SG&A stands for Selling, General, and Administrative expenses. These are the costs a company incurs to run its business, excluding the cost of goods sold (COGS). SG&A expenses include salaries, marketing, rent, utilities, and office supplies. The SG&A margin is the percentage of revenue consumed by these expenses. For example, if a company has 31% SG&A margin, that means for each $1 of revenue, $0.31 cents is spent on SG&A expenses. SG&A does not include raw product costs, such as supplies used to manufacture Cannabis products, which would be included in COGS. Let’s look at how to analyze SG&A expenses and trends in the US MSO Cannabis markets.
Why are SG&A Margins Important?
- Operational Efficiency: SG&A margins show how efficiently a company manages its operating expenses. Lower margins indicate better cost control.
- Profitability: High SG&A expenses can reduce profitability. Monitoring SG&A margins helps assess how much revenue is being absorbed by overhead costs.
- Comparative Analysis: SG&A margins allow for comparisons between companies in the same industry, helping to identify those with better cost management.
- Trend Analysis: Changes in SG&A margins over time can indicate shifts in strategy or efficiency. A decreasing margin might suggest improved cost management or increased revenue without a proportional expense rise.
When analyzing earnings press releases, consider these trends in SG&A margins:
- Year-over-Year Comparison: Compare the current SG&A margin to the same period in previous years to identify long-term trends. Ideally, the trends should be going down as the company matures and increases its efficiency.
- Sequential Changes: Look at the SG&A margin relative to the previous quarter. Significant changes can indicate seasonal effects, strategic shifts, or changes in efficiency. Ideally, it is better to look back at the same period of time one year ago; this will help you avoid seasonal variability.
- Industry Benchmarks: Compare the company’s SG&A margin to industry averages to understand how well it manages operating expenses relative to peers.
- Management Commentary: Note management’s explanations for significant changes or strategic initiatives affecting SG&A expenses.
What trends have been observed in the US MSO cannabis marketplace regarding SG&A?
The average US MSO had an SG&A margin of 38.2% and a median of 35.5% over the last twelve months. The overall Cannabis market is improving. In the previous 12-month period, the SG&A average was 39.5%, and the median was 37.3%. As these companies mature and scale revenue, they are becoming more efficient with costs. The industry ranking can be found in the table below. Remember, a lower number is better than a higher number for this metric.
Source: Capital IQ / S&P
When the next earnings season announcements happen in August, companies will announce their SG&A margin for Q2 2024; the best way to look for progress is to find the SG&A number of Q2 2023 and see if it has decreased and by how much. The goal for companies is to still decrease this number by 1% to 2% over the course of a full year. We will update each company’s progress as they announce their earnings for our readers.
