GrowGeneration Corp. (NASDAQ:GRWG) Q1 2024 Earnings Call Transcript

GrowGeneration Corp. (NASDAQ:GRWG) Q1 2024 Earnings Call Transcript May 8, 2024

GrowGeneration Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to GrowGeneration’s First Quarter 2024 Earnings Conference Call. My name is Juana. I will be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. I will now hand the call over to John Mills with ICR. Please go ahead.

John Mills: Thank you, and welcome everyone to the GrowGeneration’s first quarter 2024 earnings results conference call. Today’s call is being recorded. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration. You should have access to the company’s first quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of the GrowGeneration’s website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to today’s press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements made today. During the call, we’ll use some non-GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release which provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, we will take questions from research analysts. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please reenter the queue and we will take them as time allows.

Now, I will turn the call over to our Founder and CEO, Darren Lampert. Darren?

Darren Lampert: Thanks, John, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 financial results. As always, I want to extend my gratitude to each one of our employees across GrowGeneration for the dedication and hard work. Commitment is fundamental and the backbone to our success. I am pleased to announce that our first quarter results are in line with our expectations with revenue of $47.9 million and adjusted EBITDA of a $2.9 million loss. Encouragingly, our retail stores in isolation are positive on a same-store sales comp basis in the first quarter, which represents the first time we’ve seen a positive same-store sales comp for retail stores in nine quarters. This indicates a stabilization of sales, affirming the effectiveness of our strategic adjustments over the past 2 years.

Our proprietary brand sales also continued to grow, supporting sequential gross margin improvement from fourth quarter 2023. Lastly, through our continued focus on cost controls, we’ve achieved the lowest total expense base that the company has reported in 3 years. Based on this quarter’s results, we continue to believe that our business is strong and poised for growth. And you have seen that confidence reflected in our stock repurchase program, which we announced last quarter to help support long-term shareholder value creation. Looking ahead, our strategic focus for 2024 remains on expanding our brand portfolio, growing and broadening our customer base and prioritizing profitability through rigorous cost control and margin expansion. I’m excited to discuss several key points today that underline our strategic direction and future growth.

We continue to see accelerating adoption of our proprietary brands, including Charcoir, Drip Hydro and the Harvest Company. In the quarter, 22.6% of our total gardening and cultivation sales are generated from our proprietary brand portfolio, the highest mix in our company’s history and above the 18.8% we reported for full year 2023. We’re especially excited about the early signs of momentum within our Drip Hydro powdered nutrients, which are now in over 300 active trials with licensed cultivators around the country. We expect these trials to begin transitioning to sales and benefiting our P&L beginning late in Q2. Our margin expansion strategy continues to focus on increasing sales of higher margin proprietary products and forging close strategic relationships with key [indiscernible] breed manufacturing partners.

We’re also working to develop new vertical markets within our existing offerings, including the marketing and sales of the Harvest Company line of proprietary products, which is targeting the home and edible gardening markets. Within the Harvest Company, branded products include raised garden beds, organic seeds and various gardening tools and accessories that are now available for sale online and in our stores. We’re also actively seeking opportunities to enter the high value greenhouse nursery and floriculture verticals with our proprietary products later this year. Lastly, our commitment to investing in our customer success remains unwavering. We continue to offer a complete suite of industry leading products, competitive prices, and opportunities for financing and comprehensive inventory management and logistics solutions.

Additionally, our soon to be launched digital platform will enhance connectivity to our B2B portal, further empowering our customers ability and convenience to do business with us. Now before turning to guidance, I want to briefly mention two additional points. First, I’d like to address the significant news last week that the DEA agreed with the Health and Human Services and FDA recommendation to reschedule cannabis from a Schedule 1 to a Schedule 3 controlled substance. This critical shift in a regulatory landscape is expected to ease restrictions on cannabis research and to strengthen the cash flow and balance sheets of state legal cannabis operators by allowing them to take federal tax deductions for the business expenses. While additional steps remain an additional challenges, such as litigation may arise, we ultimately expect these developments to strengthen investor sentiment and broaden market opportunities for our products, as cultivators will have more capital available to invest back into their businesses, including in building new facilities, and refreshing existing ones.

