GrowGeneration Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 10 speakers on the call.

Operator

Hello, and welcome to Growth Generation's 3rd Quarter 2023 Earnings Conference Call. My name is Julie, and I will be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions instructions to be given at that time. I will now hand the call over to Clay Pramblett with ICR.

Speaker 1

Good afternoon, and welcome to the Enbridge's Q3 2023 Earnings Results Conference Call. Today's call is being recorded. With us are Mr. Darren Lambert, Co Founder and Chief Executive Officer and Greg Sanders, Chief Financial Officer of Pro Generation 1. You should have access to the company's 3rd quarter earnings press release This information is available on the Investor Relations section of the GrowGeneration website at ir.

Speaker 1

Dotgrowgeneration.com. Certain comments made on this call include forward looking statements, which are subject to the Safe Harbor provisions the Private Securities Litigation Reform Act of 19 91. These forward looking statements are based on management's current expectations and beliefs to complete future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in this forward looking statements.

Operator

My name is Julie 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 Cromblece with ICR.

Speaker 1

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 Lambert, Co Founder and Chief Executive Officer and Greg Sanders, Chief Financial Officer of GrowGeneration Corp. You should have access to the company's 3rd quarter earnings press release issued after the market closed today.

Speaker 1

This information is available on the Investor Relations the call to the call to the call to the call to the call to the call to the call to the Safe 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 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.

Speaker 1

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 Lambert. Darren?

Speaker 2

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our Q3 2023 financial results in our full year 2023 guidance. As always, I want to thank each one of our employees across 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 3rd quarter results and I'm happy to discuss the progress we have 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.

Speaker 2

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 Q3 of 2023, we generated net revenue of $55,700,000 Which represents a 13% decline over the Q2 of 2023, consistent with the expectations we communicated on our 2nd quarter call. Gross margins improved 320 basis points to 29.1% versus the prior year's comparable quarter of 25.9 percent and improved 230 basis points from 2nd quarter gross margins of 26.8%. We ended the 3rd quarter with $66,600,000 of cash, cash equivalents and marketable securities, no debt and $76,000,000 of inventory on our balance sheet. Year to date, we've generated approximately $2,800,000 of operating cash flow.

Speaker 2

While the federal legislative agenda has not moved definitively in our favor, it does seem to be getting more favorable. There is renewed optimism for federal reform with the SAFER 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 is 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 100 of 1,000,000 of dollars back into the cannabis industry. We expect that this would provide a major tailwind for our industry. With that said, our 3 main initiatives remain our primary focus.

Speaker 2

As we discussed last quarter, what that means in practical terms is number 1, we're continuing to bring to market innovative new products and growing our proprietary brand portfolio attracting a larger customer base. Number 2, We're building upon our ERP launch and for informing our technology and digital platforms. And number 3, We're putting profitability at the forefront focusing on margin expansion and profitable growth. Briefly on each of these. First, we remain committed to the expansion of our proprietary and distributed brands and we are very satisfied with the results.

Speaker 2

Proprietary products accounted for $7,400,000 of retail and e commerce sales in the Q3 of 2023, which is around 16.6% of our overall retail and e commerce sales, Up from 15% in the Q2 of 2023. Product launches include the introduction of the much anticipated new drip powder nutrient line in Q4 delivering a cost 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 in Q4. In Q3, we rolled out Charcor Coco coins Entering 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 the Garden in the Box kit, an all in one solution for gardening enthusiasts That includes raised metal beds, soils, fertilizers and a curated selection of organic seeds.

Speaker 2

Lastly, MMI Ag is introducing a single tier mobile bench and tray systems for indoor and greenhouse growers in Q4. 2nd, 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. But we are 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 We're pleased with the progress that has been made today.

Speaker 2

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 advancement and solidifying our digital infrastructure. And third, we are prioritizing profitable growth, Which we believe we will obtain through our continued efforts to grow revenue, execute our margin expansion strategies and consolidate stores. We We're constantly analyzing the business for additional optimization and cost savings opportunities and expect the continued benefit to flow through to our margins the remainder of 2023 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 6 retail locations in the 3rd quarter and are in the process of consolidating and closing 6 additional locations in the Q4 that we expect to be finalized in November.

