This Company's Formula For Success Is Worth Imitating
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Last year and the first part of 2020 were painful for cannabis investors. Company after company disappointed with lackluster financial results that did not match the incredible growth prospects of the industry. These companies made acquisitions at very high prices, diluting shareholders. The going-public process in Canada lent itself to selling pressure from the shells' owners into which cannabis companies merged. And the investment bankers who ran many of these companies turned out not to have the operational skills to make their companies grow profitably.
When investor sentiment shifted from valuing large geographic footprints and potential future revenue to focusing on profitability and near-term revenue possibilities, many of these companies were unable to make the adjustment the investors had quickly enough—and share prices suffered.
A company stands apart
A few companies were smart enough to stick to a plan which focused on exactly what makes companies profitable in the long run: revenues and profitability. The best example of that is Florida-based Trulieve. In my opinion, Trulieve is the best company in the cannabis industry. The company's success provides a template for other cannabis companies, and those that follow Trulieve’s path can share in the success that awaits the industry.
Trulieve’s path to success is easy to understand. Top-notch management, geographic concentration, control over products, and good relations with regulators are the keys. Other things successful companies must do is understand their local markets, emphasize markets where supply is controlled, keep a sharp eye on costs, and be careful with those valuable shares. Most importantly, learn what your customers want and find a way to provide it to them profitably. Trulieve’s results came despite a sizable decrease in its realized price per gram because it started providing value-priced cannabis flower, a new category which is powering revenue growth in several markets.
Fortunately, many US cannabis companies are refocusing on exactly those goals and we will see more companies post better results. Acreage Holdings announced on the same day as Trulieve’s earnings that it had agreed to sell its Maryland dispensary license, for example. Maryland is a good state for cannabis, but a single dispensary that has yet to be built is not the way to go for a public company. Acreage’s new management team knew it had to get big or get out of Maryland and decided to focus its capital on states where it already has a presence. As an aside, Acreage’s results may have turned the corner quickly after the new management team took over; I’ll have more about that in another article.
A look at Trulieve’s accomplishments gives us a view of the future of other cannabis companies. Instead of repeating the results, I’ll simply direct you to the company’s press release for details about the profits, the giant revenue increase, and the growing estimates for the year.
I want to focus on one metric that wasn’t in the press release, but which CEO Kim Rivers mentioned during her investor call. One of the most important numbers that investors in retail companies look at is same-store sales. That number backs out the revenue growth that comes from opening new stores, which most growing retail companies are doing. It measures what the stores that were open for a full year saw in terms of growth. Domino’s Pizza, for example, saw US same-store sales growth of 16.9 percent in the most recent quarter, as more people opted for delivery options during their extended stays at home due to the COVID19 pandemic.
Trulieve’s same-store sales grew by 30 percent. That is, each of Trulieve’s dispensaries open for a year or more saw nearly a third more sales during this quarter than they did during the same quarter last year. That performance is nearly unheard of in retail.
The best news is that we can expect similar kinds of numbers as some of the new cannabis markets start to mature. In California, legal cannabis sales are more than three times higher than they were in the first month of legalization. Michigan is selling $100 million per month of cannabis. Illinois is selling nearly $50 million per month, 17 percent more than in its first month in January. The cannabis market will grow 40 percent this year according to Marijuana Business Daily, and that doesn’t count any new states legalizing medical or adult-use cannabis. I see no reason why that wouldn’t occur again in 2020.
This is an exciting industry that will produce good profits for investors in well-run companies. It’s nice to get such a clear reminder of that from Trulieve.