Regarding next steps, we expect a formal announcement by the DEA soon, following which the proposal will go to the Office of Management and Budget for review, and then to public comment period before being finalized. We are actively assessing how this regulatory change will impact our operations and strategic opportunities, and we will keep our stakeholders informed in future earnings calls as things progress. Second, continuing from our year end discussions, we’re continuing to seek opportunities to monetize our Storage Solution segment, MMI which remains a leader in providing mobile shelving and racking solutions. While we did not have any news to report this quarter, should a material update become available as it relates to the MMI business.

We issue an announcement accordingly. Moving on to our guidance. We are reiterating our previously communicated guidance for full year 2024. We anticipate net revenue to be in the range of $205 million to $215 million, adjusted EBITA expected to range from a $2 million loss to a $3 million profit. This guidance underscores our confidence in our strategic direction, and the underlying strength of our business model. I’m proud of the work and effort our team has put into getting us where we are today. As we look through the balance of the year, we are optimistic that GrowGen is on a solid platform for growth in 2024 and beyond. With that, I’ll turn the call over to our CFO, Greg Sanders. Greg.

Greg Sanders: Good afternoon everyone. Starting with our first quarter results GrowGeneration is pleased to report revenue at $47.9 million versus $56.8 million in the first quarter of 2023, representing a decline of approximately 16% year-over-year. On an absolute basis, this measurement includes the impact of 15fewer retail occasions. Our same-store sales for the Gardening and Cultivation segment in the first quarter of 2024 was $38.2 million compared to $38.6 million in 2023, representing a 1% decline to the comparable year ago quarter. Our same-store sales metric includes eCommerce. Excluding eCommerce, retail in isolation was positive on a same-store sales comp basis for the first time since the third quarter of 2021. Our storage solutions revenue was $4.8 million for the quarter compared to $7.7 million in the year ago period, representing a decline of 37.9% year-over-year.

But our storage solutions revenue did not perform to ply [ph] in this quarter. We expect some pickup in the second and third quarters for this reporting segment. To offset gardening and cultivation sales were higher than planned, which is an encouraging development and in consolidation. First quarter revenue reported at the high end of guidance. Gross profit margin was 25.8% for the first quarter of 2024, a sequential improvement of approximately 230 basis points, compared to our fourth quarter 2023 results. Although gross margin improved on a quarter-over-quarter basis, we observed a decline on a year-over-year basis, partially due to higher freight expense in plan relative to cost associated with relocating inventory from store closures. Further, we observed some impacts from segment reporting mix.

More specifically, storage solutions, which boasts a 43% gross margin profile reported that approximately 10% of total company sales in the first quarter compared to an average of 14% of sales in 2023. As we look forward, we expect sequential improvements in consolidated gross margins in the second and third quarters, resulting from higher plant storage solutions revenue as well as less impact from store closures. The company’s total expense base was 21.8 million in the first quarter, compared to 23.7 million in the first quarter of 2023. Withstanding any further improvements, that management executes over the remainder of 2024,this was the lowest total expense base that the company has reported since Q1 of 2021 We believe that the current cost model is sustainable going forward, and it highlights our commitment to driving a more nimble and profitable business long-term.

Your operating costs and other operational expenses declined to $10.6 million in the first quarter compared to $11.8 million in the fourth quarter of 2023. The company closed and consolidated four locations in the first quarter of 2024, of which one-time closure costs were included in our first quarter results. We believe that the closures and consolidations align our operating model to future strategic priorities and allow for stronger operating leverage. Selling, general administrative costs were $7.9 million in the first quarter, compared to $7.9 million in the fourth quarter of 2023. Within our first quarter SG&A results, were a few significant non-recurring expenses, including $900,000 in severances and legal settlements and $250,000 in marketing samples, primarily attributed to the nutrient powder launch from our proprietary brand, Drip Hydro.

