GrowGeneration Corp.

Hello and welcome to Grow Generation's second 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 Crumlis with ICR. Clay, please go ahead.

Good afternoon and welcome everyone to the Grow Generation second quarter 2023 earnings results conference call. Today's call is being recorded. With us today are Darren Lampert, co-founder and chief executive officer, and Greg Sanders, chief financial officer of Grow Generation Corp. You should have access to the company's second quarter earnings release issued after the market closed today. This information is available on the investor relations section of Grow Generation's website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements made today. During the call, we 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. 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 re-enter 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?

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 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 second quarter results and 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 1st. In the second quarter of 2023, we generated net revenue of $63.9 million, which represents a 12% sequential improvement over the first quarter of 2023, consistent with the expectations we communicated earlier this year. Recall that historically the second quarter 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 quarters adjusted EBITDA loss of $1.8 million. As we've detailed on previous calls, we made significant progress right-sizing our cost structure over the last year, and we're encouraged that those efforts are now bearing tangible results in our P&L. Additionally, we ended the second quarter with $71 million of cash, cash equivalents, and marketable securities, no debt, and $77 million of inventory on our balance sheets. And year to date, we've generated more than $7 million 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 second quarter results. That represents the progress we've been striving to achieve. However, the broader cannabis industry continues to face headwinds, and GroGen is not immune to these issues. With capital availability and investment at an all-time low and interest rates reaching their highest point since 2007, 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 nutrients and additives line, 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 position for profitable growth in 2023 and beyond. And we certainly not backing away from the priorities we outlined last quarter. 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. 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. 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 7.6 million of retail and e-commerce sales in the second quarter of 2023. which is around 15% of our overall retail e-commerce sales, up from 10.7% in the second quarter of 2022. In addition, GroGen 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. This development will feature traditional gardening products alongside our private label brands. Second, Progen is actively seeking creative 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. 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 entered our 18th state with the acquisition of two retail locations in Alaska and Maine. Third, 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 and 2024. As part of these efforts, we're constantly assessing the performance of our stores with respect to redundancies in the footprint. 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 second 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 third quarter results. 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 third quarter 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 third and fourth quarters of this year. We now expect net revenue in the range of $220 million to $225 million and adjusted EBITDA loss in the range of minus $4 million to minus $6 million. With that, I will turn the call over to our CFO, Greg Sanders.

