Third-Quarter Earnings Highlight Distinct Pathways For U.S. Cannabis Operators

In recent weeks, distinct differences have emerged among U.S. cannabis operators following the release of their third-quarter results. Despite shared challenges across the industry—such as price compression, strained consumer demand, and exorbitant tax rates—it is evident that certain operators possess a stronger ability to thrive amid adversity compared to others.

Green Thumb Industries Inc GTBIF has long set the pace in the industry, and continued its impressive streak with 9.1% sequential revenue growth and robust cost controls. These measures have propelled adjusted EBITDA margins to 30.1%, marking a further expansion from the previous quarter. Notably, Green Thumb has effectively translated its adjusted EBITDA into substantial cash flows, surpassing $154 million in the initial nine months of the year—a figure significantly higher than that of its closest competitors. As a result of its strong cash flow generation, the company announced in September the launch of a stock buyback program, aiming to acquire up to 4.4% of its outstanding shares. Far from mere talk, the company took substantial action by purchasing 2.5 million shares in the third quarter, a tangible demonstration of their commitment to delivering value to shareholders.

Verano Holdings Corp VRNOF unveiled similarly impressive third-quarter results, showcasing notable advancements in cost efficiency despite a tempered top-line performance. The company witnessed a surge in gross profit margins to 55.5% and achieved adjusted EBITDA of $89.3 million, reflecting robust 25% growth from the previous quarter. Verano strategically benefited from its operations in New Jersey and the recent launch of adult-use cannabis sales in Maryland, initiated on July 1. The company's disciplined financial approach was clearly evident, as it managed to maintain essentially flat SG&A expenses despite a $12.5 million year-over-year revenue increase. Verano's exceptional performance prompted management to revise its free cash flow guidance for the year upward to $74 million at the midpoint.

Among the smaller cannabis operators, TerrAscend Corp TSNDF stood out with a robust performance. The company achieved 23.7% quarter-over-quarter revenue growth, a sector-leading figure, and bolstered its adjusted EBITDA margins by an impressive 1000 basis points. This leap resulted in nearly a doubling of adjusted EBITDA from the preceding quarter. TerrAscend's success, akin to its industry counterparts, was driven by its operations in New Jersey and Maryland, coupled with noteworthy progress in both Michigan and Pennsylvania. Beyond operational gains, the company also demonstrated financial prudence by reducing its debt, consequently slashing annual interest expense by a substantial 30% moving forward.

At the same time, the third quarter marked a less favorable period for some operators. The Cannabist Company Holdings Inc. CBSTF reported a slight dip in sales figures compared to the previous quarter, despite 55% growth in its Maryland operations. This highlighted weaknesses in the performance of the company's remaining portfolio. With an overall adjusted EBITDA margin of 15.9%, The Cannabist Company lags behind its peers, while showing only marginal improvement from the prior quarter. Similarly, Ayr Wellness Inc AYRWF reported disappointing results as the company experienced top-line growth, but materially below estimates. As a result, management was compelled to revise downward its revenue guidance for the remainder of the year.

Overall, the third quarter unveiled the robust potential of the newly introduced adult-use market in Maryland and highlighted significant financial advancements among several operators. Nonetheless, it also underscored the disparities among cannabis companies and showcased the emergence of standout management teams. While initial investor attention gravitated towards licenses and market reach, the quarter illuminated the escalating importance of operational prowess for sustained success in the long term.

Disclaimer: The author has positions in the equities mentioned in this article.