Cresco Labs Inc. (CRLBF) CEO Charlie Bachtell on Q1 2022 Results – Earnings Call Transcript

Cresco Labs Inc. (OTCQX:CRLBF) Q1 2022 Earnings Conference Call May 18, 2022 8:30 AM ET

Company Participants

Megan Kulick – Investor Relations

Charlie Bachtell – Chief Executive Officer and Co-Founder

Dennis Olis – Chief Financial Officer

Greg Butler – Chief Commercial Officer

Conference Call Participants

Owen Bennett – Jefferies

Camilo Lyon – BTIG

Derek Dley – Canaccord Genuity

Andrew Partheniou – Stifel

Kenric Tyghe – ATB Capital Markets

Aaron Grey – Alliance Global Partners

Harrison Vivas – Cowen & Company

Matt Mcginley – Needham & Co.

Scott Fortune – ROTH capital Partners

Operator

Hello, everyone, and welcome to the Cresco Labs’ First Quarter 2022 Earnings Conference Call. My name is Victoria, and I will be coordinating your call today. [Operator Instructions]

I’ll now pass over to your host Megan Kulick to begin. Please go ahead.

Megan Kulick

Thank you. Good morning and welcome to Cresco Labs’ first quarter 2022 earnings conference call. On the call today we have Chief Executive Officer and Co-Founder, Charlie Bachtell; Chief Financial Officer, Dennis Olis; and Chief Commercial Officer, Greg Butler, who will be available for Q&A.

Prior to this call, we issued our first quarter earnings press release which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for first quarter of 2022 are provided prior to the completion of all internal and external reviews and therefore are subject to adjustments until the filing of the company’s quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the three months ended March 31, 2022 on SEDAR and EDGAR later this week.

Certain statements made on today’s call may contain forward-looking information within the meaning of applicable Canadian securities legislation, as well as within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements may include estimates, projections, goals, forecasts, or assumptions that are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company’s beliefs regarding future events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations.

Additional information regarding the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found in our earnings press release and in Cresco Labs’ filings with SEDAR and the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to any of its forward-looking statements or to update or supplement any information provided on today’s call. Please note that all financial information on today’s call is presented in U.S. dollars and all interim financial information is unaudited.

In addition, during today’s conference call, Cresco Labs will refer to certain non-GAAP financial measures such as adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with the GAAP financial measures presented in our financial statements.

With that, I will turn it over to Charlie.

Charlie Bachtell

Good morning, everybody, and thank you for joining us on the call today. We’ve got a bit to cover so we’ll jump right into it. While Q1 was a slower quarter for a young industry that’s been conditioned to expect incredible growth without much impact from traditional seasonal trends, we understand that in emerging industries growth trajectory is rarely linear, especially in a highly regulated industry with a fragmented state by state structure, conflicting federal and state laws, and the addition of some general macro pressures affecting everyone.

Our team continues to drive toward the macro thesis of cannabis becoming a core U.S. consumer product industry and we’re dedicated to executing a focused discipline strategy for long-term industry leadership. We’re building the most strategic geographic footprint, we’re obtaining material positions in each state, and we’re proficient in all verticals of the value chain, while emphasizing branded products and distribution to drive the greatest long term value. In Q1, we showed the resilience and strength that resulted from this focused strategy. We produced $214 million in revenue, representing a 20% year-over-year growth.

Our adjusted gross margin was 53%, a roughly 350 basis point improvement year-over-year. Adjusted EBITDA margin was 24%, up 400 basis points year-over-year. And we maintained our position as the number one wholesaler of branded cannabis products in the industry, as well as having the highest per store revenue of any scale national retailer. We continue to compete incredibly well, holding or gaining branded share in the majority of our markets. With our markets down on average of 4.5% sequentially, our revenue was only down 2%. As was the case in Q4, our incredible Cresco family team members took everything that this quarter was willing to give.

Now let’s again review our proven playbook of the three specific ways Cresco Labs is delivering long term growth and shareholder value that we introduced in 2020. Number one, developing the most strategic geographic footprint through organic growth and accretive M&A; two, being the leading wholesaler of branded cannabis products; and three, operating high volume strategic retail stores.

Number one, we’re developing the most strategic market footprint through organic growth and accretive M&A. The acquisition of Columbia Care is the most efficient way for Cresco Labs to achieve material positions in the most strategic markets in the industry. While we love the value that our current footprint provides, the addition of Columbia Cares market access makes Cresco Labs unrivaled. Columbia Care will add eight additional markets to the Cresco Labs’ footprint including the high priority states of New Jersey and Virginia. And it provides depth, vertical integration or the opportunity for asset optimization across the entire portfolio. Combined, our pro forma footprint covers 180 million Americans or 55% of the total U.S. population and 70% of the addressable cannabis market.

Our pro forma footprint is expected to be at $31 billion total addressable market by 2025 according to BDSA, including all 10 of the industry’s top 10 revenue states. We expect to have the number one branded and/or retail share position in five markets, Illinois, Pennsylvania, Colorado, Virginia and Massachusetts, as well as eight states each contributing over $100 million in annual revenue in 2023. Again, this level of depth and breadth in the industry’s largest market is unrivaled. It provides diversification that helps insulate us from market to market volatility. And we believe it’ll provide us with the economies of scale, leading to superior margins, meaningful brand equity and long-term competitive moats.

