Cresco Labs Inc. (CL) Earnings Call Transcript & Summary

Good day, and welcome to the Cresco Labs 2021 Second Quarter Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Good morning, and welcome to Cresco Labs Second Quarter 2021 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 second quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. We plan to file our corresponding financial statements and MD&A for the 3 and 6 months ended June 30, 2021 on SEDAR and EDGAR later today. 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 for our forward-looking statements and risk factors can be found in our earnings press release and in Cresco Labs' filings on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. Please also 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 some non-GAAP financial measures, such as adjusted EBITDA, 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'll now turn the call over to Charlie.

Hi, everyone, and thank you all for joining us this morning. We're once again very pleased to share our results with you today and discuss what an outstanding quarter this was for our organization. Early in the second quarter, as the weather warmed up, COVID restrictions lifted, and tourism return to cities around the country, we saw consumer demand reach all-time highs in numerous cannabis markets around the country. Between strong demand growth, continued progression of state legalization efforts and renewed potential for federal reform, we believe the outlook for the U.S. cannabis sector has never been brighter than it is today. As for Cresco, we love the trajectory we're on. We've demonstrated the ability to reach and sustain top market share positions in multiple billion-dollar-plus markets and we're gearing up to repeat that success. We fortified the balance sheet with substantial non-dilutive capital to create more growth for shareholders. We continue to advance this industry with thought leadership and engagement in the legislative process. We're winning awards for product quality. Our social equity team is developing and incubating license winners, our brands are dominating categories in numerous states, and this is just the beginning. Revenue in Q2 was $210 million, an increase of 18% sequentially and 123% year-over-year. We've demonstrated industry leadership on both sides of the field, with $109 million of net wholesale revenue, we remain the #1 wholesaler of branded cannabis products in the industry. With $101 million of retail revenue from 33 stores, Sunnyside remains the most effective and productive per-store retail platform among scaled national retailers. Q2 gross margin, adjusted for the fair value markup of acquired inventory increased to 51%, and adjusted EBITDA increased to $46 million, growing 30% sequentially. In Q1, we mentioned that we were optimizing operations across the footprint. While we consolidated newly acquired Florida assets midway through April, approximately 86% of our sequential top line improvement was driven from organic growth in existing states. We're very proud of the performance in Q2, but we're even more excited to begin seeing the contributions from our 2020, 2021 growth initiatives that are still to come later this year. We invested in infrastructure, operationalized new assets and deployed our playbook across the footprint. Once again, we're hitting our stride as we enter the next phase of growth. On previous calls, we've discussed the 3 specific ways Cresco Labs is delivering growth and shareholder value. This framework provides a simple, straightforward view and of the logic behind our strategy. Before discussing the how, it's important to first reiterate the why. First, we're investing in the most important U.S. markets to build meaningful material market share positions and create the most valuable footprint in cannabis. We've established operations in 10 of the most strategic markets in the U.S., and now we're focused on achieving Top 3 market share positions in each state. In doing so, we generate scalable capabilities, increased operating leverage and create leading brands in the largest, most influential states through quality, consistency and availability. Second, we're increasing our leadership in wholesale because we believe strong capabilities in the middle verticals of the value chain is key for long-term success. We've demonstrated the unique ability to build cultivation capacity, bring brands to market and distribute to a 100% of retail stores. As more and more nonvertical independent retailers enter this industry, this proven playbook will continue to be a formula for success today and as regulatory structures inevitably evolve. Third, we're operating high-volume retail stores to better understand consumer preferences, complement our wholesale operations and drive profitability. Maximizing retail opportunities in limited license states will continue to serve as an important aspect of our plan to drive near-term value creation. Using the fundamentals of established consumer industries, we've created our strategy to achieve growth and shareholder value in 2021, while simultaneously building the platform for long-term leadership in cannabis. Now let's review the 3 specific ways Cresco Labs is executing in 2021. Number one, accelerating growth through organic investments and M&A in the most important markets. In April, our entrance into Florida marked a significant milestone for our company and we're thrilled to welcome the entire Bluma team to the Cresco family. We're off to a phenomenal start in the market, with pro forma Florida revenue growing 33% in Q2 over Q1. Integration is moving quickly and has already yielded numerous operational improvements, increased cultivation output and facilitated valuable knowledge sharing between the 2 companies. Over the coming quarters, we'll begin to roll out additional form factors like edibles, more brands from the Cresco Labs portfolio, expand cultivation capacity and double the current store count. As an organization, we become proficient in closing and seamlessly integrating new assets through M&A. This ability creates tangible shareholder value and makes us all the more excited for our upcoming acquisitions. Massachusetts represent a substantial growth opportunity in the back half of this year and into 2022 as we complete the 2 initiatives that will propel us to our Top 3 market share goal. First, we're nearing the initial harvest from the expansion of our Fall River cultivation facility, which will drive meaningful impact on our operating leverage in Q4. Second, upon the closing of the Cultivate transaction, we'll operate the maximum number of dispensaries, double our cultivation