Oct 2, 2021
[13 min Read]
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Green Thumb Industries is a national consumer packaged goods company and retailer whose core business is manufacturing, distributing, and marketing a group of owned cannabis brands. The company's brands include Beboe, Dogwalkers, Dr. Soloman's, incredibles, Rhythm, and The Feel Collection which are distributed to third-party retail stores across the United States and through Green Thumb retail stores. The company owns and operates retail stores which includes their fast growing chains of dispensaries named Rise and Essence. Their retail chain Rise operates nationally while Essence operates in the Las Vegas, Nevada and Pasadena, California areas. As of June 30, 2021, the Company had 58 open and operating retail locations. As of June 30th, 2021, Green Thumb has revenue in twelve markets , employs 2,850 people, and serves millions of patients and customers yearly. The states that this company operates in includes California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Ohio, and Pennsylvania. Their portfolio of stock keeping units (“SKUs”) range through a number of cannabis product types including flower, pre-rolls, concentrates, vape, capsules, tinctures, edibles, topicals and other cannabis-related products. As of right now, the company operates 16 cultivation and manufacturing facilities.
According to New Frontier Data, annual medical and adult-use cannabis sales in the U.S are expected to reach more than $41 billion by 2025 from $13.2 billion in 2019. That growth represents a compounded annual growth rate (CAGR) of 21%. By 2025, 39% of the total annual cannabis market demand will be achieved by legal purchases. Legal cannabis sales in the U.S passed $17.5 billion in 2020 and that is growth of 40%+ over 2019. According to a July 2019 Gallup poll, 12% of U.S adults said they smoke marijuana (basically unchanged from 2015). In addition, the poll found that men are 6% more likely to smoke marijuana (“MJ”) than females. 18-29 year olds are the most likely age group to smoke MJ and twice as likely as those between the ages of 30 and 64.
In terms of trends, we're seeing that public support for MJ increasing. According to the Pew Research Center, Fewer than 10% of U.S adults say that MJ shouldn't be legal at all. In terms of federal legalization, on May 28, 2021, representative Jerrold Nadler (D-NY) reintroduced the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act in the House of Representatives. In December 2020, the MORE act was passed by the House but failed to advance to the Senate. If the MOREs Act is to be passed, the main changes that would occur include the end of criminalization of cannabis, a 5% tax on retail sales to go to the Opportunity Trust Fund, and increased research. Another bill just passed the House with bipartisan support in late April called the Secure and Fair Enforcement Banking (SAFE) Act. This legislation would protect federal depository institutions and credit unions from federal prosecution if they work with MJ companies in legal states. Thus, the SAFE Act would be a huge catalyst for the MJ market as companies would have access to traditional and reliable lines of credit.
Another trend that is playing out is market consolidation. According to Mordor Intelligence, the cannabis market is extremely fragmented with local and regional companies taking up significant market share. The largest players in the market are Canopy Growth Company, GW Pharmaceuticals PLC, Aurora Cannabis Inc., Aphria Inc., and Tilray. In an article titled “The Consolidation Curve” by Harvard Business Review, the author states how industries go through four stages/cycles in which they consolidate as they mature. Those cycles include opening, scaling, focus, and balance/alliance. Stage one consists of entrepreneurs who grab market share by innovating (where the MJ market was a few years ago). In stage 2, consolidation will begin and the top three players will take up 15-45% of their market (arguably where we are today). Stage 3 occurs when the top three companies control 35-70% of the market in which they operate. Finally, stage 4 is when the three largest companies claim as much as 70-90% of the market. The question remains as to which companies will dominate in the coming years.
Green Thumb Industries Closes Transaction to Acquire Vertically Integrated Cannabis Business in Rhode Island
On August 2nd, 2021, Green Thumb Industries closed on the acquisition of Mobley Pain Management and Wellness Center, LLC and Canwell Processing, LLC. Both acquired companies held interests in Summit Medical Compassion Center, Inc., a non-profit corporation that operates vertically integrated cannabis operations in Rhode Island. The acquisition includes one of only three retail locations in the state. Including the acquisition, Green Thumb industries has cannabis operations to serve nearly 50% of the U.S population. CEO Ben Kolver said, “Entry into the Rhode Island cannabis market further strengthens Green Thumb's position on the East Coast, a region that has embraced the freedom for adults 21+ to choose cannabis. This acquisition provides immediate scale within a limited license market and sits squarely in our enter, open, scale strategy to expand access to well-being through cannabis. We are ready to welcome the Summit team aboard Green Thumb's front row seat to the Great American Growth Story.”