On Columbia Care’s call on Monday, they talked about the strong performance they saw in the first month of adult-use sales in New Jersey. This is just the first of many adult-use catalysts in our portfolio. On a pro forma basis, we have leading positions in Pennsylvania, Ohio, Maryland and Virginia, four markets that are likely to go adult-use in the relatively near-term. These four, along with New York and Florida, represent some of the biggest industry catalysts in coming years, and Cresco Labs has exposure to all of them. While any form of federal banking and tax reform will be material, the demand from the cannabis consumer and progress with state accessibility continue to be the bellwether for the cannabis thesis.

We’re making significant progress on the closing of the transaction on our previously communicated timeline of around year-end. On Monday, we accomplished our first major milestone as the transaction cleared the federal HSR review. The next milestone, Columbia Care shareholder vote, will occur this summer.

On the state level, we’ve been working closely with regulators to ensure a smooth progression towards the deal approval. As most know, the reputations of Cresco Labs and Columbia Care have foundations rooted in regulatory compliance, and working with regulators to build the most responsible, respectable and robust industry possible. The regulatory process is reasonable, manageable, and we do not expect it to be an issue for our closing timeline. In the few states where we will have divestiture requirements, namely Illinois, Massachusetts, Ohio, New York, Florida and Maryland, we’ve started the sales process and have been very pleased with the progress thus far.

Our official RFP process was launched last week. Based on the initial expression of interest, we’re confident that this will be a smooth and successful process. The acquisition of Columbia Care is a major step in building the most strategic footprint and long-term industry leadership. While the closing and integration planning is hard work, and we’re all enthusiastic for the post-closing look at Cresco Labs, our team has not taken their eye off the ball and continues to execute operationally and compete well in all of our markets.

Number two, we maintained our leadership as the number one wholesaler of branded products in the cannabis industry. Q1 net wholesale revenue was an industry best $95 million. For the quarter, Cresco products were the top portfolio of branded cannabis products according to BDSA. We were the industry’s number one seller of branded flower, number one seller of branded concentrates, number two seller of branded vapes and a top five seller of branded edibles. We reference BDSA, because we think it’s the best source for branded sales, similar to how traditional CPG would quote Nielsen or IRI data.

Internally, we’re focused on growing branded share as that demonstrates our ability to create a differentiated product that consumers love. In Illinois, we maintained our position as the number one seller of branded cannabis in the state. We’re incredibly proud of the Illinois team and their unrelenting focus on continuously improving operations, and leading this market with world class execution. This team launched FloraCal premium artisanal flower and concentrates just in time for the 420 holiday to an incredible reception and sold out shelves. The FloraCal launch is a good example of several key points of our operational execution as it shows: one, our ability to take a successful brand from one state, FloraCal is now the number four flower brand in California across our footprint; number two, our ability to successfully introduce a premium price product during a period of general price compression, thereby stretching and broadening the price index of available product categories and widening the delta between each; three, our ability to produce premium products, a term that is way too easily thrown around in this industry; and four, the importance of having an intelligent brand and product portfolio architecture including a variety of differentiated value propositions to meet the consumers where the consumers want to be met.

In Pennsylvania, we’re also the number one seller of branded cannabis products per BDSA. Our continually improving flower offerings have lifted us to the number two share position in the state for flower in the quarter. We continue to lead the vape and concentrate categories. While we’re proud of our current performance, we are incredibly excited to see what happens when we launch our FloraCal flower and concentrates in Pennsylvania later this year.

In Massachusetts, where we saw the most headwind in the quarter, but remain number two in branded share, we’re working through our integration process, aligning cultivate on all our systems and aligning our production across cultivation facilities. Even with the mentioned headwinds, we continue to compete well and have effectively closed the gap between us and the number one branded share position. At the end of the day, we focus on creating branded products that consumers love and getting them on the shelves as close to the consumer as possible. The Columbia Care acquisition will allow us to get these products in front of more consumers, in more states, expanding brand equity and driving wholesale growth for years to come.

Number three, we’re operating the most productive retail stores in the most strategic markets. Q1 retail revenue was $119 million, with same-store sales growing 9% year-over-year. Sunnyside continues to rank number one among the scaled national operators with an average quarterly revenue per store of $2.5 million. In Florida, we finished our manufacturing kitchen and brought edibles to our stores for the first time mid quarter. This is a huge unlock for us as we look to be able to provide the full selection of Cresco Labs’ products to patients in Florida.

In addition to flower, we now have launched vapes under the High Supply and Good News brands, Sunnyside Chews and Remedi tinctures. Over the course of the year, we expect new store openings in Pennsylvania and Florida with store openings weighted towards the back half of the year. Core to the success of Sunnyside is better assortment, throughput, location and experience. Strategic retail will continue to play an important role in the success of our business. It generates near-term ROI and supports long-term sustainable wholesale success.

We look forward to adding new stores to our retail footprint as part of the Columbia Care transaction as it makes Cresco Labs the most well rounded formidable competitor possible and sets us up perfectly for our long-term vision.

In summary, Cresco Labs continues to execute on our established strategy of creating the most strategic geographic footprint possible with material market shares in each state by being the number one wholesaler of branded cannabis products and operating the highest volume strategic retail. The strategy remains constant and the Columbia Care acquisition simply fits these stated priorities hand in glove.

With that, I’ll turn it over to Dennis to discuss Q1 results.

Dennis Olis

Thank you Charlie and good morning everyone. I’ll begin by reviewing the financial results from the quarter, then highlight a few items from the balance sheet and discuss our capital position. Our first quarter revenue was $214 million, up 20% year-over-year. As already noted by several of our peers, the quarter was impacted by macro pressures that stressed the consumer wallet and seasonality.

