Green Thumb Industries Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Green Thumb Industries (GTI) is a national cannabis consumer packaged goods company and retailer, primarily operating in the United States, with a vertically integrated model spanning cultivation, manufacturing, and retail distribution.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Green Thumb Industries (GTI), often referred to as Green Thumb, is a U.S.-based cannabis company focused on consumer packaged goods and retail operations. The company is vertically integrated, meaning it operates across the cannabis supply chain, including:

  • Cultivation: Growing its own cannabis crops.
  • Manufacturing: Processing cannabis into various products.
  • Retail: Selling finished cannabis products through its own retail stores.

GTI’s focus is primarily on the US market, although it also has operations in Canada.

Revenue Streams:

GTI generates revenue through three primary channels:

  • Retail Sales: The majority of revenue comes from sales in its own Rise and other retail locations. These stores sell a variety of cannabis products including flower, pre-rolls, concentrates, and edibles.
  • Packaged Goods: GTI manufactures and sells its branded products to other retailers across the states where it has a license for wholesaling its products. This segment includes revenue derived from its branded packaged goods that may be sold by third party retailers.
  • Wholesale Revenue: From selling their products to other retailers who are not in their retail chain.

Green Thumb’s operating activities are mainly in the United States.

  • The cannabis industry is in a state of growth with legalization occurring in a large amount of new jurisdictions that allows the company to expand their market opportunity. There has been a transition over the last couple of years where recreational usage has become more popular than medicinal usage and is leading to more growth overall in the industry.
  • The industry is also being increasingly targeted by regulatory authorities which increases the importance of a high barrier to entry as it gives companies that have more resources an edge to be successful in the industry. However, at the same time it can lead to lower growth as new entrants find it much more difficult to establish and grow.
  • Due to its nascent stage, the industry also faces challenges such as the slow process of legalization, and constant shifts in market demand and consumer preference.

Competitive Landscape:

  • The cannabis market is highly fragmented with both smaller players and well-established companies.
  • Competitive advantage varies from market to market depending on the regulatory environment and the presence of different companies in each area.
  • Companies like Trulieve Cannabis and Curaleaf also dominate a few specific markets.

Major players are often vertically integrated, which gives them more control over their supply and distribution channels.

What Makes Green Thumb Unique:

  • Brand Power: Green Thumb has developed a strong portfolio of consumer brands that aims to build a lasting relationship with its consumers and help establish its retail footprint.
  • Vertically Integrated Operations: Allows GTI more control over production and distribution, which leads to higher efficiency.

Vertical integration can reduce costs and allow better control over brand image.

  • Operational Excellence: Green Thumb has shown strength in being able to generate revenues and operate profitable businesses. The company has been able to continually increase the number of stores that it has all across the nation.

Financial Analysis

GTI’s financial performance demonstrates impressive growth, although it shows some struggles in terms of profitability.

For the purposes of analysis, please note that all numbers are in USD unless otherwise stated.

Revenue Growth:

  • The company has been growing its top line at an impressive pace, going from $776 million in 2021 to $1.01 billion in 2022 and a TTM of $1.07 billion, showing the high demand for cannabis products.
  • The company’s revenue has been consistently expanding over time due to expansion into new markets and an increasing number of retail stores.

Profitability and Margins:

  • Gross profit margins have remained relatively stable in a range of approximately 43-49% over the last three years. The gross profit has been increasing but is not enough to overcome the increasing operating costs.
  • Operating loss has increased from $33 million in 2021 to a loss of $96 million in 2022 and then a $121 million loss in TTM. This shows that the company is still not able to reduce expenses enough to be profitable as of right now.
  • Net income follows a similar pattern, with a net loss of $163 million in 2021, a net loss of $286 million in 2022, and a net loss of $183 million in TTM, meaning that overall the company’s net losses have ballooned as the company has grown.

This profitability issue is a major red flag that needs to be addressed by management.

  • The company is experiencing decreasing net profit margins, as seen by net margins of negative 21%, negative 28%, and negative 17%, for the years 2021, 2022, and the TTM, respectively, which are cause for concern.

Balance Sheet Health:

  • Assets: Total assets have grown from $1.77 billion in 2021, to 2.41 billion in 2022, and 2.49 billion in TTM, demonstrating the expansion of the company into new markets and its ability to gain market share.
  • Liabilities: Liabilities have increased from $741 million in 2021 to $1.29 billion in 2022, to 1.32 billion in TTM. This mirrors an increased use of debt to acquire new assets and grow the company.
  • Shareholders Equity: Total equity increased from $1.03 billion in 2021 to $1.11 billion in 2022, to $1.17 billion in TTM, indicating that the company does continue to add value for shareholders.
  • Capital Structure: The company has a debt-to-equity ratio of 1.13 (based on December 2022 numbers), which is relatively high, signaling that it uses debt as a large source of funding.