footprint and become the premier wholesaler for the state's more than 170 retail outlets. In Ohio, we're seeing outstanding performance from the 4 new Sunnyside stores, and the team is working to bring product to market from our new extraction and manufacturing capabilities that will introduce our full suite of offerings to the state for the first time. Once again, the maximum number of retail stores, a robust wholesale portfolio, and already more than 80% penetration, Cresco Labs will be positioned to accelerate growth in Q4 on our way to earning another Top 3 market share. To round out the cultivation expansion projects we initiated last year, we're looking forward to the first harvest in our Michigan facility around year-end. With more than $450 million of quarterly state sales, we're excited to deploy our proven playbook led with CPG fundamentals to Michigan's massive fast-growing adult-use market and build a commanding market share position. We've made incredible progress year-to-date investing in our strategic footprint. We're constantly analyzing state dynamics, evaluating the needs of stakeholders, impacting where the puck is going and making responsible strategic investments for the benefit of our shareholders. With upside driven by regulatory change in Illinois and New York and encouraging adult-use discussions happening in Ohio, Maryland, Pennsylvania and Florida; now is the time to execute our playbook and establish the foundation for multiyear growth in the country's most important markets. Number two, increasing our leadership as the #1 wholesaler of branded cannabis products. Q2 net wholesale revenue grew 14% sequentially to $109 million, by far the most in the industry. During the quarter, our brands reached more than 1,000 retail stores around the country for the first time. We continue to bring innovation to market through recent launches under the Good News and Wonder Wellness brands. Illinois was the standout market in Q2, with state sales rising 19% sequentially, supported by 11 store openings in April and robust consumer demand growth. We continue to execute our wholesale strategy at the highest level, with a #1 share position in the state. Per BDSA data, Cresco is the #1 best-selling brand in the state. We have the Top 2 best-selling flower brands with Cresco and High Supply; the #1 edibles portfolio with Mindy's Good News and Wonder Wellness; and the #1 concentrate brand with Cresco. We've held our leading market share steady since Q3 of last year and still have the largest potential future cultivation capacity of any operator in the state. With 185 new retail licenses forthcoming, this is exactly why we believe in the prioritization of wholesale over owned retail, and we could not be in a better position to capture growth in Illinois next year and beyond. Across our footprint, we're relentlessly focused on the pillars of successful brand building, knowing what the consumer needs, quality, consistency and availability. Our Michigan team deserves a shout-out here. At the 2021 Hash Bash Cup held last month, our Cresco brand took home first and second place in the vape category; first and second place in concentrates, and Mindy's earned second place in the edibles category. This is a perfect example of how the quality of Cresco Labs' product stacks up in even the most competitive markets, and this bodes well for our launch of premium flower in Michigan in 2022. In California, over the last 12 months, we've successfully competed to grow our share of the market, sharpened our wholesale expertise and established a meaningful presence in the world's largest and most influential cannabis market. We've leveraged top-performing partner brands to open doors for our owned brand portfolio, and over time, demand for our own brands has steadily grown. Our high-low flower portfolio strategy with Floracal and High Supply delivered year-over-year growth of 173%, while shelf penetration and repeat purchasing across key accounts has continued to increase. In vape, we grew 71% year-over-year, and Cresco is now the eighth best-selling live resin cart in the marketplace according to BDSA. Recognizing our key competitive advantage in the cultivation and processing of premium flower, we will continue to strategically manage our California operations to both capitalize on the enormous top line opportunity while reducing costs and increasing profitability. Strong wholesale capabilities are critical for future success in the cannabis industry and with the top-selling brand portfolio in multiple states, no company has proven these capabilities more than Cresco Labs. Number three, operating high-volume strategic retail stores. Q2 revenue was $101 million, 22% growth quarter-over-quarter. Same-store sales grew 14% sequentially for the 20 stores opened during the entirety of Q1 and 58% year-over-year for the 16 stores opened in Q2 of 2020. Average quarterly revenue per store increased to $3.9 million for the 24 stores opened during all of Q2, the highest per-store revenue among top MSOs. While we're very pleased with our retail performance in the first half of the year, there's even more to look forward to as we add stores in Florida, Massachusetts and Pennsylvania and make enhancements to Illinois locations. And a perfect example of how our retail teams are executing, the 4 Verdant stores, all of which had been opened for 2-plus years, increased revenue on a pro forma basis by 12% sequentially in Q2 after we took control, outpacing the market by 30%. We've developed the repeatable model on how to attract more consumers, deliver an unparalleled shopping experience and earn an outsized share of the market, a model we'll continue to deploy this year as we grow Sunnyside. In summary, we continue to validate our thesis that you win this industry by building the most strategic geographic footprint, establishing material positions in each of those markets. And vertical integration is key in the near term, but the greatest opportunity for creating long-term shareholder value is in branded products and the wholesale distribution of those branded products. We have market leadership positions in multiple billion-dollar markets. We're the #1 wholesaler of branded cannabis products in the industry, and we have the most productive per-store retail operations of any scale national operator. As an organization, as shareholders, as employees, as community members and as advocates, we are all fierce believers in what the future holds for this industry. Using the fundamentals of established consumer industries, we've created our strategy to achieve long-term success, and we are executing. With that, I'll now pass the call to Dennis.

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. As a reminder, we converted from IFRS to U.S. GAAP in Q1 and continue to make investments in SOX compliance in advance of our future listing on the U.S. exchange. Q2 was another quarter of head-down execution as we deployed our playbook in more markets, including Massachusetts, Ohio and Florida; and we're beginning to see the hard work pay off. As we look ahead and continue to lay the foundation for growth, we've secured additional funding to pursue expansion in states like New York, Florida and Pennsylvania, while simultaneously reducing our cost of capital. I'll discuss this more in a moment, but let's first turn to our results. In the second quarter, we generated $210 million of revenue, up 18% quarter-over-quarter and 123% year-over-year. During the quarter, we consolidated Bluma on April 14, benefited from a full quarter of the 4 new stores in Ohio, and had our first quarter since removing 180 Smoke. Parsing out these items, we had a fantastic quarter of 15% sequential organic growth, driven primarily by process improvements within production facilities and same-store sales growth across our footprint. As Charlie mentioned, the contributions from most of our 2021 growth initiatives are still ahead, putting us in a strong position to achieve our internal estimate of $250 million of Q4 revenue. Q2 revenue mix was 52% wholesale and 48% retail. Our emphasis on the middle 2 verticals resulted in $109 million in net wholesale revenue, a 14% increase quarter-over-quarter and a 98% increase year-over-year. Our highly productive retail footprint generated $101 million of revenue from 33 stores, up 22% quarter-over-quarter and 158% year-over-year. Our retail sales in the quarter benefited from Florida's vertically integrated structure, which will continue to be reported as a retail revenue in our financial results. We're proud to say that we remain the #1 wholesaler of branded products in cannabis, and Sunnyside continues to be the most productive per-store retail platform among top MSOs. As we look at Q3, we expect continued strong performance across our asset base and are very encouraged by the state sales data for July. In Q3, we remain focused on the integration of new assets, the completion of growth initiatives in Massachusetts and Ohio and expect to recognize the full benefits of the Florida acquisition as well as new retail openings across multiple states. Turning to gross profit. Excluding the fair value markup of acquired Bluma inventory, we generated $108 million or 51% of revenue in Q2, a 182 basis point increase from Q1. As we discussed last quarter, gross margin is expected to increase as facility expansions are completed and costs associated with those facilities are absorbed over a larger revenue base. We also expect the acquisition of Cultivate and continued growth in Florida to positively impact gross margins in the second half of the year. Second quarter SG&A expense, excluding share-based compensation and onetime items were $66 million or 31.6% of revenue compared to 32.4% in Q1. The increase in absolute SG&A dollars from Q1 is primarily related to Bluma as are the onetime charges related to transaction fees and severance. We expect SG&A as a percentage of revenue to decline over the back half of the year as we continue to grow top line, complete investments in corporate infrastructure and recognize SG&A savings as we complete the integration work for acquisitions. Adjusted EBITDA for the second quarter was $46 million, a 30% increase from Q1, outpacing our revenue growth. Adjusted EBITDA margin was 22% in the quarter, a 207 basis point increase from the previous quarter. Looking ahead, we expect to see contributions to profitability from gross margin expansion, continued operation leverage improvement, as well as closing of accretive acquisitions like Cultivate. We reaffirm our internal estimate of 30% EBITDA margin for Q4 and see additional upside in 2022 as we deepen our operations across more states. Second quarter CapEx was approximately $29 million, $16 million of which was funded through tenant improvement allowances. We exited Q2 with $131 million in cash on the balance sheet after making the 2020 tax payments during the quarter. Earlier this week, we completed a refinancing and upsizing of our term loan, effectively increasing funding by an incremental $200 million. I'm proud to report that we've accomplished what we believe is the lowest cost of capital in the industry today by reducing the interest rate to 9.5% without any dilutive equity components. We've also simplified our capital structure and consolidated the loan with 5 existing institutional lenders. This additional funding positions us for significant high-margin growth within our existing states over the coming years. The proceeds will be used to capitalize on expansion opportunities in New York, Florida and Pennsylvania and allow us to continue pursuing high-return investments in key markets. Finally, a congratulation to all of our team members for the outstanding performance in Q2. These results could not have been achieved without your dedication and enormous individual contributions. The first 2 quarters of 2021 have set the stage for strong growth in the remainder of the year and beyond, and we couldn't be more excited about what lies ahead. Thank you for your time today, and I'll now hand the call back to Charlie for a few final remarks.