Thank you, Darren. And good afternoon, everyone. First, I will address our second quarter 2023 financial results, and then I will discuss our updated full year 2023 guidance. For the second quarter, Grow Generation generated revenue of $63.9 million versus $71 million in the second quarter of 2022, representing a decline of approximately 10.1%. Our same store sales for the second quarter 2023 were 44.7 million compared to prior year sales of 52.6 million, representing a 15.1% decline against the comparable year-ago quarter. The decline in same-store sales in the second quarter represents a significant sequential improvement over prior quarters. Specifically, we observed a 21.5% sequential improvement in the second quarter compared to the first quarter year-over-year same-store sales percentage. Our e-commerce revenue showed a nine basis point increase year over year and remained normalized at 3.7 million. Our distribution and other revenue was 13.3 million for the quarter compared to 12 million in the year ago period, representing an improvement of 10%. Gross profit margin was 26.8% for the second quarter of 2023, down approximately 185 basis points, from the first quarter of 2023. The decrease in gross margin in the second quarter 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 from 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 setup costs associated to pre-opening of our Columbus, Ohio distribution facility. Store operating costs and other operational expenses declined from $13.8 million in the second quarter of 2022 to $12.3 million in the second quarter 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 2023. Selling, general, and administrative, or SG&A, costs were $7.5 million in the second quarter, of which $947,000 was derived from stock-based compensation. This compares to $6.8 million in the first quarter with $567,000 of stock-based compensation. This represents a 10% increase quarter-over-quarter to SG&A, primarily driven from share-based compensation. Compared to the second quarter last year, SG&A expense decreased $2.3 million in 2023, with overall savings driven from payroll reductions and increased cost control over a broad range of categories. Depreciation and amortization of intangibles was $3.8 million in the second quarter of 2023 compared to $4.8 million in the year-ago period. In the second quarter 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. As such, the company has established a full valuation allowance primarily resulting from the 2022 impairment of goodwill. Net loss for the second quarter was $5.7 million or negative $0.09 per share compared to a net loss of $136.4 million or negative $2.24 per share in the year-ago period. Compared to the first quarter of 2023, the company improved net income from a loss of $6.1 million to a net loss of $5.7 million. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, restructuring charges, and share-based compensation, was a $856,000 profit for the second quarter of 2023, compared to a loss of $3 million in the second quarter of 2022. Compared to the first quarter of 2023, the company improved adjusted EBITDA from a loss of $1.8 million to an $856,000 profit, primarily resulting from the increased revenue as well as sustainable reductions in expense. In the second quarter, the company included $1.2 million of expenses related to store consolidations and restructuring costs of establishing a distribution center in Columbus, Ohio. Related to the balance sheet, as of June 30, 2023, the company had total cash, cash equivalents, and marketable securities of $70.6 million which was a decrease of $1.3 million to the first quarter of 2023. The company leveraged $3.2 million of cash in the second quarter for investment of acquisitions. From a year-over-year perspective, cash and cash equivalents increased by $5 million, mainly due to inventory rationalization measures and other strategic initiatives. Within working capital, the company executed on quarter-over-quarter improvements within accounts receivable, prepaids, and accounts payable from a cash flow perspective. As such, the company generated positive cash from operations of $3.9 million in the quarter. In the second quarter, the company increased inventory by approximately $1.1 million compared to the first quarter. 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 1st, 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 2023, 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. As Darren mentioned, we are changing our previously communicated guidance with full year 2023 revenue to be between $220 and $225 million and full year adjusted EBITDA loss to be in the range of minus $4 million to minus $6 million. Well, we are pleased with our second quarter results. We have not yet seen the industry improvements in the third quarter 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 2023 and a 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 2023 and are cautiously forecasting revenue and adjusted EBITDA to slow sequentially through the balance of the year compared to our second quarter results. 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 three M&A transactions at desirable valuation in the second quarter and will 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. 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.

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 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.

We will now take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Aaron Gray, Alliance Global Partners. Aaron, please go ahead.

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, so 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 32 basis points, is that going to remain within that? 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.

Greg, do you want to take that?

Yeah. So, hey, Aaron. You know, as far as the back half of 2023, we're anticipating gross margins to normalize, you know, 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. 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.

Yeah, Aaron, with that, what we are seeing and we saw in the second quarter is tremendous discounting coming out of some of the vendors in the industry to move inventory. And with that, we've taken some, you know, one-time lumps on certain products that we're holding in inventory. And we do believe that will alleviate, you know, 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, you know, we do believe, you know, when this all shakes out, that you will see margins that grow down in the low 30s, but certainly not in the back half of this year.

Thanks. I really appreciate that detail. And then, you know, go more towards the top line, lowering the back half expectations, you know, spike 2Q. It sounds like it came roughly in line with what you're expecting and certainly what the street was. 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 expecting, less manners or 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 protracted 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. Thank you.

Yeah, right now, Aaron, we're not seeing a pickup in CapEx as most of the cultivators are managing their 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. And what you're seeing is a very slow adoption in 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 to 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, you know, the large operators is there's just no capital coming in. And I think you see that also, you know, from your vantage point. And I do believe that, you know, the industry needs capital right now. There was a tremendous amount of facilities built in 2020 and 21. And you start just 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 and 21. And there will be a refresh cycle coming in the next couple of years with the products that have been bought. 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.

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

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

Hi, good afternoon.

Good afternoon, Brian.

So just, I guess, to follow up on that question, Darren, and we've talked a lot about the impacts of your partners not as aggressively or not building out infrastructure. But as you look across the chain, and I guess you see some of these states have legalized more recently. Are you seeing a different trend there, or is it really across the board?

