GrowGeneration Corp. (NASDAQ:GRWG) Q4 2023 Earnings Call Transcript

GrowGeneration Corp. (NASDAQ:GRWG) Q4 2023 Earnings Call Transcript March 13, 2024

GrowGeneration Corp. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.12. GRWG 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 Fourth Quarter 2023 Earnings Conference Call. My name is Jenny, and 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 fourth quarter and full year 2023 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 fourth 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 Safe Harbor provisions of the Private Securities Reform Act of 1995. These forward-looking statements are based on management’s current expectations and beliefs concerning future events and are subjected 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 provide 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 Co-Founder and CEO, Darren Lampert. Darren?

Darren Lampert: Thank you, John. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2023 financial results and our full year 2024 guidance. As always, I want to thank each one of our employees across our company at GrowGen. I’m grateful to our entire team for their continued hard work and dedication. We are pleased that our full year 2023 net revenue of $226 million exceeded our previously communicated guidance range of $220 million to $225 million. Adjusted EBITDA for the year came in at a loss of $5.6 million within our previously communicated guidance. We remain encouraged by the progress that we made last year in further right-sizing our business and positioning us for long-term profitable growth.

I’m also happy to report that 2024 is off to a strong start. As we noted, a 19% improvement in gardening and cultivation sales in January from December. Further, we observed private label sales as a percentage of revenue, eclipsed 20% in January. Because of our hard work and strategic focus, we are seeing areas of year-over-year growth and are optimistic that these efforts will continue to enhance our results. I also want to address our new segmentation that you will see in our 10-K. Moving forward, we’ve separated our reporting into two segments. First, Cultivation and Gardening; and second, Storage Solution. Our Cultivation and Gardening segment represents our core hydroponic and organic gardening business. Our second segment Storage Solution represents our MMI acquisition that we made over two years ago to help build out our benching and vertical racking offerings.

MMI has grown substantially since acquisition and has become a thriving business in its own right. Looking forward to 2024, we are focused on three main initiatives. Number one, we are continuing to expand our brand portfolio, bringing to market innovative new proprietary products and building key partnerships with best-of-breed manufacturers. Number two, we are attracting a large customer base, expanding our products, partnerships, and opportunities in the home gardening market. And number three, we are putting profitability at the forefront, continuing our focus on cost control, margin expansion, and profitable growth. Touching briefly on each of these further. First, we continue to expand our proprietary and distributed brands and remain very satisfied with the results.

As we’ve mentioned previously, a key pillar of our strategy focuses on shifting more of our sales, the higher margins proprietary brands. In 2023, proprietary brands accounted for $36.5 million of sales, which amounts to approximately 19% of our overall gardening and cultivation sales, up from approximately 15% in 2022. Recent new proprietary products includes a much anticipated Drip powder nutrient line, which provides a high quality, cost efficient nutrient solution to commercial and craft growers everywhere. We continue to focus on supporting this launch with over 150 after trials being conducted by licensed cannabis cultivators and we are excited by the early momentum we have seen thus far. We’re also enhancing product offering and customer value by expanding our distribution of top-of-the-line trusted brands within the hydroponic phase.

For example, we recently announced a strategic partnership between our wholesale distribution arm, HRG, and Quest Climate, offering high-quality and advanced dehumidification capabilities for commercial customers. Strategic partnerships remain a key piece of our strategy and we continue to evaluate our portfolio of offerings to drive sales growth by providing customers with a comprehensive suite of products. Second, we’re excited to announce the official launch of the Harvest Company, our expanding consumer gardening line. This initiative focuses on a specialized product portfolio and branding that resonates specifically with home gardeners, emphasizing GrowGen’s commitment to supporting sustainable and healthy living. Approximately one quarter of all U.S. households grow microgreens, fruits, and vegetables, gardening both indoors and outdoors.

Our products include the already launched premium gloves and pruners, as well as a garden and the box kit, an all-in-one solution for gardening enthusiasts with raised metal bed, soils, fertilizers, and a curated selection of organic seeds. We believe there is a compelling growth opportunity to further expand into the home gardening market and target consumers who want a different garden shopping experience than previous generations and who care about home cultivation of healthier organic microgreens, fruits, and vegetables. And third, we’re putting profitability at the forefront with a continued focus on cost control, margin expansion, and profitable growth. As part of our ongoing cost optimization efforts, we consolidated 14 retail locations in 2023 and have already consolidated an additional three retail locations in the first quarter of 2024, bringing our current store count to 47.

