Buried within Schwazze's Q1 2024 earnings call transcript <a href="https://seekingalpha.com/article/4624211-schwazze-shwz-q1-2024-earnings-call-transcript" alt="source1">[1]</a> lies a hidden gem, a subtle shift in the Colorado market that could signal a significant opportunity for the company – the quiet but steady growth of medical cannabis. While analysts and investors fixate on the challenges of New Mexico's oversaturation and the price wars raging in both states, Schwazze appears to be strategically leveraging a less crowded, potentially more profitable niche.

The transcript reveals that medical cannabis sales now constitute 8% of Schwazze's total sales, a figure that has been steadily increasing. While this may seem insignificant at first glance, it's important to remember that Colorado's recreational market is a behemoth, so even a small percentage represents a substantial volume. Furthermore, Forrest Hoffmaster, the Interim CEO and CFO, specifically highlighted the growing importance of medical sales in their portfolio, particularly after the Standing Akimbo acquisition.

Why Focus on Medical Cannabis?

The answer lies in the margin differential between medical and recreational cannabis. While recreational sales face relentless price pressure, medical cannabis enjoys a more stable pricing environment. This is because medical patients are often less price-sensitive, prioritizing consistent access to specific strains and products for their medical needs. Consequently, Schwazze achieves a 35% margin on medical sales, compared to the company-wide gross profit margin of 43% reported for Q1 2024.

"Could Schwazze be quietly building a high-margin medical cannabis stronghold within the fiercely competitive Colorado market?"

The Numbers Tell a Story

While overall revenue growth in Q1 2024 was 4%, Colorado specifically saw a 9% year-over-year sales growth, outpacing the statewide decline of 10%. This suggests that Schwazze's focus on customer experience, product assortment, and loyalty programs is attracting both recreational and medical customers. However, it's the medical segment that offers the potential for a more resilient and profitable revenue stream, especially as recreational margins continue to be squeezed.

Consider this: If Schwazze can maintain its current trajectory and grow medical sales to 15% of its total revenue, with the 35% margin, it could significantly bolster its overall profitability. This would provide a buffer against the volatility of the recreational market, allowing Schwazze to weather the current storm while strengthening its long-term position.

A National Trend

It's also worth noting that Schwazze is not alone in this observation. Across the country, a growing number of cannabis companies are recognizing the untapped potential of the medical market. Some are even pivoting their strategy entirely, focusing on developing specialized medical products and cultivating relationships with healthcare providers.

Schwazze's Smart Play

Schwazze's focus on the medical market could be viewed as a savvy countermove in the chess game of cannabis retail. While others duke it out in the crowded and increasingly price-sensitive recreational arena, Schwazze might be quietly positioning itself as a leader in the less volatile, potentially more profitable medical segment.

Challenges and Opportunities

This is not to say that the road ahead will be easy. Schwazze still faces challenges, particularly in New Mexico's oversupplied market. However, the company's focus on operational efficiency, strategic cost management, and customer experience provides a solid foundation for success. And if Schwazze can successfully leverage the quiet rise of medical cannabis in Colorado, it could unlock a significant competitive advantage and solidify its position as a leader in the rapidly evolving cannabis landscape.

Visualizing Schwazze's Performance

The following tables illustrate key data points from Schwazze's Q1 2024 earnings call, highlighting the company's performance in both Colorado and New Mexico.

Colorado Performance

Metric, Q1 2024, Change (YoY)

Sales Growth, 9%, Positive (Outpacing statewide decline of 10%)

Wholesale Penetration, 30% of total doors, Significant increase

Medical Sales Mix, 8% of total sales, Steady increase

Medical Sales Margin, 35%, Stable and higher than recreational

New Mexico Performance

Metric, Q1 2024, Change

Store Count Growth, 2% (Q-over-Q), Slowing down from 11% in Q3 2023

Store Closures, 72, Increased 36% sequentially from Q4 2023

Net New Store Openings, Expected to flip negative in Q2 2024, Positive sign of market stabilization

"Fun Fact: Colorado was one of the first states in the US to legalize recreational cannabis in 2012. Since then, the state has generated billions of dollars in tax revenue from cannabis sales, funding important public programs and services. [2] [https://www.colorado.gov/pacific/revenue/colorado-marijuana-revenue-data]"