While we saw a sequential decline of 2%, we outpaced our markets, which saw a 4.5% sequential drop from the prior quarter. Adjusting for Massachusetts alone, the remaining portfolio achieved 2% growth in the quarter. Q1 revenue mix was 44% wholesale and 56% retail. Retail performance was particularly strong, growing 44% year-over-year driven by same-store sales increasing 9% and store growth in Florida and Pennsylvania. Retail was up 2.3% sequentially.

Net wholesale revenue was flat year-over-year with growth across almost all of our markets, offset by meaningful but strategic attrition in California associated with our shift away from third-party brand distribution. Wholesale revenue declined 6% sequentially. The main driver was softness in the Massachusetts market driven by a mix of factors. The overall Massachusetts market was down 7% with lower price per pound, especially on lower THC products. This had a disproportionate impact on us as the harvest from our new capacity in late Q4 and Q1 had lower than normal potency, which relegated that product to the most price competitive category.

Additionally, in Q1, we transitioned to cultivate operations to align with our operational systems, cultivation methodologies and brand manufacturing which caused some short-term disruptions. These issues are now behind us. But again, as Charlie stated, we maintained our number two branded share position in the state, and effectively closed the delta between us and the number one share spot. Not bad for the first quarter becoming an integrated business.

Looking at the second quarter and the rest of 2022, while we have started to see some signs of improvement in March and April trends, we believe it is too soon to call a turn beyond just typical seasonality. As such, for now, we are maintaining our cost outlook for relatively flat to muted growth in Q2.

First quarter adjusted gross profit excluding the fair value markup of acquired inventory was $113 million, with adjusted gross margin of 53%, down from 54% in Q4 as a result of lower revenue and pricing pressure particularly in Massachusetts and California. Over the last 12 months, we’ve seen a 350 basis point improvement driven by achieving operational scale in more markets, the strategic decision to shift away from third-party branded distribution in California and our entry into the vertically integrated high margin Florida market. Looking ahead, our goal is to maintain gross margins above 50%.

We will continue to see improvements from the investments we are making today in organizational structure, automation for processing and packaging, and increased cultivation yields to offset the likelihood of further price compression.

First quarter SG&A expense, excluding share-based compensation and noncore items, was $69 million, or 32% of revenue. The increase in SG&A was primarily due to the additional four new dispensaries fully integrating the Laurel Harvest and Cure Penn acquisitions, merit-based compensation increases and adding new employees during the quarter as we make investments for future growth. We will continue to make investments in our people, processes and systems this year as we build the industry’s leading company for the long-term.

Adjusted EBITDA for the quarter was $51 million, representing a margin of 24%. The decline of a 200 basis points sequentially was a result of lower gross margin and the additional SG&A expense. We have room for operating leverage, especially on the wholesale side of our business as we exit a seasonally slower part of the year.

Cash used in operation was $3 million. This was primarily driven by the accumulation of $20 million of inventory sequentially. We took proactive purchasing actions to reduce the impact of global supply chain challenges and inflation. We fully expect these investments in working capital to reverse in the coming quarters, and the proactive purchasing should lead to lower input costs and higher operating cash flow throughout the rest of the year.

We also built the FloraCal inventory in Illinois in Q1 to prepare for its incredibly successful 420 launch date. First quarter gross CapEx was approximately $33 million, including a $23 million cash purchase of property in New York. We remain very excited for the positive impact that Columbia Care acquisition will have to lessen our needs for CapEx to drive future growth. We are also evaluating our footprint and exploring how to maximize value from potentially redundant assets as we continue to optimize our national footprint. We expect to generate enough cash over the remainder of 2022 and have access to strategic and efficient sources of capital to fund our capital needs.

We are developing a leading CPG company, making the investments in facilities, people and processes that will allow us to lead this industry long-term and generate value for our shareholders.

And with that, I’ll pass it back to Charlie for some closing remarks.

Charlie Bachtell

Thank you, Dennis. I’m incredibly excited about what lies ahead for Cresco Labs. While the inflationary pressures are real and are impacting many aspects of the consumer goods markets, it emphasizes the need for cannabis operators to get better, more efficient, and offer more value to the consumer.

Cannabis has a unique catalyst that most consumer categories do not have, a robust shadow market sitting alongside us, an illicit U.S. cannabis market that’s conservatively estimated to be in excess of $100 billion annually. There are two main things that we can do to help convert these cannabis consumers to this burgeoning regulated cannabis market that is already exceeding $25 billion in annual sales, employing over 400,000 people in the U.S. and generating billions of dollars in annual tax revenues.

One, create the scale, operational efficiencies and strategic initiatives that will allow you to offer products with a higher perceived value to the consumer. And two, engage to drive reform at a regulatory level. As stated throughout our prepared remarks today, Cresco Labs is focused every day to execute on doing both.

From my perspective as a CEO of Cresco Labs, and as the Chairman of the National Cannabis Roundtable, we have never been closer to achieving some form of federal regulatory reform than we are right now. While nothing in politics is a given, it does reinforce that now is the time to lean in. The ultimate unlock for this industry is normalized banking and taxation. All of the other phenomenal benefits of rocket ship job creation, entrepreneurial opportunities, social equity and justice initiatives, and total economic impact start with normalized banking and taxation.

On the strategic initiative front, our Columbia Care acquisition pairs the best consumer brands with a broad, deep and strategic footprint, along with scale and revenue diversification that is unmatched. It allows us to offer more differentiated products with the highest perceived value to more customers across the country.

