Schwazze (SHWZ) - Record Breaking Quarter as Growth Plans on Track

Schwazze is a leading vertically integrated cannabis company that is involved in all aspects of the Cannabis cycle, including growth and retail operations. The company is headquartered in Denver Colorado and has operations in Colorado as well as New Mexico and is ranked as the number one Cannabis manufacturer in both states.  

The company on the 11th of August 2022, announced its Q2 2022 financial results. The Q2 2022 financial results include highlights as USD$ 44.3 million in revenue, an increase of 44% from Q2 2021. The retail sales of the company increased by approximately 77% to USD$ 38.1 million since Q2 2021, with the company’s gross margin for Q2 2022 being USD$ 14.9 million, an increase of 69% from Q2 2021. The net income of the company was USD$ 33.8 million in Q2 2022, with its adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) increasing from USD$ 10 million to USD$ 15 million, equating to 33.9% of its revenue.  

Schwazze has since December 2021 acquired 15 cannabis dispensaries in New Mexico and Colorado as well as five cultivation facilities and a production facility. The company on the 1st of June 2022 announced that it had acquired substantially all of the assets of Urban Health and Wellness, Inc. The company rebranded the previous Urban Health and Wellness, Inc. assets and held a grand opening for the assets now known as Emerald Fields, a premier cannaboutique.

The company will continue to advance its operations whilst the public perspective of cannabis changes. The cannabis market is projected to be worth approximately USD$ 100 billion by 2026, with the company positioning itself to be a key part of the market.

Q2 2022 financial and operational results

Schwazze on the 11th of August 2022 released its financial results for the second quarter (Q2) of 2022. The financial results include an increase of 44% from Q2 2021 at USD$ 44.3 million as well as the company’s revenue increasing 77% to USD$ 38.1 million with its gross margin increasing by 69% to USD$ 25.2 million. The company’s net income for the period was USD$ 33.8 million and has grown vastly from USD$ 4.4 million in Q2 2021. Schwazze has been able to outperform the state of Colorado by 12% in the past quarter, with Justin Dye the Chairman and CEO of the company stating:

“We're seeing that we're beating state averages in terms of sales growth considerably. This last quarter, we outgrew the state of Colorado by 12%, which is our oldest market, so we're super excited about that.”

The company also included in its Q2 results an operational update. Schwazze has in 2022 alone closed the acquisition of 15 cannabis dispensaries, with 10 thereof in New Mexico and the remainder in the state of Colorado. The company further added a cultivation facility in Colorado to its asset portfolio as well as four in New Mexico. The further highlights of the company’s 2022 activities include closing the acquisition of Urban Health and Wellness, Inc., listing on the NEO Stock Exchange and acquiring Emerald Fields, a premier cannaboutique. Dye accredits the company’s success to its customer-focused business model, he states:

“…we believe with our size, scale, efficiencies and how we connect with our customers. We have a tremendous loyalty program and we take great care of our consumers, we believe we will be set up to win as well taking care of our wholesale customers.”

The Schwazze business model

The Schwazze business model includes the physical in-store experience, the total customer experience and the company’s high-low promoter approach to products. The three elements of the company’s business model combined with the company’s implementation of Six Sigma principles and lean manufacturing initiatives justify its Q2 results.

The in-store experience is of fundamental importance to Schwazze, with Dye stating:  

“We've taken the position that we are going to be really strong with physical four-wall stores in great locations, with great displays, great customer service, bright, fully stocked with the highest quality products, offering the consumer and the patient the broadest assortment possible. That's what we get: service, assortment and quality.”

The complete customer experience, or Omni-Channel, is as important to the company as its in-store experience. The Omni-channel can be summarised as the multi-channel approach a company takes to provide its customers with a seamless shopping experience, Dye explains:

“Omni-channel is (to) meet the customer the way they want to be met, so if they want to buy online and place an order in advance and come pick it up at the store, they can do that. If they want to place an order online and have it delivered the next day, they will have the ability to do that. If they want to place the order and have it delivered the same day, they need to order that in the morning before the 12:00 pm or 1:00 pm cut-off. If they want to come in and shop within the store, they can do that as well.”

The company implements a high-low promoter approach regarding the sourcing of its products. The approach entails a reduction in product cost, resulting in an increase in sales volume. Dye explains the approach as follows:

“Our model is that we have very high-quality products in our stores. They are at a certain price and then we will take them at a good value and then we will pulse, meaning we will partner with supplier A and say, okay, we want a dollar off a case and we're going to go drop that dollar off, pass it on to the consumer, and we're going to drive more volume of your product because of price elasticity.”