Speaker 2

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 $220,000,000 to $225,000,000 and adjusted EBITDA loss in the range of minus $4,000,000 to minus 6,000,000 with that, I will turn the call over to our CFO, Greg Sanders.

Speaker 3

Thank you, Darren, and good afternoon, everyone. First, I will address our Q3 2023 financial results and then I will discuss our updated full year 2023 guidance. For the Q3, GrowGeneration generated revenue of $55,700,000 versus $70,900,000 in the Q3 of 2022, Representing a decline of approximately 21.4%. Our same store sales for the Q3 of 2023 were $40,700,000 compared to prior year sales of $47,500,000 representing a 14.4% decline against the comparable year ago quarter. Comparable same store sales in the 3rd quarter represent a modest sequential improvement over the prior quarter on a percentage basis.

Speaker 3

Our e commerce division generated $2,700,000 of revenue versus $3,100,000 in the year ago period, representing a decline of 10.2% year over year. Our distribution and other revenue was $11,500,000 for the quarter compared to $19,800,000 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 percent for the Q3 of 2023, which is an improvement of 3 20 basis points to the year ago period. The increase in gross margin in the Q3 of 2023 was largely attributed to the improvement of proprietary brand sales as a percent of revenue, which increased to 16.6% of sales in the 3rd quarter versus 13 Percent 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.

Speaker 3

Store operating costs and other operational expenses a decline from $13,600,000 in the Q3 of 2022 to $11,900,000 in the Q3 of 2023, representing a 12.2 percent reduction. The savings year over year were primarily attributed to rationalization efforts of our store count and personnel expense. We believe that the expense reductions to date are sustainable and we expect to execute upon further reductions through the balance of the year and into the Q1 2024. Selling, general and administrative or SG and A costs with the Q3. This compares to $8,800,000 in the year ago period, representing a 13.8% improvement year over year.

Speaker 3

SG and A expense reductions are being achieved through various cost controls, most notably through personnel. Depreciation and amortization of intangibles was $4,700,000 in the Q3 of 2023 compared to $3,900,000 in the year ago period. The increase in depreciation expense is primarily due to the go live of our new business systems in the Q3 for which we placed the assets into service at July 1. In the Q3 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.

Speaker 3

As such, the company has established a full valuation allowance against its deferred tax assets. Net loss for the Q3 was $7,300,000 or negative $0.12 per share compared to a net loss of 7,200,000 a 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 Q3 of 2023 compared to a loss of $2,700,000 in the Q3 of 2022, representing a $1,800,000 improvement. Related to the balance sheet, as of September 30, 2023, the company had total cash, cash equivalents and marketable securities of $66,600,000 which was a decrease of $4,000,000 to the Q2 of 2023. The company increased its prepays by $4,500,000 in the 3rd quarter, primarily to increase our inventory positions in our proprietary branded products where we are seeing demand increase.

Speaker 3

Cash used from operations for the Q3 was approximately $4,600,000 primarily related to the aforementioned prepaid investments. Year to date, the company generated positive cash from operations of 2,800,000 That said, the company has sufficient reserves with over $60,000,000 held in money market accounts and short term low risk investments at September 30, 2023. In the Q3, the company decreased inventory by approximately $700,000 Compared to the Q2. As we look at the Q4, 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 4th quarter to help drive additional sell through of inventory.

Speaker 3

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 220,000,000 $225,000,000 and full year adjusted EBITDA loss to be in the range of minus $4,000,000 to minus $6,000,000 We believe The 4th quarter should benefit from lower inventories and continued rationalization of operating expenses through our strategic initiatives.

Speaker 3

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 and driving long term shareholder value. Positioning the business a 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.

Speaker 3

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

Speaker 2

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 by our continued progress 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.

Speaker 2

We will now take your questions.

Operator

On your touch tone phone. One moment please for your first question. Your first question comes from Aaron Grey from Alliance Global Partners. Please go ahead.

Speaker 4

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 to Schedule 3. For you guys, maybe more of an indirect impact, 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 when Schedule 3 could have a removal of 280E, Some of your players are going to be pulling back on CapEx initiatives and how that could change and direct benefit you guys could have from that. Thank you.