Green Thumb Industries Closes on Acquisition of Dharma Pharmaceuticals; Enters Virginia Cannabis Market
On July 1, 2021, Green Thumb industries announced that it has closed on its acquisition of Dharma Pharmaceuticals LLC. Dharma is licensed to grow, process, and sell cannabis to patients and is one of only five licenses in Virginia. Green Thumb will take over operations at an existing production facility and retail dispensary in Abington, Virginia. In addition, Green Thumb will also maintain the opportunity to open up to five additional retail locations in the state. Virginia has a population of almost 8.5 million and is expected to generate over $1.5 billion in legal cannabis sales. CEO and Founder Ben Kovler said ,”In a limited-license market with a population of nearly 8.5 million people, this transaction is a major win for our shareholders, and we are ready to welcome Dharma officially to the Green Thumb team. Expanding into the first state to pass adult use cannabis in the Southeastern U.S. is an important milestone for Green Thumb and we are excited for the future.”
Green Thumb and COOKIES Announce the Grand Opening of COOKIES on the Strip in Las Vegas on May 14
On May 13, 2021, Green Thumb Industries announced the grand opening of COOKIES (formerly an Essence location) on the Strip in Las Vegas. The company had previously made an announcement on an exclusive partnership with COOKIES which is an international cannabis brand. This store will be the first COOKIES store in Nevada. The retail location will sell the portfolio of Cookies, Lemonnade, Runtz, Minntz, Powerzzzup Genetics, Collins Ave, Run The Jewels and Grandiflora products. COOKIES was founded by rapper and entrepreneur Berner in conjunction with his partner Jai, a highly respected cannabis cultivator and breeder. The Green Thumb CEO and Founder said, “We are thrilled to open the first Cookies store in Nevada in partnership with Berner, Jai and their visionary team. Brand recognition is key to winning in the cannabis industry and with Cookies, Berner has created one of the most desired and recognizable cannabis and lifestyle brands. We are excited to partner with them and open this flagship location right on the Las Vegas Strip. People are looking for experiences as the country reopens, and Cookies offers a unique one for residents and tourists alike.”
As stated in Green Thumb's August 2021 Investor presentation, this company is focused on expanding their portfolio of brands and improving their retail presence and experience. In addition, they want to build a sense of community in the areas they operate with the goal of sustaining financial flexibility and positive cashflow. Their growth will be coming from the combination of building their brands, achieving operational efficiency through increased capacity and automation, and expanding their points of distribution through third-party and wholly owned retail stores. Perhaps the most exciting part of Green Thumb industries is their brands which cater to a wide variety of consumers and have the ability to be leveraged and sold in an increasing number of locations. A stat that attests to the execution of the management team is the high growth in retail this company has experienced with 34% same store sales.
“The second quarter continued to be about disciplined execution and the team should be proud of the results. On a year-over-year basis, we grew revenue by 85% to $222 million; more than doubled Adjusted EBITDA to $79 million and continued to deliver positive cash flow. Since the first quarter, we closed three acquisitions, expanding our manufacturing capabilities in Massachusetts and geographic footprint into two new states, Virginia and Rhode Island. These critical steps strengthened our position to distribute our brands to more patients and consumers in existing and new markets. Finding new and meaningful ways to support the communities we serve is a mission we all share at Green Thumb. We are especially proud of our recently announced Good Green grant program for heroes helping to fight problems created by the failed War on Drugs. Ahead of launching the Good Green brand of products later this year, we are allocating at least $1,300,000 in social equity grants to qualified 501(c)(3) organizations over the next 18 months to jump start this important initiative,” - CEO and Founder, Ben Kovler
Looking at Green Thumb's Q2 performance we can see that this company is growing at a fast pace and the revenue which they achieved this quarter doesn't include the additional 5 stores they have the ability to open in Virginia. Sales were primarily driven by increased foot traffic in established and new store openings. Comparable sales growth for stores open at least 12 months (42 stores) came in at 34% and up 7% sequentially on a base of 51 stores. All that growth has led Green Thumb to hit the milestone of having four consecutive quarters of positive GAAP net income which proves that this business has the ability to scale. Furthermore, Green Thumb retired $105.5 million in high interest debt at 12% by raising $216.7 million in senior secured debt at 7%. The remainder of the senior secured debt will place this company in the position to build out more retail locations and further expand their production capabilities to achieve a higher gross margin (currently 55.4%).
