TCNNF - Up In Smoke: Trulieve Has A Big Florida Problem

2023-08-28 11:07:18 ET

Summary

• The legal cannabis sector remains fragmented, and Trulieve's history in markets with recreational marijuana suggests challenges in achieving profitability.
• The upcoming vote on recreational cannabis use in Florida poses a potential threat to Trulieve's stronghold in its primary market.
• Florida is also issuing new licenses that will double the number of active players in this market, where 65% of Trulieve's stores are located.

Trulieve's ( TCNNF ) stock saw an impressive 311% gain between its IPO and its 2021 peak. However, since then, it has lost over 90% of its value. This decline sparked my curiosity, prompting me to delve deeper into the stock to determine the potential for a turnaround. While I don’t dismiss the possibility of the company benefiting from legislative changes down the road, I am skeptical about a significant improvement in its fundamentals.

The crux of my analysis isn't necessarily that Trulieve is doomed or incapable of keeping pace with its competitors. Instead, I wish to emphasize that the company is approaching a period of heightened uncertainty. Come November 2024, Florida will vote on recreational cannabis use, and current polls suggest a favorable outcome from the electorate.

Concurrently, Trulieve has had a challenging history in markets where recreational marijuana is legal, even reaching a point where it had to cease operations in California and scale back significantly in Massachusetts. Given that Florida is Trulieve's primary market, the company stands at a pivotal juncture. The odds seem stacked against a robust expansion, and lean more towards jeopardizing the company's stronghold in the only market currently sustaining its business.

Legal Cannabis: Intense Competition and Ongoing Consolidation

The legal cannabis sector remains highly fragmented. Companies battle it out state by state, resulting in regional victors and losers. Trulieve’s exit from the Californian market and its dominance in Florida is a case in point. One plausible scenario is true market consolidation, akin to what is typically seen in the commodities market: over time, a clear market leader and a significant follower will emerge, while the remaining companies might be acquired or left with minor market shares.

Alternatively, the industry may never fully consolidate, remaining fragmented akin to the wine market. Much hinges on consumer perception: markets viewed more as commodities tend to consolidate, while those with products perceived as distinct and unique have a chance at long-term fragmentation.

Notable competitors in this sector include Canopy Growth, GW Pharmaceuticals, Aurora Cannabis, Aphria, Tilray, SNDL, Vivo Cannabis, Cara Therapeutics, and Curaleaf. This list barely scratches the surface of companies offering essentially the same product: cannabis. While brands, in-store experiences, and cannabis varieties may differ, other markets, offering a broader range for product differentiation (like cafes, sodas, and harvesters), have still undergone significant consolidation.

Learning from California and Massachusetts

Both California and Massachusetts legalized recreational cannabis use for adults in 2016. Since then, they've become two of the hottest markets for industry competitors, including Trulieve.

On June 1, 2023, Trulieve officially announced its departure from the Californian market and a significant downsizing of its Massachusetts operations. The focus has shifted to its activities in the southeastern U.S., especially Florida, Georgia, and Arizona. Of these, only Arizona currently allows recreational cannabis use. Florida's stance will be clarified in the upcoming November vote.

The experiences in Massachusetts and California underscore an essential lesson: recreational cannabis legalization doesn't inherently benefit Trulieve. If anything, it led to their market exit. The CEO has repeatedly stressed the “impossibility” of generating profits from the legal cannabis sector in California. Currently, 86% of Trulieve's sales are medicinal cannabis, as highlighted by Kim Rivers in various conferences this year.

Not only does the legalization of recreational cannabis pave the way for more competition, but it also allows individuals to grow their own at home. The costs are a fraction of buying from a store, a single plant can yield an abundant amount for personal use, and for many, it’s a therapeutic hobby.