Although, we are constantly monitoring our retail footprint with respect to redundancy and non-performance, we believe our consolidation efforts are largely behind us, and we’ll be using our current store count and geographic spread as a base for growth and positive same-store sales. With respect to margin expansion, in addition to increasing sales for proprietary products, we are very pleased with the growth of the consumable side of our business, especially noted in Q4. As you’ve heard from us before, consumable products typically command higher margins than durable products. So the shift to a greater percentage of our total sales being a consumable product that’s helped our margins. Consumable products are also typically reoccurring revenue generators, which offers more predictable revenue, enhanced customer engagement, and opportunities for upselling and cross-selling, particularly for proprietary brands.

Turning our attention to MMI, our Storage Solution segment. I am thrilled to report remarkable progress and strategic advancement that underscore our commitment to innovation and excellence in this sector. Over the past two years, MMI has demonstrated exceptional growth, escalating from approximately $12 million in 2021 to approximately $31 million in 2023 revenue. This remarkable achievement is a testament to our team’s dedication and the strategic initiatives we have implemented to drive sales growth, and operational efficiency. Earnings from MMI have been equally impressive, reaching approximately $9 million in 2023. In conjunction with today’s earnings announcement, we are also announcing that we have engaged Lake Street Capital to seek strategic opportunities as it comes to this piece of our business.

By monetizing this business, we believe we will maximize shareholder return and give GrowGen further flexibility to pursue growth both organically and through other acquisitions. Finally, before I discuss our 2024 guidance, I’d like to provide a brief update on cannabis legalization. The legal landscape for cannabis has undergone significant advancements recently with several new states legalizing cannabis as well as international movements. Notably, Germany’s recent legalization signaling a broader shift towards acceptance and regulation of cannabis. Specifically in the last 12 months in the United States, Maryland, Minnesota, and Ohio have joined the growing list of states legalizing cannabis for recreational use. These developments not only expand the market for cannabis products, but also hint at broader implications for businesses operating within the industry.

In the United States, there’s growing optimism about the potential rescheduling of cannabis at the federal level, which could have a profound impact on commercial cultivators by eliminating the burden of Section 280E of the Internal Revenue Code on plant-touching businesses. As many of you know, this section of the code currently prohibits cannabis businesses from deducting ordinary business expenses through the federal classification of cannabis as a Schedule I drug under the Controlled Substances Act. Rescheduling would alleviate these tax burdens, significantly improving profitability for cannabis companies by allowing them to claim deductions like any other business. For GrowGen, these changes present a landscape with many opportunities.

As more states legalize cannabis and issue new cultivation licenses, the demand for hydroponics and gardening equipment and supplies will grow, directly benefiting GrowGen’s core business, supplying specialty hydroponic and organic gardening products at both the retail and wholesale levels. Internationally, developments like Germany’s legalization is serving the catalyst for increased global demand for cultivation equipment and supplies, positioning GrowGeneration to explore international expansion and export opportunities. Furthermore, rescheduling the U.S. to significantly enhance the operational efficiency and profitability of cannabis producers, allowing them to expand operations and invest more in cultivation infrastructure, further increasing demand for our products.

Turning to guidance for full year 2024. We expect net revenue in the range of $205 million to $215 million, adjusted EBITDA in the range of a $2 million loss to a $3 million profit. As part of that, in the first quarter of 2024, we expect net revenue in the range of $45 million to $48 million, and adjusted EBITDA in the range of a $1 million loss to a $3 million loss. As we look forward to 2024, we continue to focus on controlling what we can’t control and managing our business prudently. I believe the hard worker team continues to do on a daily basis is putting GrowGen in a position for long-term profitable growth in 2024 and beyond. With that, I will turn the call over to our CFO, Greg Sanders. Greg?

Greg Sanders: Thank you, Darren, and good afternoon, everyone. First, I will address our fourth quarter and full year 2023 financial results, and then I will discuss our preliminary outlook for the 2024 fiscal year. Starting with our fourth quarter results, GrowGeneration generated revenue of $49.5 million versus $54.5 million in the fourth quarter of 2022, representing a decline of approximately 9%. Our same-store sales for the Gardening and Cultivation segment in the fourth quarter of 2023 were $35.6 million compared to prior year sales of $37 million, representing a 3.6% decline against the comparable year ago quarter. Our sales of consumable products in the fourth quarter outperformed prior year on an absolute basis, which we believe is a favorable performance indicator.

Our Storage Solutions revenue was $7.7 million for the quarter compared to $7.8 million in the year ago period. Gross profit margin was 23.5% for the fourth quarter 2023, an increase of approximately 600 basis points from the prior year. As a reminder, the fourth quarter has historically lower margins due in part to end-of-year sales initiatives and any true-up adjustments from full physical inventory counts that coincide with year-end. In the fourth quarter, Shrink had a 480 basis point impact, which was partially to do with inventory discards from 12 store consolidations that were finalized from an operational perspective in the fourth quarter. Store operating costs and other operational expenses declined to $11.8 million in the fourth quarter compared to $12.8 million in the year ago period.

The company closed and consolidated 12 locations in the third and fourth quarter of 2023, of which one-time material closure costs were included in our fourth 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 and administrative or SG&A costs were $7.9 million in the fourth quarter compared to $8.6 million in the fourth quarter of 2022. This represents an 8.4% improvement to the year ago period. Depreciation and amortization of intangibles was $4.1 million in the fourth quarter of 2023 compared to $4 million in the year ago period. In the company’s annual test of impairment, the company recognized $15.7 million in impaired asset value.

As a result, the company recorded non-cash adjustments of $9.3 million of goodwill and $6.2 million of intangible assets. The adjustments were concluded in review of the carrying value of certain acquisition assets and were supported by updated assumptions on performance of the acquisitions and forward-looking recoverability. Those updated assumptions are included in our forward-looking guidance. Income tax in the fourth quarter was a benefit of $61,000 for tax purposes, but with a full valuation allowance, we did not observe a significant income tax provision benefit in the period. Net loss for the fourth quarter was $27.3 million, or $0.44 per share, compared to a net loss of $15 million or $0.25 per share for the comparable year ago quarter.

Withstanding the non-cash impairments recorded in Q4 of 2023 related to the prior period acquisitions, the company would have recognized a $3.5 million improvement year-over-year, which translates to a 23% improvement. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, share-based compensation, impairment, and restructuring charges was a loss of $3.7 million for the fourth quarter of 2023 compared to a loss of $10.2 million in the fourth quarter of 2022. The improvements in year-over-year performance are primarily related to the cost restructuring initiatives that we have communicated and executed on over the prior quarters. Now, I will provide a quick overview of our results for the full year 2023. Net sales were down $52 million or 18.8% to $226 million, trailing from the full year 2022, which had sales of $278 million.

Gross profit for the full year 2023 decreased by $9 million to $61.3 million. However, gross profit margin as a percentage increased 186 basis points to 27.1% for the full year 2023. As Darren mentioned earlier, we have taken a number of steps throughout the year to right-size operating expenses and reduce our selling, general, and administrative expense base. As a result of these efforts, we are proud to report a $13.6 million expense reduction through our restructuring initiatives and improvements in operational efficiency. Related to the balance sheet, as of December 31, 2023, the company had total cash, cash equivalents and marketable securities of $65 million. Within working capital, the company reduced inventory by $12.2 million, partially offset by a $4.1 million decrease in accounts payable as we reduced inventory orders and improved upon turns.

We also invested approximately $6.7 million for payments in CapEx associated with technology and distribution investments, and $3 million into acquisitions. On a full year basis, the company generated $1.4 million in cash from operating activities, primarily driven from the reduction of inventory. I will now discuss our guidance for the full year 2024. We expect full year 2024 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. We expect first quarter revenue in the range of $45 million to $48 million and adjusted EBITDA to be in the range of a $1 million loss to a $3 million loss. In addition, we expect during 2024 to begin reporting positive same-store sales comps for the first time since 2021.

Our updated guidance assumes normalized sales trends, along with continued improvements in our operating expense base from our strategic operating initiatives. That being said, we continue to be confident with our position in the industry. We remain focused on balance sheet management and optimization of our expense structure with the intent to return the business to profitability. Our capital allocation approach is centered on long-term planning. We are optimizing our digital and distribution capabilities to propel our company through future business cycles with focus on adding value to our end customer. Further, we will continue to invest capital into the development of private label products and initiatives that expand our value proposition to a broader base of customers.

To close, I’ll reiterate that our daily mandate is executing our business strategy with a sharp focus on long-term profitability and shareholder value. With that, I will turn the call back over to Darren for closing remarks.

Darren Lampert: Thank you, Greg. Before we open the line for your questions, I want to reiterate that GrowGen is on solid financial footing with a strong balance sheet, healthy liquidity, and a solid cash position. We continue to manage our business prudently through the current industry landscape with an emphasis on sustainable growth, margin expansion, and profitability. We are encouraged for our continued progress and remain laser focused on continuing to build a stronger, nimbler, and more profitable company. Thank you for your time today and thank you for your interest in GrowGeneration. We will now take your questions. Operator?

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Scott Fortune from ROTH MKM. Please ask your question.

Scott Fortune: Yes. Good afternoon, and thank you for the questions. Just wanted to kind of hone in on the guidance a little bit. I know you’ve lowered three more stores in this quarter. Kind of what’s that — kind of store base that you’re looking for in the guidance here moving forward from that standpoint? And then I’ve follow up question. Just kind of a little more picture on what you’re seeing opportunities for stores in new states coming on board versus kind of replacing or kind of shuttering down some old stores in some of the more mature markets. A little bit of color on that would be great.

Darren Lampert: Yeah, Scott. I think right now, we’re pretty happy with our portfolio of stores around the country. I do believe you’ll see another two to three store closings within the first six months. And then we will be — we’re still looking around the country and dependent upon what we see on the legislative side, the legalization side, and the store side, we’re a buyer for the right price if there’s something that will be accretive to our portfolio. And as you know, we’ve just finished building out 100,000 square feet of distribution in Ohio, coupling with our 55,000 square feet of distribution in Sacramento. So we feel pretty comfortable right now that we can pretty much service the country with a portfolio that we have right now. But if building starts up again and candidates get talked, we will be back in the market. But right now, we’re pretty comfortable with our portfolio.

Scott Fortune: Okay. And a follow-up on that. I appreciate that Darren. Just touching base, kind of, at some point, there’s going to be a replacement cycle here, obviously, need for the lights, you’re seeing some of the top MSOs, the large MSO partners you work with generating cash flow. If we get the elimination of 280 and rescheduling boosts, and there’s going to be some CapEx kind of maintenance needed here and replacement cycle needs. Just kind of step us through kind of what you’re hearing from your partners as far as the replacement cycle and maintaining kind of, top grows from — for those partners going forward here.

Darren Lampert: Scott, as you probably know and have seen, earnings from the MSOs have been pretty good this quarter. On the legislative side, we’re also waiting on 280E. And I certainly I’m one that does believe that you will see, reclass the schedule of three and hopefully something with [indiscernible] Act by the end of the year. We do believe a refresh cycle is coming. There was tremendous growth in 2020 and 2021. And you’re coming up on that three to five year reclass cycle. So we believe we will start seeing plenty of action on the durable side of it. The nice side is that we’re seeing growth right now on a consumable side of it, which is 75% to 80% of our business right now, which is much more predictable business. It’s weekly, monthly business, as opposed to one-time build-outs.

So we’re really comfortable where we are right now on the consumable side of it. But we are starting to see much more quoting from our commercial team on lights, dehumidification and also control systems. So we do believe this is the start of it. And with some help from our government, I think it’ll probably make it go that much quicker. So we’re pretty excited about 2024 and beyond. I think we’ve done a tremendous job restructuring this business and getting it to where it is today. And I do believe that you will see a strong ear from GrowGen.

Scott Fortune: Thanks. I appreciate the color.

Operator: Thank you.

Darren Lampert: Thank you, Scott.

Operator: Your next question is from Eric Des Lauriers from Craig-Hallam Capital Group. Please ask your question.

Eric Des Lauriers: Great. Thank you for taking my questions. I was wondering, if you could comment broadly on some of the differences in same-store sales that you’re seeing in different geographies. Obviously, you don’t have to go through all the states here, but if there’s any sort of outliers to comment on? And then in relation to that, could you comment on the geography of the three consolidated stores that you’ve consolidated year to date? Thank you.

Greg Sanders: Yeah, Eric. Thanks for the question. Sorry, go ahead, Darren.

Darren Lampert: You can go. [indiscernible]

Greg Sanders: Okay. Eric, I think when you look at our comp sales over the last handful of quarters, where we landed in the fourth quarter was down 3.5% year-over-year. And that comes from, when you look at our same-store sales comps last year, we were in the 50s. So we’ve made a lot of improvement both from a consolidated basis, but also within the geography and in various localities. There’s areas of strength and there’s a few states that are still going through a lot of consolidation. So we’re comfortable with our overall performance on things as it relates to the comp sales. When you look at the three locations that we consolidated in the fourth quarter or the first quarter, we consolidated Brownstown, which is in Michigan, Traverse City, which is in Michigan, and Salinas, which is in California.

We believe those two markets between Michigan and California are very mature in nature, and we have the opportunity to generally service the same customer base out of locations that were in close approximation. So we expect some decline from those consolidations, because not every customer we have in the portfolio will continue to shop at the new location that is retaining the large scale of the customers. We don’t expect a material difference in our 2024 results as a result of that. And the updated assumptions around those closures is included in our guidance for the year.