Cronos Group (CRON) topped third-quarter forecasts Thursday, and Aphria (APHA) acquired a foothold in the U.S. beverage market. Marijuana stocks jumped, after seesawing this week before and after U.S. federal and state elections.
Cronos Group Earnings, Cronos Group Stock
The Canadian pot producer's overall net income was $68.5 million, lifted by a $105.3 million gain resulting from a change in the value of derivative liabilities related to tobacco giant Altria's (MO) investment in the company.
Cronos earned 19 cents per share, above Zacks' estimates for a loss of six cents. Sales rose 15% to $11.358 million, above forecasts for $10.83 million.
Growth in Canada's recreational market boosted sales. So did growth in Israel's medical cannabis market, as well as the acquisition of the Lord Jones CBD brand in the U.S. The company cut prices on some recreational pot products in parts of Canada, offsetting gains.
The company's total reported operating loss was $41.2 million, deeper than the prior quarter. Costs related to separation agreements related to Redwood Holding Group, the company that operates under the Lord Jones name, along with costs related to restating some financial results, were among the expenses that drove the losses.
U.S. Business Struggles
However, sales in Cronos' U.S. business dropped 24% from the prior quarter to $1.639 million. Cronos said that in the U.S., "a significant number of the company's retail customers continued to be challenged by permanent and temporary store closings."
Stores that were open, it said, were running with reduced hours and staff, and dealing with thinner traffic.
"Further decreases in consumer demand, increases in Covid-19 case numbers in various states in the U.S. and extended periods of retail store closure could result in negative impacts on future operating results," the company said.
The company booked $35 million in impairment charges and $5 million on the Lord Jones brand. Cronos last year bought Lord Jones for $300 million.
"With the company spending $300 million on this first acquisition, the performance limits the enthusiasm for deploying capital towards future endeavors," Stifel analyst Andrew Carter said in a research note. "Given the capital spent and the performance, we believe the company needs to fully frame the opportunities and realities for this business in order to properly frame expectations."
Business in Canada and elsewhere, it said, was not "materially impacted" by the pandemic.
The company last month launched a CBD brand in the U.S. in partnership with actor Kristen Bell. Cronos' Peace Naturals medical weed brand also launched in Israel last month.
Margin Questions
Cronos' gross margins came in at -14%, its fourth straight quarter in which those figures were negative. In the company's business outside the U.S., they were -23%.
When measured by sales, Cronos Group has been smaller than some of the other Canadian marijuana stocks that trade on U.S. exchanges. Stifel analyst Andrew Carter said the negative margin called into question "the speed at which this platform can scale with its limited critical mass."
Canaccord analyst Matt Bottomley echoed those sentiments about Cronos Group's margins.
"Although details on this remain thin, we believe it is largely attributable to the historical reliance on third-party wholesale purchases for products, and that the company has not yet ramped up its top-line to critical mass," he said in a research note.
Other Marijuana Stocks
Cronos Group stock soared 17% to 6.47 in the stock market today. Shares have a 30 Composite Rating and a 13 EPS Rating. Among other marijuana stocks,Canopy Growth (CGC) rose nearly 12% to 21.20, back above a 20.54 buy point. Tilray (TLRY) spiked 30%. Aurora Cannabis (ACB) skyrocketed 41%.
Aphria popped 9.9%. A day earlier, Aphria announced its entry into the U.S. via an agreement to acquire craft brewer Sweetwater Brewing Co. for around $300 million. The deal is expected to close before the end of December.
Aphria said SweetWater, known for brews that use terpenes and hemp flavoring, was "closely aligned with a cannabis lifestyle."
Last year, SweetWater brought in net sales of $66.6 million. Its adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization — was $22.1 million.
Aphria said the acquisition "establishes an infrastructure" in the U.S. that would allow it to move quickly into the nation's cannabis market, whenever pot is legalized nationwide.
"We will establish and grow our U.S. presence through SweetWater's robust, profitable platform of craft brewing innovation, manufacturing, marketing and distribution expertise," Aphria CEO Irwin Simon said in a statement.
Simon also said the acquisition would help make more U.S. customers aware of its recreational pot brands — Broken Coast, Good Supply, Riff and Solei.
Cannabis beverages, at least, remain a small portion of North America's cannabis market.