In closing, the market volatility and industry headwinds we faced over the past few months have made it even more clear to us that this was the right strategic move for our business and for the industry. With our operational and strategic initiatives underway, we’ll continue to keep our heads down, execute on the business and put the pieces in place for long-term leadership and achieve our vision of being the most important company in cannabis.

With that, I’ll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Owen Bennett at Jefferies.

Owen Bennett

Just first question on the FloraCal launch into Illinois. Just curious with a few questions around this. Curious in terms of how much of a premium that’s being priced relative to the broad market. Also interested to hear if it’s cannibalizing the rest of your portfolio or sourcing from competitive brands? And then any data around trial levels, how much you’re seeing in terms of repeat purchases? And then finally kind of plans for further rollouts. You mentioned PA. Would it be fair to assume you may target states where we’re seeing increased pricing pressures?

Charlie Bachtell

I may ask for a couple of repeats on the questions. But yes, from a premium level — and this is Charlie by the way, from a premium level we were excited to, as I mentioned, be able to introduce a new product into a very competitive marketplace at a premium price point that is at the top of the scale in Illinois and have the reception be as strong as the reception was. And not only in sales, but in sort of public feedback as all know that cannabis consumers are fairly vocal and they share their opinions on social media fairly regularly. And it was just great to see the reception that the product got. And what it did is it validated this thesis that, that the value, the perceived value that the consumer is looking for is really what drives their behavior. So if the quality is there, they’ll pay for it. They will pay for the quality that you’re offering. It was very exciting.

So again, top price point in Illinois, it is something that I’ll let Greg talk more about the specific other impacts that you’ve mentioned, I think, cannibalization and then likely next states that we will be deploying and launching the product into. Greg?

Greg Butler

Good morning, Owen. Just a couple of stats we’re seeing, I would say it’s still relatively early from our launch of FloraCal truly was in advance of 420. But to Charlie’s point, we are seeing some encouraging stats in the weekly things like — I think your question is cannibalization, how we look at that is outlets buying that bought on the first purchase grew as we got in the second week. So I think the outlet buying is plus 20%. So more accounts continue to buy. We’re seeing more placements continue to grow. So as those accounts are buying, they’re buying one more unit as each week goes on. And then also most important metric of FloraCal’s revenue per outlet buying, that’s increasing as well in the double-digits each week over week.

So customer accounts are buying and are continuing to support it, and I think your question was a repeat purchasing. And I think the part C of your question of FloraCal was also cannibalization off of core business. As it sits right now, we’re not seeing that materially of any sort of slowdown on either Cresco or High Supply. And once we get the latest BDSA data, what we’re hoping to see is that actually helps us continue to like strengthen our share position in Illinois and see where that source of volume is coming from outside of our own portfolio.

Owen Bennett

And just the next question. You mentioned the launch in PA, would it be fair to assume you’re perhaps targeting states where we’re seeing increased pricing pressures right now, so you can bring in that premium product?

Greg Butler

Absolutely, I think if you look at our target, of where we would like to go next, what we’ve publicly stated is Michigan, we think there’s a big opportunity for us to bring FloraCal products into Michigan. We think there’s a big opportunity in Massachusetts, there’s an opportunity in Pennsylvania, and there’s also not the opportunity in Florida as we think of kind of the next markets roll while we’re also strengthening its position in California, which is also quite pleasing, right? We’re expanding outside of California, but even in California FloraCal remains one of the top four flower brands in the state. So we’re able to kind of hold our core while expanding.

Owen Bennett

And then just one quick follow-up on the same-store sales increase, nice increase there, I was just wondering any color on what states are perhaps driving this and any particular drive, which you would call out? I mean, it is a greater footfall, higher basket size, anything in particular?

Greg Butler

Overall, we don’t tend to give too much of our state specific information, but what I will tell you is from a growth of same-store sales, it’s a little bit more on the trip side, baskets continue to stay relatively whole for Q1. And so from average basket size, we see some material growth, but really trip growth is what is driving that from an overall revenue perspective.

Operator

Our next question comes from Camilo Lyon at BTIG.

Camilo Lyon

I have a couple of questions. The first one we have is just an update on the divestitures process. And specifically, how you’re thinking about which assets to proceed with in New York, if there’s some sort of evolution in the thought process there as it relates to your assets, your CapEx in that market, or the Columbia Care assets? That’s my first question.

Charlie Bachtell

We’ll start with your first question. We haven’t and we’re not going to provide very specific details on the specific assets included. The states themselves, of course, have been identified. But there’s some opportunity for optimization, as the process continues to unfold on the very specific assets in those states that would be included to be based on with buyer requests, opportunities to optimize the proceeds depending on the mix.

So we’re not going to give too much specifics there, but the process in general itself, going really well. And we’re very pleased with inbound interest, pleased with the team’s performance in putting everything together and the structure of it, so — and also, of course, definitely the conversations with regulators, everything is going really well.

Camilo Lyon

It’s great to hear that, that process is unfolding, as you described. Is it fair to assume that when the launch in New York happens for adult-use, that you will be ready in whichever asset you end up deciding to go forward with?

Charlie Bachtell

Yes. We’ll have product ready for New York when adult-use launches.

Camilo Lyon

And is the, — is this the general range that I think we outlined upon the announcement of the deal for proceeds of 300 million to 400 million? Is that still a good range to stick with?

Charlie Bachtell

Yes. We don’t see a risk to it. And again, we’re going to encourage the buyers to make their offers and we’re liking the inbound interest and hoping to create a competitive environment. So — but yes, we don’t see a risk to it.

