• Brett Schafer

Not So Deep Dive: Green Thumb Industries Stock



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Show Notes


(Ryan) What they do: GreenThumb manufactures, distributes, and markets a portfolio of owned cannabis consumer packaged goods brands. These packaged goods or stock keeping units consist of the following product categories: flower, pre-rolls, concentrates, vape, capsules, tinctures, edibles, topicals and other cannabis-related products. These products are primarily generated from plant material that GreenThumb grows and processes itself.


And these products are then distributed and marketed to both third party licensed retail cannabis stores as well as GreenThumb’s own retail stores. For a sense of scale, GreenThumb has 16 manufacturing facilities and 66 open retail locations across 14 states. These retail locations are primarily traditional brick and mortar type as regulation limits their ability to provide e-commerce or guest pick-up services.


Last year about 29% of revenue came from their consumer packaged goods business and 71% came from their retail stores.


(Ryan) History: If you’re reading through the history of greenthumb in its 10-k, it’s insanely complicated. It says the company was initially incorporated in 1979 under the name “Dalmation Resources Ltd”, and has subsequently changed its name 4 different times since. But finally in 2018, the company completed another transaction where it changed its name from “Bayswater Uranium Corporation” to GreenThumb industries. I honestly couldn’t understand the transaction. If I had to guess, this was a small shell company that GreenThumb essentially merged with to bring its shares to the public.


As for Greenthumb specifically, they were founded in 2014 in Chicago by a gentleman named Ben Kovler. Between Ben and a few investment parters, they launched with 1 dispensary in Illinois. Some fascinating background here actually. Ben’s grandfather basically did what Ben is trying to do now back in 1930 when prohibition was repealed. Ben’s grandpa (Harry Blum) was the President of the Jim Beam Distilling Company, and Ben’s father ran the company afterward before they sold to the American Tobacco Company in the 1960’s. The Kovler’s are part of the Chicago “elite” and Ben’s father owned a minority stake in the Chicago Bulls.


(Brett) Industry/Landscape/Competition:

  • Cannabis market is $24 billion a year right now (according to management)

  • Management expects it to be $80 billion a year a decade from now

  • For reference, WA state (which is where cannabis is 18+ fully unrestricted) spending is $1.5 billion a year. The state has less than 10 million people

  • Competitors: Verano, Planet 13, Curaleaf, Trulieve, the local shop


(Brad) Management and Ownership:


Founder/CEO is Ben Kovler:

  • since 2014

  • He’s also the co-founder of a site called invest for kids which is an investing pitch competition held annually in Chicago

  • Deeply involved in the Chicago community as he has to be to ensure best chances for limited licensing

  • His family was involved in the end of prohibition – great grandson of Harry Blum who developed Jim Beam

  • Somewhat complicated history of co-founders feeling Kovler took the name Green Thumb but they settled.

  • 76% Glassdoor rating with very limited reviews


CFO is Anthony Georgiadis:

  • Former COO of Wendover Art Group which seems like a B2B decorator

  • Former Senior Associate of CIVC Partner which is a Chicago PE firm


Head of Capital markets is Andy Grossman since 2016

  • Was a senior manager at Chesapeake Capital Partners for a long time (PE firm)


GC is Beth Burk

  • Former Chief Compliance Officer at AON

  • Former partner at a law firm before that

  • General Studies degree with an Economics concentration from UofM like me


CIO is Swadheen Sehgal

  • Former Director of DTC and CRM at Adidas

  • Manager at Sears


Ownership

  • Kovler owns 61% of the super voting shares and 38% of the overall voting power

  • CFO Anthony Georgiadis owns 9% of the overall voting power through the same class of super shares

  • AG funding group owns 5.75% of the voting power (associated with Andy Grossman

  • Former CEO Peter Kadens owns 9.28% of the voting power. He left to pursue philanthropic endeavors although it seems like he was pushed out


(Brett) Valuation:

  • Market cap of $4.9 billion, ticker GTBIF

  • EV of $4.76 billion

  • EV/gp of 10.3 (explain)

  • EV/OCF of 44

  • No positive FCF because they are investing a lot to grow its infrastructure right now

  • Around 10 mil dilutive securities vs. 241 mil shares outstanding (explain)


(Ryan) Earnings: I’ll start with LTM numbers then move to the most recent quarter

  • LTM Revenue of $827M, up 81%

  • 56% gross margins

  • And generated $107M in OCF. But spent $128M in capex as it builds out its footprint

Q3:

  • Q3 revenue was $234M, up 49% YoY

  • Operating income was $59M, up 50% YoY

  • But they had to pay $37M in income taxes. (mention why that is)

  • So really the focus should be OCF. And they’ve generated about $83M in OCF so far this year.

