GrowGeneration Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2024

There are 9 speakers on the call.

Operator

Hello, and welcome to GrowGeneration's 4th Quarter 2023 Earnings Conference Call. My name is Jenny, 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 John Mills with ICR. Please go ahead.

Speaker 1

Thank you, and welcome everyone to the GrowGeneration's 4th quarter and full year 2023 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. You should have access to the company's 4th quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website at ir.growgeneration.com.

Speaker 1

Certain comments made on this call include forward looking statements, which are subject to Safe Harbor provisions of the Private Securities 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 at that time. Now, I will turn the call over to our Co Founder and CEO, Darren Lampert. Darren?

Speaker 2

Thank you, Ken, and good afternoon, everyone. Thank you for joining us today to discuss our Q4 and full year 2023 financial results and our full year 2024 guidance. As always, I want to thank each one of our employees across our company at GrowGen. I'm grateful to our entire team for their continued hard work and dedication. We are pleased that our full year 2023 net revenue of $226,000,000 exceeded our previously communicated guidance range of $220,000,000 to $225,000,000 Adjusted EBITDA for the year came in at a loss of $5,600,000 within our previously communicated guidance.

Speaker 2

We remain encouraged by the progress that we made last year and further rightsizing our business and positioning us for long term profitable growth. I'm also happy to report that 2024 is off to a strong start. As we noted a 19% improvement in gardening and cultivation sales in January from December. Further, we observed private label sales as a percentage of revenue eclipsed 20% in January. Because of our hard work and strategic focus, we are seeing areas of year over year growth and are optimistic that these efforts will continue to enhance our results.

Speaker 2

I also want to address our new segmentation that you will see in our 10 ks. Moving forward, we have separated our reporting into 2 segments. 1st, cultivation and gardening and second, storage solutions. Our cultivation and gardening segment represents our core hydroponic and organic gardening business. Our second segment, Storage Solutions, represents our MMI acquisition that we made over 2 years ago to help build out our benching and vertical racking offering.

Speaker 2

MMI has grown substantially since acquisition and has become a thriving business in its own right. Looking forward to 2024, we are focused on 3 main initiatives. Number 1, we are continuing to expand our brand portfolio, bringing to market innovative new proprietary products and building key partnerships with best of breed manufacturers. Number 2, we are attracting a large customer base, expanding our products, partnerships and opportunities in the home gardening market. And number 3, we're putting profitability at the forefront, continuing our focus on cost control, margin expansion and profitable growth.

Speaker 2

Touching briefly on each of these further. 1st, we continue to expand our proprietary and distributed brands and remain very satisfied with the results. As we've mentioned previously, a key pillar of our strategy focused on shifting more of our sales to higher margin proprietary brands. In 2023, proprietary brands accounted for $36,500,000 of sales, which amounts to approximately 19% of our overall gardening and cultivation sales, up from approximately 15% in 2022. Recent new proprietary products includes a much anticipated drip powder nutrient line, which provides a high quality, cost efficient nutrient solution to commercial and craft growers everywhere.

Speaker 2

We continue to focus on supporting this launch with over 150 active trials being conducted by licensed cannabis cultivators and we are excited by the early momentum we have seen thus far. We're also enhancing product offerings and customer value by expanding our distribution of top of the line trusted brands within the Hydrovonic base. For example, we recently announced a strategic partnership between our wholesale distribution arm HRG and Quest Climate, offering high quality and advanced dehumidification capabilities for commercial customers. Strategic partnerships remain a key piece of our strategy and we continue to evaluate our portfolio of offerings to drive sales growth by providing customers with a comprehensive suite of products. 2nd, we're excited to announce the official launch of The Harvest Company, our expanding consumer gardening line.

Speaker 2

This initiative focuses on a specialized product portfolio and branding that resonates specifically with home gardeners, emphasizing GrowGen's commitment to supporting sustainable and healthy living. Approximately one quarter of all U. S. Households grow microgreens, fruits and vegetables, gardening both indoors and outdoors. Our products include the already launched premium gloves and pruners as well as a garden in a box kit, an all in one solution for gardening enthusiasts with raised metal beds, soils, fertilizers and a curated selection of organic seeds.

