In its Q1 2023 earnings report announced on May 10, multi-state operator Verano Holdings presented an image of a company that has been navigating difficult market conditions with intention.

As it tightened its belt on selling, general, and administrative (SG&A) expenses in Q1 2023 by nearly 16% after reducing headcount, decreasing earnouts, and lowering employee stock compensation expense in 2022, Verano reported a net loss of $9 million, up from a $214,000 loss in the same period of 2022. In its press release, Verano attributed this increase in net loss to higher incurred interest and tax payments.

Adjusted EBITDA also was down in the first quarter of 2023 for the company whose operations span 13 states, 126 dispensaries and 14 cultivation and processing facilities. It was $71 million (or 31% of revenue), down from $87 million (or 43% of revenue) in Q1 2022, and down from $79 million (or 35% of revenue) in Q4 2022.

Total revenue was up 12% during Q1 2023 compared to the same period last year (moving from $202 million to $227 million). The revenue growth was notable, however it did not outpace roaring inflation, which sits at a double-digit rate from late 2021. 

In an interview with Cannabis Business Executive, Verano COO Darren Weiss said the company was happy with its performance despite a relatively quiet quarter. “We’ve integrated a number of assets, many of which we purchased in 2021,” he said, noting that the company has been focused on optimizing operations and “leveraging automation and best practice policies at the CPG and retail level.”

Bit by Inflation

Weiss did not deny the macroeconomic landscape dampened the company’s performance. “Inflationary pressures and macroeconomic pressures that we see throughout the country are impacting our business,” he said. “Obviously what comes with inflation is the cost of basic materials and basic goods going up. At the time when our inputs are going up, when our labor costs go up, we’re also seeing [cannabis] prices coming down in many markets” as consumers reduce discretionary spending and pivot to value products and larger formats.

While it positions itself as offering premium products and services, last year Verano launched a mid-tier value brand, “our Essence line,” and its “Savvy” value brand to better reach these price-sensitive consumers, Weiss noted.

Despite these tough market conditions, Verano was able to grow its gross profits. Gross profit for Q1 2023 was $109 million, up from $99 million in Q1 2022. “We’ve seen demand in many markets slow,” Weiss said. “We were able to continue to grow the top line and maintain the bottom line” in these conditions.

As mentioned, the company underwent staffing cuts in 2022 to streamline operations, and Weiss believes Verano is better positioned to not only survive a tough economy, but come out of this cloudy period ahead of its competitors. 

“It’s never easy to take a hard look at the business, particularly when it comes to the people side and making those tough [staffing] decisions. But now we are laser-focused on profitability and cash flow,” Weiss said. “We think that what’s going to [separate] the folks who survive this downturn and the folks who have to either get out or turn the business over to their creditors is their bottom line and cash flow. It’s not going to be market share. It’s not going to be the race to the bottom that gets you there.”

While the company is always looking to optimize processes, Verano’s COO does not expect the company will make any additional major cuts. He noted that the company is in a strong position to navigate further market turmoil, citing its ownership of its CPG real estate and its underleveraged balance sheet (compared to industry peers) as giving it “that agility to be able to echo production with the needs of our marketplaces.”

Approaches to Retail

As consumers look to cut expenses, some cannabis connoisseurs might be eyeing the illicit market’s wares as a way to cut costs. The company tries not to measure success against the illicit market, but Weiss also acknowledges the market’s realities. 

“The biggest competitor to our industry is the [illicit] market,” Weiss said, highlighting that the illicit market often sets a price target that regulated operators must strive to match or beat. “When we are able to have pricing in line with the [illicit] market or even a little bit higher than the [illicit] market, we view that as success.”

When it comes to customer and patient acquisition, Weiss says Verano tries to meet people where they are and offer products that excite them. We have to be able to address both the … cannabis enthusiasts, and … the folks who are maybe cannabis curious, sitting on the sidelines.”

Broadening its product portfolio across markets has allowed the company to create inroads with both consumer types, Weiss said. “We’ve launched recently a new brand starting in Illinois called Holy Union, which is a pre-roll [line infused with solventless hash aimed at really that cannabis community. 

On the other end of the spectrum, Verano introduced a low-dose edible brand called Bits that appeal to newer consumers and the canna-curious.

“Innovation is huge in the cannabis space. We’ve got to stay ahead of the trends. We’ve got to continue to introduce new and better genetics, and find ways to optimize the business.”

Eyeing High Entry Barriers 

As Verano continues to work on optimizing its internal processes and technologies, it is keeping an eye on the broader landscape and where it might be able to pounce on an opportunity, Weiss shared, especially in limited-license markets with high entry barriers. 

Verano is “not looking to expand and put flags in the ground in every market,” Weiss said. “We are very selective in terms of new markets that we enter into [and] businesses that we’re looking for. We like to see lean operations. … Profitability and cash flow are really the name of the game.”

In this capital market crunch, most operators are not in a position to make large all-cash deals, Verano’s COO continued. In that environment, sellers are sometimes open to entertaining a financed sale, and Verano has access to other financing options, Weiss said.

“I think that our biggest hurdle in this environment is just the federal legal landscape with 280e being what it is … [and] the limitations on our ability to access cheap capital,” the COO said. (Verano paid nearly $15.9 million in net interest and more than $28 million in taxes in Q1 2023, up from $10.6 million and $25.5 million, respectively, in Q1 2022.)

While many publicly traded cannabis companies have taken a beating on the markets, Weiss remains pleased with the overall progress the cannabis industry and its actors have made over the last eight years. 

“The toothpaste is out of the tube,” he said, adding that states such as North Carolina, Alabama, and Texas processing applications for cannabis licenses will see the south and southeast U.S. markets finally open up.

“Certainly we’ve accomplished a lot, but it’s not the beginning of the end–it might only be the end of the beginning.”