GrowGeneration Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Welcome to GrowGeneration's 2nd Quarter 2023 Earnings Conference Call. My name is Chris. I'll 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'll now hand the call over to Clay Krumlov with ICR.

Operator

Clay, please go ahead.

Speaker 1

Good afternoon, and welcome, everyone, to the GrowGeneration Second Quarter 20 20 3 Earnings Results Conference Call. Today's call is being recorded. With us today are 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 2nd quarter earnings release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website at ir.growgeneration.com.

Speaker 1

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 will use some non GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release, which provide reconciliations of non GAAP financial measures to the most directly comparable GAAP measures Are all available on our website.

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 Lampert. Darren?

Speaker 2

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our Q2 2023 financial results and 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 stepping up to every challenge and for being steadfast in executing our company's strategy. I am pleased with GrowGen's 2nd quarter results.

Speaker 2

I'm happy to discuss the great progress we have made against some of our key initiatives to drive future growth and profitability, including the official launch of our new ERP system on July 1. In the Q2 of 2023, we generated net revenue of $63,900,000 which represents a 12% sequential improvement over the Q1 of 2023, consistent with the expectations we communicated earlier this year. Recall That historically, the Q2 is the strongest quarter of the year due to seasonality of the planting and growing cycle. I'm especially pleased that we generated positive adjusted EBITDA of $856,000 in the quarter, Which represents a significant improvement versus the prior quarter's adjusted EBITDA loss of 1,800,000 As we've detailed on previous calls, we made significant progress rightsizing our cost structure over the last year And we're encouraged that those efforts are now bearing tangible results in our P and L. Additionally, we ended the Q2 with $71,000,000 of cash, Cash equivalents and marketable securities, no debt and $77,000,000 of inventory on our balance sheet.

Speaker 2

And year to date, we've generated more than $7,000,000 of operating cash flow. All this to say, Despite the ongoing challenges in our industry, GrowGen remains in a strong financial position to continue investing for growth, while putting profitability at the forefront. I'll reiterate that we are happy with our 2nd quarter results That represents the progress we've been striving to achieve. However, the broader cannabis industry Continues to face headwinds and GrowGen is not immune to these issues. With capital availability and investment in an all time low And interest rates reaching their highest point since 2007.

Speaker 2

Growers simply aren't building out capacity, which means demand for durable products has slowed beyond what we expected. In addition, the federal legislative agenda has not moved in our favor and in fact Seems to be getting less favorable. On a positive note, we are seeing continued market acceptance of our private label brand strategy And growth in our consumable products, including our recently launched Nutrienx and Additiveslime Drip Hydro and our Cocoa line of products, Charcor. What remains true is that we believe we've made significant progress transforming our business to be more nimble, Efficient and better positioned for profitable growth in 2023 and beyond. And we're certainly not backing away from the priorities We're singularly focused on managing our business despite what's happening in the cannabis industry That may continue to weigh on the balance of the year.

Speaker 2

While we maintain our cautious optimism about the next 12 months, It's fair to say we are now more on the cautious side about the back half of the year than we were last time we spoke. That said, investing for growth and searching out opportunities is what we're coming to work for every day. As we discussed last quarter, what that means in practical terms is, we will continue building and growing our private label brand portfolio and expanding our distribution channels. We remain on the acquisition front with multiple acquisitions in the second quarter. And most importantly, we are putting profitability at the forefront, focusing on margin expansion and profitable growth.

Speaker 2

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 of our private label products. Private label accounted for $7,600,000 Retail and e commerce sales in the Q2 of 2023, which is around 15% of our overall retail and e commerce sales, up from 10.7% in the Q2 of 2022. In addition, GrowGen is currently working on an expansion initiative that will enhance the shopping experience for all garden enthusiasts. In 2024, We expect to add dedicated gardening sections in select retail stores to attract the home gardening consumer.

Speaker 2

This development will feature traditional gardening products alongside our private label brands. 2nd, ROGEN is actively seeking accretive acquisitions where we believe they are complementary to our current business. We believe we're one of the few companies that is well positioned and well capitalized enough to take advantage of the attractive valuations in the hydroponics and garden center space. Our track record of execution with prudent balance sheet management and controlling expenses allows us the flexibility. So far this year, we acquired a store in Traverse, Michigan in January.