Speaker 2

Aaron, I find it quite exciting and I think the industry

Speaker 5

needs it currently.

Speaker 2

There is 100 of 1,000,000 of dollars right now being spent on 280 tax penalties as you probably know. I mean we're talking 100 of 1,000,000 of dollars. And with this money coming back into the industry at reschedule, The money will go to the MSOs and the large single state operators back onto their balance sheet, to strengthen balance sheets. And with that, We do believe we'll start coming into expansion of facilities and also more importantly into refreshing facilities. We've seen so many build outs from 2019 to 2021.

Speaker 2

And with the life expectancy The LED lighting and DU's and a lot of the durable products that they use, they will become becoming a tremendous a fresh 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 A lot of the business coming out of 280E if it goes away with the rescheduling.

Speaker 2

So we're excited about it and We got our fingers crossed and like we all know in the next couple of months we should be hearing something.

Speaker 4

Okay, great. Thanks for that color. And then second one for me, just kind of bring down the store fleet, 50 now, sounds like you'll be at about 44th, another 6 in the upcoming quarter. Number 1, how do you feel with the store fleet at that level? Do you feel like kind of hold there Maybe some smaller growth opportunities to open up some new stores.

Speaker 4

And then number 2, on the 14% Same store sales decline. Could you maybe provide what that might be on a pro form a basis on what the new 44 will be including the 6 you plan to consolidate in in 4Q.

Speaker 2

Thank you. Yes. I'll start and then send it over to Greg. With the 6 stores there and that brings us down to 50. So You're double counting the 6.

Speaker 2

So we were at 56 with the 6 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.

Speaker 2

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 And when you take a look at what we've closed in the last 4 months, it was 12 stores, I think 15 during the last 7 or 8 months, but most of them 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.

Speaker 2

But 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 2 fold opposed to 1. And when you look at the stores that we've closed, the 12 stores that we closed accounted for about $22,000,000 Greg, do you have anything to add to that?

Speaker 3

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 $3,000,000 to $4,000,000 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 Q4 as well. And the number around 50, Erin, just to mention is inclusive of the Q4 activity, where we've ceased operations within November and expect to conclude The operational procedures around closing by the end of the month.

Speaker 3

So that's an all in number for us at this point.

Speaker 2

Yes, Aaron, just a little more color. Aaron, just a little more color with 7 stores in California, 3 stores in Colorado, 1 store in Michigan and the 1 store in Washington.

Speaker 4

Thanks for the color. Appreciate that. Thanks for the color and the clarification. I'll jump back in the queue.

Speaker 2

Thank you, Aaron.

Operator

Your next question comes from Andrew Carter from Stifel. Please go ahead.

Speaker 5

Hey, thanks. Just I want to build on that just a little bit with the same Obviously, you're closing the more redundant locations and therefore there should be some kind of lift Within the cannibalization, so I think we can 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?

Speaker 2

Aaron, I believe that we see it next year. We've been bouncing along the bottom this year. Our same store sales for the last 6 months have 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.

Speaker 2

We do believe That business is going to restart, and GrowGen will be a better company for it. Can I tell you it's going to happen in the Q1, Q4 this year, I can't tell you that? But with what's going on in legislation right now, I think of 280E, I think if we reschedule, you'll see money coming back into this industry. So we're very optimistic where we've brought the cost levels of this company. We brought costs down almost $25,000,000 over the last couple of years.

Speaker 2

We brought inventory down over $30,000,000 over the last couple of years. So we are working hard at getting this company back profitable and getting same store sales the other way. We closed a lot of the stores that we closed were redundant, but a portion of them were 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 fuel same store sales growth at our stores.

Speaker 5

The second question I wanted 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 reads in the category of kind of the necessity of that last mile. Do you believe like the 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 Grover doesn't have to have it in 24 hours.

Speaker 5

He 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.

Speaker 2

Yes. When I look at GrowGen right now in our store counts, 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.

Speaker 2

So with more money going back onto the balance sheet, 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. And you've seen it through the year. You've seen it through our numbers right now.