Speaker 2

We believe there is compelling growth opportunity to further expand into the home gardening market and target consumers who want a different garden shopping experience than previous generations and who care about home cultivation of healthier organic microgreens, fruits and vegetables. And 3rd, we're putting profitability at the forefront with a continued focus on cost control, margin expansion and profitable growth. As part of our ongoing cost optimization efforts, we consolidated 14 retail locations in 2023 and have already consolidated an additional 3 retail locations in the Q1 of 2024, bringing our current store count to 47. Although we are constantly monitoring our retail footprint with respect to redundancies and non performance, we believe our consolidation efforts are largely behind us and look to use our current store count and geographic spread as a base for growth and positive same store sales. With respect to margin expansion, in addition to increasing sales of our proprietary products, we are very pleased with the growth of the consumable side of our business, especially noted in Q4.

Speaker 2

As you've heard from us before, consumable products typically command higher margins than durable products. So the shift to a greater percentage of our total sales being a consumable product has helped our margins. Consumable products are also typically reoccurring revenue generators, which offers more predictable revenue, enhanced customer engagement and opportunities for upselling and cross selling, particularly for our proprietary brands. Turning our attention to MMI, our Storage Solutions segment. I am thrilled to report remarkable progress and strategic advancement that underscore our commitment to innovation and excellence in this sector.

Speaker 2

Over the past 2 years, MMI has demonstrated exceptional growth, escalating from approximately $12,000,000 in 2021 to approximately $31,000,000 in 2023 revenue. This remarkable achievement is a testament to our team's dedication and the strategic initiatives we have implemented to drive sales growth and operational efficiency. Earnings from MMI have been equally impressive, reaching approximately $9,000,000 in 2023. In conjunction with today's earnings announcement, we're also announcing that we have engaged Lake Street Capital to seek strategic opportunities as it comes to this piece of our business. By monetizing this business, we believe we will maximize shareholder return and give GrowGen further flexibility to pursue growth both organically and through other acquisitions.

Speaker 2

Finally, before I discuss our 2024 guidance, I'd like to provide a brief update on cannabis legalization. The legal landscape for cannabis has undergone significant advancements recently with several new states legalizing cannabis as well as international movements. Notably, Germany's recent legalization, signaling a broader shift towards acceptance and regulation of cannabis. Specifically in the last 12 months in the United States, Maryland, Minnesota and Ohio have joined the growing list of states legalizing cannabis for recreational use. These developments not only expand the market for cannabis products, but also hinted broader implications for businesses operating within the industry.

Speaker 2

In the United States, there's growing optimism about the potential rescheduling of cannabis at the federal level, which could have a profound impact on commercial cultivators by eliminating the burden of Section 280E of the internal revenue code on plant touching businesses. As many of you know, this section of the code currently prohibits cannabis businesses from deducting ordinary business expenses through the federal classification of cannabis as a Schedule 1 drug under the Control Substance Act. Rescheduling would alleviate these tax burdens, significantly improving profitability for cannabis companies by allowing them to claim deductions like any other business. For GrowGen, these changes present a landscape with many opportunities. As more states legalize cannabis and issue new cultivation licenses, the demand for hydroponic and gardening equipment and supplies will grow, directly benefiting GrowJet's core business, supplying specialty hydroponic and organic gardening products at both the retail and wholesale levels.

Speaker 2

Internationally, developments like Germany's legalization to serve as a catalyst for increased global demand for cultivation equipment and supplies, positioning GrowGeneration to explore international expansion and export opportunities. Furthermore, rescheduling in the U. S. Has significantly enhanced the operational efficiency and profitability of cannabis producers, allowing them to expand operations and invest more in cultivation infrastructure, further increasing demand for our products. Turning to guidance for full year 2024, we expect net revenue in the range of $205,000,000 to $215,000,000 adjusted EBITDA in the range of a $2,000,000 loss to a $3,000,000 profit.

Speaker 2

As part of that, in the Q1 of 2024, we expect net revenue in the range of $45,000,000 to $48,000,000 and adjusted EBITDA in the range of a $1,000,000 loss to a $3,000,000 loss. As we look forward to 2024, we continue to focus on controlling what we can't control and managing our business prudently. I believe the hard work our team continues to do on a daily basis is putting GrowGen in a position for long term profitable growth in 2024 and beyond. With that, I will turn the call over to our CFO, Greg Sanders. Greg?