Speaker 2

We entered our 17th state with the acquisition of a store in Bozeman, Montana in early April. We acquired a retail store in Jackson, Michigan in April and added our 18th state with the acquisition of 2 retail locations in Alaska and Maine. 3rd, we are prioritizing profitable growth, which we believe we will attain through our continued efforts to expand revenue and execute our margin expansion strategies. We are constantly analyzing the business for additional optimization and cost cutting opportunities and expect to continue benefit to flow through our margins through the remainder of 2023 2024. As part of these efforts, we're constantly assessing the performance of our stores with respect to redundancies in the footprint.

Speaker 2

Separately and importantly, I'm pleased to announce that we have fully rolled out and implemented our new ERP system with Oracle, NetSuite and point of sale and warehouse management systems with Manhattan Associates during the 2nd quarter. This represents a tremendous milestone for GrowGen and our supply chain management capabilities and will directly benefit our company in terms of better freight and logistic rates, optimize order timing and filling And ultimately, improve customer service and relationships. 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, and we are pleased with the progress that has been made to date. We are continuing to work through solutions to some of the more disruptive situations that we expect to have some impact on our 3rd quarter results.

Speaker 2

This early in the quarter, we are not prepared to quantify those potential impacts, if any, on today's call. Despite that, we are happy where we are in the process and we look forward to updating you on our progress during our Q3 call in November. Turning to guidance for full year 2023. We're updating our guidance to reflect our view of the broader industry Today, given our expectation of softer than expected demand in the 3rd and 4th quarters of this year. We now expect 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 Q2 2023 financial results and then I will discuss our updated full year 2023 guidance. For the Q2, GrowGeneration generated revenue of $63,900,000 versus $71,000,000 in the Q2 of 2022, representing a decline of approximately 10.1%. Our same store sales for the Q2 of 2023 We're $44,700,000 compared to prior year sales of $52,600,000 representing a 15.1% decline against the comparable year ago quarter. The decline in same store sales in the 2nd quarter represents a significant sequential improvement over prior quarters.

Speaker 3

Specifically, we observed a 21.5% sequential improvement in the 2nd quarter compared to the 1st quarter Year over year same store sales percentage. Our e commerce revenue showed a 9 basis point increase year over year And remain normalized at $3,700,000 Our distribution and other revenue was $13,300,000 for the quarter compared to $12,000,000 in the year ago period, representing an improvement of 10%. Gross profit margin Was 26.8 percent for the Q2 of 2023, down approximately 185 basis points from the Q1 of 2023. The decrease in gross margin in the Q2 of 2023 Was largely attributed to a 133 basis point impact from shrink and obsolescence expense, primarily driven from the restructuring of our distribution facilities as well as a 32 basis point impact for margin pressure on Lighting, primarily driven from vendor price reductions. The restructuring was a one time event And related to the closure of our Ogden distribution facility and set up costs associated to pre opening of our Columbus, Ohio Distribution facility.

Speaker 3

Store operating costs and other operational expenses declined from 13,800,000 in the Q2 of 2022 to $12,300,000 in the Q2 of 2023, representing a 10.9% reduction. The savings year over year were primarily attributed to rationalization of store count as well as payroll reductions. We believe that the expense reductions to date are sustainable and we expect to execute upon further reductions in the back half of twenty twenty three. Selling, general and administrative or SG and A costs were $7,500,000 in the 2nd quarter of which 947,000 Was derived from stock based compensation. This compares to $6,800,000 in the Q1 with 567,000 of stock based compensation.

Speaker 3

This represents a 10% increase quarter over quarter to SG and A, primarily driven from share based compensation. Compared to the Q2 last year, SG and A expense decreased $2,300,000 in 2023 with overall savings driven from payroll reductions and increase cost control over a broad range of categories. Depreciation and amortization of intangibles was $3,800,000 in the Q2 of 2023 compared to $4,800,000 in the year ago period. In the Q2 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, primarily resulting from the 2022 impairment of goodwill. Net loss for the Q2 was 5,700,000 or negative $0.09 per share compared to a net loss of $136,400,000 or negative $2.24 per share in the year ago period. Compared to the Q1 of 2023, the company improved net income from a loss of 6,100,000 to a net loss of $5,700,000 Adjusted EBITDA, which excludes interest, taxes, depreciation, Amortization, restructuring charges and share based compensation was $856,000 profit for the Q2 of 2023 compared to a loss of $3,000,000 in the Q2 of 2022. Compared to the Q1 of 2023, The company improved adjusted EBITDA from a loss of $1,800,000 to $856,000 profit, primarily resulting from the increased revenue as well as sustainable reductions in expense. In the Q2, the company included $1,200,000 of expenses related to store consolidations And restructuring costs of establishing a distribution center in Columbus, Ohio.