Speaker 2

But the most exciting part of GrowGen right now The uptake of our private label products and the brands that we're bringing to market. We're launching drip powders this quarter to follow-up on our Drip nutrient line that's had a tremendous first year for us. We're adding products onto our Charcutter brands. We're launching a benching from our MMI company, single tier benching. So there's a lot of excitement in our company right now, But getting costs in line with really it's the new norm in the business if you ask me.

Speaker 2

There are people waking up in the morning and deciding to go out and start growing. That's kind of that's run its course. So you're seeing many more legal growers out there, and also single license in states that are allowing. As you saw in Ohio yesterday, They have very favorable homegrowers in Ohio. You probably will see a store from GrowGen in Ohio this year.

Speaker 2

It's not probably Q1 next year. We will still be expanding, but you're probably talking 1 or 2 stores in states, not what we used to have. The industry right now is more predictable on forecasting is better. So less is more right now for us.

Speaker 5

Thanks. I'll pass it on.

Operator

And your next question is from Eric Des Lauriers from Craig Hallum Capital Group. Please go ahead.

Speaker 6

Great. Thank you for taking my question. I guess first one just kind of following up on the Store outlook here. It sounds like you're mostly consolidating stores in these more legacy unlimited license markets here. You mentioned Ohio is a place that you might look to add a store within the next couple of months here.

Speaker 6

Beyond this newly legalized Ohio state here, are there other states that you are looking to sort of continue expanding in? I guess, just How should we think of the overall expansion plans kind of going forward here? Is it kind of following states as they legalize? Or do you have Sort of a more extensive roadmap for call it the next year or so.

Speaker 2

Yes, Rick, the states that are legalizing dependent upon rules. Again, the Ohio rules were favorable. We have a 100,000 square foot warehouse in Ohio. So we'll probably only get store in Ohio and ship out of our warehouses within 24 hours. We're still looking at New York.

Speaker 2

We're looking at Pennsylvania, Maryland in a couple of other states. We'd love to add another store in Missouri and New Jersey. But right now, we're taking a wait and see attitude. The states that we're already in, we believe that we're pretty Well served in those states and aren't looking to add to footprints. But if something comes up that's beneficial to our shareholders, We will do it.

Speaker 2

What we're really looking for right now is stores that are closing. We're bringing them into the GrowGen buying some inventory from them and taking customer lists and sometimes some employees. We did that in in St. Louis this year and it worked out tremendously for us. So it's just that wait and see and see where the market goes.

Speaker 2

But the one thing that we will continue to do is keep our balance That's helpful. I appreciate that

Speaker 6

color. Excellent from me. I think I caught in some of the Q and A here that, using private label as a percentage of overall sales or maybe it's as a percent of retail sales, I'm not sure, but that could go up into the 20s next year. I think that's an increase from Sort of previous commentary. Could you just kind of expand on that a bit of do you need to get additional new products in line here.

Speaker 6

I know you have a handful that you've just recently Introduce here, is this sort of portfolio of proprietary brands now sufficient to get you to that 20% plus level. And if you could kind of if you're willing to share any And longer term goals of where you think private label could be as a percentage of sales, that'd be helpful. Thanks.

Speaker 2

I believe that What we have in house right now with the launch of drip hydro powders will bring us into that 20% mark next year. We're also doing a lot of work through the Harvest Company, and we will be launching products into ITC next year, Pruners and Garden in a Box that we've just started to roll out certain mushroom kits that we're rolling out, Well, CharCor has had a wonderful year this has had a wonderful 2023 and we continue to launch new CharCor products from CharCor. We just entered the propagation space with COCO coins. So there's a lot going on right now in our private label division And it's really what's fueling RoGen right now, starting to fuel new customers coming to our stores and also on the distribution side of it. So we're excited and we do believe you will see that number in the 2020s next year.

Speaker 2

Further out into 2025, we do We believe there's a lot of wonderful products from other casino vendors out there right now. So we believe somewhere between that 30% to 35% number when we fully grow up and that will probably be 2026, 2027. We do believe we've reached that number. Thank you. Appreciate it.

Operator

Your next question comes from Brian Niudal from Oppenheimer. Please go ahead.

Speaker 1

Hey, guys. Good afternoon.