Depreciation, and amortization of intangibles was 3.7 million in the first quarter of 2024, compared to 4.1 million in the prior quarter. As it relates to income tax, with a full valuation allowance in place, we did not recognize a significant tax benefit or expense in the period. Net loss for the first quarter of 2024 was $8.8 million, or negative $0.14 per share, compared to a net loss of $6.1 million, or negative $0.10 per share for the comparable year ago quarter. Compared to the fourth quarter of 2023, the company improved net income from a net loss of $27.3 million to a net loss of $8.8 million. Adjusted EBITDA, as defined in our press release was a loss of 2.9 million for the first quarter of 2024, compared to a loss of 1.8 million in the first quarter of 2023.

The change in year-over-year performance is primarily related to a $3.9 million decline in gross profit dollars compared to the fourth quarter of 2023 the company improved adjusted EBITDA by approximately $800,000. Moving to the balance sheet. As of March 31, 2024, the company had total cash, cash equivalents and marketable securities of $61.3 million, a decrease of $3.6 million from December 31, 2023. Within working capital, inventory increased by $1.1 million, driven by first quarter bulk inventory purchases to support Q2 sales demand for which we expect favorable seasonality. We believe that the cash position of the business is in strong health, which was evidenced by our recent announcement of the company’s share repurchase program. As Darren mentioned earlier, we are reiterating our full year 2024 guidance with revenue to be between $205 million and 215 million and full year adjusted EBITDA to be in the range of a $2 million loss to a positive $3 million profit.

Our guidance assumes higher second and third quarter revenue from a seasonality perspective, along with stabilized improvements in our operating expense base from our strategic operating initiatives. That said, we are optimistic about the 2024 fiscal year, and how our cost control initiatives have translated into the lowest expense base that we have reported in several years. Our balance sheet remains strong with a healthy cash position from which we see opportunities to deploy resources towards customer growth initiatives, product development, market expansion, and accretive pathways such as the share repurchase program to drive shareholder value. Our daily mandate remains centered on executing the business strategy to drive future growth and profitable executing the business strategy to drive future growth and profitability.

With that, I will turn the call back over to Darren for closing remarks.

Darren Lampert: Thank you, Greg. As we continue our journey through 2024, our commitment to operational excellence, strategic market expansion and profitability remains unwavering. I am immensely proud of what our team has achieved, and I look forward to our continued growth and success. We remain optimistic about the future backed by our robust business model and strategic initiatives that are set to drive our growth in the evolving market landscape. Thank you all once again for your continued support and interest in GrowGeneration. We will now take your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] First question comes from Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel: Hi, good afternoon.

Darren Lampert: Good afternoon, Brian.

Brian Nagel: My first question, Darren, I know you’ve talked a little bit about this in your prepared comments, but with regard to the, I guess, let’s just say, potential rescheduling here, that’s something we’ve talked about for a while. But — is there any recognizing it’s early, and there’s still a lot of unknowns. [Indiscernible] think about that and your GrowGeneration business? I mean, is there any parameters, you’d give us how we should think about the size of the potential positive or even how this would play out for GrowGeneration?

Darren Lampert: I think the simple part is Brian, with rescheduling 280 egos away, and that is the tax penalty on licensed cultivators. Basically [indiscernible] saying almost between a $1.5 billion to $2 billion will come back to the balance sheet of the cultivators which we’ll go to shoring up balance sheets, and also going into rebuilding facilities, updating facilities and going out and getting new products that are coming to market. So there will be a tremendously different view with our customers with money coming back in. Our customers will be making money, reinvesting in their businesses. Over the last 3 years, with Wall Street pretty much pulling funding from most of the cultivators, most of the public companies, also the large private companies, these cultivators have not been able to refresh their facilities.

They haven’t put money into facilities. And so we’ve been in this place where our durable sales have been tremendously lower over the last couple of years. But in the first quarter, we did see a little up — we did see a little uptick in durables, and we are starting to see much more bidding out there. And we do believe that you will see the other part of our business, the durable side of it start picking up and again, everyone still is waiting. It’s a waiting game out there, Brian. We’ve been waiting 10 years since we started GrowGen. It is still the process is not complete right now. The DEA has agreed with the Health and Human Services to reschedule what it could be another 4 to 6 months. And that’s probably as quick as it can go, and that’s of litigation and other issues don’t arise.

