GTBIF - Green Thumb Industries: Distributing Brands At Scale

Summary

• Green Thumb is the third largest North American cannabis company by revenue.
• The US multi-state operator recorded its highest revenue on record and positive operating cash flow for its fiscal 2022 third quarter.
• A brand-focused strategy has been paying off and should continue to drive revenue gains in 2023.

Green Thumb Industries ( GTBIF ) reported revenue of $261.2 million for its last reported fiscal 2022 third quarter, a record quarterly figure that rendered the company the third largest multi-state operator by revenue. Adjusted operating income was positive and came in at $48.8 million for the quarter to form a critical differentiator for the Chicago-based company operating in a space that's come to be defined by structural unprofitability, cash burn, and consolidation. However, with cannabis still illegal under federal law, the overall future for MSOs remains unclear.

Despite trailing 12-month revenue of just over $1 billion, Green Thumb commands a price-to-sales multiple of 1.86x , a figure that is nearly 60% lower than the median for a broad basket of peer companies. Critically, this relative discount reflects two factors that now form tranches of the long-term bullish thesis. Firstly, with cannabis still classed as a Schedule I drug, MSOs have simply always commanded an insignificant level of institutional ownership. For Green Thumb, this figure currently stands at 0.15% with its common shares only allowed to trade over the counter.

Secondly, this relative pariah status has prevented the industry from accessing cheap capital. Equity offerings are made to be more expensive due to the relative discount on common shares with access to banking facilities also being more limited, increasing cost.

Brands, Positive Adjusted EBITDA, And The Year Ahead

Hence, Green Thumb's historical returns have not been great as the commons have reflected the broader market malaise over the last 12 months to pull back by 58%. This has brought the current year into view with the company failing to join the year-to-date relief rally.

Green Thumb describes itself as a national cannabis consumer packaged goods company and retailer. The company's CPG portfolio includes Beboe, &Shine, Dogwalkers, Good Green, Doctor Solomon’s, incredibles, and RYTHM. Green Thumb also operates RISE, a retail cannabis store with 77 locations across 15 US markets.

The company's revenue for its last reported third quarter at $261 million, was a 12% increase from its year-ago comp and a $6.07 million beat on consensus estimates with sales from RISE locations in Illinois and New Jersey driving this growth.

Gross profit came in at $131.24 million, an incremental increase from $129.5 in the year-ago quarter on the back of gross margin of 50.23%. This was an increase of 76 basis points from the prior second quarter and meant GAAP net income came in at $9.8 million. Hence, Green Thumb recorded its ninth consecutive quarter of positive net income, around $0.04 per share.

Cash flow from operations, what I consider the most important financial metric for investability, came in at $48 million . This was up by 40% from $34.5 million in the year-ago quarter. The strong overall profitability meant cash and equivalents of $147.3 million as of the end of the third quarter, around 7.86% of Green Thumb's market cap.

Attractive Investment Profile But Medium-Term Returns Could Remain Constrained

Green Thumb's management remains bullish on growth and plans to launch at least 10 RISE Express medical dispensaries adjoining Circle K Stores in Florida. The core risk for a long-term investment remains the murky legal status and the still uncertain roadmap for cannabis. The current illegal status sets the backdrop for a legal US cannabis market that is expected to reach more than $34 billion by 2025. Fundamentally, even as the rising tide of state cannabis legalization has created large opportunities for growth, I think the Schedule I status of cannabis will create a forever ceiling on valuation multiples for US MSOs.

Green Thumb has one of the most attractive investment profiles of any cannabis company. The company is profitable, is generating significant operating cash flow, and has built a portfolio of distinctive brands whilst maintaining operations at a stable level to maintain gross margins at just over 50%.

This is a healthy level that compares favorably to the other four largest US MSOs. The near-term risk is of course the recession expected in the second half of this year. Whilst this would pull in Green Thumb as it's essentially in the consumer discretionary sector, cannabis sales likely have a level of stickiness not enjoyed by other companies in the CPG space. Longer-term, federal legalization remains the catalyst and Green Thumb is one of the best-placed companies for investors looking to gain exposure to this potential event.

Whilst I think this is unlikely before 2025, after the next US elections, the returns till this date could come in healthy if the company continues to put out strong profitability figures against revenues that are still growing. I'm currently neutral on the industry due to legalization uncertainty but will revisit this position as the landscape evolves.

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