Camilo Lyon

And then Charlie, my last question, Charlie, for you. Maybe you could help us understand or think about the gross margin evolution throughout the rest of the year. Q4, Q1, were challenged quarters, high levels of promotion, maybe some slowdown on demand. But there certainly seems to be, as you guys also noted, an improvement in demand here in March and April, which I think is actually continuing to [dismay] from some of the data that we see. Have we hit nadir on gross margins for the year? And should we see an expansion of gross margins going forward? Or kind of holding at a level that you performed at in Q1? What’s the right way to think about that progression this year? Thank you.

Charlie Bachtell

I’ll start, and then Dennis, feel free to jump in. But as we’ve historically done, we sort of — we want to make sure that we’re maintaining gross margins above 50%. And again, the strategies that we’ve deployed, including the launch of premium products, the continued focus on creating more scale, more verticality where possible, including the market structures that allow for more verticality, i.e., Florida, we think those are opportunities for us to maintain a strong gross margin and the durability of it. While we continue though, do anticipate further competitiveness in the markets, including pricing pressure, macro, influence of inflation and all of that. So, Dennis, anything more to add?

Dennis Olis

Yes, I think just building on what Charlie said. Yes, we’re taking actions now to try to combat some of the inflationary costs associated with parts that we’re putting into our products. But we feel comfortable of the 50% plus margin target that we gave on over the long haul, and that we’ll be able to maintain that through the balance of the year.

Operator

Our next question comes from Derek Dley at Canaccord Genuity.

Derek Dley

Just a question on CapEx for the remainder of the year. Can you just give us some guidance on what you expect for CapEx and where the bulk of these investments are going to take place?

Charlie Bachtell

Good morning, Derek. Dennis is going to answer.

Dennis Olis

Derek, yes, when we look at CapEx, there certainly is a — as we rationalize the combined footprint of the two companies, there will be a smaller need for CapEx as we go into 2022. We made significant investments over the last year or so in a number of states, in Michigan, Florida, Ohio. So a lot of the large CapEx, expenditures absent New York had been made previously. So we’ll continue to make investments as needed to improve cultivation, add to automation. We’ve got a number of stores that we will be opening in Florida and Pennsylvania during the course of the year. So there will be continued CapEx needs.

I think last quarter, we threw out a number of about $100 million for the course of the year, I think that number will come down as we do the evaluation when the needs between the two combined companies going.

Derek Dley

And then in terms of your own brand sales through your store — through your existing stores, were you still in that sort of 40% plus range that I think you guys quoted last quarter?

Dennis Olis

Yes, it’s 40%, give or take, depending on the market.

Derek Dley

And then just last one for me, just in terms of California. We’ve been hearing that, obviously, there’s been a challenging pricing environment, more supply coming online, supply exceeding — cultivation supply coming online, exceeding that of store growth. But also hearing that we’re seeing some stabilization recently in the pricing environment. Can you comment on that? And have you seen any — that would imply that some stores are likely to close down, have you seen any of that take place so far?

Charlie Bachtell

So as we’ve talked previously, I think California is going through a process, right? And it’s something that we’ve seen in other markets with maybe comparable regulatory structures that have played out over the years, just earlier, Colorado, Washington, Oregon, et cetera, boom-bust sort of thing, and then a rebuild in sort of the who’s left standing, we’ve seen increases in greater support come in after the fact. I’m not sure that we’re ready to call California being there yet and I’m sure Greg has some additional details.

Greg Butler

I think building on the last point from Charlie, which is calling California, let’s look at Q1 here, average price points in the market did continue to decline sequentially, down about a buck on average from about $9 per gram to about $0.830 a gram by Q1. So prices continue to decline. I think the one concern for California too is, in some of our other markets where we see price compression, but unit growth. In California you’re seeing both. You’re seeing prices come down but also unit growth also declined, which means there is a combination of, total revenue is down because of price per units are down, but also consumer demand to purchases in the track market also continues to be down. And that is probably related to more macro issues driving the total market. California, as we closed Q1 still had some tough macro headwinds against it. We were very pleased, as we talked about how we were able to continue to grow our share across our segments in the state. But from a macro perspective, Derek, I just — I think you need more time to see how this flushes out. I don’t think anyone’s prepared to call a “bottom” in the market yet.

Derek Dley

And so is the unit growth decline solely related to macro challenges? Or is it — or is the grey market or illicit market taking incremental share?

Greg Butler

There’s no perfect way to get that information. But I would tell you, if consumer wallets are shrinking, and there is tough household and condition pressures, surely that is both a question of whether that’s consuming less or buying from other markets would be a driver. But the net takeaway being in the track market, legal track market, unit volume continues to decline.

Operator

Our next question comes from Andrew Partheniou at Stifel.

Andrew Partheniou

Maybe continuing on discussing margin and trying to get a little bit more color on seasonal trends. Could you give us a sense of the level of impact from systemic pricing pressure, like you mentioned on — in Massachusetts on pricing versus seasonal promotional trends, which in Q1, maybe you could give some color, whether higher promotion or lower promotion versus Q4? And is it also fair to say that Q2 is typically a higher promotional period versus Q1? And assuming the systemic pricing pressure remains the same and you alluded to flat sales in Q2, should we expect continued margin pressure in Q2?

Charlie Bachtell

Good morning, Andrew. Thanks for the question. Why don’t you start…?

