GrowGeneration Corp. (NASDAQ:GRWG) Q4 2022 Earnings Call Transcript

GrowGeneration Corp. (NASDAQ:GRWG) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Hello, and welcome to GrowGeneration’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is JP, and I’ll be coordinating your call today. I will now hand the call over to Clay Crumbliss with ICR.

Clay Crumbliss: Thank you, and welcome, everyone to the GrowGeneration Fourth Quarter and Full Year 2022 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 Corp. 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 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 filings 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. Now, I will turn the call over to our co-founder and CEO, Darren Lampert.

Darren Lampert: Thank you, Clay. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for your continued support of GrowGen. The last year has been extremely challenging, but I, along with the rest of the executive team, appreciate your continued hard work and dedication to our vision and strategic plan. Regardless of the market challenges throughout the year, and really over the last three years since we entered the pandemic, the team has been steadfast in executing our business model. I commend our entire team for stepping up to every challenge that has come at us over this time period.

We were pleased that our full year 2022 net revenue, $278 million, was in line with our previously communicated guidance range. We are also encouraged that our efforts in 2022 to rightsize the business are starting to show in our financial results. And we are optimistic that the work we’re doing is putting GrowGen in a significantly better position going into 2023. Further, for the first time in seven quarters, we believe GrowGen will see sequential revenue growth in Q1 2023 versus Q4 2022. In addition, we believe that gross margin will normalize in the mid- to high-20s, beginning in Q1 of 2023. In 2022, we invested in our stores, product portfolio, supply chain, technology, and other strategic initiative as part of our long-term strategy to enhance profitability.

In the fourth quarter, we added three members to senior management in the hydroponic industry, in the areas of commercial sales, supply chain, and product development. We also have significantly increased our volume of our private label products driven by our Drip Hydro and Char Coir brands. Private label accounted for $26 million for retail and e-commerce sales in the full year 2022, which is around 12% of our overall retail and e-commerce sales, growing 6% year-over-year as a percent of sales. Our team also continued to make advancements in our supply chain through the expansion of our distribution centers and fulfillment hubs with now total eight locations, with our newest center in Columbus, Ohio expected to be operational before summer.

With that as a backdrop, our day-to-day strategy is generally the same since we last spoke. We remain hyper-focused on controlling costs and generating cash, and we made significant progress in 2022. While some of these efforts have come at the short-term expense of our gross margin, especially in the fourth quarter, we firmly believe these decisions are putting GrowGen in a better place to be stronger and more nimble than ever before. It’s important to reiterate that GrowGen remains on solid financial footing. We have a strong balance sheet, and we don’t anticipate the need for external debt or equity issuance. We ended the 2022 fiscal year with $72 million of cash and cash equivalents and marketable securities and no debt on our balance sheet, representing a sequential increase of $1 million in our net cash position since the end of the third quarter of 2022.

This marks the second consecutive quarter that we have grown our cash balance despite the incredibly challenging industry conditions. Now, I’d like to provide a brief overview on some of our key business initiatives throughout 2022, how we see those going forward in 2023. We cognized the need early last year to focus our organization on cost control, store consolidation, inventory reduction and cash generation. In 2022, we reduced inventory by $28 million compared to the end of 2021, including a sequential $12 million reduction in the fourth quarter from the end of the third quarter. These inventory reductions have generally occurred at discounted prices, which clearly pressured our gross margin in 2022, but we believe it was the prudent thing to do as we optimized our working capital base and prioritized cash generation and balance sheet preservation.

Partially offsetting the negative impact of our gross margin contraction, we made significant progress rightsizing our expense structure in 2022. We made the difficult decision to reduce our payroll base by a total of $12 million throughout 2022. In terms of our store footprint, we made considerable progress eliminating market redundancies and overlaps by closing eight stores in total for 2022. We also continued to expand into market where we see long-term value, opening five new stores and included four new states where we didn’t previously have retail operations. These new locations, including Virginia and New Jersey stores, branded as GrowGeneration, Hydroponic and Garden Center, which we think represents an opportunity to provide a broader in-store product assortment that should allow us to increase store traffic and productivity by attracting new customers.

Next, we reduced our store account by three stores and ended the year on December 31st with 59 locations in operation. We expect these initiatives in 2022 to continue benefiting our company well into 2023, including cost savings flow through from store consolidations, reduced payroll expenses, improved shipping costs from declining ocean freight rates, reduced headwinds from inventory discounting on our margins, and a greater percentage private-label sales. This will all have a positive impact on adjusted EBITDA dollar generation and margin. Going forward, we expect to continue seeking out acquisitions in white space markets where we think it makes sense. We’ll also continue product development around our key brands and private label offerings.

We’re focused on monetization of our 1 million square feet of retail space, including merchandising and product education with key partners and our laser focused on execution of the various business transformation initiatives, centered around supply chain and enhancing our customer journey. GrowGen is a unique, highly differentiated retailer. We are the leader in a large, fragmented market. Our customers have a passion for our GrowPro lifestyle. GrowGen is more than just a retailer. We are a developer of market leading brands and private label products. We’re distributors supporting the entire hydroponic growing community, and we are above all a passionate and dedicated partner to our customers. We live our mission and value, and our culture defines our relationship with our customers.

