Considered a “smaller” multistate cannabis operator with only forty stores, Jushi has focused its energy on a handful of states, with almost half of its retail presence – 18 dispensaries – in Pennsylvania. This last quarter may have been a big break out for Jushi, however, as it reported a slightly profitable period of positive EBITDA.
Company CEO and founder Jim Cacioppo, says this is a sign of things to come as the company shifts from acquisition to profit making, using existing footprint and becoming a vertically integrated company in multiple markets.
In a sit down interview conducted earlier this week, Cacioppo suggested that New York, ballyhooed for its potential, is “socialistic” and not good for business. Meanwhile, he thinks many other states, like Maryland and Missouri, still need some time before they’re good investment opportunities. And we should expect a lot of consolidation in the cannabis industry over the next three to five years, while tobacco and beer companies prepare to buy everything in the cannabis industry.
This interview was edited for clarity and brevity.
Grown In: You’re a former money and mergers guy, from private equity and distressed debt. I’m betting that experience gave you a sharp-eye for balance sheets. How has that been an advantage when it comes to running a cannabis company?.
Jim Cacioppo: I spent 25 years being a founder and building up big hedge funds as a partner. I’d say number one, learning how to run businesses. I ran a hedge fund business that did almost $200 million of revenue and had 170 people around the world in Hong Kong and London. I also, as part of distressed investment businesses, have spearheaded change of controls of companies where we took control of the board through new investment and conversion of debt to equity. I got on boards, put people on boards, and learned how to do turnarounds and start ups.
When you take over a distressed company you’re starting from scratch, because typically the management is gone. So, I’ve been learning how to build management teams and that kind of stuff, as an equity-sponsored turnaround as opposed to an equity type of investment where you’re investing in a mature management team.
That’s a much different experience, much more challenging. The rewards were similarly skewed, where you made 9 to 10 times your money if you got it right.
Those kinds of things were invaluable in terms of the management side. In terms of the balance sheet, you were referring to and understanding how to finance the company, we were able to raise in the beginning almost $70 million before we went public. And then we raised another $68 million in the IPO. We’ve raised over $350 million now in equity. We didn’t have any licenses or win any licenses like the largest MSOs did, we went out and bought stuff. So raising money is also very important and then also being able to do deals – they are very difficult in the cannabis industry.
Cannabis entrepreneurs who won licenses often have very little sophistication and you’re buying out people who don’t understand contracts and overvalue the businesses. So just working through that process of finding counterparties who understood how to do deals and have some sophistication and not wasting your time with people you couldn’t do deals with, and then even with those people you have a tough time because it’s a highly regulated business.
I think the M&A, being able to do tough deals was also very important. So, one, running businesses, starting businesses, two, raising money both debt and equity, and three being able to do the deals to bring all the assets together.
Grown In: Much of the cannabis business has become about retail and marketing these days. What do you do to get smart on that side of the business?
Jim Cacioppo: We targeted retail to start our business, rather than growing the plant, and now we’ve become a fully integrated business.
In terms of retail, if you open up in the right markets, it’s a product where people really want to use it, so in some sense it sells itself. In the beginning, in less competitive markets, it’s just getting the stores open and getting the cost structure right in that store – which is not so easy. The real estate: You need to pick the right location. And then learning how to manage it with the people who are very enthusiastic about the cannabis plant, but also people that are retail professionals.
We’ve had three generations of management teams. The initial generation was led by myself, just getting these stores open. And some that had come to us through acquisition – we bought them out and they helped us manage it. Then we went to gen two, where we found some people with cannabis retail management experience. And then gen three. We now have a real retail leadership team who really did not have cannabis experience, we brought that to them, and they brought retail. The company we hired out of was Urban Outfitters, which you probably know, it’s a well run company, and our leadership team comes from there.
So, we’re very happy where we stand with retail, it’s very professionally run, we’re not in the beginning of the book of retail management, we’re midway through the book on what you’re supposed to do.
Now we’re implementing lean strategies, labor management, in terms of using part time help, and we have state level management that reports to the senior level team. These state level people are more professional than they were in the past and now the store level teams are also more professional.
It’s really a more professional operation and we’re able to generate higher profit margins because of that professionalism. But we still have a ways to go. We have about $300 million of sales. It grew very fast, since two years ago we did about $80 million of sales.
