Green Thumb Industries – Growing in the Right Direction

Founded in 2014, Chicago-based Green Thumb Industries (GTI) ultimately aims to operate as a consumer good business. GTI is a vertically-integrated cannabis producer that operates in 11 US States, covering over 145 million Americans (45% of the population).

Listing on the Canadian Stock Exchange on June 13, 2018, GTI is one of the larger US Multi-State Operators (MSO), and currently operates 14 dispensaries with licenses to open another 85. They have spent significantly in the past couple of months to grow their operations and US market reach. They have a slightly different mentality to the rest of the pack.

 

Source: Company Investor Presentation

 

They prefer to be a bigger fish in a smaller pond. Whilst their competitors (like MedMen) try and operate in the biggest markets (California, Nevada etc), GTI prefers to go after smaller States that have limited license numbers, and have executed on this strategy with a combination of organic growth and acquisition.

GTI has both a retail and wholesale model. They operate their own dispensaries (under their RISE brand) and, in addition, wholesale their products to other dispensaries. This is particularly synergistic to their "big fish-small pond" strategy in that there are only a limited number of stores in these "limited-states" and with a wholesale model, GTI gets to potentially supply them all.

RISE

The RISE dispensary chain is GTI's direct to consumer play. Designed with the entire experience in mind, these "cannabis classrooms" are more service and not lifestyle oriented. In other words, RISE is more medicinally focussed than it is recreationally.

The stores offer over 1,000 SKU's with 300 of those being GTI specific products – making them the largest MSO by unique product range. The product range currently offers five strains of flower, wax, shatter, resin, tinctures, and edibles.

 

Their Coverage

On The 5th of February, GTI announced it had acquired the lifestyle suite of Beboe branded cannabis products. Beboe is known for its thoughtful design aesthetic from product to packaging including its iconic rose gold vaporizer pens and its ice water hash micro-dosed pastilles.

Available in more than 125 California and Colorado retail locations and via home delivery across California, Beboe also recently launched a direct-to-consumer hemp-derived CBD line of products and has launched several collaborations, including a CBD-infused drink with wellness brand Dirty Lemon. Beboe products will expand beyond California and Colorado with distribution in select GTI markets.

Currently, across the 11 States, GTI has 14 retail dispensaries open and aims to double that number in 2019.

GTI is completely focussed on the US market, and with Cowen estimating that market to be worth $80 billion in 2030, it's certainly worth focusing on. As discussed, GTI tries to operate in limited-license states, and hence, unsurprisingly, this is where most of their recent activities have taken place.

 

       Source: Company Investor Presentation

 

On the 19th January, GTI acquired an Ohio processing license that gives them the ability to open up to five dispensaries. With this license, they will also be able to process and produce, in order to deliver on its wholesale strategy.

In December 2018, GTI announced that they had acquired Advanced Grow Labs (AGL) for $80 million (which includes $15 million to be paid in cash and 7.0 million shares), and in doing so, entered the Connecticut market. This was huge news for Green Thumb, as AGL is one of only four companies in the state licensed to grow and process marijuana.

The Connecticut-based cannabis company operates a 41,000 square foot manufacturing facility in West Haven and has a 46 percent ownership of a recently-awarded dispensary that will be located in Westport which makes it the only vertically licensed company in the state. 

Earlier in 2018, they executed a definitive agreement to acquire a New York licensee, for $46 million in cash and 1.7 million shares, which made GTI one of ten license holders in the regulated New York State cannabis market. This license also came with 4 retail licenses which, on the back of Governor Cuomo's drive to legalise recreational marijuana in New York by June 2019, are extremely valuable.

In November 2018, they acquired Keith St. Germain Nursery Farms (KSGNF) for $46 million in cash and 3.3 million shares, to officially enter the Florida medicinal market. The acquisition bought GTI one of only 13 licenses for the state, and the ability to open up to 30 dispensaries. They have already secured 9 leases under their RISE dispensary brand in anticipation of opening them in 2019.

Florida is a very big medical market with an aging population and a very broad range of qualifying conditions, creating the foundation for a fast-growing patient base. The Florida market is estimated to be worth over $1.8 billion by 2020. 

November was a very busy month for GTI, as they also completed their acquisition of Integral Associates, in a $290 million deal ($52 million in cash and the balance in stock) that bought them 11 retail stores and 2 production facilities (Desert Grow Farms and Cannabiotix) in Nevada, and a retail store in West Hollywood.

 

Billionaire Hedge Fund Manager – Leon Cooperman

 

Their Financials

In their Q2 earnings call, a question from Billionaire Fund manager, Leon Cooperman, and the eventuating knowledge that he was indeed on the share registry, sent the stock price soaring. Although the stock has pulled back since then, GTI has been very smart in using their inflated stock price to raise capital.

GTI tapped the markets twice, post their IPO in 2018. In August they raised $80 million in a bought deal selling 7.3 million shares at $11 per share. Then in October, they went back to the well, and raised another $78 million, selling 4.4 minion shares at $20 per share.

These two raises have given GTI a very healthy looking balance sheet, with over $225 million in cash, ready to be deployed.

Their Q3 2018 earnings were very strong. Revenue of $17 million for the quarter was up 26% on Q2 and 344% up on Q3 2017. Q3 revenue was generated from existing stores in Illinois, Maryland, Pennsylvania, and Massachusetts. The revenue could have been more, but they were only reporting revenue from 5 of their 8 markets, with near-term entry into New York, Florida, Nevada, and Ohio, not yet reported on.

 

         Source: Company Filings

 

EBITDA also came in positive at $3.4 million while net income remains a $3.3 million loss. A gross profit margin of 54.6% had declined slightly from a year ago but remains healthy. Overall revenue mix was 65% retail and 35% wholesale.

Their top line revenue has seen hyperbolic growth since their IPO as a result of expansion into the new states, and the rollout of their RISE branded dispensaries. Interestingly, RISE same-store growth was over 50% year on year, showing significant growth in their existing markets.

We expect the momentum to continue into Q4 and 2019 as GTI executes on its pipeline of new opportunities including new markets like Florida and Ohio into the mix.

 

The Bottom Line

Although GTI currently trades at a higher multiple of annualised revenue to market cap than MedMen and Trulieve, both of them do have their issues.

MedMen is burning cash like there is no tomorrow, growing new states faster than it can grow weed, whilst Trulieve is being penalised for being a single state player in Florida only. This puts GTI almost in the middle with its aggressive expansion associated with only minor cash burn.

 

      Source: Company Filings. Share Prices as at 02/07/2019

 

GTI is one of the largest MSOs operating in the fledgling (but booming) US Market. They have a unique retail/wholesale model that allows them much broader distribution reach. As an example, GTI's products are stocked in 122 of 125 dispensaries across Illinois, Maryland, and Pennsylvania (yet they only operate 14 dispensaries in total).

They are cashed up and have made some very savvy acquisitions in the past couple of months to aggressively scale up in size. GTI is a solid option for investors looking to play the US market. With new acquisitions coming online in 2019, we have no doubt they have the ingredients to continue to grow top-line revenue and store numbers.

Will they end up being the winner? Well, given no one knows for sure whether the multi-state, aggressive, cash-burning, land grab, or the single state, profitable business is the best way to grow, it is a good idea to diversify across the two strategies.

The US market offers much higher risk in the short-term than the Canadian market does. But in contrast, it offers much, much larger long-run returns. And GTI is in the US…for the long-run.  In the short term, however, investors should cast their net wide in order to capture all the multi-baggers and spread out company-specific execution risks.

Never put all your eggs in one basket. Especially if it's going to be a bumpy ride home.

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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