Curaleaf Earnings: Illicit Market Still Hindering Top-Line Growth, but Profit Focus Protects Margins

No-moat Curaleaf CURA announced first-quarter results with few surprises. Revenue declined about 2.5% sequentially, in line with the pressure from the stubborn illicit market. On the positive side, management’s shifted focus to profitability led adjusted EBITDA margins to expand to 22% from 20% in the fourth quarter. Looking to the rest of the year, Curaleaf maintained its guidance for full-year revenue growth of low- to mid-single digits and adjusted EBITDA margins in the mid-20% range. In comparison, we forecast top-line growth of 5% and margins of 23%. We’ve maintained our fair value estimates of $20 and CAD 27 per share.

Full-year margins may end up higher than we forecast if cost cuts outpace new expenses stemming from acquisition. Management estimated cost-cutting initiatives will generate $60 million in savings, with another $15 million to come from automation in production—in total, about 6% of 2022 cost of goods sold and selling, general and administrative expenses. But it’s hard to estimate the cumulative effect after considering Curaleaf has rightly continued to spend for growth in recently acquired assets, new store openings, and the beginning of its footprint in Europe.

Shares continue to trade at nearly 90% below our fair value estimate, with last week’s market reaction to SAFE banking hearings leading to more negative sentiment on the stock. We think the market continues to overemphasize the lack of progress on easing federal prohibition and mistakes slower-than-expected growth as signs the overall market potential has changed. Compared with the massive expectations priced in a few years ago, we now think investors have swung too far the other way.