To close, I'll first echo Dennis' congratulations to our teams for the outstanding performance so far this year. I've personally had the chance to get back out into the field over the past few months to visit our cultivation and retail sites around the country. After 15 months of working virtually and managing the business mostly remotely, it has been incredibly invigorating to see our hyper growth in action and connect with our incredible team members face-to-face once again. In Illinois, the social equity license lotteries are underway and we're excited for what this means for the winners, for the state, and for this industry. We're proud to report that multiple license winners were part of our 2020 SEED program's incubator. We are so proud of these organizations. They put in the work, they met the challenge, and they've been rewarded with an opportunity of a lifetime. We look forward to helping them operationalize the businesses for success. We're also extremely proud of the internal team members who volunteered hundreds of hours to prepare our incubatees for their applications. This is the product of years of hard work and a ground-breaking event for inclusiveness and social justice and cannabis as Cresco Labs continues being a stakeholder-focused organization and leads by example. We firmly believe that a responsible industry leads to a respectable industry, leads to the most robust industry possible. Lastly, related to the Federal Cannabis Administration framework introduced last month, as a company, we're simply never been more excited about the future. We've always known that this industry creates win-win-win scenarios and now the unmatched potential of cannabis is being discussed at the highest levels. We've taken the steps as an organization to prepare our business to succeed today and as regulatory structures inevitably evolve. We're playing the long game and we're building this company to win. The reality is, the U.S. cannabis sector will continue its exponential growth and Cresco Labs is positioned for long-term industry leadership while executing our vision of being the most important company in cannabis. Thank you for your time, and I'll now ask the operator to open the line for questions.