Speaker 3

Thank you, Darren, and good afternoon, everyone. First, I will address our 4th quarter and full year 2023 financial results and then I will discuss our preliminary outlook for the 2024 fiscal year. Starting with our Q4 results, GrowGeneration generated revenue of $49,500,000 versus $54,500,000 in the Q4 of 2022, representing a decline of approximately 9%. Our same store sales for the Gardening and Cultivation segment in the Q4 of 2023 were $35,600,000 compared to prior year sales of $37,000,000 representing a 3.6% decline against the comparable year ago quarter. Our sales of consumable products in the 4th quarter outperformed prior year on an absolute basis, which we believe is a favorable performance indicator.

Speaker 3

Our storage solutions revenue was $7,700,000 for the quarter compared to $7,800,000 in the year ago period. Gross profit margin was 23.5 percent for the Q4 2023, an increase of approximately 600 basis points from the prior year. As a reminder, the 4th quarter has historically lower margins due in part to end of year sales initiatives and any true up adjustments from full physical inventory counts that coincide with year end. In the Q4, shrink had a 480 basis point impact, which was partially to do with inventory discards from 12 store consolidations that were finalized from an operational perspective in the 4th quarter. Store operating costs and other operational expenses declined to $11,800,000 in the 4th quarter compared to $12,800,000 in the year ago period.

Speaker 3

The company closed and consolidated 12 locations in the 3rd Q4 of 2023, of which one time material closure costs were included in our Q4 results. We believe that the closures and consolidations align our operating model to future strategic priorities and allow for stronger operating leverage. Selling, general and administrative or SG and A costs were 7,900,000 dollars in the Q4 compared to $8,600,000 in the Q4 of 2022. This represents an 8.4% improvement to the year ago period. Depreciation and amortization of intangibles was $4,100,000 in the Q4 of 2023 compared to $4,000,000 in the year ago period.

Speaker 3

In the company's annual test of impairment, the company recognized $15,700,000 in impaired asset value. As a result, the company recorded non cash adjustments of $9,300,000 of goodwill and $6,200,000 of intangible assets. The adjustments were concluded in review of the carrying value of certain acquisition assets and were supported by updated assumptions on performance of the acquisitions and forward looking recoverability. Those updated assumptions are included in our forward looking guidance. Income tax in the 4th quarter was a benefit of $61,000 for tax purposes, but with a full valuation allowance, we did not observe a significant income tax provision benefit in the period.

Speaker 3

Net loss for the Q4 was 27,300,000 dollars or $0.44 per share compared to a net loss of $15,000,000 or $0.25 per share for the comparable year ago quarter. Withstanding the non cash impairments recorded in Q4 of 2023 related to the prior period acquisitions, the company would have recognized a $3,500,000 improvement year over year, which translates to a 23% improvement. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, share based compensation, impairment and restructuring charges was a loss of $3,700,000 for the Q4 of 2023 compared to a loss of $10,200,000 in the Q4 of 2022. The improvements in year over year performance are primarily related to the cost restructuring initiatives that we have communicated and executed on over the prior quarters. Now I will provide a quick overview of our results for the full year 2023.

Speaker 3

Net sales were down 52,000,000 dollars or 18.8 percent to $226,000,000 trailing from the full year 2022, which had sales of $278,000,000 dollars Gross profit for the full year 2023 decreased by $9,000,000 to $61,300,000 However, gross profit margin as a percentage increased 186 basis points to 27.1 percent for the full year 2023. As Darren mentioned earlier, we have taken a number of steps throughout the year to right size operating expenses and reduce our selling, general and administrative expense base. As a result of these efforts, we are proud to report a $13,600,000 expense reduction through our restructuring initiatives and improvements in operational efficiency. Related to the balance sheet, as of December 31, 2023, the company had total cash, cash equivalents and marketable securities of $65,000,000 Within working capital, the company reduced inventory by $12,200,000 partially offset by a $4,100,000 decrease in accounts payable as we reduced inventory orders and improved upon turns. We also invested approximately $6,700,000 for payments in CapEx associated with technology and distribution investments and $3,000,000 into acquisitions.