Speaker 2

Good afternoon, Brian.

Speaker 7

So I apologize this is repetitive. I do want you to jump in the call late. But just with regard to the store closing, are you is this repositioning within Are you with these closings exiting some markets? And then a second question, and I apologize if you may have already laid this out. But how should we think about kind of the near term financial implications of closing these stores from a sales loss perspective as well as an expense reduction perspective.

Speaker 2

The 12 stores that we've closed, Brian, in the last 4 months, we weren't leasing markets, they were redundancies. Most I think probably 10 or 11 other stores within 30 miles is another store that we had. They were smaller stores within regions and not performing as well as we would have liked. And we've done a decent job getting out of most of the leases right now and cutting When you look from a financial side of it, those 12 stores accounted for about $22,000,000 of business in 2022 And that was tailing off into 2023. From a revenue standpoint, what we believe we're going to keep, Somewhere in that 50% mark, we usually will keep a majority of the commercial customers.

Speaker 2

And depending upon which store it is And how close there's another store to it, that's where the home grown markets will fall. We believe that again GrowGen still is the best on we have the best stock in our stores, we have the best solutions and again people still want to shop with us. So we are incentivizing our staff to keep these customers to go getting the customers. We're doing work before closing stores with contacting customers and giving them benefits understanding of what percentage we kept, but we do track it. Right now for guidance, we aren't changing guidance for 2023.

Speaker 2

So with that, you'll probably drop $3,000,000 or $4,000,000 off the Q4, but we still we're very comfortable with guidance right now for the year.

Speaker 7

That's very helpful, Jerry. And then a follow-up question if I could. Sorry, same caveat if you address this, I apologize. But gross margin looked A bit better here. So I guess, when you confirm that, but then also what how should we think about the drivers there of the better gross margins in Q3?

Speaker 2

Greg, you can take that.

Speaker 3

Yes. So I think when you look at the Q3 gross margin, the primary driver within the period itself was Private label more than any other independent factor. On a quarter over quarter basis, we drove private label from 15% to 17% year over year it was 13% to 17%. 75% of our Q3 sales were from the retail business, which in itself Improve a point and a half on margin, primarily from some of the private label benefits also some improvement And mix as well as price increases within some of our products as we're focused on profitability of the business. Separate from that, I think you're starting to see early signs of some of the margin improvements from the distribution development and investments that we've made as we're going out and negotiating larger bulk buys, negotiating points off those SKUs that we're bringing into our portfolio and then recognizing a slightly larger margin on the sale itself.

Speaker 3

So there's a lot of factors that go into it, but we were very, very pleased with how the quarter reported and we're optimistic that we'll continue to build on this into future periods.

Speaker 7

I appreciate all the color. Thanks a lot.

Speaker 8

Thanks, Brent.

Operator

Your next question comes from Scott Fortune from Roth and Kilometers. Please go ahead.

Speaker 8

Yes, good afternoon. Thanks for the questions. Just kind of follow-up on that. Can you break down a little bit or provide a little more color On the sustainable kind of model that you're looking, Bill, was the consumables, what percent came from consumables versus the equipment mix. I know if we see rescheduling, which we think is likely, that could increase the equipment side of it, but just kind of Give us a sense of that mix and how you see it kind of going forward in 2024 moving forward with the margin improvement there.

Speaker 1

Greg, do you have any specifics with that or you want me to take it?

Speaker 3

Maybe I'll just start Darren and pass it over to you. I mean, What we've seen on a consumables versus durables basis over the last several quarters is certainly more stabilization In the consumables end of our business primarily in the Charcor and Dripline, which are our private label brands. I think Charcor at this point in time is Maybe our best selling brand in our entire portfolio. So you're seeing about a 75%, 25% mix, Which has been generally consistent over the last 3 or 4 quarters as we've looked at the business and certainly down from some of the higher end years or quarters in 2020 2021 when we're seeing a lot of build activity. So we do have a fair amount of comfort at this point with Where consumables are and how they're supporting kind of the baseline of the business.

Speaker 3

And Darren, I'll pass it over to you.