We’ll be celebrating our 10th anniversary in a year. As we begin the New Year ahead, we take great pride in our past and we’re equally excited about our future. Turning to guidance for full year 2023, we expect net revenue in the range of $250 million to $270 million, translating into adjusted EBITDA in the range of a $4 million loss to a $1 million profit. As part of that, in the first quarter of 2023, we expect net revenue in the range of $55 million to $57 million, translating into adjusted EBITDA in the range of a $2 million loss to a $4 million loss. 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 fourth quarter and full year 2022 financial results, and then I will discuss our preliminary outlook for the 2023 fiscal year. Starting with our fourth quarter results, GrowGeneration generated revenue of $54.5 million versus $90.6 million in the fourth quarter of 2021, representing a decline of approximately 40%. Our same-store sales for the fourth quarter 2022 were $34.3 million compared to prior year sales of $71.4 million, representing a 51.9% decline against the comparable year-ago quarter. Our e-commerce revenue declined on a comparable base from $7.7 million to $3 million. Our distribution and other revenue was $13.5 million for the quarter compared to $4.6 million in the year-ago period, representing an improvement of 195%.

Gross profit margin was 17.6% for the fourth quarter 2022, down approximately 830 basis points sequentially from the third quarter of 2022. Gross profit dollar generation in the fourth quarter decreased 7.9% from the prior year, which includes the addition of gross profit from acquisitions of HRG, MMI and St. Louis Hydro in the trailing 12 months. The Company sold over $12 million of overstock and aged inventory in Q4 clearance events that we estimate resulted in a total gross margin degradation of 332 basis points. Further, the Company increased its inventory reserves by over $2 million in the quarter, which had a 379 basis-point impact. The combination of these two strategic initiatives resulted in a 1 time margin reduction of 7.1%. Our Q4 strategic initiatives to further rightsize the inventory of the business are largely complete as of December 31, 2022, and better position the Company as we move into 2023.

Store operating costs and other operational expenses declined sequentially from the third quarter. Overall, store operating expense declined from $14.5 million in Q1 to $13.8 million in Q2 to $13.6 million in Q3, finally to $12.8 million in Q4. The savings recognized throughout 2022 were primarily attributed to payroll reductions. We anticipate further cost decreases to continue into 2023, resulting from the execution of store consolidations in the latter half of 2022. Selling, general and administrative or SG&A costs were $8.6 million in the fourth quarter of which $1 million was derived from stock-based compensation. This compares to $8.8 million in the third quarter with $1.3 million of stock-based compensation. This represents a 2.3% improvement quarter-over-quarter to SG&A.

Depreciation and amortization of intangibles was $4 million in the fourth quarter of 2022 compared to $4.1 million in the year-ago period. Compared to the fourth quarter last year SG&A expense decreased $2.8 million in the same period of 2022 with overall savings driven from payroll reductions and increased cost controls over a broad range of categories. Income tax in the fourth quarter was a benefit of $248,000 for tax purposes, but with a full valuation allowance we did not observe a significant income tax provision benefit or expense in the period. Net loss for the fourth quarter was $15 million or negative $0.25 per share compared to a net loss of $4.1 million or negative $0.07 per share for the comparable year-ago quarter. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and share-based compensation was a loss of $10.2 million for the fourth quarter of 2022 compared to a loss of $1.7 million in the fourth quarter of 2021.

We estimate this quarter’s adjusted EBITDA loss includes roughly $1 million in expense associated with the closure and consolidation of our Las Vegas, Compton and Cotati locations, and nearly $4 million associated with the inventory clean-up measures taken in the fourth quarter. These areas of execution were strategic initiatives taken to position the Company for 2023. Cash generated from operations in the quarter was $2.6 million, primarily attributed to the reduction in inventory and additional measures taken to strengthen the balance sheet. Now, I will provide a quick overview of our results for the full year 2022. Net sales were down $144 million for 34%, $278 million from $422 million in the full year 2021. Gross profit for the full year 2022 decreased by $48 million to $70.2 million, and gross profit margin was 25.3% in 2022 compared to 28% in the full year 2021.

As Darren mentioned earlier, we have taken a number of steps throughout the year to rightsize operating expenses and reduce our selling, general and administrative expenses base by roughly $20.7 million through operational rationalization, workforce reduction, and tighter day-to-day expense controls. Related to the balance sheet, as of December 31, 2022, the Company had total cash, cash equivalents and marketable securities of $71.9 million. Within working capital, the Company reduced inventory by $28.4 million, partially offset by a $2.6 million increase in high credit worthy accounts receivable. We also invested approximately $9 million for payments associated with technology and distribution investments. On a full year basis, the Company generated $12.5 million in cash from operating activities, primarily driven by the reduction of inventory and prepaid accounts payable.

