U.S. Cannabis Earnings: 3 Reasons Why A Revenue Growth Trough Has Been Reached

It’s no secret that the U.S. cannabis market, as broadly reflected by the industry benchmark AdvisorShares Pure US Cannabis ETF (NYSE: MSOS), has experienced a precipitous slowdown in growth over the past couple of quarters. Last reporting quarter, in particular, saw many of the industry’s top companies report low single-digit topline sequential revenue growth, while a select few slashed full year 2022 revenue guidance. Furthermore, this was broadly accompanied by a dip in gross margins, as pricing power waned and elevated produce price costs squeezed operators. The lackluster results have played an important role why MSO component companies have experienced profound weakness in 2022. While Q1 2022 numbers are not expected to be particularly enthralling, there is optimism that Q1 2022 may mark a cyclical revenue trough in U.S. cannabis.

U.S. Cannabis Earnings Calendar

May 4Green Thumb Industries (GTBIF)5:00pm
May 9Curaleaf Holdings (CURLF)5:00pm
May 11Marimed Inc. (MRMD)8:00am
May 11Ascend Wellness Holdings (AAWH)5:00pm
May 12Trulieve Cannabis8:30am
May 12Glass House Brands5:00pm
May 12TerrAscend Corp.6:00pm
May 16Columbia Care (Acq. By Cresco Labs)8:00am
May 17Tpco Hldg Corp (GRAMF)8:30am

1. Seasonality In Winding To An End

As an agricultural crop, fluctuations in cannabis supply are readily apparent during peaks and trough in the growing season. In states such as California, Colorado and Oregon, the peak of the harvest seasons begins to manifest itself from about mid-September through October, creating what is know as the “Croptober” effect. With peak harvest comes peak supply, which then filters its way through intra-state and black markets, thus exerting downward pressures on prices on legal dispensaries through aggressive pricing competitiveness.

“We’re sitting in the middle of “Croptober”. It’s the time of year when prices are down. It’s more drastic this year, than it was last year. I imagine it will be more drastic next year than it was this year because of the volume in the market.

Andrew Rost, owner of cultivator New Genetics, on the flood of outdoor crops coming to market in Michigan during 2021 Croptober

While the length of any “Croptober” effect varies upon the bounty of the year’s harvest, the effect generally does not last through March of the following year—just in time for the rollover in the fiscal quarters of many reporting U.S. cannabis companies. Thus is practicality, pricing power and margins tend to improve for reporting companies as cannabis inventories draw down. For the next couple of quarters, anyway.

After reaching a cycle low of approximately $1,175 per pound in March, prices are already on the rebound. According to the latest figures by Cannabis Benchmarks, The U.S. Cannabis Spot Index stood at $1,277 per pound, down 0.4% from the previous week.

2. New Jersey To Add Significant Revenue To The Topline Of Several MSOs

With New Jersey opening its doors to adult-use cannabis sales last month, several Tier-1 MSOs will experience a material boost in revenues on the topline. In all, thirteen dispensaries are now selling recreational cannabis in the Garden State, with most strategically located near the Pennsylvania or New York borders to maximize sales growth from neighboring citizens. Initial entrants among public MSOs include Acreage Holdings, Ascend Wellness Holdings, Columbia Care (Cresco Labs), Curaleaf Holdings, Green Thumb Industries, TerrAscend Corp. and Verano Holdings.

According to MJBizDaily, New Jersey is poised to become one of the largest on the East Coast with annual sales projected to top $2 billion within a few years.

Furthermore, TDR recently obtained a preview of the revenue generation power that some of these individual dispensary will have in current limited license conditions. According to TerrAscend Corp. Chairman Jason Wild, he expects each of the company’s three dispensaries could generate more than $40 million per store on an annualized basis (14:41).

The next New Jersey Cannabis Regulatory Commission meeting is expected on May 24 (with 5 additional meetings scheduled in 2022), where it possible that additional retail licenses could be granted.

3. Has Peak Inflation Arrived?

While it’s too early to determine whether peak inflation has arrived, there are signs we may have seen the worst of its deleterious effects on consumer spending.

For example, let’s take The core personal consumption expenditures index, which the Federal Reserve closely watches to measure the price of goods and services. The index grew by 5.2% in March (5.3% pace seen the month prior)—excluding food and energy prices—and that was the first monthly decline since October 2020. It also came in below consensus expectations. Core PCE rose just 0.3% through March, practically matching the February pace and holding below the 0.5% upticks posted from October to January.

And according to Business Insider, the Dallas Fed’s trimmed-mean price index, which excludes the wildest price swings each month and averages the remaining price changes, is rapidly decelerating. One-month trimmed-mean PCE inflation slowed to a 3.1% annual pace from the 4.0% jump seen in February. The measure suggests inflation actually peaked in January, when trimmed-mean inflation hit a one-month annual rate of 6.3%. 

Furthermore, the U.S. Federal Reserve is expected to aggressively attempt to reign-in inflation by raising its benchmark interest rate at its Wednesday meeting. Members are widely expected to raise interest rates by 50 basis points—with 75 basis points remaining at outside possibility—while also detailing plans to reduce the central bank’s balance sheet, which swelled to $9 trillion during the pandemic. The fed funds rate controls the amount that banks charge each other for short-term borrowing but also influences borrowing costs for many forms of consumer debt.

While a rise in interest rates is a net negative for consumer spending, if the tradeoff is reduced inflation, it should have a positive effect at the dispensary level. As a quasi consumer discretionary product (with consumer staples characteristics), high inflation serves to dampen cannabis demand as it competes with other discretionary goods in the consumer spending hierarchy.

If indeed the economy has reached peak inflation, a significant headwind should gradually alleviate throughout the course of the year.

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