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.

A farmer placing an accessory into a hydroponic system, filled with a nutrient-rich growing media.

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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