Dennis Olis

Yes. I can start and then pass along to Greg. Now, we don’t give specific guidance on margin. But if we look going forward into Q2, some of the dynamics that we saw in Q1 around pricing and some of the inflationary pressures that we saw, those will continue into Q2 now. There’ll be some mix variants across different state lines that will help offset part of that, and some of the automation and efficiencies within our facilities will help offset some of those pressures. So we feel pretty comfortable that what you saw in Q1 will be repeatable into Q2 at a macro level, there may be some plus or minus variations from that. But we feel pretty comfortable with that level.

Greg Butler

Especially as you get state by state, it could vary state to state.

Dennis Olis

Yes. As we see, Massachusetts start to get a little bit increased sales in Q2 and we see Florida pick up as we add some more stores to our Florida operations and added our edibles and kitchen products into those stores, we should see higher margins that come out of Florida and Massachusetts compared to our average gross margins. That, again, will offset some of the pressures that we see in inflation and price pressures.

Greg Butler

I think the second part of your question was price promotion activity. And you are right, historically, Q3 particularly is one of the biggest quarters in the market on seasonality and size just there’s more trading days, better trading days within the quarter. Historically, we’ve also seen increased pricing activity in the quarter but I think what we’re seeing this year is pricing activity across all quarters. So I don’t — we’re not predicting necessarily it’s going to intensify to the price activity in the quarter. What we’re watching very closely is we expect each month to get a little bit stronger. That’s just how the market tends to trend. And in order for our industry to continue to show the double-digit growth that everyone wants or high single-digit growth that everyone wants, these weeks have to get bigger and bigger. What they normally have to do, they have to improve because we expect that but they have to get bigger than they were a year ago.

And so I think when everyone asks us about just looking at the future, we do expect to see things improve. But we need to continue to see this market accelerate in order to show year-over-year growth. And as we stand right now, we are seeing improvement, but we are cautiously optimistic on it, that improvement is accelerating into the back half. We haven’t seen it necessarily accelerating as we’ve gotten into April.

Andrew Partheniou

And on organic performance, could you provide your sequential same-store sales growth? And if you could discuss if you benefited or were impacted by the vape recall in Pennsylvania? How are those trends looking like thus far in Q2, especially in Pennsylvania with the vape recall?

Greg Butler

So thanks for question on the vape recall situation, Pennsylvania continues to be a strong market for us. We did see some growth in from Q4 over to Q1. Some of that could have been the vape recall. I’d remind just that, that particular recall had an impact on some suppliers, not all suppliers. So it wasn’t that the entire market lost its entire supply.

What we are encouraged about is more is the performance of our products in Pennsylvania. I think what we are encouraged to see is on our vape products in particular we continue to have a leading market share in the state even though we don’t have a leading number of doors position. So it does tell you how strong those products perform within our stores, but particularly within our partner stores. And so that for us continues to be an encouraging spot from it.

From our stores — from a same-store sale perspective, as Dennis mentioned earlier, we don’t tend to give state specific call outs for that, but I will tell you in Pennsylvania from a store perspective is right now most of our growth is continuing to come from growth in our existing stores and also growth in some of the new stores like Ambler that we brought on at the beginning of the year. All of our new stores that we’ll be bringing online will happen in the back half of this year, early next year. And that will be the incremental growth on our retail business in the state.

Charlie Bachtell

Yes. And then just to build on to that, when you look at organic growth, the impact of the acquisitions that we had in Laurel Harvest and Cure Penn, both of those deals closed in December. There were three stores with Cure Penn and only one store with Laurel Harvest that was open at that time. So the impact from Q4 to Q1 is pretty minimal.

Operator

Our next question comes from Kenric Tyghe at ATB Capital Markets.

Kenric Tyghe

Charlie, I wonder if you could provide some insight on just how in the context of California market dynamics, you’re pivoting away from third-party to own brand? How valuable was and how you choose to define value in the California market, given that backdrop? Just trying to see not only how valuable it was, but also how it’s set in the market and set with the end customers?

Charlie Bachtell

Good morning, Kenric. Can you repeat the back half of the question? So in California and our move away from third-party take it from there.

Kenric Tyghe

Yes, sure. Sorry, Charlie. How valuable to you was and how are you choosing to define value in the context of that market, whether was strategically or from a margin perspective? And then the second one is, how is that decision sitting or settling in the market? In other words, is it resonating? Has there been push back? What is the read through from sort of that first full quarter for one to have a better way to characterize it off the pivot?

Charlie Bachtell

Got it. I think the pivot — the value from the pivot is significant in multiple ways, right? It allowed us to optimize the business out there, both from a margin perspective, and also focus a 100% of our attention on driving our own brands. And I think you’ve seen the sort of improvement in FloraCal’s positioning and some of our other brands out there too, by having that increased focus on it. So from a P&L perspective, of course, I think it helped us manage California more effectively.

As far as feedback from the market, at this point, we’ve created that stabilization and the change, this shift has been absorbed. So again, I think it lends credence to the strategic nature of the decision that it was the right thing to do. I’m glad that we did it. And now we move forward as this version of Cresco in California. And Greg, anything else to add?

Greg Butler

No, I think the only thing I’d add to your commenting on that we have learned. Has our business changed anything from our decision to move some of the partners? What I’d say is what we talked about in the last call was we did expect to see some sort of distribution dip as some accounts that historically had bought our partner brands may not buy it, because they don’t have this brand in our portfolio.

As we got into Q1 of this year, what we’re encouraged by is we’re able to pick up some of those doors, again, with our own brands. So we’re starting to backfill volume we had on partner brands. As we talked before, we’re beat hollow revenue with brands on our portfolio that give us a much better margin profile. So we’re encouraged to see that.