Grown In: Your recent quarterly report showed you were keeping operating expenses down while you’re continuing to increase your revenue and you declared a positive EBITDA this last quarter. Jushi has been a money losing operation for a long time though. Are you turning a corner now? Are you working towards more positive revenue as part of a game plan, or are you planning to stay in a more acquisitive mode?
Jim Cacioppo: I think startups tend to be money losing, capital losing organizations, so there is definitely, using a business school analysis, growth requires capital both to acquire and invest in those assets, and when you slow that growth down you can focus on profitability. When you look at great companies in the tech sector, when you go back 10 to 15 years when I was an investor, they lost money typically, and then you get into that virtuous cycle where you make money at a certain scale.
We’re reaching that scale. We’re $300 million in revenue and I think our target is to get between $400 and $500 million of revenue to get 20% of EBITDA margin. When you get between $500 and $1 billion of revenue, you get to a 30% EBITDA margin.
That’s not made up numbers, that’s looking at what’s happened in the industry. When you look at companies, that’s typically where it falls out.
For us right now we are much more focused on profitability. Part of it is because we have to, the market has become very expensive to raise capital, it’s not very good for shareholders. So I think we have to, we’re definitely switching our focus to profit management, but also because we’re at the level where we should be able to make margin.
What differentiates Jushi’s profit margins from other companies that have more margins is we were retail first. We always thought the retail business was a more durable business and you want to have an end market for the products you produce, to launch your third party business. So instead of just competing to get on shelf space in stores, you have your shelf space. And in these markets if you have your shelf space you sell your products to other retailers because you offer your shelf space in exchange for them taking your products if your product has a certain value for their customer.
That has always been our strategy. And we are, as we speak, scaling up as a vertical company where the much higher margins are. Our biggest state from a retail perspective, Pennsylvania, we now have a full suite of products. I can only say that since August, where we offer concentrates, we offer hydrocarbon, solventless – we’re the only ones in the state to offer that. We also offer, for the first time, a whole series of different genetics. Because of the way the regulations work we weren’t able to offer, and then they changed the law, and we were instrumental in getting that law changed.
So, Pennsylvania will be a driver of margins, along with Virginia. Virginia is a vertical market to start and is now rolling out in a big way. In Virginia, we will have the largest grower-processor by the end of the year already producing the highest quality cannabis in terms of potency. And we have exclusive rights in the northern part of the state.
Those two markets will power our vertical margins, which will power our EBITDA margins, which is essentially just barely above break even to our goal of about $400 to $500 million, with 20% EBITDA margin and again if we get higher, we’ll be targeting a 30% EBITDA margin.
Grown In: Like many other cannabis companies, Jushi’s stock price is below its IPO, and your market cap, about $350 million, is potentially low enough that you could be taken private again. As a private company you wouldn’t have to deal with shareholders and maybe you’d get some better loan deals than as a public company. Why not go private?
Jim Cacioppo: The math isn’t right. On a treasury stock method, we’re more like a $600 million market cap company if you look at shares outstanding. And then we have about $200 million of gross debt, so let’s say $800 million, maybe $700 million for the total enterprise value. So as a multiple of sales, it’s about two times sales, which is considered quite cheap for a company that’s been growing, we’re growing sales right now, 50% year over year or more, we more than doubled last year.
Grown In: You’re clearly performing, but the stock market isn’t rewarding you for that because it doesn’t like cannabis companies.
Jim Cacioppo: We’ve had people talk to us about that who have interest, some private equity firms who are interested in cannabis that are trying to get over the hump on it. I personally believe a public security becomes very handy in terms of doing deals. When you’re buying out a company often the founders want to keep a hand in the cannabis business. When they are getting stock, they feel like they have a closer path to liquidity than if you’re private and they have a tax free exchange and often when the business requires a lot of investment when you buy a business, maybe having some equity to give out is very essential to doing deals at a fairly swift pace.
I don’t think the private businesses enjoy being private to be quite honest. The large MSOs that are private have just missed the window to get public, there’s only one or two left and the model is to be public. I think it helps out on the M&A in particular, and I believe that retail investors are very interested in cannabis because they often are users of the product.