Speaker 2

On a

Speaker 3

full year basis, the company generated $1,400,000 in cash from operating activities, primarily driven from the reduction of inventory. I will now discuss our guidance for the full year 2024. We expect full year 2024 revenue to be between 205,000,000 $215,000,000 and full year adjusted EBITDA to be in the range of a $2,000,000 loss to a positive $3,000,000 profit. We expect 1st quarter revenue in the range of $45,000,000 to $48,000,000 and adjusted EBITDA to be in the range of a $1,000,000 loss to a $3,000,000 loss. In addition, we expect during 2024 to begin reporting positive same store sales comps for the first time since 2021.

Speaker 3

Our updated guidance assumes normalized sales trends along with continued improvements in our operating expense base from our strategic operating initiatives. That being said, we continue to be confident with our position in the industry. We remain focused on balance sheet management and optimization of our expense structure with the intent to return the business to profitability. Our capital allocation approach is centered on long term planning. We are optimizing our digital and distribution capabilities to propel our company through future business cycles with focus on adding value to our end customer.

Speaker 3

Further, we will continue to invest capital into the 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 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 for our continued progress and remain laser focused on continuing 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?

Operator

Thank you. Your first question is from Scott Fortune from Roth MKM. Please ask your question.

Speaker 4

Yes. Good afternoon and thank you for the questions. Just wanted to kind of hone in on the guidance a little bit. I know you've lowered 3 more stores in this quarter. Kind of what's that kind of store base that you're looking for in the guidance here moving forward from that standpoint?

Speaker 4

And then I have a follow-up question. Just kind of a little more picture on what you're seeing opportunity for stores in new states coming on board versus kind of replacing or kind of shuttering down some old stores in some of the more mature markets? A little bit color on that would

Speaker 3

be great.

Speaker 2

Yes, Scott. I think right now we're pretty happy with our portfolio of stores around the country. I do believe you'll see another 2 to 3 store closings within the 1st 6 months. And we will see we're still looking around the country and dependent upon what we see on the legislative side, the legalization side and the store side. We're a buyer for the right price.

Speaker 2

If there's something that will be accretive to our portfolio. And as you know, we've just finished building out 100,000 square feet of distribution in Ohio, coupling with our 65,000 square feet of distribution in Sacramento. So we feel pretty comfortable right now that we can pretty much service the country with our portfolio that we have right now. But if building starts up again and cannabis gets hot, we will be back in the market. But right now, we're pretty comfortable with our portfolio.

Speaker 4

Okay. And then a follow-up on that. I appreciate that, Darren. Just touching base kind of at some point, there's going to be a replacement cycle here, obviously, need for the lights. You're seeing some of the top MSOs, large MSO partners you work with generating cash flow.

Speaker 4

If we get the elimination of 280 and rescheduling boosts and there's going to be some CapEx kind of maintenance needed here and replacement cycle needs. Just kind of step us through kind of what you're hearing from your partners as far as the replacement cycle and maintaining kind of top growth from for those partners going forward here?

Speaker 2

Scott, as you probably know and have seen, earnings from the MSOs have been pretty good this quarter. On the legislative side, we're all still waiting on 280E. And I certainly am one that does believe that you will see reclassed Schedule of 3 and hopefully something with the SAFER Act by the end of the year. We do believe a refresh cycle is coming. There was tremendous growth in 202020 21.

Speaker 2

And you're coming up on that 3 to 5 year reclass cycle. So we believe we will start seeing plenty of action on the durable side of it. The nice side is that we're seeing growth right now on our consumable side of it, which is 75% to 80% of our business right now, which is much more predictable business. It's weekly, monthly business as opposed to one time build outs. So we're really comfortable where we are right now on the consumable side of it.

Speaker 2

But we are starting to see much more quoting from our commercial team on lights, dehumidification and also control systems. So we do believe this is the start of it. And with some help from our government, I think it'll probably make it go that much quicker. So we're pretty excited about 2024 and beyond. I think we've done a tremendous job restructuring this business and getting it to where it is today.

Speaker 2

And I do believe that you will see a strong year from GrowGen.

Speaker 4

Thanks. I appreciate the color.

Operator

Thank you.

Speaker 2

Thank you, John.

Operator

Your next question is from Eric Delores from Craig Hallum Capital Group. Please ask your question.

Speaker 3

Great. Thank you for taking my questions. I was wondering if you could comment broadly on some of the differences in same store sales that you're seeing in different geographies. Obviously, you don't have to go through all the states here, but just if there's any sort of outliers to comment on. And then in relation to that, could you comment on the geography of the 3 consolidated stores that you've consolidated year to date?

