Chicago-based cannabis producer Green Thumb Industries beat expectations after reporting second-quarter earnings, boosted by growth in markets like Illinois and New Jersey. In spite of looming macroeconomic pressures, CEO Ben Kovler told Cheddar News that he feels optimistic consumer demand will hold steady even with a potential recession looming.
"The American cannabis consumer remains strong. There are headwinds, there's inflation and other macro pressures, but the demand on cannabis remains strong," Kovler told Cheddar News on Thursday.
For the quarter ending June 30, Green Thumb Industries reported $254.3 million in revenue, a jump of 14.6 percent year-over-year and 4.8 percent sequentially. The company also grew its adjusted operating EBITDA, a popular metric for assessing financial performance in the cannabis industry, 17.4 percent to $78.7 million.
"Our 5 percent growth was really fueled by [recreational cannabis] going live in New Jersey in April. And as new states turn on, there's plenty of new growth coming," Kovler said.
Cannabis sales in Illinois, one of GTI's core markets, have continued to grow since adult-use sales kicked off in 2020. Illinois Gov. J.B. Pritzker announced in July that the state's adult-use cannabis sales grew 50 percent to $1.5 billion million in fiscal 2022 from $1 billion in 2021. Kovler sees the market continuing to grow steadily until it's worth about $3 billion
Customers wait to have their orders filled at a RISE dispensary in Bloomfield, N.J., Thursday, April 21, 2022. Recreational sales of cannabis for adults 21 and older started Thursday, with the first alternative treatment centers opening at 6 a.m. in part of the state. (AP Photo/Seth Wenig)
"We're bullish on Illinois growing. The catalyst for that growth is going to be new stores. It's been a long wait, but finally, the state has issued some of the social equity licenses," Kovler said. "It's not going to be a step up where Illinois creates a billion dollars right away, but the Illinois market should go over $3 billion over time."
The New Jersey market, which kicked off adult-use cannabis sales in April, provided a big boost for the business where Green Thumb operates three Rise dispensaries. The state's Cannabis Regulatory Commission reported sales exceeding $24 million in just the first month.
One area of concern for analysts in the earnings report was a 12 percent drop in consumer packaged goods sales to external customers, meaning products sold to other dispensaries and companies. Kovler said the business isn't shrinking but more products are being sold internally.
"It's really a shifting of the dial, not a shrinking of the business. As we go more vertical as a business, that's both a product of the regulatory environment, stores we're opening and … more control over our retail channels," Kovler said.
Heading into second-quarter earnings, analysts predicted the cannabis industry would feel the squeeze that inflation is putting on consumers.
"Ahead of [Q2 2022] earnings season, we are lowering our U.S. cannabis company estimates and U.S. [total addressable market]. This is the first negative revision to our U.S. industry outlook and reflects the challenging consumer backdrop," Cowen analysts wrote in a note on Monday.
The cannabis industry saw major growth during the early days of COVID-19 after dispensaries in most legal states were granted essential status. Sales also benefited from the stimulus checks consumers received. But experts say coming economic troubles will be less beneficial for consumers, who are already feeling the effects of sky-high inflation. Kovler agreed with the sentiment but said he doesn't anticipate pressure impacting consumer demand.
"The good news for us is we don't see impact on demand. This is not a discretionary spend, where people are traveling less or doing other things when money gets tight. This is a product that's in demand that people want. So we see changes in the demand, like trade down to value product, different brands, things like that," Kovler said.
That's not to say Green Thumb Industries is insulated from the broader macroeconomic forces at work. Kovler said there is price compression across the industry impacting margins and that controlling the selling, general, and administrative (SG&A) expenses, controlling verticality, and investing in states with big growth are some tactics the company is using to keep consumers from seeing inflated prices on store shelves.
Following Green Thumb Industries' earnings report, Cowen analysts wrote that the company's revenue growth likely reflected increased market share but continued to urge caution for the year ahead.
"The company seemingly gained market share, delivering sequential growth of 5% (~400 bps ahead of our forecast) on a total company basis, helped by the addition of NJ, but also growth in core markets like IL," analysts wrote in a note on Wednesday.
"We continue to believe that our more cautious near-term stance for the industry overall remains prudent as management noted that they are observing trade down," the analysts added.
Unlike in other industries, cannabis can continue to count on growth from new markets when states move ahead with adult-use or medical legalization. In the second half of 2022 and into 2023, Kovler said Green Thumb Industries is looking ahead to states like Connecticut, New York, Rhode Island, and Virginia kicking off sales. When it comes to New York, Kovler said the company has tempered its expectations until there is more insight on what regulations could look like but has continued to invest.
As for federal cannabis reform, Kovler said he's hopeful but isn't betting on it.
"We're not betting that, right? So we built Green Thumb Industries to be in very good shape, regardless of federal change," Kovler said.
Senate Majority Leader Charles Schumer (D-N.Y.), Sen. Cory Booker (D-N.J.), and Sen. Ron Wyden (D-Ore.) introduced their Cannabis Administration and Opportunity Act in the Senate containing revisions from the draft legislation introduced in 2021, but it still faces an uphill battle in the Senate. Meanwhile, Booker, once a staunch opponent of the popular Secure and Fair Enforcement (SAFE) Banking Act, told Cheddar News he is willing to support the bill if it contains certain equity-related revisions.
Green Thumb Industries trades over the counter in the U.S. and on the Canadian Securities Exchange in Canada. AdvisorShares Pure US Cannabis ETF, which tracks major U.S. cannabis companies, has lost close to 55 percent year-to-date.