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SGMD BudCars: Built to Thrive

In California, the business context is reverting back to fears around another wave of full economic shutdowns due to the increasing numbers of coronavirus infections, hospitalizations, and deaths in recent weeks. Besides the inherently tragic nature of this dark turn in events, many industries and businesses are now faced with the unthinkable prospect of “turtling” and praying for rain from the Federal Reserve and the Federal Government in the form of another bridge made of printed and borrowed money to help survive a drop-off in commercial activity.

This even applies to the cannabis market. The distribution landscape for cannabis in California, and elsewhere, is predominantly structured like any other retail market: with physical stores that consumers drive to and shop at. As consumers choose to stay at home more and more while the lockdowns go back into effect in many areas, cannabis product retailers will be in the same position that other businesses in the state are in: praying for survival.

Even though cannabis stores are considered essential goods during this process, we will no doubt see them suffer as they did in March, April, and May.

However, this throws the spotlight back on an upstart name in the space with a model that has paid huge dividends during this period: Sugarmade Inc (OTCMKTS:SGMD), a cannabis player that operates now mostly through its controlling stake in BudCars, a leading California cannabis delivery company that operates on a traditional retail model with consistent 45-50% gross margins on cannabis inventory.

Sugarmade’s BudCars model has been feasting on increasing market share during the pandemic for obvious reasons: cannabis consumers can order their favorite products and have them delivered right to the door in touchless convenience.

 

Organic Explosion

That dynamic has presented SGMD shareholders with a dramatic boom over recent months. Since Sugarmade took over control of BudCars in March, the outfit has posted 10% week-over-week sales growth basically at a minimum. With that growth, the rate of sales growth expected from the company in 2020 has walked up a steep ladder, with the latest guidance suggesting we could see it north of $30 million in annualized terms by year-end.

According to the company’s most recent release, based on robust growth and underlying data trends witnessed in May and June, and continued very strong performance underway so far in July, management now forecasts continued month-over-month sequential sales growth of 30% in July and August, positioning the company for July sales of at least $650K, and a pace lined up to close out September with annualized BudCars revenues running at or above $11 million.

Jimmy Chan, CEO of Sugarmade, noted, “We believe we have enough visibility and enough data in hand to forecast that we will continue to see extremely robust growth in July and August. Many of the trends we saw come together in June to drive our performance remain in place and suggest new records across many metrics are likely this month as well.”

However, astute observers will note that this is the company firing on only one engine: organic execution at its initial hub.

 

Why you ain’t seen nothin’ yet

We would submit that the explosive rate of growth for BudCars at its home Sacramento hub is certainly impressive and suggests shares of the stock are probably undervalued at present levels. But that doesn’t begin to scratch the surface of where this story may be heading when one starts to figure in geographic expansion.

The next phase later this year will likely be the launch of BudCars in the Southern California marketplace through the acquisition of two locations in the greater Los Angeles area (according to a recent press release).

As noted there, the BudCars Sacramento has been experiencing dramatic growth, with revenues consistently increasing 10% week-over-week, driven by exploding demand for contactless delivery of cannabis products due to the coronavirus lockdown. And that makes expansion necessary.

As Chan noted there: “Our Sacramento locations will pass the $10 million mark for annualized sales within the next 60-90 days. The growth has been so dramatic that we have had to drastically revise our expectations to the upside, which demands expansion, both in terms of staff and fleet in Sacramento, and in terms of regional expansion into Southern California. As a result, we are acquiring two distribution hub locations in the LA area with cannabis licenses included so we can hit the ground running.”

Based on data from its current operations as well as trends in the LA region, management believes that each additional new BudCars hub will provide an annual revenue run-rate of $15-20 million as a moderate baseline estimate.

 

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