You don’t want to overlever companies in any event, so it’s not something we’re interested in – going private. Of course if we get an offer from a private equity firm at a high level for our shareholders we would definitely consider any and all options. We’ve had a lot of interest in Jushi strategically by private and public parties over the last few years. We’re always willing to talk and figure out if it works for shareholders.
Grown In: You’ve just opened your 40th store. You’ve been expanding in Illinois, Virginia, and Ohio. But growth has been incremental so far. Is that intentional, or just because you haven’t found the right opportunities yet?
Jim Cacioppo: It’s a four year history. We put together a great license footprint and we almost had no revenues when we bought Pennsylvania, and now Pennsylvania is doing almost $100 million in revenues, so a lot of growth came from Pennsylvania. And Illinois was number two where we took a business from like $7 million to about $80 million. So those two businesses drove 2019 and 2020 and even significantly into 2021.
Ohio is a new business, that’s a business you’re going to see – we like to be focused on states where we’re going to have a dominant position in one way or another. Ohio is a state, a medical state, we’re very early in our development there. You’re allowed to have five retail. We’re opening up our first retail.
Usually we start with retail, Ohio is the only state we went in the other direction, we have a grower-processor, now we’re opening retail. I think the more access we have to capital in the coming year the quicker we’ll be able to pull together that retail network in Ohio.
We can definitely pull it together, they issued 77 new licenses, most of the MSOs are tapped out: they can only own five. There’s very few of us competing for those licenses. So we think we’ll get decent deals for what we think are great locations.
We feel really good about building out Ohio. But I think Ohio is for us in terms of scale of revenue, I think you’ll see larger contributions from Ohio. The significance to Jushi really is in 2024 when we believe Ohio will go adult use.
In terms of Virginia, that’s where our capital has really been put in. In terms of Pennsylvania we’re preparing for adult use, where revenue will double. We’ll produce our own cannabis. We’ll have our own factory. That will be a lot of growth, where we have 18 of our own stores. I would say that’s a 2024 adult use market for us.
We’ve invested something around $50 million and now these grow rooms are coming on, it’s a beautiful facility that’s state of the art, so we plan to capture margin next year in Pennsylvania. So, that’s a key growth area for us.
I think the most significant growth area for us is Virginia. In Virginia we have stores in Fairfax, Alexandria, and one shortly in Arlington. We have one by Dulles Airport. These are tremendous places to be. Very high per capita incomes, high population base for each store. These stores were designed to be super stores with 50 to 100 parking spots. Customers want to come in and out like in CVS or Walgreens. They will be able to handle $50 to $100 million sales without having huge lines.
I don’t see us going anywhere else, given the cost of capital right now. We don’t see these super attractive states. There’s been two models in the business, a model like Trulieve where you concentrate on one state, and you grow from there and there’s other companies with a shotgun approach where you get into all states. Some of them have made it, because they had good core states that have driven growth, but others haven’t’ because they overstressed themselves.
We’re the sort of in between. We have some new states early, but we have a big focus on the core states of Illinois and Virginia. We have others like Nevada and Massachusetts, but they are on the periphery in terms of our growth.
Grown In: Let me ask you about California. Few MSOs are taking risks there. Why Jushi?
Jim Cacioppo: I wouldn’t say we’re taking a lot of risks there. We’ve been looking at that state like the other MSOs have been investing in that state for 4 to 5 years. It’s not new to us, our focus in California isn’t new, it’s preexisting. We’ve gotten a lot out of it. We’ve gotten a whole brand structure by understanding California brands.
By being in the California market in a small way you really understand the product-brands-talent. So we’ve gotten a lot out of it from an intellectual property standpoint. And we haven’t invested a lot. We only have three stores open, each one was gotten in a distressed fashion where the sellers had no other choice. For example, we bought a license out of MedMen when they were out of cash. We won a license, and that store hasn’t opened yet. If we open that store, it’ll be four stores in four years. I don’t think that’s a big commitment.
I’m not enjoying that market as much as I thought I would. I’ve gone in gingerly and light, so we’re not overly exposed to that. I believe it’s an important market from an information standpoint – it’s the biggest cannabis market in the world. I think you need a flag post. It’s like going to the moon. You need to go there and check it out, but you don’t want to go and live, there’s no oxygen.
