It's no secret by now that marijuana is one of the fastest-growing industries on the planet. With Canada legalizing recreational cannabis in October and two-thirds of U.S. states giving the green light to medical marijuana, sales for legal pot are really beginning to take off.
But what you may not realize is that there's a niche trend within the cannabis industry that promises a growth rate that's far beyond what the broad-based pot industry could produce. Ladies and gentlemen, say hello to the rise of cannabidiol (CBD).
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CBD is all the buzz, without delivering a buzz
Cannabidiol and tetrahydrocannabinol (THC) are the two best-known cannabinoids but serve different purposes. THC is the psychoactive cannabinoid that gets users high and it's found in significant quantities in the cannabis plant. Meanwhile, CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits.
While CBD can be extracted from the cannabis plant, it's found in abundant quantities in hemp plants (which often have very low concentrations of THC). And since hemp is a lot less costly to grow than cannabis and is now legal to grow in the U.S. following the signing of the farm bill in December, it's often the preferred source of CBD extraction.
CBD is an especially popular cannabinoid, given the high margins it can produce for pot companies. CBD extracts are being used in all sorts of derivative products, such as edibles, topicals, oils, and cannabis-infused beverages. These products have considerably higher price points than traditional dried flower and are far less likely to face oversupply concerns in the near term, which should be a positive for pricing power.
Just how big could the CBD market grow? A new report from the Brightfield Group is looking for sales to surge more than 700% in 2019 in the United States, with CBD revenue in the U.S. hitting $23.7 billion by 2023. This represents a five-year compound annual growth rate of more than 100%, which would trounce even the most aggressive broad-based marijuana industry growth estimates.
The only question is: Which CBD stocks will emerge as winners in the United States?
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This CBD stock's products are popping up in some well-known retail locations
Although we've witnessed a number of brand-name companies, such as CVS Health and Kroger, announce that they'd begin carrying CBD-based products, it's the lesser-known Green Growth Brands (GGBXF) that's been making an absolute splash on the retail side of the equation. Since the year began, Green Growth has landed a number of major retail partnerships for its Seventh Sense line of CBD-infused products.
It all began in January, when Green Growth and Designer Brands (DBI 3.29%) (formerly DSW) expanded their existing partnership. Designer Brands, which sells designer footwear and other accessories, worked with Green Growth on a pilot program to test Seventh Sense products in 10 of its stores over 10 weeks. Designer Brands wound up seeing a 74% sell-through rate of these pilot CBD products, leading the duo to expand their relationship to 96 U.S. Designer Brands stores.
In total, the deal involves nearly 55,000 units of CBD topical products. It's also worth noting that current Green Growth CEO Peter Horvath served as Designer Brands' President for 3.5 years, so he knows the company and the U.S. retail landscape very well.
Over the past three weeks, Green Growth has landed two retail partners focused on millennials: Abercrombie & Fitch (ANF 0.95%) and American Eagle Outfitters (AEO 0.18%). Millennials are important for the future growth prospects of the CBD (and cannabis) industry, given their substantially stronger favorability toward legalization than older generations of Americans.
Similar to Designer Brands, Abercrombie & Fitch did a trial of CBD's Seventh Sense products in 10 of its stores. After initial success, Abercrombie and Green Growth announced plans to expand Seventh Sense to more than 160 stores. For context, this works out to more than 60% of Abercrombie & Fitch's stores.
This past week, American Eagle Outfitters and Green Growth announced plans to sell a specialty line of CBD-infused lotions, balms, and aromatherapy in nearly 500 stores, with sales beginning in October 2019. With more than 1,000 stores worldwide, it would appear that American Eagle is placing these CBD products in a majority of its U.S. locations.
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But wait... there's more
In addition to working with well-known retailers, Green Growth is also branching out to open up its own CBD shops within malls. In February, Green Growth Brands announced that it was partnering with Simon Property Group (SPG 0.05%), the largest mall operator in the U.S., to open 108 retail locations. With a number of anchor stores facing tough times (ahem, Sears Holdings and J.C. Penney), the introduction of CBD-focused shops could help drive traffic back to Simon Property Group's malls and, hopefully, help improve its pricing power when leasing.
Beyond Simon Property Group, Green Growth also announced plans in June to open more than 70 shops at shopping centers owned by Brookfield Properties throughout the United States. There were already seven Green Growth CBD shops in Brookfield's properties at the time of the announcement.
While expansion is clearly on the mind of Peter Horvath and Green Growth, the one and only concern continues to be that the company's deals and aggressive expansion tactics typically involve issuing common stock and diluting the value of existing shareholders. Though common practice throughout an industry that still has relatively limited access to traditional streams of capital, these share issuances could constrain Green Growth's share price despite rising sales and a larger retail presence.
I'm eager to see if Green Growth's physical presence in brand-name stores and malls will pay off. But I'm also just as eager to see the company slow its dilutive share-issuance spree.
