reaches 176 million people: 63% of the US population.

Their operations span ten states, with 50 retail locations, and 28 cultivation and production facilities. Whenever possible, Cresco strives for vertical integration, meaning they pair the cultivation with retail stores. This tends to lead to higher margins and greater control of the supply chain.

One feature unique to Cresco is the robust wholesale business. Roughly 50% of their revenue comes from retail sales and the other half from wholesale. As of January, Cresco products are sold by over 1,000 dispensaries and this covers more than 2,600 SKUs.

Illinois and Pennsylvania are two key states. Cresco roots are in Illinois and they have 215,000 square feet of current canopy with the potential to go up to 630,000, which is the largest of any Illinois operator. Plus, they have reached their max of 10 retail stores allowed in the state. Pennsylvania boasts 88,000 square feet of cultivation, and Cresco has opened nine of their maximum of 15 retail stores. Deeply penetrating key markets is part of the plan.

These core markets are complemented by emerging presences in key east-coast markets moving from medical to recreational sales. Flipping from medical to recreational is often the cannabis-investing sweet spot, as the addressable market increases from just those with medical licenses to anyone over 21-years-old.

Ohio has 11.7 million people and is expected to vote on adult-use this fall. Cresco has cultivation and processing licenses, plus the state maximum of five retail stores. New York is home to 19.3 million people and is expected to start recreational sales in 2023. Cresco holds one of only ten vertically-integrated licenses and operates four stores. Maryland and Massachusetts are additional states where Cresco is well positioned.

Retail Presence

Sunnyside is Cresco’s flagship line of dispensaries. Designed to be “bright, welcoming and convenient” they emphasize the wellness angle. These retail stores span 51 licenses in seven states, with deep penetration in Florida, Illinois and Pennsylvania. Massachusetts retail are called Cultivate, as these were an acquisition and have not been converted to Sunnyside branding.

One of the most interesting locations is the new Wrigleyville/Lakeview store. This beautiful 10,000 square-foot dispensary is within 400 feet of Wrigley Field, which is home to the Chicago Cubs and major concerts like Motley Crue, Def Leppard and Dead & Company.

Wrigley Field holds 23,000 people and it’s easy to imagine lines out the door to grab a low-key edible or share a joint before heading into an event. This store opened in November 2021, and should start to shine when Cubs season starts this spring.

Products

According to Chief Commercial Officer Greg Butler, “brands exist to help us make decisions.” Cresco categorizes their brands into good, better and best, then delineates between inhalable products (flower/vapes) and ingestibles such as edibles. They also distinguish between wellness and fun. Below is a graphical illustration of the brand portfolio.

Floracal is the premium flower and pre roll line and hails from Sonoma, California. Touted as small batch and sustainable farming, these are terpene-heavy flowers designed for cannesuers or those that want the best.  I appreciate not focusing on high THC content, but instead going deeper into flavonoids and terpenes that drive the experience. I am hoping to find a jar locally for a review.

Cresco is the mid-range inhalable line and spans flower, pre rolls, concentrates and liquid live resin cartridges. The line is branded around benefits, or effects, and are offered in Rest (indica), Refresh (hybrid) and Rise (sativa). I find these categories to be overly simplified, but do see how they may be helpful for new consumers. I have friends that rave about the liquid live resin cartridges. These use oil from fresh/frozen flowers and are a significant upgrade from the cheaper cartridges made with distillate and botanical terpenes.

High Supply is the affordable line and includes shake, popcorn (smalls), flower, vape carts, pre rolls, and concentrates. I speculate these are typically outdoor or greenhouse flowers, maybe machine trimmed, and in streamlined packaging. While not as sexy as the top-shelf offerings, I appreciate when brands are hitting multiple price points.

Mindy’s are higher-end edibles created by the award-winning pastry chef James Beach and Mindy Segal. This brand uses premium oils, prettier packaging, and covers gummies, fruit chews, hard sweets and chocolates.

Good News and Wonder Wellness are the final two edibles brands. Wonder makes formulation around effects (again) and divides the products into Relax, Laugh and Focus. Good News is an affordable line of gummies with clever names like Counting Sheep (sleep formula), Friyay (sativa) and Day Off (hybrid + CBD).

Cresco offers over 2,600 total SKUs in their wholesale portfolio, which is the broadest lineup I have seen. These products are distributed to more than 1,000 dispensaries in 10 states.

Mergers and Acquisitions

Cresco has been actively acquiring businesses to expand their footprint in key states. They made three major transactions in 2021.

Bluma Wellness closed on April 14th, 2021 and gives Cresco exposure to the Florida market. Florida has one of the biggest medical programs in the country with approximately 650,000 patients. It is also the third-most-populated state and is expected to move from medical to adult use by 2025. The transaction was an all-stock deal valued at $213 million.

This gives Cresco 8 currently operational Florida dispensaries and 7 more in permitting or under construction. Plus, a premium indoor flower facility and an additional 54,000 square feet of cultivation to feed new stores as they open.

Cultivate is a vertically-integrated operator in Massachusetts and adds 42,000 square feet of active canopy and three more dispensaries in the state. After the transaction, Cresco has the maximum allowed four stores and top three market share in Massachusetts.

This was a $90 million acquisition, funded with $15 million in cash and $75 million in stock, with the possibility of another $68 million if earn-out targets are met.

Cresco made two key acquisitions in Pennsylvania.  Laurel Harvest brings 52,000 square feet of indoor grow/processing space, foundation for another 52,000 square feet of indoor, two dispensaries and the ability to open four more stores in the state. This cash and stock funded deal was valued at $80 million, with the potential for additional earnouts.

The Cure Penn acquisition gave Cresco three more high-performing Pennsylvania stores. These premium retail locations cost $90 million in a deal done with stock and cash. Cresco has the number one wholesale market share in Pennsylvania with 100% penetration and up to 15 retail locations.

Cresco also planned to acquire a Maryland chain of dispensaries from Blair Wellness. The acquisition was terminated on January 19th, 2022 for failing to meet certain closing conditions.

Valuation

Cresco has a strong balance sheet and has been consistently growing revenue and adjusted EBITDA.  The charts below show how revenue and adjusted EBITDA have been increasing since the first quarter of 2020.

Below are two metrics comparing Cresco’s valuation to their peers. Based on EV/Sales and EV/EBITDA basis, Cresco is cheaper than the tier-one averages.

Conclusions

Cresco is one of the most proven and dominant multi-state operators. The business is well managed, expanding aggressively, and holds key assets in the most-populated states.

More than any other MSO, Cresco is built around brands and distribution. They have a meaningful retail presence and are vertically integrated, but deriving 51% of revenues from wholesale is a distinguishing trait. As cannabis markets evolve, this balanced approach will help protect their margins.

Cresco offers one of the top C-suites, strong branding, deep penetration in key markets, and a uniquely balanced revenue base. The stocks is also reasonably valued. After a year-long drawdown, the entire cannabis space is cheap, but Cresco is less expensive than their peers.

We are in the latter stages of adding Cresco to the Green Giants portfolio. Once the final due diligence is done, I look forward to making them a core position.

Disclosure: At the time of publication I was not invested in Cresco and I was not compensated for writing this report.

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