MedMen Enterprises Inc: The No.1 Retail Pot Stock in America?

This Pot Stock Deserves a Serious Look

Over the past two years, quite a few marijuana producers have delivered oversized returns to investors. However, keep in mind that companies that grow marijuana are not the only ones that operate in the booming cannabis industry. Today, I want to talk to you about a pot retailer: MedMen Enterprises Inc (OTCMKTS:MMNFF, CNSX:MMEN).

Before we get in the details, you might have noticed that MedMen doesn’t trade on the New York Stock Exchange or the Nasdaq. Instead, the company is listed on the on the Canadian Securities Exchange under the ticker symbol “MMEN.” If an U.S. investor wants to buy MedMen stock, they would need to purchase over the counter using the symbol “MMNFF.”

Still, despite not being listed on a major U.S. stock exchange, MedMen Enterprises Inc is very, very American. Headquartered in Culver City, California, the company is licensed for 84 cannabis retail stores in 12 states. MedMen already has 35 stores operating and plans to increase that number to 50 by the end of this year. (Source: “Corporate Presentation May 2019,” MedMen Enterprises Inc, last accessed June 20, 2019.)

Now, compared to the big-name marijuana growers that are often mentioned in financial media, this cannabis retailer doesn’t seem to get as much investor attention. However, through its first-mover advantage, MedMen has built quite a solid business.

You see, unlike most other businesses, cannabis is a highly regulated industry. Usually, the government only gives out a limited number of retail licenses in each market. Not to mention there are strict zoning restrictions for cannabis retailers; for instance, in Los Angeles, a cannabis retailer cannot have a store within 700 feet of a school, park, library, or other dispensary.

As a result, the cannabis retail industry basically operates like a regulated oligopoly. Competition is limited, so each existing player in the business get a chance to earn higher profits than under perfect competition.

The key, of course, is to get in the business early and occupy the best real estate locations, and that’s exactly what MedMen Enterprises Inc has done. The company opened its first medical marijuana dispensary back in 2010 and is now known for having some of the most iconic cannabis retail stores in the country. To give you an idea, MedMen stores can be found in Beverly Hills, Venice Beach, LAX Airport, and on New York’s 5th Avenue.

MedMen Enterprises Inc (OTCMKTS:MMNFF) Stock Chart

Chart courtesy of StockCharts.com

Despite its solid presence in the cannabis retail business, the company’s stock hasn’t exactly been a hot commodity lately. MMNFF stock had a strong rally in August, September, and early October of last year, but after that, it started to lose its momentum. Since the beginning of this year—a period where many pot stocks surged to new highs—MMNFF stock is down more than 20%.

So, does that mean the business is in trouble?

Not really. While MedMen stock doesn’t look like an investor favorite at the moment, the company’s business is actually firing on all cylinders.

Just take a look at the latest earnings report and you’ll see what I mean. In the third quarter of MedMen’s fiscal year 2019, which ended March 30, the company generated $36.6 million of revenue, representing a 156% increase year-over-year and a 22% increase sequentially. At the same time, MedMen’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss narrowed from $43.9 million in the previous quarter to $42.6 million. (Source: “MedMen Reports Third Quarter Fiscal Year 2019 Financial Results,” MedMen Enterprises Inc, May 29, 2019.)

Notably, California remains the biggest market for the company, as MedMen stores in the “Golden State” brought in $24.9 million in retail revenue during the quarter. Moreover, the company’s retail gross margin in California expanded from 51% to 57%. The company now has a seven percent share of the California retail cannabis market.

“Over the past nine years, MedMen has built the most valuable retail brand in the cannabis industry by taking advantage of the land grab opportunity and scaling with speed to secure as many flagship assets as possible,” said Chief Executive officer Adam Bierman. “We continue to march onward towards profitability.” (Source: Ibid.)

One of the initiatives that could drive profitability for MedMen Enterprises Inc going forward is its investments in supply chain. You see, when a MedMen store sells a third-party-brand cannabis product, it would earn a gross margin of around 55%. If MedMen sells a cannabis product from one of its owned brands, its gross margin would be at a much higher 80%.

Right now, owned brands account for less than five percent of the company’s total sales. With its scaling cultivation and manufacturing efforts, MedMen plans to increase the share of higher-margin owned brands to around 50% of total sales in the long term.

Analyst Take

At the end of the day, keep in mind that we live in an era where investors are extremely enthusiastic about pot stocks. As a result, many of the popular cannabis stocks have already enjoyed astronomical gains.

Trading at $2.19 per share, MedMen Enterprises Inc is one of the few solid pot companies that haven’t shot through the roof already. Once more investors realize the potential of this dominant cannabis retailer, we could see a lot more upside in MMNFF stock.