Speaker 3

Related to the balance sheet, As of June 30, 2023, the company had total cash, cash equivalents and marketable securities of $70,600,000 which was a decrease of $1,300,000 to the Q1 of 2023. The company leveraged 3 point $2,000,000 of cash in the 2nd quarter for investment of acquisitions. From a year over year perspective, Cash and cash equivalents increased by $5,000,000 mainly due to inventory rationalization measures and other strategic initiatives. Within working capital, the company executed on quarter over quarter improvements within accounts receivable, prepaid and accounts payable from a cash flow perspective. As such, the company generated positive cash from operations of $3,900,000 in the quarter.

Speaker 3

In the Q2, the company increased inventory by approximately $1,100,000 compared to the Q1. The increase in inventory position was largely due to stocking orders of a more seasonally active second quarter. Further, With the rollout of the new ERP at July 1, 2023, the company increased inventory to hedge potential risk on a short term basis with regards to change management of new technology. As we contemplate the back half of twenty twenty three, the company will aim to reduce its Overall inventory position, while ensuring that we continue to meet the procurement needs of our customers. Now Moving to our full year 2023 outlook.

Speaker 3

As Darren mentioned, we are changing 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 Well, we are pleased with our 2nd quarter results. We have not yet seen the industry improvements in the Q3 to date that we initially expected. Within our second quarter results, We observed continued stabilization in our expense structure and believe that we achieved sufficient alignment on cost of sales. As we contemplate the back half of twenty twenty three and lower sales demand, we expect to execute on further opportunities for cost savings. As Darren mentioned, we expect continued industry headwinds in the latter half of twenty twenty three and are cautiously forecasting revenue and adjusted EBITDA to slow sequentially through the balance of the year compared to our Q2 results.

Speaker 3

That said, 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 while driving long term shareholder value. Positioning the business for long term profitability continues to be a top priority in 2023. Our approach to capital allocation remains focused on a disciplined approach to return on invested capital. We completed 3 M and A transactions at desirable valuation in the Q2 and we'll continue to execute upon the right opportunities to sustainably grow our business. We are investing in transformational technology that will help propel our company through future business cycles.

Speaker 3

Lastly, we continue to invest capital in our development of private label products and initiatives that expand our value proposition to a broader base of customers. To close, I'll reiterate that our daily mandate is executing our business strategy with a sharp focus on long term profitability and shareholder value. With that, I will turn the call back over to Darren for closing remarks.

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 in 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're encouraged by our continued progress and remain laser focused on controlling what we can control and ultimately emerge as 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?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Aaron Grey, Alliance Global Partners. Aaron, please go ahead.

Speaker 4

Hi, good evening and thank you very much for the questions. First one for me, I want to talk about the guidance as it relates to Maybe the embedded gross margin expectations. So you talked about for this quarter 130 basis points from the shrinkage restructuring. Imagine that's more than one time event. So just how best to think about gross margins in the back half, you get that 130 back, that lighting reduction of of 32 basis points, is that going to remain within that?

Speaker 4

So just any of the gross margin expectations we should have for the back half embedded, in the guidance will be very helpful. Thank you.

Speaker 2

Craig, do you want to take that?

Speaker 3

Yes. So, hey, Aaron. As far as the back half Of 2023, we're anticipating gross margin to normalize in the mid to upper 20s. And what does that mean for our business generally? We're looking at a gross margin profile in that 27%, 28% range.

Speaker 3

And we're continuing to focus on private label penetration as a long term strategy to continue to expand our gross profit margin on a long term perspective.

Speaker 2

Yes, Aaron, with that, what we are Seeing and we saw in the Q2 is tremendous discounting coming out of some of the vendors in the industry to move inventory. And with that, we've taken some one time lumps on certain products that we're holding in inventory. And we do believe that That will alleviate through the back half of the year. But on a normalized basis, we still do believe that you will see margins Normalizing in the high 20s and we do believe when this all shakes out that you will see margins at GrowGen in the low 30s, but certainly not in the back half of this year.

