Schwazze Takes Focused Approach to Become Market a Leader
The term ‘schwazze’ or ‘schwazzing’ refers to a process of pruning leaves from cannabis plants to focus nutrients in a way that enhances flower development and overall yield.
It’s also an apt name for the Denver-based cannabis company that has employed a similar focus to grow not only its business but its status as a leading player in an expanding U.S. cannabis market.
Over the last few years, Schwazze (OTCQX: SHWZ / NEO: SHWZ) has relied on a “go deep, run lean” strategy to help them emerge as a regional force in the lucrative Colorado and New Mexico markets.
The company already has 23 retail outlets - 19 Star Buds and four Emerald Fields in Colorado, the first state to legalize recreational cannabis use in 2014. Today, it’s the second largest addressable cannabis market in the U.S., currently estimated at $2.2 billion.
New Mexico, a relatively new market for Schwazze, also promises to be fertile ground for the company. It currently represents a $200 million opportunity, and forecasts suggest the market there could grow up to 400% over the next couple of years. Schwazze made a significant commitment to New Mexico when it acquired 10 Greenleaf retail stores this past February.
While the plan is to ultimately expand beyond these two states, Schwazze will continue its disciplined approach for the time being, as they work on another key element of its business model – vertical integration.
According to Justin Dye, the company’s CEO, Schwazze is the number one vertically- integrated cannabis business in Colorado. It’s an approach that is helping the company lower costs, enhance product quality and improve selection, along with the overall customer experience.
“We’re a house of brands,” says Dye. “Our business at Schwazze spans everything from seed to sale. This includes our Star Buds retail stores; Emerald Fields, our chain of upscale boutique stores; Purplebee’s, which produces distillate as well as vape cartridges; a hydroponics business, Big Tomato; and Success Nutrients, a wholesale business that supports cultivation needs growers. Our portfolio also includes eight cultivation facilities under the name of Grow Forth Gardens and a biosciences R&D division focused on innovation.”
While Schwazze’s vertical integration is considered to be industry leading, it is part of a growing trend in the cannabis space practiced most notably by companies like the Trulieve Cannabis Corp. (CSE: TRUL / OTCQX: TCNNF) and Harborside Inc. (CNQ: HBOR / OTCQX: HBORF).
Schwazze will continue to look for opportunities to add retail locations either organically or through acquisitions, but vertical integration will remain an important component of its growth strategy. “We're also launching product brands in our own retail stores as well as distributing in the wholesale market,” Dye declared. “Recent examples are Purplebee’s vape cartridges. It was our first launch, and we'll continue to launch products over time. Because Schwazze is vertically integrated, we can bring those products into our stores, put them on the shelf, and promote and grow these brands. That's really our secret sauce.”
Schwazze’s financial performance is starting to show the benefits of this strategy. The company has north of $47 million cash on the balance sheet at the end of Q1 2022 and was able to generate free cash flow from their operations last year. That trend should continue thanks to its on-going focus on discipline around cost structure.
“Whenever we invest in new stores, remodel older ones, or bring in new products, equipment, or manufacturing capabilities, we use a common sense approach to ensure we get returns on our investments within the first year or two,” Dye said. “I think we're rapidly seeing the benefits of doing just that.”
The tailwinds that Schwazze has experienced should persist over the next couple of years, with possible legislation that will allow cannabis to come off the Schedule 1 drug list. That would open a great deal of opportunity for institutional investors looking to back companies with good management teams like Schwazze.
“I love to win. Our team loves to win,” Dye said. “Schwazze is one of the leading cannabis companies in the United States. It's one of the fastest growing. It's one of the most profitable. It's managed by one of the most seasoned teams with both cannabis expertise and Fortune 500 experience, and it’s part of a sector that has been punished from a valuation perspective. As a result, our stock trades very cheaply, and it's a great time for an investor to come into Schwazze.”
Riding a winner could also pay-off handsomely for investors longer-term. The U.S. cannabis market is still in its early days and estimates project it will grow to $100 billion over the next ten years. This presents an enormous opportunity for an industry leader like Schwazze.
According to Schwazze General Counsel Dan Pabon, the company has the potential to become an iconic national brand. “We’re sort of where we were coming out of Prohibition in the 1930s. Out of the repeal of prohibition of alcohol, you saw the emergence of some of the best-known brands and biggest companies in the world, like Coors and Anheuser-Busch. There’s no Coors and Anheuser-Busch of cannabis right now. Given that, the opportunity to invest in a company that has a excellent chance of becoming that brand and transforming into an ubiquitous name, is still ripe for the picking. Anyone who knows history, understands which direction the industry is going.”
And that direction, over time, is up.
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