Cronos Group’s Q3 Earnings: Good or Bad News?

After Cronos Group (CRON) reported its third-quarter earnings results yesterday, its stock closed at 10.40 Canadian dollars on the Toronto Stock Exchange, 2.71% lower than its previous close. Meanwhile, the stock closed at $7.83 on the NYSE, 3.09% lower than the day prior. Why did it fall? Let’s find out.

Cronos missed analysts’ revenue and EBITDA estimates

In the third quarter, Cronos’s revenue grew 238% YoY (year-over-year) and 24% sequentially to 12.7 million Canadian dollars, missing analysts’ estimate of 14.62 million Canadian dollars. Cronos attributed its third-quarter revenue performance to opportunistic sales in the Canadian wholesale channel and the inclusion its recently acquired Redwood Holding Group subsidiaries. Its Canadian extract sales as a percentage of total revenue fell sequentially to 9% in the quarter from 20%.

In the third quarter, Cronos’s gross margin narrowed by 14 percentage points YoY and 12 percentage points sequentially to 41%, missing analysts’ estimate by 11.6 percentage points. The company’s adjusted EBITDA fell 648% YoY and 35% sequentially to -23.93 million Canadian dollars. They fell short of analysts’ forecast of -19.8 million Canadian dollars.

The company is facing pricing pressure

In the third quarter, Cronos’s Canadian cannabis sales rose 511% YoY and 98% sequentially to 3,142 kilograms. The company reported it benefited significantly from wholesale shipments. However, it faced an oversupply and low retail store count in Canada.

Cronos plans to continue using its wholesale channel to sell off excess cannabis. It also expects to benefit from Cannabis 2.0 legalization, and plans to boost hemp-derived cannabidiol product sales in the US. This move could shift its sales mix toward recreational cannabis in future quarters. In the third quarter, Cronos’s net product revenue per gram sold fell 48% YoY and 42% sequentially to 3.73 Canadian dollars due to its revenue mix shifting toward the wholesale channel.

In the third quarter, Cronos’s net income of 788 million Canadian dollars beat analysts’ estimate of -16.21 million Canadian dollars. The company attributed the profit to the revaluation of financial liabilities associated with Altria’s investment in the company. Cronos’s non-cash gain rose sequentially to $835 million from $264 million. It expects its earnings to stay volatile in future quarters.

Cronos has a strong balance sheet

At the end of the third quarter, Cronos had 1.47 billion Canadian dollars in cash and cash equivalents and 517 million Canadian dollars in short-term investments on its balance sheet. Its cash and short-term investments fell by around $332 million sequentially due to its Redwood acquisition and fermentation facility.

MKM analyst Bill Kirk not optimistic about Cronos

MarketWatch reports Cronos’s third-quarter performance disappointed MKM Partners analyst Bill Kirk. He is concerned about the entire sector’s profitability due to pricing pressure and provinces’ high inventories.