I think what we're seeing is a much slower trend in new legalized states. You know, 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 lives. So it's just taking time, you know, to convert them over to the legal markets. But you're also seeing a lack of capital. Wall Street has not raised money for, you know, for any of the MSOs recently. 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 balance sheets 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. 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. We attended our first gardening show a few weeks ago, and we had tremendous interest in GrowGen products. We believe a lot of the products that we're selling into the cannabis space are interchangeable into gardening. And, you know, through customer segmentation and just what we're hearing and seeing from speaking with stores out there, that we believe the distribution centers that we're setting up right now, the leading ERP system that we just set up, will give us the ability to sell GrowGen products into thousands of independent garden stores around the country.

Then my second question, you mentioned, you talked more about the acquisitions here. So, you know, just given the ongoing struggles of the sector, are you seeing more acquisition opportunities emerge? And I guess related to that, is the pricing for these targets becoming more advantageous for you?

You know, the answer to that is yes and yes, Brian. But, you know, on the other side of it right now, you know, we certainly are taking a cautious stance in a lot of ways. And we will only buy best of breed right now. So, you know, we've turned down a lot of acquisitions in the last couple months. We're happy with our portfolio around the country right now. There still are some states that Grosjean needs to be in. We'd like to be in Maryland. We'd like to be in Ohio right now. We'd like to be in New York. 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.

I appreciate all the color. Thanks, Darren.

You're welcome. Thank you. Your next question comes from Andrew Carter, Stifel. Andrew, please go ahead.

Hey, thanks. Good evening. What I wanted to ask you 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, are you closing more stores? Are the stores that are Greenfield in line with your projection? What's the store closure target for the second half?

I'll start with the stores that we've purchased this year. Andrew, are in line with our targets and performing well. We have no issues with any of the purchases that we've made this year. As we said, I think in our In our script today and press release, we will be closing some more stores. With distribution that we've built out in our new ERP system, there are certain stores that are close to other locations. And with the industry where it is right now, that we believe there is room for optimization, both on, you know, right around growth and costs. And we will be working on cost structures over the next six months.

Second question I ask about, you mentioned discounting. You mentioned lighting in particular. So number one, how much more do you have? How much inventory is kind of upside down or was that all taken? And how pervasive is the discounting? Is it isolated lighting or are you seeing it other product categories as well?

I think in the second quarter, Brian, it was isolated mostly to lighting. There was lighting inventory that we had from some major companies. Vendors of ours that discontinued certain models and brought pricing down, you know, 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. So we don't see it continuing. And again, we, you know, we took our lumps in the second quarter because of it. You know, you're seeing sporadic discounting. You're seeing stores going out of business, you know, around the country. So, you know, there's always, you know, if it's not one thing, it's another. But, you know, like anything else, as you've heard, you know, our private label brands are performing well, 15% of sales within our stores right now. And that's not within our distribution channels. We're selling it to 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.

Thanks. I'll pass it on.

Thank you.

Thank you. Your next question comes from Eric Delorier, Craig Hallam Capital Group. Eric, please go ahead.

Thank you for taking my questions. So, my first one, it sounds like the guide is mostly resulting from sort of lower than expected durable sales. So, my question is, you know, how consumable sales are sort of trending so far this year and sort of what's embedded in the guide here. You know, you're commenting on private label sales, which are, you know, mostly in the consumable area that, you know, you're continuing to see some strength there. So just kind of wondering if you can sort of, you know, shape the second half outlook, you know, sort of between durables and consumables. That'd be great. Thanks.

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

Yeah. Yeah. So, hey, Eric, you know, for the back half of the year, we're looking at total revenue of somewhere in the range of $100 to $105 million. We traditionally see more strength in the third quarter, of course, than the fourth. In terms of what does that mean for CapEx or consumables, what we've been seeing from a trending perspective over the last several quarters is a mix of about 70-30, even as high as 75-25 on consumables versus CapEx. And like Darren alluded to earlier, we're just not seeing the build activity that we expected in many of the newer states that have come online recently. So, you know, we're hitting the brakes a little bit on expectations in the back half and focusing on, you know, driving profitability from the base of revenue that we expect now in the back half. So hopefully that helps answer the question.

Yeah, no, that does. And could you just kind of help us frame it a bit? So, you know, currently 70-30-ish consumable-durable splits. How has that changed, you know, from like the heydays of, you know, 2021 and 2022? And just kind of wondering where you see, you know, durables kind of bottoming out. I mean, is it reasonable to assume that, you know, consumable sales are kind of continuing to grow nicely and you just have this, you know, that's just being, you know, kind of more than offset by durables here and that eventually durables will start to bottom and you'll kind of return to growth just on consumables? Is that sort of the right way to think about it or? Is there anything else that you would add to that?