Speaker 4

Thanks. I really appreciate that detail. And then going more Towards the top line, lowering the back half expectations despite 2Q, it sounds like it came roughly in line with what you're expecting and So looking towards the back half and what you're seeing, are you seeing just more of a shakeout maybe within the cultivators than you might have been I'm expecting less manners, it's just same clients, but then they're buying less. Maybe some more color in terms of what's driving that and what you're seeing out there and then whether or not you think that might be more Attracted being more of a shakeout or if it's just the current customer base buying less and maybe it rebounds more in 2024. So more of what you're seeing in terms of that outlook would be appreciated.

Speaker 4

Thank you.

Speaker 2

Yes. Right now, Aaron, we're not seeing a pickup in CapEx as most of the cultivators are managing our balance sheets And waiting out the industry downturn. I think you've heard it from most of the MSOs and single state operators. They're not building unless they have to right now. And I think the name of the game right now is just wait and see.

Speaker 2

And what you're seeing is a very slow adoption And new states coming aboard. And in all states, a lot of the cultivators are happy with their positions right now, And they're not taking shots at adding to the positions. They're adding to dispensaries, but certainly not the cultivation right now. And I think what you're going to need right now in the industry is whether it's the Safe Act, whether it's legalization, Whether it's something to get a shot in the arm, but what you're also hearing from the cultivators around the country and the large operators is there's just no capital coming in. And I think you see that also from your vantage point.

Speaker 2

And I do believe that the industry needs capital right now. There was a Tremendous amount of facilities built in 2020 2021. And you start to seeing that people are just optimizing their facilities right now. But most of the sea changes you've seen in lighting and dehumidification came in 2020 2021. And there will be a refresh cycle coming in the next couple of years with the products that have been bought.

Speaker 2

But we still do believe that it's going to take time. Our business was up 12% quarter over quarter, which we couldn't be happier with. But right now, we're just not seeing the Enthusiasm from our customers right now on the build side of it, but like anything else, they're still managing their cultivation facilities and buying products from us every day.

Speaker 4

Really appreciate that color. And I'll drop back in the queue.

Operator

Thank you. Your next question comes from Brian Nagel, Oppenheimer. Brian, please go ahead.

Speaker 5

Hi. Good afternoon.

Speaker 2

Good afternoon, Brian.

Speaker 5

So just I guess Follow-up on that question, Darren. I know we talked a lot about the impacts of your partners not as aggressively or not building out Infrastructure. But are you as you look across the chain, and I guess, as you see, some of these states are probably more legal or more Have legalized more recently? Are you seeing a different trend there? Or is it really across the board?

Speaker 2

I think what we're seeing is a much slower trend In new legalized states, this late in the game, there are plenty of individuals that are still buying from the illegal markets. That's what they've done their whole life. So it's just taking time to convert them over to the legal markets. But you're also seeing a lack of capital. Wall Street has not raised money for any of the MSOs recently.

Speaker 2

What you're starting to do is seeing sale leasebacks here and there, but you're hearing it from the whole group. Everyone's optimizing their And waiting it out. And that's not necessarily bad for GrowGen. And again, we had a profitable quarter. We were up 12 Quarter over quarter.

Speaker 2

And we've made tremendous strides in our private label brands. And we still do believe that you will see from GrowGen next year, Is us getting into the gardening space, Penn and Garden stores around the country?

Speaker 5

All right. Then my second question, you mentioned you talked more about the acquisitions here. So just given the ongoing

Operator

Is the

Speaker 5

pricing for these targets becoming more evident?

Speaker 2

We're side of it right now. We certainly are taking a cautious We're happy with our portfolio around the country right now. There still are some states that GrowGen needs to be in. We'd like to be in Maryland. We'd like to be Ohio right now, we'd like to be in New York.

Speaker 2

So you will see stores in those states, but we don't believe right now that we need to go much deeper in the states that we're in.

Speaker 5

I appreciate all the color. Thanks, Darren.

Speaker 2

You're welcome.

Operator

Thank you. Your next question comes from Andrew Carter Stifel. Andrew, please go ahead.

Speaker 6

Hey, thanks. Good evening.

Speaker 7

What I wanted to ask is kind of looking in the back half guide, you're applying kind of Actually flat with the first half of the year. Store base was 64 at the end of the quarter, if I caught that. Is it are you closing more stores? Are the stores that you built that are Greenfield in line with your projection? Kind of just yes, what's the store closure target for the second half?

Speaker 2

No, I'll start with the story this year. As we said, I think in our script today and press release, we will be closing some more stores. With distribution, we are a P system. There are certain stores that are close to other locations. I mean, with the industry believe there is room for optimization, Both on right around GrowGen and costs and we will be working on cost structures over the next 6 months.