Speaker 2

Yes, Scott, on

Speaker 3

the other side of that,

Speaker 2

with rescheduling, rescheduling does come. There is no question that build outs will resume money will come into the industry and we still believe that there's a tremendous refresh cycle coming. So With that consumables will stay the same, if not start picking up a notch as people hopefully start opening up certain rooms that they've closed. But we do believe you'll see a tremendous lift on the durable side of it, on the lighting side and on the DU side of it. And we are seeing much more bidding.

Speaker 2

We're seeing a tremendous amount of bidding right now on commercial products around the country in anticipation of rescheduling. So I think our commercial team has been extremely busy, the busiest that they've been in the last couple of years. Albeit it takes time to get these projects done, but the amount of quoting we're doing right now It's certainly much different than we've seen in no, it's much better than we've seen in the last couple of years.

Speaker 8

Great. I appreciate that color. And then just real one other where are you with the inventory levels kind of Obviously, with the discounting of inventory from competitors, is that kind of playing out here? Are we still seeing some pressure there? And then with consolidating your store base, what's kind of the normalized inventory level that you're looking at?

Speaker 8

I know you have like 76 1,000,000 or something at this quarter. And where are the turns that are kind of you focused on targeting towards getting on inventory level 5 things?

Speaker 2

Greg, I'm going to send that fun question over to you.

Speaker 3

Yes. So inventory, we're highly focused on this quarter. As we moved into our new European warehouse management systems, we loaded on inventory a little bit heading into that kind of massive change management piece in our business, Which we think went pretty well. So now we're looking at eliminating redundancies in our inventory and driving progress in the 4th quarter. We think there is opportunity to improve upon our turns.

Speaker 3

Where we're adding inventory more than anywhere else right now is on our private label side of things as there's longer lead times and demand is increasing. We still have a lot of very, very good vendors domestically that We have great partnerships with as well, that will continue to carry their products and sell through. But we think there's opportunity to reduce inventory, $5,000,000 or so in the 4th quarter and then we'll probably have more color on the next call in terms of what that might look like for 2024.

Speaker 8

Appreciate it. Thanks guys.

Speaker 2

Yes.

Operator

Your next question comes from Mark Smith from Lake Street Capital Markets. Please go ahead.

Speaker 9

Hi, guys. Just a follow-up from that last one. Darren, within your private label, what does your mix look like there of kind of consumables versus durables?

Speaker 2

I would say consumable is probably at about 80% of it right now on the 17%. And we have a lighting brand, Ion Lights that have been quite successful. It is our leading lighting brand right now in GrowGen. But the leading part of our portfolio right now on our Private label side is certainly Charcor and DRIP has had a tremendous launch this year and is growing very quickly. So we believe that will stay somewhere like that eighty-twenty, maybe ninety-ten, but much more on the consumable side than the durable side.

Speaker 2

The only thing on the durable side you'll see from GrowGen Is a lighting brand ion and again some people include fans and durables or consumables. We do have a We have decent fan business, the durable breeze brand has been selling for many years. And that's really the 9 years of what you're seeing. The only difference next year, we are bringing to market a single tiered bench from MMI that we believe will make some inroads into the industry.

Speaker 9

Okay. And then as we look at potential growth down the road, What are you seeing in kind of M and A market for stores? I know you said you're looking at some that are kind of closures right now. And what's kind of your Strategy as far as mix that you see us in buying versus building.

Speaker 2

Right now, we haven't been 100% concentrating on it, Mark. We've been getting our own house in order, especially with the launch of our ERP system. So we've had a quiet 6 months on the M and A side of it. But we do believe next year you will see us back. Certainly nothing like you've seen in the past.

Speaker 2

We will do it slowly and deliberately and depends what markets we're going into and what is there. We still do believe with the with our distribution centers working Our commercial team out there, there's a lot of large commercial growers that don't come to the stores anymore

Speaker 1

and we can ship out

Speaker 2

of our warehouses to them. So we're just balancing it right now. If you ask me, we'll probably add 5 stores to the portfolio next year, But you will see some consolidations from GrowGen next year, depending upon leases, but certainly nowhere in the realm of what you've seen this year. Thank you.

Operator

And there are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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Earnings Conference Call
GrowGeneration Q3 2023
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