I will now discuss our guidance for the full year 2023. We expect full year 2023 revenue to be between $250 million and $270 million, and full year adjusted EBITDA to be in the range of a $4 million loss to a positive $1 million profit. Our updated guidance assumes quarter-over-quarter improvements in Q1 of 2023 and further revenue and profitability improvements continuing into the second and third quarters of 2023. The improvement in adjusted EBITDA expectations is primarily driven from the execution of our 2022 reductions to payroll, our eight store closures and our inventory optimization efforts. We expect gross margins to normalize into the mid- to high-20s in the first quarter of 2023. On a comparative basis to the fourth quarter, management expects modest improvements in revenue in Q1 of 2023, which would be the first quarter-over-quarter improvement to revenue since the second quarter of 2021.

We expect operating expenses to be controlled and sequentially down in the first quarter as we recognize additional cost improvements from our strategic initiatives. We are positioning the Company and executing our business strategy to focus on cash from operations and EBITDA improvement. As we mentioned earlier, we expect that our headcount reductions are largely complete and the heavy lifting to correct our inventory position was mostly concluded in the last two quarters of 2022. 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, while 2022 was a challenging year for everyone in the cannabis value chain, GrowGen remains focused on the areas of the business that we can control. We continue to make strong gains against our priorities, drive cost control, consolidate stores, reduce inventories, and improve profitability, while preparing to capture the many growth opportunities that lie ahead, all of which we expect to drive incremental benefits in 2023. We remain committed to the expansion of our proprietary and distributed brands. We are very satisfied with our results of our private label products, including Char Coir and Drip Hydro. The addition of MMI strengthens our position to gain indoor vertical cultivation projects within their leading benching and racking systems.

Controlled environmental agriculture and sustainable ag are only in the development stage. And we believe that more companies will invest in sustainable indoor vertical farms for local production of leafy greens, tomatoes, fruits, and other food products. To close, while we expect a degree of continued uncertainty in 2023 and we are not planning for an imminent turn in the cannabis cycle, we remain nimble and well-prepared for a turnaround when it happens. Thanks to proactive management of the business in 2022, we believe GrowGen is on solid financial footing with a solid balance sheet, healthy liquidity, and a solid cash position. Thank you for your time today, and thank you for your interest in GrowGeneration. We’ll now take your questions.

Operator?

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Q&A Session

Operator: Thank you. Your first question comes from the line of Mark Smith from Lake Street Capital.

Mark Smith: First question is really around inventory. You did a good job getting those levels down, but it sounds like you had to clear some stuff out to kind of get there. Can you just talk about your comfort with inventory levels today? And do you still have any inventory that you think still needs to maybe be cleared out here in 2023?

Greg Sanders: Hey, Mark. This is Greg. We reduced inventory $28 million in the year, $22 million in the last two quarters of the year. At this point in time, we’re carrying $77 million in inventory as we concluded the year. We believe that the volume of inventory that we have is appropriate for the business on a forward-looking basis. Our inventory isn’t completely perfect, but we think it’s in a very good position at this point with all of the efforts that we’ve taken, primarily over the last two quarters. We don’t expect any major changes in our inventory volume as we move forward.

Mark Smith: Excellent. And then just following up on that, can you talk a little bit about kind of the mix of consumables versus more kind of capital equipment? And Darren at the end, you talked a little bit about we’re maybe not seeing improvement yet in the industry, but are you seeing signs of that? And your guidance for the year, does that include the beginning of more build-outs of kind of new growth facilities?

Darren Lampert: Yes. Mark, I’ll start at the beginning. When you look at the mix of our inventory right now, we’ve moved through a tremendous amount of non-consumable inventory in 2022. So, when you look at the tremendous reduction, you’re really looking at the lighting side, the DE side, and the products that we use in build-outs. We’ve kept our inventory up on the consumable side. Those are products that our customers need on a weekly, daily basis. So, we’ve kept that to a point where we’re very comfortable. When you unpack the second parts of the question, we have been grinding around the bottom for the last — probably for the last three to four months. And March is the first month that we are starting to see some upticks.

We’re starting to see more bidding out there on commercial products back east. And we are seeing stabilization. We have consolidated some of our stores around the country. We consolidated our stores. And we feel that we’re in a very good position right now going into 2023. We’re seeing stabilization on pricing on cannabis out in California. That’s what we’re hearing from our customers. We’re also hearing out in the California markets that you are starting to see the large amounts of supply starting to dwindle. So, we are keeping an eye on the outdoor season right now that’s coming up in April. But, we have seen a little stabilization in our business.

Operator: Your next question comes from the line of Brian Nagel from Oppenheimer.

Brian Nagel: So I want to — my first question, and just basically to follow up on that the question, the prior question, just with respect to the overall industry. So, Darren, you’re saying, you’re seeing — we’ve been kind of grinding along the bottom, maybe seeing some sign to stabilization here. So as you look at — I know this — we’ve been talking about the factors that weighed upon the industry now for a while, over supply, maybe slower licensing. As you look at the business now and you look at some of the stabilization, is it becoming clearer whether those factors we discussed were more transitory in nature, or has there been a sort of, say, a reset lower on the underlying growth potential from an industry perspective within the space?