Yeah, I could take that, Greg. You know, one, the consumable part of our business is and always will be the stronger part of our business. It's the reoccurring part of our business. When you look at the durable business, you know, sometimes it's a one-time sale of a big build-out at low margins. So when you look at GrowGen, you know, 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 uh we believe right now that that's that 70 30 75 25 mix will stay um you may have certain quarters of pockets of strength on the build side but most of it you know most of it does go away you know when you find saturation on the building it just depends how this industry continues to grow when you look a few years ago Forecasts were to go to $100 billion by 2030 on the legal side of it. And right now, I think you're still under $30 billion. 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 side, is really how large our durable business will grow. But we feel quite comfortable that The other part of the business, the consumable part of the business, does pay the bills. And during the heyday, it was probably 60-40. And right now, it's probably running 75-25, if you took a hard look at it. But we do believe there'll be build, there'll be refresh cycles coming online. So you will see pockets of strength in the future.

Okay, great. That's very helpful, but it sounds like this 70-30 slash 75-25 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 I may have missed a comment there, so just wondering if you could kind of flesh out the OPEX implication for the second half of the year. Thanks.

Yeah, Eric, I think what you saw from us in the second quarter is we took down total expense 600 grand compared to the first quarter, so we did see some improvements in the second quarter itself, and we believe that we'll continue to see expense improvements both in SG&A and operating expense in the back half of the year. You know, 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&A that we expect as well in Q3 and Q4. 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 a lower base or aiming for that metric against a lower base.

Thank you for taking my questions.

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

Yeah, good afternoon, and thanks for the questions. I 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 we have higher exposure and what are you kind of seeing and kind of turnaround potentially in California or are we lumping all these things together here?

Yeah, I think when you look at California right now, Scott, we're seeing more strength in northern California than we are in southern California right now, even though our story is growing in downtown L.A. When you go out to the coast and out to Temecula and that area, Anza, And Lake Elsinore was 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. You know, our Santa Rosa store is performing well. So we are seeing some strength in California. And we are seeing some weakness in California. And, you know, we are on, you know, we do believe that we'll be closing probably another two to three stores in California, you know, in the third and fourth quarters. We're also seeing weakness in the San Diego area. So, you know, I think it's case by case, just dependent upon, you know, where the customers are and where they feel comfortable growing right now. But some of the, you know, 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 is pretty steady. We're not seeing a lift in Michigan, but we're not seeing further degradation in business in Michigan right now. Back east, again, back east still remains, you know, it remains fluent for us. So, you know, business right now, you saw same-store sales were down 15% in the second quarter, and that was versus 37 in the first quarter and 50-something a year earlier. So you're seeing certainly that, you know, we're getting to that break-even on same-store sales point. So we definitely have seen an uptick, but not like we would like to. You know, we were certainly, you know, expecting much more pickup going into the third and fourth quarters. And, you know, one of the reasons we're bringing numbers down today is, you know, we speak to cultivators every day. Our guys are on the street. We have, you know, over 600 employees out there and they're just not seeing, you know, they're not seeing the work coming in on the build side right now. But again, on the other side of it, people are buying soils every day. People are buying nutrients to feed the plants every day. So, you know, we still have, you know, we still have, you know, 75,000 customers a month coming into GradGen.

Got it. I appreciate the color there. And then just real quick, you know, obviously one of your peers or supplier, however you call them, has mentioned and mentioned quarterly earnings, you know, maybe it's time for the hydroponic market to kind of start getting more combinations together. strategically, I know you can't really talk about specifically, but how are you looking at the competitive or kind of the partnerships opportunity in the agribusiness market kind of going forward here overall?

