Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Viridian Capital Chart of the Week: Which Companies Have Improved Their SG&A Expense Ratios?
- The tone of the operators at the recent Benzinga conference was determined self-reliance. There is a general feeling that the industry cannot depend on Washington for anything, and companies need to do whatever possible to control their own fate. In the current environment, this primarily means achieving free cash flow positivity.
- Ongoing price compression in nearly every market makes controlling Gross Profit difficult. Cost inflation is likely to worsen due to expected increases in energy prices resulting from unrest in the Middle East, as well as the lesser impact of tariffs on accessory costs. Selling, general & administrative expenses are perhaps the most controllable items for operators to focus on.
- The Viridian Chart of the Week examines Selling, General, and Administrative Expenses / Revenues for the last twelve months ended Q125 (green bars) versus the LTM ended Q124 (orange bars) for twenty-one public cultivation and retail companies. The black line (measured on the right axis) shows the percentage change in the expense ratio between the two LTM periods. The chart is arranged so that the companies that have reduced their expense ratio the most are on the left.
- Four companies, including 1933 Industries, Vext, Ascend, and Glass House, have reduced their SG&A ratios by more than 20%. Conversely, three companies, including Fluent, Trulieve, and Grown Rogue, have seen increases in their SG&A ratios of more than 20%. The rise in Fluent’s ratio likely stems from the consolidation of RIV, which was generally less profitable. Similarly, Grown Rogue’s numbers have likely deteriorated due to the startup of its New Jersey operations. Trulieve’s numbers were possibly influenced by its spending on the unsuccessful effort to gain adult rec for Florida.
- Nine of the twenty-one operators were able to reduce their expense ratios, while twelve companies experienced an increase in SG&A as a percentage of sales. The group, in aggregate, had a 2% increase in the SG&A ratio, from 33% to 35%.
- With the continued tightness of capital markets (except on the debt side) and great uncertainty regarding the timing and likelihood of regulatory reform, gaining better control of SG&A expenses is a key component in increasing free cash flow (along with working capital control and reduced CAPEX). The numbers show a mixed bag, with several competitors able to sharply reduce costs while others have experienced an upward drift.
- Investors should scrutinize these figures closely. Growth is less of a goal over the next year than maintaining financial stability. SG&A is a primary lever for self-reliance through positive free cash flow.