  • They also acquired Dharma Pharmaceuticals during the quarter. This helped them expand into the Virginia market, as Dharma owns several licenses that allow them to grow in Virginia.


(Brad) Balance sheet and liquidity:


Toughest part of the space is artificially high cost of capital due to legislation in place

  • $285 million in cash vs. $83 million YoY following a series of warrant and debt raises

  • $34 million in warrant liabilities $205.76 million in notes payable with $7.6 million of that current

  • Interest rates of its warrant and debt offerings ranges from 7-12% which is actually comparatively low but obviously expensive on an absolute basis (why profitability is so vitally important right now)

  • Interest expense over the first 9 months of the year = roughly 2.5% of sales but a lot of this debt is long dated and there

  • About 11 million shares in outstanding warrants and options outstanding for roughly 5% dilution


Anecdotal Evidence:

  • (Ryan) Watched some interviews with the CEO and I like him, but no experience product wise.

  • (Brett) None. They don’t operate in WA state.

  • (Brad) Big fan of Ben but they don’t sell in Michigan. I’ve been to a Green Thumb store in vegas and they bought my favorite flow brand a few years ago (Cannabiotix) so I’m a fan of the product


Future growth opportunities:

  • (Ryan) Aside from expanding as geographies open up, I think trying to build that moat now is the best thing they can do. Establishing customer loyalty is really the only thing that gives them a defensible position if the market really opens up. I could see this company being acquired eventually.

  • (Brett) CPG growth nationwide. What this means is getting their brands (Dogwalk, Rhythm, etc.) into as many stores/outlets as possible. If cannabis continues to get freed up nationwide they should have a steady runway to do this. Goal is to turn millions of people into habitual consumers of the product like soda, candy, tobacco, alcohol, coffee companies do.

  • (Brad) Beyond retail and wholesale growth, I think normalized marketing spend in a world where weed isn’t federally illegal will be a boon to black market conversion (which is still the majority of sales in some states). Most of these companies barely spend anything on brand marketing at this point. Drinks, CBN/CBD – getting people involved in the category via less intimidating means of consumption.

Highlights and lowlights:

  • (Ryan) Highlights: Growing fast, prioritizing cash flow, and they have good liquidity in an industry where it isn’t all that accessible. Lowlights: Unfavorable tax treatment (can’t deduct ordinary business expenses), limited banking, and no access to US bankruptcy protections (which makes it less enticing to lend to a company).

  • (Brett) Highlights: Solid unit economics, growing market, and a long runway to reinvest for growth. Reviews seem to say products are high quality. Lowlights: Getting investigated by the feds about pay to play state licenses, income taxes for cannabis companies in general, no brands have proven staying power yet.

  • (Brad) Leading market share position in key states and within an industry poised for 20% organic growth through 2030. Balance sheet puts it in one of the 3 best positions to accumulate struggling assets in the space thanks to its capital discipline. Polar opposite of Canadian growers. Low light is probably having to track political banter and developments as part of investing in the space . Politicians stink and are unpredictable (why I focus on the companies in the space thriving with none of those tailwinds


Bull Case:

  • (Ryan) State by state, Greenthumb steadily expands. They grow a massive footprint prior to better tax laws and they become a household brand in the cannabis space. I don’t think you have to worry about top line growth here, just potential multiple compression.

  • (Brett) Very simple. Steady end-market growth lifts demand for their brands, and the tax burden goes away eventually. If sales per share double, P/GP comes down to 5. If tax rates normalize that could lead to a 10% earnings yield given how the business is structured.

  • (Brad) 280E and Safe banking comes to vastly cut cost of capital and effective tax rates and the company grows at a slightly better than 20% compounded rate (say 25%) as it acquires smaller assets and expands its footprint via legalization and rec flipping. That gets you to roughly a billion in free cash with modest 15% margins (some are expecting nearly 30% thanks to full vertical integration but just to be conservative). Give it just a 15X forward free cash flow multiple and you get a 9 year compounded return of 14.3%. These are conservative projections but have to be considering just how much legal risk and uncertainty there is.


Bear Case:

  • (Ryan) Regulations are sort of a double-edged sword for them right now. It’s slowing them down but also prohibiting competitors. If regulations fall by the wayside, tax code becomes more favorable and licenses become more accessible, a flood of competition could hinder GTI’s growth.

  • (Brett) Tax burden never goes away, multiple compression down to sinstock level, and brands fall out of favor from consumer demand.

  • (Brad) Great points from both that I want to steal but won’t. Interstate commerce erodes gross profit margins considerably and we don’t get the net income tailwinds we’ve been talking about. If federal legalization comes and we get away from limited licensing that could erode the value of rapidly growing retail footprints (what if 7/11 can sell a joint? Favors the wholesalers deeply)



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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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