You know, the one thing I could tell you is, you know, we built this business from, you know, from zero revenues in 2014, $30 million of revenue in 2018. our balance sheet remains the strongest in the industry, which gives us tremendous flexibility. Really to do, you know, basically to build out the business model that we've 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. We're bringing best of breed products to market. Does Growjet need to consolidate the answers? Definitely not. But like always, Scott, as I say, whatever's in the best, you know, whatever best for our shareholders, we will always entertain. But we've built quite a business. We just built out our ERP system that's taken us two years and a tremendous amount of money. We built out distribution. So we have distribution of leading products that can go, you know, anywhere from cannabis to gardening. And what this world lacks right now is really an independent gardening chain that has the knowledge of GrowGen. Got it. I appreciate the call. Thanks, Stan.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1 on your touchtone phone. Your next question comes from Mark Smith, Lake Street Capital Markets. Mark, please go ahead.

Hi, guys. My question is really just first off around the comfort with the current inventory. You talked about some tough weakness with lighting. Is there anything out there that you've got in inventory that you're a little nervous about, or how do you guys feel about it today?

Go ahead, Greg. I'm sorry.

Oh, no. You're good. Yeah, Mark. Hey, I think when you look at our inventory, we ramped up inventory slightly in the quarter. largely due to 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 initiative. 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. 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. Hopefully that helps.

Oh, that's helpful. Other questions, just as we think about the store count kind of big picture here, Darren, You know, it sounds like a couple more closures coming probably in some of the more mature, bigger states for you. You know, can you talk two things, you know, which states you really like? I think you mentioned New York, Ohio, you know, where you really want to expand. And then also, you know, as you look at peers, you'd mentioned, you know, some peers going out of business with Hertz as they kind of liquidate their inventory. You know, does that present a good long term opportunity as you move into a market? You know, somebody else kind of goes out of business and then it gives you opportunity to really take share over time. Maybe talk about where you're seeing opportunities, whether it's from closures, from peers or, you know, states where you really want to expand.

You know, 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. 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, you know, 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, you know, we do look at that. And even looking at stores that could be close to ours, taking their inventory and customer lists. In this industry, it's quite fickle. You know, many customers still like to shop at their old hydroponic store from 10 years ago. They have friends that work there. So, you know, we are very careful. When it comes to that, and we've turned down a lot of purchases that 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'd rather not compete with right now. So we weigh everything and whatever's in the best interest of our company, we will do. So, you know, right now it's not a rush to build 100 stores. That rush was a couple years ago, three years ago when the industry was booming. Right now, you know, we're solely focused on, you know, on managing our footprint, managing our balance sheet, managing, you know, our private label initiatives and distribution right now. So, you know, we will be adding stores much slowly than we thought, you know, 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, you know, into, into, into other locations. Excellent. Thank you.

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

Uh, yeah. So the private label I saw at 15%, I know that's kind of like flatline, uh, from last quarter. I think last quarter was around that same level of big year over year. Can you just talk about, um, what do you do to push that a little higher over the medium term? You've talked about it a little bit, but just some detail maybe on new product innovation. I mean, you talk about the gardening space. That's interesting, but I imagine it's going to take some time to build progress there. And while you're touching on that also in the gardening 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.

unquestionably um to start with we have many uh line extensions coming out you know with brands that we do have um so you'll see you know line extensions within our drip hydro brands within our charcoal brands so we continue to innovate um we have another line extension you know shortly hopefully coming on the drip on the powder side of our liquid brands um so like anything else you know, private label is growing. Uh, it started at zero a couple of years ago. You will have certain quarters of stagnation within it as new products come to market. Um, so again, we're very happy with that. The gardening space right now, Glenn, we're not, you know, you know, that is, that's a work in progress at the second quarter event next year that we're putting together a plan that we will update wall street on probably in the fourth quarter. Um,

Okay. Any other comments you can make about 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, you know, 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?

I think what you've seen also – I think what you've also seen in prior years was us adding stores during the second and third quarter, which helped sales in the latter part of the year. But the second quarter is planting season. Third quarter is harvest season for outdoor. So we usually see the strongest part of the season is in the second quarter. And third quarter 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. 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 third quarter, and it's quite early, and we thought it was prudent to bring numbers down. Certainly, we hope we beat them, but right now, third quarter, appears to be slower than the second, and the fourth quarter usually is the slowest quarter of the year. Okay, great.

Thanks.

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

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

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