Kenric Tyghe

And just switching to Massachusetts quickly. Challenging in the fourth quarter, while there was some progress certainly in the first quarter, still challenging. How much of that is away issues within your control? How much of that is just how tough that Massachusetts market was even relative to sort of what was just broad weakness in the overall cannabis market? And just additional insight there on how to think through not just how you performed in Massachusetts in quarter, but your confidence around the — your business in that market as we sort of move through the year with the integration increasingly in the rearview mirror?

Charlie Bachtell

Yes. Kenric, this is Charlie, I’ll start. And then I think Greg has some additional color. But yes, Massachusetts, we would identify as somewhat unique in the pressures that we’ve seen there over the last two quarters. Again, you’re talking about a market that had double-digit growth, sequential growth, Q2 — Q1 to Q2, Q2 to Q3, that just then went totally flat and then we saw down from Q4 to Q1. Similar to any of the other markets that are getting more competitive, you’re seeing basically kind of a teeter-totter approach to when additional capacity comes online versus when additional doors come online. So the long-term outlook for Massachusetts, we still think, of course has upside. The doors opening in more highly populated Boston Metro areas, et cetera. But, yes, we’re also reassured by the fact that as these markets get more competitive, we’re competing well. So, maintaining that number two share, effectively closing the gap between us and number one means that we competed better in that market than our peers. And so that’s what we want to keep focusing on. All these markets are, at some stage and in some way, going to become more effective and more competitive as they grow. So we like the way that we’re competing. Greg?

Greg Butler

Let me add to that what Charlie mentioned, what we are pleased with Massachusetts in this quarter is we were able to grow share overall in the state, particularly in vapes. If you look at our vape portfolio, we have a strong vape portfolio. And then we were able to bring that into the market and continue to grow points of distribution on vape, where we took a bit of — a pretty nice jump in our share position.

Your second question, was there anything on the integration side that maybe give us hiccups? There always is, and we’ll own that. I think if you look at two areas in particular, which are just tough for us we integrated. One is on our edible side, just making sure that we’ve got the — right now two facilities talking to each other. We did have some stock outs on that as we went, which you will see in our shared data had an impact on our share. But we have — we’re continuing to close that. And the second piece too is as we continue expand in the state, the first harvest coming in and out of any expansion, cultivation room are always a little bit tougher. We wish we had little bit higher potencies coming out of those first harvests. I think we had at parity potencies which in the market like Massachusetts that has a lot of lower potency biomass available. That’s not a competitive position but we’re starting to see our next round of harvest coming out and we’re very encouraged by what we’re seeing which means we expect to see not only growth in our vape share, we expect to get our edibles business back on with some of that supply hiccup but then also really go after and take share in flower.

Operator

Our next question comes from Aaron Grey at Alliance Global Partners.

Aaron Grey

So first question for me, I just wanted to touch on Pennsylvania, still doing well on a relative basis with regard to market share. So as you guys continue to roll out stores, it gives you opportunity to expand that market share. Just want to think about how you look to — maybe how much of your own product you aim to have within your own stores as you look to open up additional stores for the remainder of the year versus third-party brands, especially in a market where you are seeing some pricing pressure made a market that started to slow down a bit in growth? Thank you.

Charlie Bachtell

Good morning, Aaron, Greg will take that.

Greg Butler

Good morning. Our view doesn’t change overall what we tend to give as a guidance on how much of our own brands assortments we want up in our own stores. We have to realize we are in a partnership market. We sell into our competitors on the wholesale side and their partners as well. And so as much as we list in our own brands mean we’re buying less from our other partner brands, which means they buy less from us. And that’s just the reality of reciprocity agreements within our industry.

So we try to make sure that our assortment is the best of our brands, but also picking up the best of what our partners are offering us. And so we tend not to look at growing that percentage of our own shelves that are just our own business across the states, particularly like Pennsylvania.

From a new store opening, what we’re encouraged about is on the retail side we do have a number of new stores that we have not opened yet. And we’ll be opening late in the back half of this year, early next year, getting those ramped up, that will give us incremental growth. But it also gives us not only more points of distribution to sell our own brands, but also more points of distribution and bring our partner brands into our portfolio as well, which helps us on our wholesale side in the states.

Aaron Grey

And then second question for me on Illinois market where you’re market share leader in. Just in terms of additional retail licenses coming online, I know, it’s something that’s been delayed for a while, just any additional outlook or color you might have there from competitions. And then how you think about your current cultivation state? And obviously, with the three cultivation licenses, it seems like right now, you’re kind of looming off on additional CapEx, to say just remind us, how you’re thinking about in terms of the timing of additional retail licenses being awarded?

Charlie Bachtell

Aaron, I’ll take that. I might take it in reverse order. Yes, we have capacity in Illinois, right? So we have the ability to absorb additional retail coming online. And we eagerly await it. Now, as it relates to the timing of it, there’s been — I don’t want to be overly optimistic, but there’s some encouraging things coming out over the last 24 hours, and also an anticipated hearing date coming up that might result in the lifting of the state and the issuing of those 185 lottery winners. There is also movement to have that next lottery for an additional 50. So again, there’s new news there, but I also don’t want to lean too hard into it, hoping that, that can get cleared up in 2022. So new stores opening in 2023, I think it’s unlikely that we see new stores in the state in 2022.

Operator

Our next question comes from Vivien Azer at Cowen & Co.

Harrison Vivas

This is Harrison Vivas on for Vivien. Just doubling back on a comment that you made, Greg, you said that baskets have been holding relatively steady. Just in the context of a challenging consumer environment where were wallets are shrinking, what would you say are the biggest drivers of that basket holding in?