Speaker 7

2nd question I asked about how you mentioned discounting, you mentioned lighting in particular. So number 1,

Speaker 2

How much is the lighting? There was lighting inventory that we had from some major vendors of ours That discontinued certain models and brought pricing down up to 80% on certain of those models. And GrowGen was holding inventory. And it also did bring down pricing for the rest of the industry during those sales. Most of that inventory has been moved through.

Speaker 2

So we don't see it continuing. And again, we took our lumps in the Q2 because of it. You're seeing sporadic Discounting, you're seeing something else. As you've heard, private label brands are performing well, 15% of sales within our stores right now. And that's not within our distribution channels.

Speaker 2

We're selling into 500 stores around the country. So we do believe as we continue to Bring out best of breed products that margins will go higher and sales will go higher. We're working through a tremendously Difficult time in this industry and our team has done a tremendous job navigating the waters.

Speaker 6

Thanks. I'll pass it on.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Eric Delaurier, Craig Hallum Capital Group.

Speaker 8

So my question is How consumable sales are sort of trending so far this year and sort of what's embedded in the guide You're commenting on private label sales, which are mostly in the consumable area, that you're considering.

Speaker 2

Greg, do you want to try to unpack that for us?

Speaker 3

Yes. So, hey, Eric. For the back half of the year, we're looking at total revenue of somewhere in the range of $100,000,000 to 105,000,000 We traditionally see more strength in the Q3, of course, than the 4th. In terms of what does that mean for CapEx?

Speaker 8

Durables kind of bottoming out. I mean, is it reasonable to assume that consumable sales are kind of continuing to grow nicely and you just have this That's just being kind of more than offset by durables here.

Speaker 2

When you look at the durable business, Sometimes it's a one time sale of a big build out at low margins. So when you look at GrowGen, we will continue to build our consumable brands And we do believe our consumable brands have access into other parts of the industry into the gardening space. And that's really what excites us today. We believe right now that that's seventythirty, seventy fivetwenty five mix will stay. You may have certain quarters of pockets of strength on the build side.

Speaker 2

But most of it does go away. Forecast were to go to $100,000,000,000 2,030 on the legal side

Speaker 4

of it.

Speaker 2

And right now, I think you're still under $30,000,000,000 So the industry has slowed. So I would tell you that dependent upon the growth of the industry from the cultivator side, From the cultivation, the other part of the business, the consumable part of the business does pay the bills. And during the heyday, it was probably sixty-forty. And right now, it's probably running 75, 25, if you took a hard look at it. And but we do believe there'll be build, there'll be refresh Cycles coming online.

Speaker 2

So you will see pockets of strength in the future.

Speaker 8

Okay, great. That's very But it sounds like this seventythirtyseventyfivetwenty 5 is kind of sustainable for the status quo, which is good to hear. My last question is just on how to think about OpEx in the second half of the year. Obviously, there was some commentary on Continued rationalized expenses and more store closings, but I just wanted to see if perhaps there will be any impact from the ERP Implementation, I may have missed a comment there. So just wondering if you could kind of flush out the OpEx implication for the second half of the year.

Speaker 8

Thanks. Yes.

Speaker 3

Eric, I think what you saw from us in the second quarter is we took down total expense 600 Grand compared to the Q1. So we did see some improvements in the Q2 itself. And we believe that we'll continue to see Expense improvements both in SG and A and operating expense in the back half of the year. We're continuing to execute on store consolidations to where we'll see improvements directly in operating expense. And we have some improvements in SG and A that we expect as well in Q3 and Q4.

Speaker 3

So you'll see continued improvement from us from a cost perspective as we get through the remainder of the year. And that's important to us as we look at profitability against The lower base or aiming for that metric against the lower base.

Speaker 8

Thank you for taking my questions.

Speaker 2

Yes.

Operator

Thank you. Your next question comes from Scott Fortune, ROTH MKM. Scott, please go ahead.

Speaker 9

Yes, good afternoon and thanks for the questions. Just want to follow-up on, I guess, a couple of your bigger markets, California, Michigan. Obviously, you've seen weakness across the board or expecting weakness across the board in the second half, but just speak To those states more where you have higher exposure, what are you kind of seeing and kind of turnaround potentially in California Or we lumping all this in together here. Yes.