In Arizona, where recreational cannabis sales began in 2022, Trulieve has already observed a drop in profit margins and the average cart value of their customers. During their Q2 2023 earnings call , the company expressed anticipation of single-digit revenue declines in the upcoming quarter. When pressed for specifics, they attributed this expected slump mainly to the Arizona market. While Trulieve blames an unprecedented heatwave, it's challenging to overlook the parallel with their experience in the California and Massachusetts markets.

The Florida Conundrum

At the Canaccord Genuity 43rd Annual Growth Conference , Kim Rivers touted Florida as “the best market in the U.S.” regarding the sales potential of legal cannabis. Trulieve boasts 130 of its 186 stores in the southeast, spread across Florida and Georgia.

In Florida, Trulieve dominates. As of September 2022, data from the Florida Office of Medical Marijuana Use reflected:

According to this data, Trulieve sold a staggering 81,698 grams of overall THC in the week from September 9 to 15, 2022, dwarfing the 22,089 grams sold by MÜV, its nearest competitor.

A University of North Florida poll indicates that 70% of surveyed voters (over 1,400) support the legalization of cannabis use. The majority, cutting across party lines—Democrats, Republicans, and Independents alike—appear to lean in favor. Thus, the odds for recreational cannabis legalization in the upcoming vote seem promising.

So, what's next? Can Trulieve harness its past achievements and retain its market leadership post-legalization? Or will Florida become yet another unprofitable market post-legalization? Even Kim Rivers seems uncertain of the answer, even as Trulieve campaigns for the reform's approval .

Given that 65% of the company's retail footprint is in Florida and considering their investment in a 750,000-square-foot indoor production facility in Jefferson County, there's no room for errors. However, their track record in markets where cannabis is recreationally legal remains lackluster. Legalization undoubtedly expands the Total Addressable Market ((TAM)) but also broadens consumer choices—like home cultivation—and intensifies competition. Margins are invariably better where cannabis is legal only for medicinal use, mainly because the legal milieu favors existing license holders.

Initially, Trulieve is bound to benefit from legalization, leveraging its first-mover advantage. Both in terms of production capacity and store presence in Florida, it’s comfortably ahead of any competitor.

The Pioneer Advantage May Not Last

While some may argue that Trulieve's performance in Florida might surpass what they achieved in California and Massachusetts due to their strong local presence and the predictability of their 750,000 square feet indoor cultivation facility, this argument might not hold water.

Indeed, even if recreational cannabis gets approved in Florida by November 2024, it would take a significant amount of time before the actual sales can commence. California initiated its legal recreational cannabis sales on January 1, 2018, and Massachusetts on November 20, 2018. Colorado, too, waited almost two years post its November 6, 2012, vote to kick-start sales in 2014.

This time-lag suggests that competitors will have ample time to strategize and recreate the very challenges for Trulieve that they've experienced in other states. While revenues might spike, profitability could take a hit. It’s noteworthy that currently, all cannabis players in California, regardless of their size or market-entry timing, struggle to turn a profit.

The Winds Are Already Shifting

If the looming legalization isn't concerning enough, Florida's cannabis market is witnessing intensified competition. April 28 marked the deadline for new license applications , raking in a total of 22. The state hadn't issued new licenses since 2017, and this move essentially doubles the number of active operators. Simultaneously, the state upped the renewal fees for these licenses, now costing about $3 million biennially.

While it will be a while before these applications are processed and the new entrants begin operations, it's an imminent challenge for Trulieve.

Final Thoughts and Opinions

Trulieve's predominant exposure is to Florida's cannabis market, where it had, till now, reaped the benefits of pioneering and the profit margins resulting from a medical-use-only legal framework. The company's track record in regions with legal recreational cannabis isn't encouraging, and it's highly likely that Florida might follow suit – first with the 2024 vote and probably full-blown by 2026.

Furthermore, my skepticism is rooted in the California experience, which showcased how the legalization of recreational use puts significant strain on every operator's margins, irrespective of their size or market-entry year. Given this constellation of factors, I find it hard to harbor optimism about Trulieve's stock performance in the mid to long-term.

For further details see: