GrowGeneration Corp. (NASDAQ:GRWG) Q3 2023 Earnings Call Transcript

GrowGeneration Corp. (NASDAQ:GRWG) Q3 2023 Earnings Call Transcript November 8, 2023

GrowGeneration Corp. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.11.

Operator: Hello and welcome to GrowGeneration’s Third Quarter 2023 Earnings Conference Call. My name is Teri, 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 Clay Crumbliss with ICR.

Clay Crumbliss: Good afternoon, and welcome to the GrowGeneration third quarter 2023 earnings results conference call. Today’s call is being recorded. With us are Mr. Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration Corp. You should have access to the company’s third quarter earnings press release issued after the market closed today. This information is available on the investor relations section of the GrowGeneration 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 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 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 the 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: Thanks, Clay. Good afternoon, everyone. Thank you for joining us today to discuss our third quarter 2023 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees, of course, our company for their continued support of GrowGen. I’m grateful to our entire team for their continued hard work, dedication, and for being steadfast in executing our company’s strategy. I’m pleased with GrowGen’s third quarter results. And I’m happy to discuss the progress we’ve made to drive future growth and profitability, including the launch of our new ERP system and East region Distribution Center on July 1 and the success of our proprietary brands. Despite the ongoing challenges in our industry, which we have discussed extensively in the past, GrowGen remains in a strong financial position with sufficient liquidity to continue investing for growth, while putting profitability at the forefront of all we do.

In the third quarter of 2023, we generated net revenue of 55.7 million, which represents a 13% decline over the second quarter of 2023, consistent with the expectations we communicated on our second quarter call. Gross margins improved 320 basis points to 29.1% versus the prior year’s comparable quarter of 25.9% and improved 230 basis points from second quarter gross margins of 26.8%. We ended the third quarter with 66.6 million of cash, cash equivalents and marketable securities, no debt and 76 million of inventory on our balance sheet. Year-to-date, we’ve generated approximately 2.8 million of operating cash flow. While the federal legislative agenda has not moved definitively in our favor, it does seem to be getting more favorable. There’s renewed optimism for federal reform with SAFE Act passing the Senate Committee on Banking and potentially heading to the Senate floor for a full vote.

And if approved to the house, then the President. More importantly, there’s excitement building around cannabis rescheduling. After the Department of Health and Human Services, recommended rescheduling cannabis from Schedule 1 to 3, which would remove the 280E tax penalty on licensed cultivators bringing hundreds of millions of dollars back into the cannabis industry. We expect that this will provide a major tailwind for our industry. With that said, our three main initiatives remain our primary focus, as we discussed last quarter, what that means in practical terms is, number one, we’re continuing to bring to market innovative new products and growing our proprietary brand portfolio, attracting a larger customer base. Number two, we’re building upon our ERP launch, instead of forming our technology and digital platforms.

And number three, we’re putting profitability at the forefront, focusing on margin expansion and profitable growth. Briefly on each of these, first, we remained committed to the expansion of our proprietary and distributed brands and we are very satisfied with the results. Proprietary products accounted for 7.4 million of retail and ecommerce sales in the third quarter of 2023, which is around 16.6% of our overall retail and ecommerce sales, up from 15% in the second quarter of 2023. Product launches include the introduction of the much anticipated new drip pad and nutrient line in Q4, delivering across efficient nutrient solution while not compromising on quality. We’re expanding Power Si with an advanced granular range of beneficial microbial solutions to bolster plant health and optimize growth to be released to Q4.

In Q3, we rolled out Char Coir coco coins, and during the propagation market, the harvest company, our consumer gardening initiative is finalizing a diverse product portfolio that includes the already launched premium gloves and pruners as well as a garden and the box kit, an all-in-one solution for gardening enthusiast that includes raised metal bed, soils, fertilizers, and a curated selection of organic seeds. Lastly, MMI Ags, introducing a single tier multiple bench and trade systems for indoor and greenhouse growers in Q4. Second, our ERP system has been rolled out across all key business verticals. Like many other ERP rollouts, ours has not been without its challenges, and it will take time before benefits fully materialize. We’re confident in our internal team and their ability to manage through the transition.

Encouragingly, most of the issues we’ve encountered have been relatively minor and we’re pleased with the progress that has been made to-date. To further develop our key technology initiatives, we have strengthened our leadership team with the addition of a Senior VP of Technology, who comes to us with impressive credentials, and whose mandate includes during our technological advancements, and solidifying our digital infrastructure. And third, we’re prioritizing profitable growth, which we believe we will obtain through our continued efforts to grow revenue, executor margin expansion strategies, and consolidate stores. We’re constantly analyzing the business for additional optimization and cost savings opportunities and expect the continued benefit to flow through to our margins through remainder of 2023 and 2024.

As part of these efforts, we continue to analyze the performance of our current stores with respect to redundancies in the footprint and non-performance. We closed and consolidated six retail locations in the third quarter and are in the process of consolidating closing six additional locations in the fourth quarter that we expect to be finalized in November. That said, we expect a lower operating expense base and aim to retain the key customers from consolidated locations on a revenue basis. Further with our recently implemented centralized distribution system, consolidation of shipments and storage, we will reduce our in-store inventory levels and ensure quicker deliveries. The SKU rationalization we executed in Q3 will now allow us to focus on high demand products and phasing out low performing SKUs. All these executables are positioning us to operate more effectively and efficiently.

Turning to guidance for full year 2023, we are maintaining our guidance of net revenue in the range of 220 million to 225 million and adjusted EBITDA loss in the range of minus 4 million to minus 6 million. With that I will turn the call over to our CFO, Greg Sanders.

Greg Sanders: Thank you, Darren, and good afternoon, everyone. First, I will address our third quarter 2023 financial results. And then I will discuss our updated full year 2023 guidance. For the third quarter, GrowGeneration generated revenue of 55.7 million versus 70.9 million in the third quarter of 2022 representing a decline of approximately 21.4% Our same-store sales for the third quarter 2023 were 40.7 million compared to prior year sales of 47.5 million representing a 14.4% decline against the comparable year ago quarter. Comparable same-store sales in the third quarter represent a modest sequential improvement over the prior quarter on a percentage basis. Our ecommerce division generated $2.7 million of revenue versus 3.1 million in the year-ago period, representing a decline of 10.2% year-over-year.

Our distribution and other revenue was 11.5 million for the quarter compared to 19.8 million in the year-ago period, representing a decline of 42%, largely due to a few large one-time transactions in the year ago period. Gross profit margin was 29.1% for the third quarter of 2023, which is an improvement of 320 basis points to the year-ago period. The increase in gross margin in the third quarter of 2023 was largely attributed to the improvement of proprietary brands sales as a percent of revenue, which increased to 16.6% of sales in the third quarter versus 13% of sales in the year ago period. Additionally, the company is executing on more bulk buys with the development of our distribution network that has led to favorable gross margin performance in the quarter.

Store operating costs and other operational expenses declined from 13.6 million in the third quarter of 2022 to 11.9 million in the third quarter of 2023 representing a 12.2% reduction. The savings year-over-year were primarily attributed to rationalization efforts of our store comp and personnel expense. We believe that the expense reduction to-date are sustainable, and we expect to execute upon further reductions through the balance of the year and into the first quarter 2024. Selling, general and administrative or SG&A costs were 7.6 million in the third quarter. This compares to 8.8 million in the year-ago period, representing a 13.8% improvement year-over-year. SG&A expense reductions are being achieved through various cost controls, most notably through personnel.

Depreciation and amortization of intangibles was 4.7 million in the third quarter of 2023, compared to 3.9 million in the year ago period. The increase in depreciation expense is primarily due to the Go Live of our new business systems in the third quarter, for which we placed the assets into service at July 1. In the third quarter of 2023, the company did not recognize an income tax benefit or expense. GrowGeneration is using a 0% tax rate as its deferred tax assets are not expected to be realizable. As such the company has established a full valuation allowance against its deferred tax assets. Net loss for the third quarter was 7.3 million or negative $0.12 per share, compared to a net loss of 7.2 million or negative $0.12 per share in the year-ago period.

Adjusted EBITDA which excludes interest, taxes, depreciation, amortization, restructuring charges and share based compensation, with a loss of $908,000 for the third quarter of 2023, compared to a loss of 2.7 million in the third quarter of 2022, representing a $1.8 million improvement. Related to the balance sheet, as of September 30, 2023, the company had total cash, cash equivalents and marketable securities of 66.6 million, which was a decrease of 4 million to the second quarter of 2023. The company increased its prepaid by $4.5 million in the third quarter, primarily to increase our inventory positions in our proprietary branded products, where we are seeing demand increase. Cash used from operations for the third quarter was approximately $4.6 million primarily related to the aforementioned prepaid investments.

Year-to-date, the company generated positive cash from operations of 2.8 million. That said the company has sufficient reserves, with over 60 million held in money market accounts and short-term low risk investments at September 30, 2023. In the third quarter, the company decreased inventory by approximately $700,000 compared to the second quarter. As we look at the fourth quarter, we are aiming to further reduce the inventory position and to improve upon turns. The company has instituted promotional sale events for overstock and slow-moving inventory in the fourth quarter to help drive additional sell through of inventory. During the quarter, we continue to see improvement in our operating expense structure. And we’re encouraged by the gross margin improvements in the quarter.

Operationally, we transitioned our entire retail and corporate business into new ERP, point of sale and warehouse management systems. As such change management and user adoption were a very large focus in the quarter. Now moving on to our full year 2023 outlook, we are reaffirming our previously communicated guidance, with full year 2023 revenue to be between 220 million and 225 million and full year adjusted EBITDA loss to be in the range of minus 4 million to minus 6 million. We believe the fourth quarter should benefit from lower inventories and continued rationalization of operating expenses through our strategic initiatives. In summary, we remain confident in our ability to navigate the industry. And we’ll continue to stay focused on managing the balance sheet and controlling costs and our efforts to return the business to profitability in driving long-term shareholder value.

Positioning the business for long term profitability continues to be a top priority today and into 2024. Our approach to capital allocation remains focused on a disciplined approach to return on invested capital, and we see opportunities in long term planning. We are continuing to invest in digital transformation to propel our company through future business cycles. Further, we continue to invest capital into the development of proprietary products and initiatives that expand our value proposition to a broader base of customers. 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 were encouraged by our continued progress and remain laser-focused on continuing what we can control to continue 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. [Operator Instructions] Your first question comes from Aaron Grey from Alliance Global Partners. Please go ahead.

Aaron Grey: Hi, good evening. And thank you for the questions. So first question for me. I just want to talk about some of the reform. Most notably the potential rescheduling of Schedule 3. For you guys, maybe more of an indirect impacts and obviously not being impacted by the 280E tax right now, but a lot of your clients are so. How do you think about potential indirect impacts a schedule and Schedule 3 could have removal of 280E, potentially with some of your players where you’re pulling back on CapEx initiatives and how that could change in the indirect benefits you guys could have come back. Thank you.

Darren Lampert: Aaron, I find it quite exciting. And I think the industry needs it. Currently, there’s hundreds of millions of dollars right now being spent on 280E tax penalties as you probably know. I mean, we’re talking hundreds of millions of dollars. And with this money coming back into the industry, if rescheduled the money will go to the MSOs and the large single state operators back onto their balance sheets to strengthen balance sheets. And with that we do believe, we will start coming into expansion of facilities and also more importantly into refreshing facilities. We’ve seen so many build outs from 2019 to 2021 and with the life expectancy of LED lighting and D use and a lot of the durable products that they use, that will be becoming a tremendous upfront cycle coming and there’s going to be a lot of durable products going out in the next couple of years to refresh a lot of the facilities out there right now.

So we are quite excited as you know, GrowGen’s bread and butter is the large commercial operators out there. So we believe that we will get a majority — a lot of the business coming out of 280E, if it goes away with the rescheduling. So we’re excited about it. And we got our fingers crossed. And like we all know, the next couple months, we should be hearing something.

Aaron Grey: Okay, great. Thanks for that color. And then second one for me. Just kind of bring down, the store fleet, 50 now sounds like it’d be at about 44, another six in the upcoming quarter. Number one, how do you feel what the store fleet at that level, like, kind of hold their, maybe some smaller growth opportunities, open up some new stores. And then, number two, on the 40%, same-store sales decline, could you maybe provide what that might be on a pro forma basis on what the new 44 would be, including the six plan to consolidate in 4Q. Thank you.

Darren Lampert: Yes. I’ll start and then send it over to Greg. With the six stores there and that brings us down to 50. So you’re double counting the six. So we weren’t at 56. With the six stores, we’re talking about closing this month, that would bring us down to 50. We’ve already shut those stores in the midst of consolidating them. So that brings us down to 50. We still do have a small amount of work to do on the portfolio. And the way we’re looking at it right now, with the build out of our distribution center in Ohio, the success of our private label brands, and the launch of our ERP system, POS and also warehouse, we’re becoming much more efficient. And we’re starting to see right now, the stores don’t need as much product in it, our customers are much more reliable, they’re planning much better.

And with that, we just don’t need redundancies within the footprint. And when you take a look, what we’ve closed in the last four months, it was 12 stores. I think 15 during the last seven or eight months, but most of them are within 30 miles of another store. They were smaller stores that were majority were bought through acquisitions. And those weren’t the main stores within the acquisitions. So we feel pretty comfortable right now. We believe that, there’ll be tremendous savings, not only through the store closures, but also through consolidation of back office staff and accounting. So it’s two-fold opposed to one. And when you look at the stores that we’ve closed, the 12 stores that we closed accounted for about $22 million of business in 2022.

Greg, you have anything to add to that?

Greg Sanders: Yes. No, I think that’s spot-on Darren. And I think, for the comp question in isolation, what we’ll see on a quarterly basis is a reduction of approximately 3 million to 4 million, depending on the quarter at this point. We did see some down performances in some of those locations that we’ve consolidated throughout the course of the year, and into the fourth quarter as well. And the number around 50, Aaron, just to mention is inclusive of the Q4 activity, where we’ve ceased operations within November and expect to conclude the operational procedures are on closing by the end of the month. So that’s an all-in number for us at this point.

Darren Lampert: Aaron just a little more color, with seven stores in California, three stores in Colorado, one store in Michigan, and the one store in Washington.

Operator: Thank you. Your next question comes from Andrew Carter from Stifel. Please go ahead.

Andrew Carter: Hey, thanks. Just wanted to build on that just a little bit with the same stores. Obviously, you’re closing the more redundant locations and therefore there should be some kind of lift within the cannibalization. So I think looking back in it seems like the absolute decline is moderating quite a bit in 4Q, given the absence of stores. But when do you think cannibalization category, you could see actually a return to same-store sales growth of the current base.

Darren Lampert: I believe that we see it next year. We’ve been bouncing along the bottom this year, our same-store sales for the last six months had been in that 14% down range. We are seeing a lot more commercial bidding coming into GrowGen right now. And with the uptake of our private label products, and distribution and being able to get products to our customers quicker than any other store in the country. We do believe that business is going to — it’s going to restart and GrowGen will be a better company for it. Can I tell you it’s going to happen, in the first quarter, fourth quarter of this year? I can’t tell you that. But with what’s going on in legislation right now, I think its 280E. I think if we reschedule, you’ll see money coming back into this industry.

So we’re very optimistic, where we brought the cost levels of this company. We’ve brought cost down almost $25 million over the last couple of years. We bought inventory down over 30 million over the last couple of years. So we’re working hard to getting this company back profitable and getting same-store sales the other way. We’ve closed a lot of them. a lot of the stores that we closed were redundant, but a portion of them are also non-performing, too. And with our private label penetration up about 17% right now, and we believe that goes into the 20s next year, we think that will feel same-store sales growth at our stores.

Andrew Carter: Second question I want to ask and just kind of stepping back like, you’re closing the stores, I guess, during the super cycle, it could have kind of given you some false read in the category of kind of the necessity of that last mile. Do you believe like this step back in the footprint, you’ll be just as well positioned with the category accelerates? Or is this or are there some trade-offs? Or is this a category where last mile is necessary? What I mean is that grower doesn’t have to have it in 24 hours, they can live with 48. Therefore, ship from Ohio, just kind of those puts and takes as you’re thinking about being prepared for the eventual return to growth in this category.

Darren Lampert: Yes. When I look at GrowGen, right now in our store accounts, where we are. And with boots on the ground with our commercial team, I think we’re better positioned than we’ve ever been, with the launch of our new ERP system distribution and private label. And the one thing that we’re starting to see is forecasting coming from our customers. And like we’ve always said, we don’t represent that much of the illegal markets. So our bread and butter is the legal markets. So with more money going back onto the balance sheets, if you see a reschedule, we do believe that business is going to come to GrowGen, and will make us a better company for it. So it’s what keeps us optimistic. And, again, we will continue to cut where needed and continue to get this company, Andrew, where it needs to be.