Speaker 2

I think when you look at California right now, Scott, We're seeing more strength in the Northern California than we are in Southern California right now, Even though our store is growing in Downtown LA, when you go out to the coast and out to Temecula in that area, Anza And like Elsinore, we're seeing tremendous weakness out there. So I guess it seems to be that it's scattered and I think it's scattered more with the outdoor growers. Our Santa Rosa store is performing well. So we are seeing some strength in California and we are seeing some weakness in California. And we are on we do believe that we'll be closing probably another 2 to 3 stores in California in the 3rd 4th quarters.

Speaker 2

We're also seeing weakness in the San Diego area. So I think it's case by case, just dependent upon where the customers are and where they feel comfortable growing right now. But some of the old very Strong areas in California have become very weak and it's mostly outdoor growing out there. Michigan right now for us It's pretty steady. We're not seeing a lift in Michigan, but we're not seeing further degradation in business in Michigan right now.

Speaker 2

Back East, again, Back East still remains it remains fluent for us. So business right now, as you saw same store sales were down 10% in the Q2, and that was versus 37% in the Q1 and 50% something a year earlier. So you're seeing Certainly that we're getting to that breakeven on same store sales point. So we've definitely have seen an uptick, Well, not like we would like to. We were certainly expecting much more pickup going into the 3rd and 4th quarters.

Speaker 2

And one of the reasons we're bringing numbers down today is we speak to cultivators every day. Our guys are on the street. We have seen over 600 employees out there And they're just not seeing they're not seeing the work coming in on the build side right now. But again, on the other People are buying soils every day, people are buying new cheese to feed the plants every day. So we still have 75,000 customers a month coming into

Speaker 9

Got it. I appreciate the color there. And then just real quick, obviously, one of your peers or supplier, I'll be calling as mentioned and mentioned quarterly earnings. Maybe it's time for the hydroponic market to And as we start getting more combinations together strategically, I know you can't really talk about Specifically, how are you looking at the competitive or kind of the partnerships opportunity in the hydroponic market And going forward here overall.

Speaker 2

The one thing I could tell you is we built this business from 0 revenues in 2014, $30,000,000 of revenue in 2018. Our balance sheet remains the strongest in the industry, which gives us tremendous flexibility, Really to do basically to build out the business model that we set forth. We're tremendously excited about bringing our products into the home and garden space. As I said earlier, we were at our first garden show and had tremendous interest From the Independent Garden Arena. So we're excited.

Speaker 2

We're bringing best of breed products to market. Does GrowGen need to consolidate? The answer is definitely not. But like always, Scott, as I say, whatever is in the best Whatever best for our shareholders, we will always entertain. But we've built quite a business.

Speaker 2

We just built out our ERP system that's taken us 2 years And a tremendous amount of money. We've built out distribution. So we have distribution of leading products that can Anywhere from cannabis to gardening. And what this world lacks right now is really an independent gardening Shane that has the knowledge of GrowGen.

Speaker 9

Got it. I appreciate the color. Thanks, Shane.

Operator

Thank you. Your next question comes from Mark Smith, Lake Street Capital Markets. Mark, please go ahead.

Speaker 10

Hi, guys. My question is really just first off around the comfort with Current inventory, you talked about some tough weakness with lighting. Is there anything out there that you've got an inventory that you're a little nervous about? Or how do you

Speaker 2

Go ahead, Greg. I'm sorry.

Speaker 3

No, you're good. Yes, Mark. Hey, I think when you look at our inventory, we ramped up inventory slightly in the quarter, largely due Some risk associated with the ERP launch. I think the ERP launch from an all practical standpoint for us Went pretty well at the beginning of July here. So we're working on bringing inventory back down a bit in the second half, now that we're comfortable with kind of where we're at on that In terms of our inventory itself, we look at it from an obsolescence, lower cost of market, overstock position Frequently every single quarter at a minimum.

Speaker 3

So we feel good about our reserves and how we look at our inventory, but we're certainly looking to make some incremental improvements through the back half of the year, particularly as it relates to the updated sales forecast that we have.

Speaker 10

Hopefully that helps. That's helpful. Other questions, just as we think about the store count and kind of big picture here, Darren, It sounds like a couple more closures coming probably in some of the more mature bigger states for you. Can you talk Two things, which states you really like? I think you mentioned New York, Ohio, where you really want to expand?