Key Takeaways from Financials:

  • GTI is growing at a rapid pace, and growing its presence in new markets, which is a strong sign.
  • The company has a problem with profitability and the operating performance of its business has declined over the last few years.
  • The high debt to equity ratio of the company has been a problem and the company should try to reduce its reliance on debt.

Moat Assessment: 3 / 5

Source of Moat: GTI’s moat is not a simple one to assess, as it does not seem to have a large moat like a company like Coca-Cola which is based entirely on brand value. The moat for Green Thumb is based on the following components that combine to give it a defensible position in the market:

  • Brand Recognition: GTI has put substantial effort to build brand recognition through its ‘Rise’ brand of retail stores. It also attempts to create unique and powerful brands that are sold at other retailers. This gives the company leverage and pricing power compared to smaller retailers that do not have brands.
  • Economies of Scale Due to the vertically integrated nature of the company, Green Thumb has been able to create economies of scale in cultivation and manufacturing as it operates across the entire supply chain.
  • Switching Costs: The switching cost for customers of Green Thumb’s product is low as there is little stopping them from buying other brands. However, for the enterprise customers who use their white label services, the high cost of switching and integration with another company’s software may be an impediment that increases stickiness.
  • Limited Licenses: The cannabis market is heavily regulated, and licenses required to operate are usually limited, making it difficult for newer entrants to get the necessary requirements. This creates high barriers to entry for the industry and protects existing companies.

Justification for Moat Rating (3/5): I’ve given it a 3/5 rating because while GTI has a number of positive traits that show a moat, it is still early days for them and they can improve on these further to get the top rating.

  • Their brand awareness still needs improvement as it is a relatively new business that is still in the growing stages of brand awareness and not yet a household name.
  • While their vertically integrated business does allow them certain benefits compared to their peers, it does not necessarily lead to higher profit margins.
  • Switching costs in the retail cannabis business remains low as there is little keeping consumers tied to a certain brand or product. It is very easy for a consumer to buy from one brand one week and another brand the next week.
  • Limited license benefits are offset by high competition for market share that is prevalent in the cannabis market.

Business Understandability: 2 / 5

I’ve given Green Thumb a business understandability rating of 2/5 because of its unique nature. The cannabis industry is fairly new and does not have much data or financial consistency that other established industries do. The business has two main sides to it, first a retail part that generates a lot of revenue from sales, and second a consumer packaged goods part that sells its branded products to other retailers. However, it is generally not a hard business to grasp on a surface level, hence the 2/5 rating.

Balance Sheet Health: 3 / 5

I’ve given it a 3/5 balance sheet rating because the company has a high debt-to-equity ratio compared to its competitors and has had growing net losses which are not good for its balance sheet. However, the company does have a large asset base, which is a net positive. While it is still quite concerning, it is not to the point where the company would have any financial difficulties immediately, but it is something to watch out for.

Risks to the Moat

While Green Thumb has an established presence, there remain considerable risks for its moat and its business viability.

  • Regulatory Changes: Changes in regulations can make existing licenses worthless and also lower barriers of entry for the industry, which would destroy their moat.
  • Competition: Increased competition in the market could put pressure on their pricing power and reduce their market share. The emergence of larger players, especially in sectors where the company is most active in could hurt their growth.
  • Market Sentiment: Since cannabis is still a relatively new market, the consumer sentiments towards cannabis can rapidly change which can affect the growth of the industry overall, as well as profitability.
  • Limited Brand Awareness: GTI’s brand recognition is still not as established as many other consumer products companies, which might cause it to lose to competitors. There is also the risk that their consumer base becomes stagnant.
  • Lack of Profitability: The biggest risk in GTI right now is that they have yet to produce profits, and have growing net losses, which is unsustainable for the long term. If the management is unable to turn its profits around, then the business model might not be viable.

Recent Concerns and Management’s Outlook:

  • GTI management has stated that it plans to take a more disciplined approach to expansion in order to reach profitability earlier, as its growing losses have been an issue recently.
  • The company is trying to get states such as New York and Pennsylvania online which will likely lead to revenue increase for the company.
  • The management is continuing to monitor the changing political and macroeconomic climate as any changes in these aspects may negatively affect the business.
  • The company also continues to maintain and grow its cultivation and manufacturing as well as open up more stores.

It is important for the management to demonstrate its ability to continue expansion, whilst growing its profit, and reducing its dependence on high levels of debt financing in order to give investors the confidence to value this company highly.