GrowGeneration Corp.

Ladies and gentlemen, please continue to stand by. Your conference will begin shortly. Once again, ladies and gentlemen, please continue to stand by. Your conference will begin shortly. Thank you. Thank you. Thank you. Thank you. Hello and welcome. to Grow Generation's fourth 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.

Thank you and welcome everyone to the Grow Generation's fourth quarter and full year 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. You should have access to the company's fourth quarter earnings press release issued after the market closed today. This information is available on the investor relations section of Grow Generation's website at i r dot grow generation dot com 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 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'll 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'll take them at that time. Now, I will turn the call over to our co-founder and CEO, Darren Lampert. Darren?

Thank you, John, and good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter 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 Growjet. 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 million exceeded our previously communicated guidance range of $220 to $225 million. Adjusted EBITDA for the year came in at a loss of $5.6 million within our previously communicated guidance. We remain encouraged by the progress that we made last year in further right-sizing 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. I also want to address our new segmentation that you will see in our 10-K. Moving forward, we have separated our reporting into two segments. First, 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 two years ago to help build out our benching and vertical racking offerings. MMI has grown substantially since acquisition and has become a thriving business in its own right. Looking forward to 2024, we are focused on three main initiatives. Number one, 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 two, we are attracting a large customer base, expanding our products, partnerships, and opportunities in the home gardening market. And number three, we are putting profitability at the forefront, continuing our focus on cost control, margin expansion, and profitable growth. touching briefly on each of these further. First, we continue to expand our proprietary and distributive brands and remain very satisfied with the results. As we've mentioned previously, a key pillar of our strategy focuses on shifting more of our sales to higher margins proprietary brands. In 2023, proprietary brands accounted for $36.5 million of sales which amounts to approximately 19% of our overall gardening and cultivation sales, up from approximately 15% in 2022. Recent new proprietary products include the much-anticipated drift powder nutrient line, which provides a high-quality, cost-efficient nutrient solution to commercial and craft growers everywhere. 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 hydroponic space. For example, we recently announced a strategic partnership between our wholesale distribution arm, HRG, and Quest Climate, offering high-quality, and advance the humidification 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. Second, we're excited to announce the official launch of The Harvest Company, our expanding consumer gardening line. 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, soil fertilizers, and a curated selection of organic seeds. We believe there is a 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. 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 three retail locations in the first quarter of 2024, bringing our current store count to 47. Although we are constantly monitoring our retail footprint with respect to redundancy 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. 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 in consumable products 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 top proprietary brands. Turning our attention to MMI, our storage solution segment, I am thrilled to report remarkable progress and strategic advancement that underscore our commitment to innovation and excellence in this sector. Over the past two years, MMI has demonstrated exceptional growth, escalating from approximately 12 million in 2021 to approximately $31 million 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 million 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. Finally, before we discuss our 2024 guidance, I'd like to provide a brief update on cannabis legalization The legal landscape for cannabis has undergone significant advancement 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 hint at broader implications for businesses operating within the industry. 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 I drug under the Controlled Substance Act. Rescheduling would alleviate these tax burdens, significantly improving profitability for cannabis companies by allowing them to claim deductions like any other business. 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 in supplying specialty hydroponic and organic gardening products at both the retail and wholesale levels. Internationally, developments like Germany's legalization have served as a catalyst for increased global demand for cultivation equipment and supplies, positioning growth generation to explore international expansion and export opportunities. Furthermore, rescheduling the U.S. could significantly enhance 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 million to $215 million, adjusted EBITDA in the range of a $2 million loss to a $3 million profit. As part of that, in the first quarter of 2024, we expect net revenue in the range of $45 million to $48 million, and adjusted EBITDA in the range of a $1 million loss to a $3 million 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 worker 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?

