A close look at the performance of cannabis retailer Green Thumb Industries (GTBIF 2.46%) offers a good example of how doubts about the broader industry make it hard for individual firms to raise capital, even if they are among the stronger players.
While the company saw revenue growth of 14% year over year in 2022 to $1 billion, a price squeeze is keeping its net income low and making investors skittish.
Net income for the year was $12 million, or $0.05 per basic and diluted share, yet in the fourth quarter, the company recorded a net loss of $51 million, or $0.22 per basic and diluted share (GAAP measures). This makes Green Thumb a rarity among cannabis companies since it has previously reported genuine net income; for example, the third quarter of 2022 was the ninth consecutive quarter in which it reported positive GAAP net income, $10 million or $0.04 per basic and diluted share.
GTBIF Revenue (Quarterly) data by YCharts
Premium brands are not selling in Illinois
In a Feb. 28 conference call, Green Thumb President Anthony Georgiadis fielded questions about what his interlocutors said was a drop in Illinois retail prices for cannabis. He said two factors were behind this: that some customers are now buying less expensive brands of cannabis, and "true price compression" due to competition. Green Thumb has headquarters in Chicago and views Illinois as its home state, which prompted detailed questions about the state of the market there during the call. As of the end of 2021, Green Thumb had 10 operating dispensaries in Illinois, which was the statutory cap. The company says it currently has 77 open retail locations across the United States, alongside 18 manufacturing facilities and operations in 15 U.S. markets.
The consumer demand factor is tricky to assess. U.S. disposable income is on the rise again, totaling $15.57 trillion in January after reaching a low of $15.06 trillion the previous April, according to the St. Louis branch of the Federal Reserve Bank. But recession fears remain widespread as the Fed keeps raising interest rates to try to bring inflation under control. So Georgiadis could be right that cannabis consumers are less willing to spend more for "premium" brands.
A focus on Florida
Looking ahead, Georgiadis said the company intends to open a "mid-teen number of retail stores" in 2023 in Virginia, Pennsylvania, Minnesota, Nevada, and Florida. Last October, the company announced it had reached a space leasing agreement with privately held convenience store chain Circle K allowing it to open adjacent retail locations to market cannabis, which is legal for medical purposes in Florida. Green Thumb is opening about 10 such "RISE Express" dispensaries as a test, adding to seven other medical retail outlets it owns and operates in the state.
Green Thumb entered the Florida market, in which more than 700,000 state residents are active cardholders in the state's medical marijuana program, in 2018. The company also has a cultivation and processing facility in Homestead and will access the cannabis for the Circle K-adjacent retail locations from its new 28-acre marijuana farm in Ocala. The company is pinning great hopes on the planned retail outlets, as Green Thumb Founder, Chairman, and CEO Ben Kovler made clear last October: "Convenience is a strong channel in retail, and people want more access to cannabis."
From Georgiadis's remarks, it is unclear whether the "mid-teen number of retail stores" planned this year for Florida and four other states includes the 10 Circle K-adjacent stores. Assuming they are related, investors should monitor the success of those openings. Georgiadis added that Green Thumb is setting up consumer packaged goods or CPG facilities in Virginia and Minnesota, opening its New York facility later this year and planning additional capacity in New Jersey and a "small expansion" in Connecticut.
Analyst-projected profit turnaround fails to move markets
In an accompanying Feb. 28 press release on its 2022 results, the company pointed to its "strong balance sheet and disciplined capital allocation to support continued future growth." The company had $178 million in cash, up from $147.3 million at the end of the third quarter, and total selling, general and administrative expenses for the fourth quarter were $80 million or 30.9% of revenue, down slightly from $82.5 million or 31.6% of revenue in the previous quarter. The company could easily cover operations and supplement future growth. The report did not contain any projections for the current year; analysts are expecting earnings per share between $0.04 and $0.37, a wild variation by a factor of more than nine that points, again, to the uncertainty of the industry.
Markets have not been overly impressed, with GTBIF trading at $8.39 at the close on March 8, little changed despite some fluctuations since late June 2022, but this may be due less to what is going on with Green Thumb than with all the uncertainties besetting the industry itself. For most investors, a watch-and-wait approach seems prudent until Green Thumb can prove otherwise.
