Many of the big cannabis names today are focused on operations in Canada, a market that last year made recreational use of cannabis legal. This makes sense, but for the businesses in this space playing the long game, it’s undeniable that where the real opportunities are (at least in North America) is the US. One smaller firm in the space, Green Growth Brands (OTCQB:GGBXF), has not let this fact escape them and in a surprising and likely welcomed development announced a partnership of sorts with Simon Property Group (SPG), one of the largest owners and providers or retail and entertainment destinations in the US. This move will permit Green Growth the opportunity to meaningfully and rapidly expand its footprint and position the firm as a real player in the US market.
A look at the news
According to the press release issued by Green Growth, the management team at the company struck a deal with Simon Property Group whereby the latter will provide to Green Growth access to 108 retail locations spread across the US. The primary goal here appears to be to allow Green Growth the ability to expand its CBD-infused personal care products that fall under the name Seventh Sense Botanical Therapy, as well as other offerings provided by management.
At this time, Green Growth has a rather large portfolio of offerings for customers to buy into. These include, but are not limited to, items like lip balm, bath salts, body lotion, and foot therapy products. These items can be seen in the image above. Prior to its deal with Simon Property Group, Green Growth controlled a few different physical locations, but by store count, its greatest presence was through its recent partnership with DSW Inc. (DSW), through which it has arranged for its products to be made available through some of DSW’s locations. A map of Green Growth’s Seventh Sense locations and the DSW locations where Green Growth’s products are sold can be seen below.
Unfortunately, a lot of the details related to these upcoming locations through Simon Property Group have not yet been released (valuable data like store size, expected sales per square foot, and more). According to management, though, these 108 locations will be set up rather quickly. The first is expected to be launched in March of this year in Indianapolis, Indiana, while the others will be launched throughout 2019. This means that investors in Green Growth should probably expect some rather high costs this year, but by next year we should begin to see the fullest extent of the fruits of management’s labors.
As part of the transaction, Green Growth has struck a deal with two different entities for consulting and advisory services. In exchange for its consulting services, Simon Canada Management Ltd., a subsidiary of Simon Property Group, will receive $2.23 million (C$2.925 million) worth of units in Green Growth, plus it will receive warrants representing 1 million units with an exercise price of $4.47 apiece. J Salter Ltd, also known as Authentic Retail Concepts Ltd., will be providing advisory services to Green Growth in exchange for $2.23 million worth of common units in Green Growth as well, but it will not receive any warrants associated with the transaction.
It’s difficult to know the full extent that these services will cover, but even though the transaction is relatively small, it’s a positive for Green Growth to have Simon Property Group as a shareholder in the business. This is especially true if the warrants end up being exercised, because it will result in additional cash for the business through which it can grow. Not only that, but as Green Growth has clearly been positioning itself as a cannabis retailer, not a cannabis producer or distributor (not to say that it can’t be those things as well).
This is good news
This move by Green Growth appears to be great news across the board. The impact on the company itself is clear so long as it is executed well: with 108 additional retail locations spread across the US, the company is preparing for strong sales growth. This makes sense because, although there is a great deal of opacity regarding the space, there’s undoubtedly upside around the corner. One source I read suggested that the industry for CBD products will expand from $591 million in 2018 to $22 billion by 2022. Other forecasts from the same source aren’t as optimistic, with the industry growing from $190 million in 2017 to $646 million by 2022. Either way, whether the global space is $22 billion or less than $1 billion, the upside potential here is quite impressive and for an early mover it could create a lot of value.
For Simon Property Group, there’s obvious upside as well. The consulting-related compensation aside, the firm will also benefit from this transaction through the rent it receives. The average rent per square foot reported by the firm last year was $54.18, up from $53.11 in 2017. While the retail industry is, in some ways, in quite some trouble these days, the properties controlled by Simon Property Growth are not. In the fourth quarter of last year, for instance, the firm’s occupancy rate was a hefty 95.9%, which was actually up from the prior year’s 95.6%. This means that Simon Property Group clearly doesn’t need Green Growth, but the higher leasing of the new locations should help to boost occupancy rates. From Green Growth’s perspective, there should be some nice upside because their partner’s locations are known for quality. This is because, despite the challenging retail environment, actually managed to see its tenants’ sales per square foot rise from $628 in 2017 to $661 last year. Such strong growth in just one year in this space is enviable.
On the whole, I believe that Green Growth’s strategy here is perfectly logical. I am still curious as to what kind of impact this will have on the firm’s sales and the ultimate costs that will be associated with this maneuver, but even modest annual sales from quality products should be accretive to the business over time. For now, all investors in Green Growth can do is wait, but in the meantime we can and should appreciate this bold and aggressive foray into turning it and its products into a truly national brand that, hopefully, will go on to create attractive value for Green Growth’s shareholders over time.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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