Taking a deeper look, this company is in strong financial standing with a current ratio of 4.57. One important thing to note is the high level of goodwill that many cannabis companies have which makes up $442 million out of $1.83 billion in total assets. If we don't account for goodwill, this company has 2.43x total assets compared to total liabilities. Furthermore, their gross margins increased from 53% in Q2 2020 to now 55% by taking advantage of economies of scale. Their net margin came in at a strong 14.6% but compared to their competitor Trulieve, which has a net margin of 19%, Green Thumb has room for improvement. It's important to note that while Trulieve has a stronger net margin, they also operate 36 more stores. Additionally, investors should be aware that a fair bit of dilution went on quarter over quarter as Green Thumb went from 210 million shares to 224 million shares.
The team at Green Thumb continues to focus on helping out the communities which they operate in. On July 15, the company announced that it joined NinetyToZero with Steph Curry and a group of leading CEOs to combat the 90% racial wealth gap between white and black Americans. Through this initiative, the organization will provide increasing capital to black businesses and focus on growing black talent. NinetyToZero is partnered up with The Wharton School of The University of Pennsylvania to spread education on how the organization can best achieve their goals.
Revenue for the three months ended June 30, 2021 was $221,871,812, up 85% from $119,639,924 for the three months ended June 30, 2020 driven by contributions from both Retail and Consumer Packaged Goods, largely due to continued growth in Illinois and Pennsylvania. Key performance drivers for the quarter are: launch of Cookies brand of cannabis products in Nevada, increased store traffic to Green Thumb's open and operating retail stores, particularly in Illinois, and Pennsylvania and new store openings including acquired stores, particularly in Pennsylvania, Illinois and Connecticut. The Company generated revenue from 58 Retail locations during the quarter compared to 48 in the same quarter of the prior year. During the three months ended June 30, 2021, the Company acquired two new stores in Massachusetts. Since June 30, 2020, the Company acquired one retail store in Connecticut and two in Massachusetts that contributed to the increase in Retail revenues and opened seven new Retail locations in Pennsylvania, Illinois, California, Florida and New Jersey.
The key driver for the Consumer Packaged Goods revenue increase was the opening of one cultivation and processing facility in Illinois as well as the expansion of sales of Green Thumb's branded product portfolio to third-party retailers through the Company's existing Consumer Packaged Goods cultivation and processing facilities in Illinois, Pennsylvania, Massachusetts, Maryland, Nevada, New Jersey and Connecticut due to increased scale and efficiency. The Company also added one cultivation and processing facility through the acquisition of Liberty during the three months ended June 30, 2021.
Source: Form 10-Q MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
In order to get an idea of the portfolio of products Green Thumb offers I checked out a few dispensaries near me and asked a number of people I know who have tried the brands to review them. Something that caught my eye was how each brand fills a niche. The Dogwalkers brand has high quality packaging and is advertised as a product for someone to be able to quickly enjoy. I know a friend who picks these up from my local Rise dispensary consistently and only had good things to say about the product. Rhythm is a huge hit in Illinois with many of the people I talked to consistently picking up their products. Specifically, they had great things to say about Rhythm vapes. Incredibles was less bought from the people I talked to but that may have to do with edibles making up a smaller share of category sales at roughly 18.5%. Nevertheless, these products taste great and are highly potent. Beboe was the most interesting of the brands and meant for the “sophisticated stoner.” Beboe is advertising themselves as a luxury brand tailored towards women with products that are natural, designed to be “socially dosed”, and trendy. In a video on YouTube with the CMO of Beboe they even referred to the products as their “Birkin Bag.” The Feel Collection is similar to Beboe in the sense that it is mainly marketed toward women and advertised as a premium product. This brand produces tinctures that are meant to have a calming effect rather than a strong high. The Doctor Solomon's brand creates a variety of medical-grade cannabis balms, lotions, drops, and RSOs that are geared toward the purpose of providing pain relief. The collection of all these brands covers a wide variety of consumers that seek to use cannabis in a number of different ways. I could see women being geared towards Beboe and The Feel Collection, customers looking for pain relief wanting to check out Doctor Solomon's, and the more consistent users enjoying Rhythm and Dogwalkers. This portfolio is really leveraging what cannabis has to offer and is one of the ways that sets this company apart from others.
Overall I really like Green Thumb industries. They manage a sticky portfolio of brands, have strong financials, and continue to build out retail locations in new markets. This company is led by Founder Ben Kovler which shows me that the same vision that this company started with is being executed. That vision has led management to continue to focus on helping out the communities in the areas in which they operate, all the while scaling a successful business. Their range of brands are niche in many respects and continue to receive praise. I've seen first hand how successful my local RISE dispensary has been and how they continue to get their products in various third-party dispensaries across Illinois. As this company continues to build out more locations and executes they will achieve higher gross margins, brand recognition, and ultimately be a formidable player in the cannabis space. My analysis has led me to conclude that this company is a buy as of current prices. There's always a possibility this stock could go below $25 and at that point I would be buying very aggressively.