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As Q2 earnings season nears an end for the American multi-state operators, it’s clear that it represented an inflection point for the sector, with the large MSOs all enjoying “beat and raise” quarters. Investors shouldn’t have been too surprised, as the strong growth across the country for legal cannabis has been quite evident in the point-of-sale data, but the extent of the growth at the largest companies was truly extraordinary, with the average of the six largest revenue generators that have reported increasing sequentially by an average of 28%:
It’s important when looking at the numbers to understand that some of the growth is from acquisitions. Additionally, some of the companies were negatively impacted by closures in Massachusetts and Nevada during the quarter. Finally, any given quarter can be impacted by new dispensary openings or especially additional production capacity leading to more product availability. Some of the companies share “same-store sales” information, which helps to better understand the growth dynamics. GTI, for instance, saw 75% same-store sales growth from a year ago and 8% sequentially. Cresco Labs reported that its same-store sales grew 31% sequentially, while Trulieve disclosed annual same-store sales growth of 30%.
We see strong demand as a common factor driving growth. On most of the conference calls, management indicated they could have generated even more revenue had they had additional product for sale. The tight supply in Illinois and Pennsylvania, which impacted all but Trulieve and Curaleaf, is especially profound. Going forward, subsequent to its recent acquisition of Grassroots Cannabis, Curaleaf is poised to capitalize on both of these markets. Trulieve, which relies primarily on its Florida operations to generate revenue, is benefiting from very strong patient growth, as the number of active patient cards crossed 399K this past week, up about 33% year-to-date.
When several of the MSOs went public in late 2018, they offered revenue and EBITDA projections, but the vaping crisis and delays in closing M&A transactions in 2019 led to the practice being curtailed. We are starting to see a return. Trulieve, which had offered guidance a year ago for 2020 but had never adjusted it higher despite it becoming obsolete after several strong quarters where it exceeded its expectations, formally revised it higher. TerrAscend provided strong guidance for the balance of the year for revenue and adjusted EBITDA as well, and Curaleaf, after hitting its pro forma guidance in Q2, provided it again for Q3, with sequential growth expected to be 24%.
Unlike 2018 and 2019, the guidance seems to be more grounded in fundamentals now, and we also think the analysts are better able to incorporate market dynamics than they were a year ago. The companies have good visibility into their own production coming online as well as their ability to improve yields. Of course, Illinois and Pennsylvania won’t have such favorable characteristics forever, but the markets are likely to be under-supplied for the foreseeable future, with demand likely to continue to expand as new stores come online. Each of these companies has growth drivers ahead. New Jersey is likely to go legal, which should benefit Curaleaf, GTI and TerrAscend. Even without adult-use, these companies should benefit from expansion in the state’s medical market. Cresco is rapidly scaling in California, while Trulieve will be bringing its operations in Massachusetts online. Arizona legalizing would benefit Cresco, Curaleaf and Harvest.
After seeing Canadian LPs fail to meet revenue expectations, we can understand how investors might be cautious about how sustainable the growth might be, but the American market is very different from Canada, which lacked distribution and a complete product set, though these have improved substantially. The MSOs face limited competition in many markets due to the licensing regime. Additionally, unlike in Canada, the sector hasn’t been overcapitalized. Many smaller companies holding coveted licenses are unable to expand capacity due to limited access to capital.
As we evaluate the recent quarter and think about how the next year or two is likely to play out, we think the expectations for robust growth can be justified. Several of the markets are under-supplied significantly and offer substantial runway as funded expansion projects come online, with traction in other newer markets also likely to add to growth. Technology and cash payment alternatives are enabling market-share gains relative to the illicit market in even more mature markets. The MSOs with strong management and operational skills and access to capital are likely to take advantage of this environment for quite some time.
1906 has been quietly pushing the boundaries of the edibles market with delicious fast-acting experiences since 2015. The brand, co-founded by Peter Barsoom, produces a new category of premium edibles, marrying the benefits of cacao, cannabis, and ethnobotanical ingredients, which are designed to appeal to responsible, informed, health conscious adults.
The patented lipid micro-encapsulation process by 1906 allows one to feel the effects of its edibles within 20 minutes or less, resulting in more accurate dosing and more consistent and predictable effects. Over the years, the 1906 brand has kept it simple and has stuck to what works, producing just six highly functional formulations that combine socially-dosed cannabis with targeted plant medicines.
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Alan & Joel