Speaker 3

Thank you. Yes, Eric. Thanks for the question. Sorry, go ahead, Darren.

Speaker 2

You can go. She's right.

Speaker 3

Okay. Eric, I think when you look at our comp sales over the last handful of quarters, where we landed in the 4th quarter was down 3.5% year over year. And that comes from when you look at our same store sales comps last year, we're in the 50s. So we've made a lot of improvement both from a consolidated basis, but also within the geography in various localities. There's areas of strength and there's a few states that are still going through a lot of consolidation.

Speaker 3

So we're comfortable with our overall performance on things as it relates to the comp sales. When you look at the 3 locations that we consolidated in the Q4 or the Q1, we consolidated Brownstown, which is in Michigan Traverse City, which is in Michigan and Salinas, which is in California. We believe those two markets between Michigan and California are very mature in nature. And we have the opportunity to generally service the same customer base out of locations that were in close approximation. So we expect some decline from those consolidations because not every customer we have in the portfolio will continue to shop at the new location that is retaining the large scale of the customers.

Speaker 3

We don't expect a material difference in our 2024 results as a result of that. And the updated assumptions around those closures is included in our guidance for the year. Okay, great. Yes, I mean, it sounds like I would think Michigan and California are probably 2 markets where you're seeing some more consolidations. I think that that should help improve even further, obviously, your same store sales going forward.

Speaker 3

And then just a quick follow-up, a point of clarification for me. Was the guide for positive same store sales, was that referring to just fiscal 'twenty four as a whole or was that Q1 or both? If you could just clarify that for me, that would be great. Thank you. Yes.

Speaker 3

We're confident that that metric will change in the year of 2024. We're not ready to call out the period in which that will convert, but we are optimistic around what we're seeing so far year to date and how that will progress throughout the rest of our results that we report this year. Thank you.

Speaker 2

Yes, Eric, just also for reporting, with our segments as we put MMI, which is on set. We've also put HRG, which is our distribution company, who will be reporting in our stores segment. So you may see a little weakness in our HRG for the 1st 6 months of this year, which will also be included with our stores. But we will break that out so you get an understanding of the stores on its own through the 1st 6 months.

Speaker 3

Okay. Thank you for that clarification.

Operator

Thank you. Your next question is from Brian Nagel from Oppenheimer. Please ask your question.

Speaker 5

Hi, good afternoon.

Speaker 2

Good afternoon, Brian.

Speaker 5

The first question I have, Darren, in your prepared comments early, you talked about just the business and I think you said January. So I give the question, obviously, maybe just repeat that. The trends you talked about early here in 2024. And then as a follow-up to that question, we have got you outlined the guidance for Q1. I mean, to what extent is that strength you've seen clearly in 2024 reflected in that guidance?

Speaker 2

Brian, as you've known, we've closed we've gone to 65 stores down to 47. So what you're pretty much seeing is pretty similar guidance to what we guided to last year. I think we did $49,000,000 in the Q1 last year. So guidance is particularly we believe pretty strong right now. We were off to a good January, we saw our consumable business very strong.

Speaker 2

We do believe durable business will become strong at the end of the year. By the back half of the year with build outs resuming. But the consumable part of our business is much more important to us right now. So what you're seeing right now is from guidance for the Q1, we're conservative as always. But we do believe you will see a steady rise the second and third quarters, which are usually our strongest 2 periods of the year with the outdoor growing season coming upon us.

Speaker 5

Okay. And then and this may not be a fair question, but you spent a lot of time talking about just some of the maybe the potential improving legislation backdrop for the for growth, Jennifer, the industry. So we've laid the guidance out, the sales guidance for the year. If some of these things will start to happen, rescheduling and other how quickly would that lead to in your view, how quickly would you start we start to see that in GrowGen results?

Speaker 2

It's hard to say, Brian. It's hard to get a feel of when the MSOs and single state operators and the commercial customers have to go back into the market and start building again and also start taking a hard look at their facilities and starting the refresh cycle with lights and the humidification. There may be a lag, there may not be. What's going on right now as you've seen from GrowGen, we've been very, very careful with our balance sheet over the last couple of years during very difficult times in the industry. And that kind of equates out to the MSOs also.

