The North American cannabis market is like the wild, wild west right now. Relatively unknown companies are staking claims to the untapped market via aggressive and unproven paths.
One such case is Green Growth Brands (GGBXF). The Columbus, OH based cannabis company has made an aggressive move to stake out the mall-based CBD market with a quick expansion into the top retail malls around the country via company owned stores and teen retailers.
Rapid Mall Expansion
Over the last few months, GGB has leased substantial shop locations at prime malls from Simon Property Group (SPG) and Brookfield Properties (BPY). The company is aggressively opening a chain of CBD-infused personal care product shops under the Seventh Sense brand.
Despite no proven research to show that consumers will purchase CBD products at top tier malls, GGB has quickly moved forward with expansion. The company signed a lease agreement with Simon Group for 108 locations and has already opened 50 stores.
Before even seeing the results of those aggressive store openings, GGB signed a deal with Brookfield Properties for over 70 prime shop locations. Additionally, the company stresses that Brookfield Properties has over 160 retail locations hinting at further expansion opportunities.
In total, GGB discusses the goal of reaching a physical footprint of 280 locations for their Seventh Sense CBD concept. The company hopes to take market share in a CBD market that Cowen forecasts to reach $16 billion by 2025.
Recent deals with Abercrombie & Fitch (ANF) and American Eagle (AEO) will add substantially to the mall focus of their CBD products.
Big Target
While GGB is moving fast with both the CBD-mall based business and a multi-state operator (MSO) business with expansion into Florida on top of Nevada and Massachusetts, the company only generated $5.6 million in FQ3 revenues for the quarter ended March 31.
The majority of revenues came from the Nevada operations where the company operated a dispensary. The original CBD-store only opened in mid-February and GGB had six locations opened during the quarter with 30 locations opened by the end of May.
The CBD concept offers substantial revenue growth opportunities, but the business model is highly unproven. The FQ3 results produced an adjusted EBITDA loss of over $11 million and the CBD business worked at a negative gross profit.
The major concern here is the ability of a relatively new company with an unproven model to ramp up a business to nearly 1,000 stores in the course of less than 1 year. The CBD market will undoubtedly offer a first mover advantage to the company that gets the product and brand name mix correct. On the flip side, any major misstep could be disastrous to early investors hoping to hit it rich.
Takeaway
The key investor takeaway is that Green Growth Brands has a compelling concept to quickly grab market share in the burgeoning CBD market that analysts have pegged at a market size topping $10 billion in a few years. The stock only has a market cap in the $340 million range, but the risk is too high until the company can provide more detailed financials on the progress of the CBD retail business.
Clearly, GGB will generate substantial revenue growth from opening so many stores at a fast clip, but questions about inventory requirements for so many stores and profit margins from leasing high-cost locations should make investors take a pause on the stock.
Disclosure: No position.