[Operator Instructions] Our first question will come from Camilo Lyon from BTIG.

Dennis, I think I'll start with just a clarification on the guidance. You're maintaining that full year outlook that -- the $1 billion exit run rate out of Q4. You had a very strong quarter here in Q2. You talked about all of the new cultivation projects coming online. I'm just wondering, there's a pretty meaningful deceleration implied in that guidance in the Q3 and Q4 period. Is there anything that we're now contemplating that would suggest that we should contemplate that? Again, given that you've got very strong cultivation projects coming online, I think in Massachusetts and Ohio, plus the Cultivate acquisition?

Yes. Thanks, Camilo, for the question. So as we noted, we're confident in our guidance that we provided for Q4 ending the year at a $250 million run rate. As you noted, there is some expansion opportunities in Massachusetts and Ohio. We do have some additional store openings throughout the second half of the year in Florida, a couple more in Pennsylvania. We will see an increase from Q2 to Q3, but there will be a bigger step-up from Q3 to Q4 as those expansions in Massachusetts and Ohio go live at the end of Q3. But again, we feel comfortable with that. We know there's risk associated with COVID and other variables going on. But again, we stand by our guidance that we provided last quarter and we reaffirm it today.

And then, Charlie, if I could ask on that last point that you mentioned in your prepared remarks regarding the licenses, the lottery winners in Illinois. Can you tell us what you're hearing from those lottery winners as to the timing of when we should expect those stores to open and come online? And then, more importantly, how are you planning your inventory to supply that new type of demand that's going to populate the state?

Yes, definitely. And it's a great question because you've got a lot of opportunities that are being provided to operators that are new to the industry. So I think just realistically looking at it, I think some have -- what we've heard out there at least, some have some pretty aggressive time lines, which by all means I hope that they are able to hit. I think, a realistic look at this from our experience in the industry is it takes potentially 6, 9, 12 months to open up the store from the time that you get to go forward to do it. So I think you'll probably see the majority of licensees fall somewhere in that time line. It might look like a bell curve, who knows. But one thing I can tell you is we're going to be there to assist in any way that we can because we know that the future growth in this industry is driven by additional doors being opened. So very excited that we've gotten into this stage of the lottery and issuing the licenses and very excited about what it means for the state and this industry as a whole.

That's great. If I could sneak one more in on Florida. Now that you've had Bluma under your belt for almost a quarter, maybe a little over a quarter. The markets developed, it's become more competitive and you're ramping up your cultivation there. Bluma is positioning in as much more of a premium end brand in the market. Can you tell us how you're thinking about the further development of that brand in the market as you bring your brands into Florida, all within the context of what's seemingly a more competitive and price-promoted market?

Yes. I mean, it's a great point, right. So the way that we look at Florida and the way that we look at Bluma when we evaluated how we wanted to make our entrance into the state of Florida was that differentiated offering that they do have, which is that premium category, the ultra-premium category. So it sort of addresses both points. It's something that we'll continue to promote and grow down there because we love the category. We love that category in every market. It's stable, it's durable. It's what the consumer wants and it's also, from a pricing standpoint, durable. So we will continue to grow that category down in Florida and across the rest of our platform as we bring in the rest of our offerings from a brand standpoint, from a product standpoint. Greg, do you want to add anything?

No, I think the only thing to add that we were encouraged about Florida. I think if you look at the latest data, flower still remains 50% of sales in the marketplace. So as Charlie said, like we can continue to play the high end of that and we have a portfolio of brands that allows us to play all price points of flower. But also if you look at the growth in other segments like edibles, it went from 3% to now 8% of the market. That's meaningful growth on that segment where we have a very strong portfolio of edible brands that we can bring into the market and play there. So it is about, as Charlie said, opening doors, but really bringing our full portfolio of brands to go after every consumer and patient opportunity that exists.