Speaker 2

They've been protecting their balance sheets. And I believe that once they get the go ahead and with 280 and the reschedule and cash going back onto the balance sheets without paying penalty to the government, I do believe you'll see a lot of movement in the industry, a lot of rebuilding and companies starting to build for the future. But the last couple of years, I think it's been unprecedented. Andrew Carter calls it a great hydroponic depression and it's hurt everybody. But I think we come out much stronger.

Speaker 2

We've built our private label division from next to nothing to 19% last year. And we do believe you'll see that number in the mid-20s this year. So we're excited about a lot of new product launches, and our consumable brands are becoming stronger by the week. And it's something that excites us about GrowGen right now.

Speaker 5

Okay. I appreciate it. Thanks, Darren.

Operator

Thank you. Your next question is from Andrew Carter from Stifel. Please ask your question.

Speaker 6

Hey, good evening. So thanks for the shout out. First thing I wanted to ask though is in your kind of guidance for the year, I know you referred to the store closures, but can you give us a sense of how much lost revenue there is from those stores? Is that are you purely assuming that that revenue is gone for the year in your kind of initial cut of guidance? Or are you assuming some kind of retention rate, therefore a boost to your same store sales?

Speaker 3

Yes, Andrew. Thanks for the question. On the guidance itself in terms of revenue, we are forecasting that we will retain some of the revenue from the closures. Of course, we closed or consolidated 14 locations in 2023 and 3 more this year. So it's a handful of locations that we've closed where we do believe we generally retain the revenue from the larger customers.

Speaker 3

Certainly, when we go through a consolidation, our aim is to retain the top 50 customers of that location. And you can imagine, we're not closing breed locations in our portfolio. We're usually consolidating the smaller ones into a larger kind of footprint store. So within that, we do believe that at some point this year, we will turn positive on same store sales comps. And we feel very comfortable with guidance coming in at that $205,000,000 to $215,000,000 range as we look at 2024.

Speaker 6

And just to be clear, does guidance include MMI number 1? I assume it does. And then the second part of it is, I guess I want to better understand the rationale of getting of kind of selling this business. Is it does it just not fit with the rest of the portfolio? Are there inventory requirements above and beyond?

Speaker 6

Is it just getting a nice mark? I believe you bought it for $9,000,000 if I'm not mistaken and it's tripled. Anything you can help us out with there?

Speaker 2

Andrew, I think there's many different reasons right now. And the one thing you have to understand is, we're looking we're seeking to monetize the asset doesn't mean that we're going to. A large majority of the sales from MMI is in typical retail, not the agricultural side of it. As the agricultural side for benching and racking has been extremely weak during the last couple of years because it's a build out product. So right now, we're trying to maximize value on this asset.

Speaker 2

And if we can, we're a seller. If not, we will keep it. So right now we have other alternatives where we can use other companies that we do business with for their vertical racking and benching. So we do believe that MMI is a wonderful company. It's got many years of growth to it, but it's not in the gardening and hydroponic space.

Speaker 2

So it was bought for the hydroponic and gardening space and we built up the other side of the business, but it's probably 90% of our business is into typical retail rebuilding back of warehouses. And again, for the right price, we're a seller and if not, we will keep it.

Speaker 6

Thanks. I'll pass it on.

Operator

Thank you. Your next question is from Aaron Grey from Alliance Global Partners. Please ask your question.

Speaker 7

Hi, good evening and thank you for the questions here. Just one for me, a couple of mine have already been answered. Just I believe it's been touched on more specifically, but

Speaker 2

in terms of the broader market,

Speaker 7

you talked about your own consolidation of some of your stores. Can you

Speaker 8

speak to what you're seeing more

Speaker 7

in the broader marketplace? I know it's tough for a lot of people. Have you seen an acceleration in terms of folks closing? Are people still trying to hang on in hopes of rescheduling, driving the regrowth in terms of CapEx spend by some of the operators? So in terms of what you're seeing in terms of broader environment would be helpful.

Speaker 7

Thanks.

Speaker 2

I think Aaron, you're still seeing the wild west out there. You're seeing manufacturers, distributors selling to whoever they can sell to. You're seeing stores discounting right and left. You're seeing people closing. So the industry still is in disarray.

Speaker 2

You're still seeing tremendous amount of discounting, people selling for under wholesale, trying to hang on. But you're also on the other side of seeing stores closing around the country, also the smaller stores they can't service the larger customers. But like anything else, when business is slow and people aren't making money, they do whatever they can to try to make a buck. But we still are the leader in the space that we're in. We believe that our private label brands are growing.