Greg Butler

Yes, I think, one of the area where you’re going to see this come to fruition as we get into the next couple of quarters here may not be on average basket size. I actually think average basket size could go up, but frequency of trips could go down. And what I mean by that is you may not, you may actually see each trip, customer shifting to bigger formats, looking for deals at stores, increasing how much they buy on an individual trip basis, but start seeing the frequency in which they’re shopping, start to pull apart.

And I think that’s where tight wallets are going to come into our market where we have a pretty high frequency of visits of our customers and patients. And I think what we’re — where the current economics will play out in consumer dynamics is you will see less trips coming into the store. And you actually might see then average basket size increase as they’re trying to find better value for the trip or stocking up in one trip. And then minimizing the frequency in which they’re visiting.

Harrison Vivas

And then just a quick clarify on California. How many doors are you distributing into now, just given the dynamics? And I think last quarter, Dennis, I think, or maybe it was you Greg that talked about a potential acquisition strategy for potential complementary assets. So is that still part of the strategy going forward? And then again, if you could just clarify the door count? Thank you.

Greg Butler

Yes, let me drop that one as one, and hit on it. From a door perspective, we saw for — we did about 497 doors in Q1 of 2022. And that was versus what we talked about last earnings call, which is about 450 doors, approximately. So we did — back to my earlier statement, we did see a nice growth in doors after we had to lose some of our partner brands, and lose some of those customers, we’re able to rebring them back into our own brand portfolio. So from an overall door perspective, continuing to hunt, and continue to feel encouraged that we’ve been able to take share of our own profitable brands in that market.

From an overall M&A — and I’m pretty sure that was me who mentioned I’m looking at Dennis here, I don’t think it’s Dennis, how we think about M&A and taking it across our footprint is things like we need to work out bringing really incredible capabilities and a solid, strong brand with a story that can resonate across our markets, across the platform. And as if we were to look at any M&A in that state or other state, what we’re really trying to find is capabilities that are accretive to our portfolio. And so that’s kind of the core asset that we look for, and how do we take that across our operations.

Charlie Bachtell

We’re going to try to get a couple of more questions in here. We know we’re at the hour mark, but we’ll get a couple of more questions.

Operator

Our next question comes from Matt Mcginley at Needham.

Matt Mcginley

Would the overall revenue growth have been up 2% if not for Massachusetts, or was that comment that you made specific to the CPG segment? And I think your overall message in the prepared remarks was that Massachusetts would improve into the second quarter but it also sounded like you’re still in the process of aligning your inventory composition to what the market wants, and that those issues could still carry into the second quarter. So I guess what’s the message into the second quarter relative to the first specific to Massachusetts?

Dennis Olis

Yes, so when we talked about the 2% growth absent Massachusetts that was in its entirety, wholesale and retail. So without that, we would have gone 2% sequentially. From a cultivation standpoint, as Greg noted earlier, some of the improvements that we are seeing in subsequent harvest, we will see some of the benefit in Q2, and in subsequent quarters, and in the second half of the year.

Greg Butler

Yes, and integration wise, we’re in a better place. Again, we’ve had a quarter under our belt now, five months under our belt of the integration. So in a much better place now.

Matt Mcginley

And on the G&A, how much of that increase in G&A dollars compared to last quarter is related to the retail growth relative to the inflation that you noted? And would be impacted those merit-based increases, boosted G&A dollar rate from the $69 million from here, or is that more of a onetime step up, so the dollars would likely hover close to closer that number in subsequent quarters?

Dennis Olis

Yes, from an SG&A standpoint, the a big piece of that growth from Q4 to Q1 was related to increased retail as we open additional stores and we had a full quarter of the Laurel Harvest and Cure Penn facilities in our — on our books. As relates to merit, what you saw in the first quarter will carry forward to the balance of the year. Those pieces went into effect January one. So we saw — did see the full quarter impact of merits.

Operator

Our final question comes from Scott Fortune at ROTH Capital Partners.

Scott Fortune

Just a real quick follow-up, shift on Florida, the goal is to be a top three position there in the state with the recent product launches, congratulations there. And how combined introduced and additional stores. And you look at the premium product rollout to the stores, how are you looking at additional verticality and capacity in the state as we look at that going forward here?

Charlie Bachtell

First part of the question, Greg?

Greg Butler

Yes. So overall, I think if you look at our performance in Florida, historically, coming into the quarter, we have been predominantly focused just on flower. And what’s exciting about what we’re able to bring to market in Q1 is starting to not only expand our flower offerings, also expand our manufacturing goods. And that’s really helping us in Florida grow our baskets, where we were losing patients from our stores, who were going to buy things like edibles at other retailer. And now we’re looking forward to keeping all of those patients and delighting them with our products in our own stores. That’s going to continue through the course of this year where we’re bringing innovation to market. We’re very pleased with how chews are performing this day. We’ve got some other interesting innovation that’s on top of the launch as we go into quarter. So that really will be focused on driving basket growth within our existing stores.

As it comes to new stores, we — in Q1, we were able to open three new stores. And then as we look at the back half of this year, we’re going to ramp that up of new store openings pushing back into towards Q4.

Operator

This concludes our Q&A session. I’d now like to pass back over to Charlie for any final remarks.

Charlie Bachtell

Just a quick thank you for everybody for joining the call today and we look forward to delivering our Q2 results later this year. Hope everybody has a great rest of the week. Bye-bye.

Operator

Thank you everybody. This concludes today’s call. You may now disconnect.

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