The final contributing factor of the company’s business model is its implementation of Six Sigma principles as well as lean manufacturing initiatives. Six Sigma is the cyclical improvement of an operation through repetitive improvement initiatives, resulting in fewer manufacturing defects and as such an optimised operation. The combination of Six Sigma, with lean manufacturing, which itself is an optimisation technique focused on maximising production rates and minimising costs has led to the company reducing its costs by more than 50% over the past 12 months, Dye states:

“We have a very nice business there. It's very efficient. We've continued to take out costs and drive efficiencies there. I won't tell you the exact number but it's well north of 50% of our costs have been reduced since we've been working on this over the last year, using Six Sigma and lean manufacturing.”

The Cannabis market and the sourcing of institutional funds

Schwazze believes that Colorado holds great potential for regulated Cannabis companies. This is accredited to the States enforcement of its Cannabis laws and the persecution of illegal operations. Dye explains the State’s allure as follows:

“I really see Colorado as being the most sophisticated market in the country. Certainly, California is the largest and it is an interesting market on its own, but if you look at the regulatory fabric in Colorado and the partnership with the enforcement with regards to really enforcing the rules and making sure the grey and black market are kept under wraps, then Colorado's done a really nice job.”

The company believes that through the stringent quality control of its products, it is able to not only provide the market with high-quality products but also play an active role in the eradication of harmful illegal substances.

“I think this is something that can certainly chip away at the opioid issue that we've got in this country. If you look at all the fentanyl coming across from China and Mexico that's getting laced in street weed, etc, that should really concern people, and I think they're going to find a safer source because ours is tested.”

Dye also states that even though the company focuses on Colorado, it has mitigated the risks associated with a one-state business through its activity in New Mexico.

“You certainly have the one-state risk, but now we've hedged that with New Mexico, we're going to continue to look at the next couple of states in the region. You've hedged your markets and what's going on with the consumer in those markets, but cannabis isn't going anywhere, it's going to get legalised. It's a matter of when.”

The Cannabis market has also shown its resilience through the Covid-19 pandemic and has evolved through the breaking of the stigma associated with it. Dye states:

“I had a couple of our investors go to a handful of our stores in Colorado, and both of them walked away and said, I cannot believe the types of people that are coming in your store. You have men, women, you have 80, 70, 60, 50, 40, 30 late 20s. You have manual labourers, construction workers, retirees, you have moms and Lululemon that are running errands and they pull in in a very nice German vehicle and they're running in and getting edibles. You're seeing businessmen come in in suits. The stigma is wearing off. It's wearing off quickly.”

The change in public perception is also opening up the entrance of various institutional investors into the Cannabis market according to Dye. He explains that even though the stigma is broken, the industry must also experience legalising on a federal level to be able to fully access institutional investments, he states:

“You're not going to have the big mutual funds or the big institutional investors because due to a lot of their relationships with their limited partners or with their investor base, they can't participate in a business that's deemed illegal on a federal basis. Cannabis is a Schedule 1 drug. It shouldn't be. It's crazy. That will change. The big pile of institutional capital, there's a wall of capital that's sitting there on the sidelines that cannot invest.”

Dye further explains that even though the larger institutions are not yet able to enter the market, they are initiating market research on identifying relevant parties should they be able to invest, he states:

“Even some of the bulge bracket banks that can't cover the sector, they have people that are starting to develop their thesis of who the winners are, what it's shaped like so that if and when it comes, they're going to be ready to go. I know a couple of banks that are ready to do that. They pick my brain all the time. I said we'd love to have you cover us. I understand you can't right now, but when you do, we'd love to try to figure out if we could borrow money, go float some bonds, and give me a lower cost of capital to do that. We're working on that.”

Future

The future of the Cannabis market according to Dye is highly promising, he explains that the market is set to be worth approximately USD$ 100 billion by 2026 and that Schwazze is positioning itself to fully capitalise on that projected market size:

“By 2026, this is going to be roughly a USD$ 95 Billion to USD$ 100 Billion market. That's a big market, particularly when you're seeing some of the big beer guys and the spirit guys struggling in some of the categories, this is a category that's taking share from them, and they need growth. We all need growth. If you're a public company you trade on growth. We offer that.”

Schwazze will continue its growth initiatives with the company believing that it can reach 100 stores in Colorado as well as in New Mexico respectively. The company will further continue to build its product range and when applicable create its own product to meet the needs of the market. 

To find out more, go to the Schwazze website