Speaker 2

They are growing. And people are shopping at GrowGen every day. And even with the 17 store closures that you store out at GrowGen right now, we still believe that we will have enough revenue, hopefully a strong year to build on and to start really regaining the 2020 to 2023 monster that we want to add. We do believe that we'll see same store sales positive this year. We're seeing some strength in some stores around the country.

Speaker 2

But even more exciting, we're seeing much more quoting coming out of our commercial team right now. We believe commercial sales will be up tremendously this year. So we're pretty positive right now. And I know you haven't heard it from some of our peers, but GrowGen is certainly seeing business coming back to the stores. We're seeing quoting, we're seeing quoting go to sale.

Speaker 2

And we do believe that you will see a great second half for GrowGen as we start going into a seasonal stronger period.

Speaker 7

Okay, great. Thanks for the color. Then I'll go

Speaker 2

ahead and jump back in queue.

Operator

Thank you. Your next question is from Mark Smith from Lake Street Capital Markets. Please ask your question.

Speaker 8

Hi, guys. First looking at gross margin, any inflationary pressure or cost easing to call out, especially as we look even at labor in California or anything that's really moving the needle one way or the other on gross profit margin?

Speaker 3

Yes, Mark. I think we see it from multiple angles on gross margin. I mean to start, we see some benefit out of our private label products that we've continued to increase penetration on. We've also issued a couple of press releases over the past few quarters, newer distribution partnerships that we've identified in the space with Quest and Grodan and others. So those have had meaningful lift to our gross margin as well.

Speaker 3

From a margin perspective, I think the industry as a whole feels a lot of pressure to price things at the right price. You get some level of pressure from the customer side of things as well as the vendor side of things, particularly on the more distributed products that we land from other distributors in the space. So we're working hard every day to continue to hold our margins strong. We think there's opportunity this year to lower inventory in our business, which will have an impact on how we might look at shrink or overstock or obsolete inventory. We believe we have the right reserves in place today, but maybe there's room to gain there and cost to continue to control more and more as we progress forward.

Speaker 3

So there's a lot to unpack within margin, but we feel comfortable with where we landed in 2023 at 27.1%. And we do believe that in 2024, there's room to build upon that number in a positive way.

Speaker 8

Similar question as we look at G and A and kind of corporate costs, you guys have done a good job cutting there. Do you feel like you've kind of cut everything out, maybe that's possible or is there more opportunities in that

Speaker 3

line? Yes. I think there is more opportunity there for us. Part of what you've seen from us through the last few quarters, you take Q3 and Q4, that's two periods in our business where we closed or consolidated 12 locations. A lot of the costs from those activities are still embedded in our results the Q4.

Speaker 3

So we do expect some level of cost improvement into the Q1 of 2024 and to continue forward into the rest of the year.

Speaker 8

Perfect. Last one for me is just I don't

Speaker 3

know if Darren, if you want

Speaker 8

to take it, just kind of big picture use of cash, you've still got a really strong balance sheet. I know you've been conservative in how you've used it. But any if you want to kind of rank or talk about kind of where you expect to put cash to work. And then if you get a deal done here on MMI, if that changes your thinking at all on use of cash?

Speaker 2

Again, we're always looking, Mark, whether it's I doubt it's going to be on the store side of it because there's nothing out there large enough that's going to take that kind of cash. So it very well could be on the product side of it, it could be on the gardening side of it. As we spoke earlier, we're getting more involved in the gardening side, getting products into ITC around the country. And we just also opened a website. And again, we are making pushes.

Speaker 2

We do believe that the hydroponic space, the gardening space has tremendous similarities. And we do believe that the typical gardeners out there want new products, more approved products, healthier products and we have them. They're coming out of GrowGen every day. So we do believe that there could be acquisitions on the lawn and garden side of it. But as of now, until we either monetize MMI where we see a tremendous turn in the industry, we will keep our balance sheet strong unless there's something that we can't resist.

Speaker 8

Sounds great. Thank you.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Dylan Lambert for the closing remarks.

Speaker 2

Thank you for your time today and thank you for your interest in GrowGeneration. Have a wonderful evening. Thank you.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Earnings Conference Call
GrowGeneration Q4 2023
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