Greg Sanders: Got it. It’s very, very helpful.

Brian Nagel: Second question, back to your business. But what you’ve done a very nice job of streamlining the model over the past several quarters, closing stores where appropriate. So as we look at the business now from a store perspective, is the base of stores appropriate.

Darren Lampert: Right now we’re happy with our portfolio. We probably will be closing three stores this year. But our business has changed dramatically. We’re seeing much more business to business opposed to business to consumer. We just opened up 100,000 square foot warehouse in Ohio. As your business evolves, our stores are both marketing tools for our private label brands and also brands of our — some of our top vendors. And the stores are a place for people to go, our customers to go and learn and also purchase products from us. But we believe that we can service most of our customers from our distribution centers and our largest stores around the country. So right now we will not be investing in new stores this year and we probably won’t be in the market buying stores.

But right now GrowGeneration is investing in supply chain distribution of B2B portals. We’re investing in our proprietary brands, which [indiscernible] growing very quickly. We’re investing in our customers. We’re using credit right now. And I think we’ve given out more credit in the last month to customers than we have in some time. And we’re investing in growth and we’re investing in stock repurchase plans. So I think we’re starting to see different use of our capital. And we’re investing in getting GrowGen into the IGC world, the one in garden space. Also GrowGen is definitely morphed into a different kind of company over the last couple of years since you’ve seen the slowdown in the cannabis space?

Brian Nagel: No, it’s very helpful. Appreciate it. Best of luck. Thank you.

Darren Lampert: Thank you, Brian.

Operator: Thank you. The next question comes from Scott Fortune at ROTH MKM. Please go ahead.

Scott Fortune: Yes, good afternoon and thank you for the questions. Just kind of following up, you put [indiscernible] on the proprietary products and the success of that segment moved up very nicely here in the quarter. But just want to kind of get a sense for the potential for your Drip?, Drip Nutritional product that you’re rolling out here. It sounds like a good interest from that level. And then just remind us the target at proprietary brands, which you are targeting your own brands for the overall business segment and mix, I believe there’s about 30% work in that target potentially go here.

Darren Lampert: We believe you’ll see anywhere between 30% and 40% on private label proprietary brands at GrowGen in the future. We believe we end this year somewhere in the mid to high 20s, which is pretty aggressive. And that is dependent upon the Drip launch. Taking — when you look at the amount of trials that we have around the country right now those turning into sales in the future. And we do believe you start seeing those late in the second quarter. We believe that the Drip, the drip powder brand could anywhere from a $25 million to $50 million business for GrowGen in the future. We will keep you posted as sales turn — that trials turn into sales.

Scott Fortune: Got it. I appreciate the color there. And just kind of from a geography interest and you mentioned stores [indiscernible] Just want to see you mentioned you’re seeing stabilization in the market overall. But can you provide a little more color on kind of the regions or the areas outside California Michigan still seem pretty weak there. Just a little more color on certain states as they’re driving the strength fear and the 2Q trends as is going forward here.

Darren Lampert: We are seeing strength from California right now, Scott, contrary to what you are hearing. We are winning a lot of new business in the California market. We are also seeing strength in Michigan right now. We’re seeing considerable weakness out in Oklahoma, and Back East in the main in Massachusetts markets. But there’s tremendous strength of that GrowGen right now in California.

Greg Sanders: I appreciate that. I will jump back into the line for queue. Thanks.

Darren Lampert: Thank you.

Operator: Thank you. The next question comes from Eric Des Lauriers from Craig-Hallum Capital Group. Please go ahead.

Eric Des Lauriers: Great. Thanks for taking my questions. First one is just on the proprietary brands. How to think about margins here going forward. It’s nice to see the increase in mix. Here obviously, margins were down year-over-year. So just wondering how to think about the overall margin profile of proprietary brands. And then if there’s anything to comment on, sort of the sub segments within that, like if Drip Hydro has a significantly different margin profile than some of the other proprietary brands. That’d be helpful as well, just kind of looking to get a sense of the margin profile of the proprietary brands. Thanks.