In California, the oxygen is profitability. There’s no profitability, so no oxygen. We have a flag post. We’ll generate a profit by the end of next year and we’re happy to stand on the sidelines and monitor the regulatory process.
Pretending like California doesn’t exist is not a strategy. I don’t know how you’ll sell yourself to a beer or tobacco company in 4 or 5 years, which a lot of people think is going to happen, if you say, “We don’t actually participate in California.” I don’t think that’s a good strategy.
Grown In: So that’s the exit plan. Some CPG company that comes along.
Jim Cacioppo: I’m not talking about Jushi, that’s very far into the future. A lot of tobacco and beer companies that have gone into Canada, and those companies that are focused on going into the U.S. as soon as the stock listing, I believe the action will start as soon as we’re able to get stock listings, to be honest with you. There’s a lot of people thinking we need full legality, I don’t think that’ll be.
I think for the people coming in through Canada, and you already know who they are. There’s Constellation, Altria, Imperial Brands, and then there’s British American Tobacco. I think a lot of those companies, just the listing thing will be enough. They’ll come in indirectly through their Canadian company affiliates.
Companies out there like Phillip Morris or Anheuser Busch, they will wait until the industry is full fledged, fully legal, with a big enough market cap that they’ll buy the biggest companies.
So, I see massive consolidation in the next 3 to 5 years.
Grown In: I’m going to rattle off some states, and could you give me a few words on how you view the opportunity there?
Too open. Too unregulated. A lot of illegal activity. Not a Jushi market.
A medical market that needs to go to adult use to be investable. More like Massachusetts because of the retail limit than another market. That would be a nice corollary.
Very interesting. Will drive growth of MSOs for the next year for MSOs that are already there. Not sure if that’s more like a Massachusetts with unlimited licenses. But it’s slow to roll out. It’s very sticky, and the stores have real value, so I think New Jersey over time may look a lot like that because they tend to issue a lot of licenses.
I would say it’s Massachusetts plus, because it’s better than that as a license structure. But the illegal activity could be worse.
New York is one of the worst regulators in the United States of America for cannabis. The worst is clearly California, and California has messed it up so bad that it’s just mind boggling. New York seems to be going along that path: they are a very anti-capitalistic, socialistic place. They are tough on anybody that wants to do business. There’s a chance the cannabis business will be pretty good there, but there’s probably a greater chance that it won’t be so great. It’ll be OK.
Huge illicit market that I think will be hard to dislodge there, on top of that.
With regulators tough and a huge illicit market, so legal people you’re probably going to get squeezed.
Connecticut I’m not really familiar with, it’s a smaller state, we haven’t focused on it. There’s a limited number of licenses. Just based on my industry observation, that appears to be a small but pretty good market.
Missouri’s interesting. As a medical market they over issued the number of stores. But when they go adult use, there’s a very high limit on the number of stores – you can own a lot of stores there. So in an environment when there’s much more free capital, that’s one I think you’ll see MSOs do a pretty good roll up strategy where you can buy up a lot of retail stores and it’ll be capital intensive.
The sellers need to be realistic about prices, which doesn’t happen very often, even in these weaker capital environments. I think it’ll be a lot better than Michigan, for example, because there will be limits, and there won’t be this huge illicit market in Missouri, most likely. I think it’ll be a decent market, not a great market, with opportunities for people who can do the long game.
Grown In: Tell me about two companies, not in cannabis, that you admire.
Jim Cacioppo: The two that I think are extremely innovative, one would be Amazon. They play the long game. They focused on newer businesses like the cloud. They explained to everybody who covered them, like analysts, what they needed to do to understand competition, but they didn’t over explain to attract competition. They were able to walk that fine line with Wall Street, they ran a conservative balance sheet. They walked that very fine line on profits, high on sales growth, and they grew into a monster market cap. The profits come when they want it to come.
The other one is Telsa. The way Elon Musk thinks about businesses, he really focuses on the future. It’s a lot of money up front where you build these businesses that have a lot of durable value for people that get what they want. With Tesla he was forced to invest tons of money up front in the car business, which is really a technology platform. People really think it’s a car business, but he really, unlike GM or any other car business, owns his whole supply chain or most of it, he’s a battery company, a solar company, he’s a charging station company. I think he’s put together this marvelous group of assets.