Speaker 10

And then As you look at peers, you'd mentioned some peers going out of business will hurt as they kind of liquidate their inventory. Does that present a good long term opportunity as you move into a market, somebody else kind of goes out of business and then it gives you Do you really take share over time? Maybe talk about where you're seeing opportunities, whether it's from closures from peers or states where you really want to expand?

Speaker 2

It goes both ways. I mean, we've done that. When we moved into the Missouri market, We built a store out in St. Louis. And prior to opening our store in St.

Speaker 2

Louis, a competitor went out of business. We bought their inventory, took their staff and moved it into the GrowGen store. So it gives you a tremendous leg up opposed to building a store slowly. If you can again, if you can take a store that makes sense in a place you want to be, it's always easier than building right now. So we do look at that And even looking at stores that could be closed doors taking their inventory and customer lists, in this industry, it's quite fickle.

Speaker 2

Many customers still like to shop at their old hydroponic store from 10 years ago. They have friends that work there. So we are very careful when it comes to that and we've turned down a lot of purchases No, it just weren't where we wanted to be. And we do believe with distribution, and GrowGen private label products, There are places that we have good customers that we sell to that we rather not compete with right now. So we weigh everything and whatever is in the best interest of our company, we will do.

Speaker 2

So right now, it's not a rush to build 100 stores. That rush was a couple of years ago, 3 years ago when the industry was booming. Right now, we're solely focused On managing our footprint, managing our balance sheet, managing our private label initiatives and distribution right now. So we will be adding stores much slowly than we thought and waiting really to see where this industry goes. But we are focusing solely as I said really On getting distribution up and getting private label into other locations.

Speaker 10

Excellent. Thank you.

Operator

Thank you. Your next question comes from Glenn Mattson, Ladenburg. Glenn, please go ahead.

Speaker 6

Yes. So the private label, I saw at 15%. I know that's kind of like flat line from last quarter. I think last quarter was around that same level, Update year over year. Can you just talk about what do you do to push that a little higher over Over the medium term, you've talked about a little bit, but just some detail maybe on like new product innovation.

Speaker 6

I mean, you talked about the gardening space. That's interesting, but I imagine it's going to take some time to build Progress there? And while you touched on that also in the Garden space, could you hit on what kind of investment you need to make to go after that space given that there's Other incumbents and all that kind of thing? Thanks.

Speaker 2

Inquestionably. To start with, we have many Line extensions coming out with brands that we do have. So you will see line extensions within our drip hydro brands, within our charcor brands. So we continue to innovate. We have another line extension shortly, hopefully coming on the drip on the powder side of our liquid brands.

Speaker 2

So like anything else, private label is growing. It started at 0 a couple of years ago. You will have certain quarters of stagnation within it as new products come to market. So again, we're very happy with that. Regarding space right now, Glenn, we're not that is that's a work in progress at the Q2 event next year We're putting together a plan that we will update Wall Street on probably in the Q4.

Speaker 6

Okay. And is there any other comments you can make on that top line in terms of seasonality in the back half? Because I'm just going back historical like in 2022, which was not necessarily a banner year, It was kind of flat Q2 to Q3 2021, which is a different environment. Obviously, it was down Maybe 10% or something, Q2 to Q3, is that obviously Q4 is the weakest, but can you just give us any sense of the magnitude From one quarter to the next?

Speaker 2

I think what you've seen also in I think what you've also seen in prior years was us adding stores during the second and third quarter, which helps sales in the latter part of the year. But the Q2 is planting season, Q3 is harvest season for outdoor. So we usually see the strongest part of the season is in the Q2 and Q3 usually does remain strong. As Greg said a little earlier as we said a little earlier, we're still assessing our ERP system. The rollout was like anything else always challenging.

Speaker 2

So we're still assessing there were certain sales lost because of it, but we do believe that it's moving in the right direction. We're just not seeing right now the kind of CapEx building we would like in the Q3 And it's quite early and we thought it was prudent to bring numbers down. Certainly, we hope we beat them. But right now, Q3 Appears to be slower than the second and the 4th quarter usually is the slowest quarter of the year.

Speaker 6

Okay, great. Thanks.

Operator

Thank you. There are no further questions at this time. I will now turn it back to Clay Crumless for closing remarks.

Speaker 1

Great. Thank you for joining our 2nd quarter earnings call today, and thank you for your interest in GrowGeneration. That concludes the call, and we'll speak to you again in November. You may disconnect.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect

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Earnings Conference Call
GrowGeneration Q2 2023
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