Preparing for Cannabis Earnings Season: Understanding Gross Profit Margins

Gross profit margin is a key financial metric showing the revenue percentage that exceeds the cost of goods sold (COGS). It reflects a company’s ability to produce and sell products at a profit. For instance, a company with a gross profit margin of 50% means that for every $1 of revenue, $0.50 is gross profit, and the remaining $0.50 covers COGS. COGS includes direct costs such as raw materials, labor, and manufacturing overhead. It does not include operating expenses like marketing, rent, and administrative costs, categorized under SG&A (Selling, General, and Administrative).

Why is Gross Profit Margin Important?

  1. Profitability: It directly impacts a company’s bottom line. Higher margins indicate that a company is selling its products at a higher profit.
  2. Cost Efficiency: It shows how well a company controls its production costs. Efficient cost management can lead to higher margins.
  3. Pricing Power: It reflects a company’s ability to maintain high prices relative to its costs, indicating strong market positioning.
  4. Comparison and Benchmarking: It allows for comparison with industry peers, helping identify leaders and laggards in cost efficiency and pricing strategies.

Analyzing Gross Profit Margins in the Cannabis Industry

When analyzing gross profit margins, consider the following trends:

  1. Year-over-Year Comparison: Compare the current gross profit margin to the same period in previous years. A rising trend indicates improving profitability and cost efficiency.
  2. Sequential Changes: Look at the margin relative to the previous quarter. Significant changes can highlight seasonal effects, cost management initiatives, or pricing adjustments.
  3. Industry Benchmarks: Compare a company’s margin to industry averages to gauge its competitive positioning. Higher margins suggest better cost control and pricing power.
  4. Management Commentary: Pay attention to explanations for margin changes. Management insights can provide context for strategic decisions impacting profitability.

The US Multi-State Operator (MSO) cannabis market has shown slight improving trends in gross profit margins over the last year. Here are some observations:

  • Average Margin: The average gross profit margin for US MSOs was 43.4%, with a median of 44.8% over the last twelve months.
  • Improvement: Compared to the previous 12-month period, where the average was 43.4%, and the median was 44.3%, there was only a slight improvement industry-wide. 
  • Industry Ranking: The table below ranks the top-performing MSOs by gross profit margin. A higher margin reflects better profitability and cost efficiency.

Looking Forward to Q2 2024 Earnings

As we approach the earnings season in August, comparing the upcoming Q2 2024 gross profit margins with Q2 2023 is crucial. Companies aim to improve their margins by at least 1-2% annually, signaling better cost management and profitability. We will update our readers on each company’s progress as they release their earnings reports.If you like this, read our previous article on understanding SG&A (Selling, General, and Administrative) margins across the cannabis industry.

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