Our next question comes from Vivien Azer from Cowen.

So my first question, please, on California. It's been kind of widely discussed that there's been some pretty meaningful price deflation in the wholesale market, Charlie, in particular for outdoor. I'm curious if you can comment at all on the implications for that on margins for the Origin House business, please?

Sure. And yes, California is a competitive market. It's the most competitive market in the world, while it's also the largest. So the additional supply that's coming into the market, as you identified is primarily on that sort of the Mixed Light and outdoor category, which is uber competitive. And so the majority of the price compression that you're seeing out there and the competition tends to be in that area which is again, it's why we prioritize the high-low play that includes the premium and ultra-premium categories too. There's stability there, there's durability there. And as far as what it means for the Cresco Labs California business out there, certain elements of what we distribute are in more of a competitive state than maybe in prior quarters. But we're still seeing growth across our product and brand suites and our own brand offerings, which is great to see.

And then just to follow up on that then. As you guys contemplate the back half of the year, it sounds like you're quite constructive on your own outlook, given the amount of capacity that you're bringing online plus new doors. Did you contemplate any price deflation broadly across your marketplace as you updated or thought through your guidance?

You know I'll turn this over to Dennis too for maybe some additional color, but I think we always appropriately model in a little bit of flexibility when it comes to pricing more states than others in very high barrier to entry, potentially supply-constrained markets less so than in those open, very competitive markets, Dennis?

Yes, we do evaluate that on a state-by-state basis and actually across the various product lines within all states. So we did contemplate a little bit of price drop across the -- as Charlie noted, some of the lower and mid-end and really kept the high-end products fairly stable for the balance of the year.

Our next question comes from Aaron Grey from Alliance Global partners.

So first one from me is kind of picking back off that last one. So 30% EBITDA margin target you guys have for 4Q, obviously, you guys have some scale coming online. It looks like that will be driven by a mix of gross margin. You have some potential deflation baked in, in some markets as well as SG&A leverage. But could you maybe help to quantify maybe how much you look to be a mix of SG&A leverage versus gross margin expansion to get to that 30% versus the 22% today?

Thanks, Aaron. You're right, we're really excited about the trajectory that we're on, heading into the back half of the year here and we do have some incremental additions to the platform that will definitely contribute to that bridge. So again, confident in reaffirming the guidance today. And Dennis, do you want to add any specifics?

Yes, thanks. So as it relates to the walk from where we're at today at adjusted EBITDA to the 30% that we're -- again, reaffirming our guidance for Q4. There will be the expansions, as Charlie noted, in manufacturing. We'll also get some additional efficiencies throughout our manufacturing and pack-out facilities. So that will be -- we will expect to see a couple hundred basis point improvement on gross margins. And then, from an SG&A standpoint, we've made a number of investments. We've been talking about this for a while. We do make some investments in our facilities ahead of the cultivation. In fact our facilities is going live. So we've been carrying that cost that will now be offset with revenue through those expansions. But also, on an SG&A standpoint, the investments we've made there will stabilize. We'll get some additional efficiencies through the integration efforts at Bluma that are, for the most part, complete now as we enter into Q3. So some of the costs that we carried in Q2 associated with the Bluma acquisition are now being phased into the rest of the company. And we feel fairly confident that our total dollars spend on SG&A, excluding excise tax and retail expansions will be fairly flat from now through the second half of the year.

And then second question from me, kind of a high-level one. Charlie, you mentioned the evolving regulatory landscape and how your kind of wholesale strategy fits into that. So first part, were you talking more so at the state level or also eventually at the federal level? And then, at the state level, I'm just curious, do you believe there might be some states where you do see that regulatory environment evolve? And I'm certainly looking at places like Massachusetts, right, where you have limited cultivation that each operator can own. Now you've had a lot of expansion at the store level. Some people are having difficulty getting supplies. Do you feel like there will be the point where those states potentially lift the amount of cannabis they might allow proper if better supply within the state?

It's a great question. And I think at the root of the question is, there's so much to be written, right, in the way that this industry develops. And that's why, as an organization, we've always put such a priority on being engaged at that government affairs, regulatory affairs level because it's really important that there is a perspective that is available for the legislators, regulators as they're thinking about how the industry should develop that they can rely on and that they can learn from. So it's one of the reasons that we've always prioritized that level of engagement. From a federal level, do I think our focus on being wholesale driven plays to future development at a federal and a state level? Simply, yes, and it's not by chance. It's when we first evaluated the industry and we sort of said, alright what kind of company do we want to build and why. You looked at where this industry was going. I don't think it was -- it wasn't too complex. We know that this is going to be sort of more available, more open federal legalization at some point in time; therefore, build a company that can succeed today and that can also succeed in the future. And that's why we really decided to be vertically integrated because of the benefits that it provides today, but prioritize those middle 2 verticals because I think in the long term, at a state level and a federal level, there will be more retail that will need products on its shelves, that aren't vertically integrated, and we want to be on all those shelves.

Our next question comes from Michael Lavery from Piper Sandler.

Just wanted to unpack the retail sales per store productivity you called out a little bit. And obviously, at a high level, it's some amount of execution, I'm sure that's driving it. But can you drill into that a little bit more and just maybe get at some of what's moving the needle there? And how much, if any, there's -- in terms of growth or improvement, it varies by geography?

Yes. Thanks for the question, Michael. So I've said it on prior calls, it's pretty cool to be able to reflect back on this and say, I think we entered 2020 as an operator that had retail and we exited 2020 came into 2021 as a retailer. And the improvements from a system standpoint, from an operations standpoint, just given a methodology, a leadership standpoint that we've made over the last year, you're really seeing the results of it. And I'm going to hand it over to Greg for some more specifics. But just at a high level, do I think that there's more juice to be squeezed from it? Of course, I think there's opportunities for us to continue optimizing with continuous improvement across every element of what we do, which is what makes this challenging and fun at the same time. So yes, there's definitely more that we can actually create, and we can become even a better retailer, which I'm really excited to continue to see happen. And Greg, any specifics that you want to add?

I would say the only thing that we'd add here is just give you a sense of why we are very bullish on our retail is that our growth this quarter really was driven by trips into or what we call transactions into our existing store base with some growth with new store openings, but really getting more of the same-store sales, which really is bringing new customers in. We saw some compression on baskets, which you'd expect as you're rapidly growing customers who are entering stores for the first time, but that's the big takeaway, is that we're getting more customers into our stores. We're getting customers through our stores faster, and it's very encouraging.

And just a quick question. You mentioned Schumer's plan and some of at least the potential direction for federal legislation or regulation. You've worked closely with states that you operate in, especially shaping some of the recreational use guidelines as they've evolved and things like that. Have you started to engage with somebody like the FDA at all or do you imagine doing that maybe going forward?

That's a great question. We've always --- again, as we looked at this industry and where it could progress to years back, there's always an opportunity for a regulator like the FDA to be involved. So we've always kept that in mind. As far as conversations with the regulators like that, they've started at a very, very high level. But I think it's important to see where the legislation actually ends up. And so just commenting a little bit on that, really encouraged by what we see and this does feel familiar. This does feel how it has felt at a state level as it progresses from sort of being not politically popular or good politics to having that flip where good policy does some good politics, and a lot of this does feel familiar. So really encouraged by the path it's on. There's going to be a lot of news over the coming quarters. Some of it will sound great. Some of it might not, but that's definitely part of this process. And so with the familiarity of the process, very encouraged by the outcome, potential outcome.

Our next question comes from Andrew Partheniou from Stifel.

Maybe touching on the debt that you raised, you guys obviously have significantly increased your cash position, essentially creating a war chest for yourselves. Wondering if you could remind us or provide any kind of color on CapEx plans, perhaps if not given a specific number, maybe remind us what's already funded through sale/leasebacks? And also a little bit of color on what you're seeing in M&A and your thoughts around that, any white space that you guys might want to fill in or anything in particular that you may want to call out?