Thank you, Darren, and good afternoon, everyone. First, I will address our fourth quarter and full year 2023 financial results, and then I will discuss our preliminary outlook for the 2024 fiscal year. Starting with our fourth quarter results, growth generation generated revenue of $49.5 million versus $54.5 million in the fourth quarter of 2022, representing a decline of approximately 9%. Our same-store sales for the gardening and cultivation segment in the fourth quarter of 2023 were 35.6 million compared to prior year sales of 37 million, representing a 3.6 percent decline against the comparable year-ago quarter. Our sales of consumable products in the fourth quarter outperformed prior year on an absolute basis, which we believe is a favorable performance indicator. Our storage solutions revenue was $7.7 million for the quarter compared to $7.8 million in the year-ago period. Gross profit margin was 23.5% for the fourth quarter 2023, an increase of approximately 600 basis points from the prior year. As a reminder, the fourth 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 fourth quarter, 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 fourth quarter. Store operating costs and other operational expenses declined to $11.8 million in the fourth quarter compared to $12.8 million in the year-ago period. The company closed and consolidated 12 locations in the third and fourth quarter of 2023, of which one-time material closure costs were included in our fourth quarter results. We believe that the closures and consolidations align our operating model to future strategic priorities and allow for stronger operating leverage. Selling, general, and administrative, or SG&A, costs were $7.9 million in the fourth quarter compared to $8.6 million in the fourth quarter of 2022. This represents an 8.4% improvement to the year-ago period. Depreciation and amortization of intangibles was $4.1 million in the fourth quarter of 2023 compared to $4 million in the year-ago period. In the company's annual test of impairment, the company recognized $15.7 million in impaired asset value. As a result, the company recorded non-cash adjustments of $9.3 million of goodwill and $6.2 million 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 fourth 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. Net loss for the fourth quarter was $27.3 million or $0.44 per share compared to a net loss of $15 million 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 $3.5 million 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 $3.7 million for the fourth quarter of 2023, compared to a loss of $10.2 million in the fourth quarter 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. Net sales were down $52 million or 18.8% to $226 million trailing from the full year 2022 which had sales of $278 million. Gross profit for the full year 2023 decreased by $9 million to $61.3 million However, gross profit margin as a percentage increased 186 basis points to 27.1% 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 $13.6 million 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 million. Within working capital, the company reduced inventory by $12.2 million, partially offset by a $4.1 million decrease in accounts payable as we reduced inventory orders and improved upon turns. We also invested approximately $6.7 million for payments in capex associated with technology and distribution investments and $3 million into acquisitions. On a full year basis, the company generated $1.4 million 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 and 215 million and full year adjusted EBITDA to be in the range of a $2 million loss to a positive $3 million profit. We expect first quarter revenue in the range of 45 to 48 million and adjusted EBITDA to be in the range of a $1 million loss to a $3 million loss. In addition, we expect during 2024 to begin reporting positive same-store sales comps for the first time since 2021. 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. 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.

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 to 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 Growth Generation. We will now take your questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Scott Fortune from Roth MKM. Please ask your question.

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 kind of lowered three 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? And then a follow-up question. Just kind of a little more picture on what you're seeing opportunities 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 of color on that would be great.

Yeah, Scott, I think right now we're pretty happy with our portfolio of stores around the country. I do believe you'll see another two to three store closings within the first six months. And we will be, we're still looking around the country and You know, dependent upon what we see on the legislative side, the legalization side, and the store side, you know, we're a buyer for the right price. If there's something that, you know, that'll be accretive to our portfolio. And as you know, we've just finished building out 100,000 square feet of distribution in Ohio, you know, 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 a portfolio that we have right now. But if building starts up again and Canada gets hot, we will be back in the market. But right now, we're pretty comfortable with our portfolio.

Okay. And a follow-up on that. I appreciate that, Darren. Just touching base, 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, the large MSO partners you work with, generating cash flow. If we get the you know, elimination of 280E 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, you know, top grows for those partners going forward here.

Scott, as you probably know and have seen, earnings from the MSOs have been pretty good in this quarter. On the legislative side, you know, we're all still waiting on 280E. And I certainly am one that does believe that you will see, you know, a reclass to Schedule III, 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 2020 and 2021. And you're coming up on that three to five 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 a 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. But we are starting to see much more quoting from our commercial team on light 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. And I do believe that you will see a strong year from GrowGen.

Thanks. I appreciate the color.

Thank you. Your next question is from Eric Delores from Craig Hallam Capital Group. Please ask your question.

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 three consolidated stores that you consolidated year-to-date? Thank you. Yeah, Eric, thanks for the question.

Sorry, go ahead, Darren.

You can go. Okay.

You know, Eric, I think when you look at our comp sales over the last handful of quarters, where we landed in the fourth quarter was down 3.5%. Year over year and that comes from when you look at our same store sales cops 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 and in various localities You know, there's there's areas of strength and you know, there's a few states that are still going through a lot of consolidation So we're comfortable with our overall performance on things as it relates to the comp sales when you look at our When you look at the three locations that we consolidated in the first quarter, 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 had 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. 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. Yeah, I mean, it sounds like, you know, I would think Michigan and California are probably two markets where you're seeing some more consolidation. So I think that that should help improve even further, obviously, your same-store sales going forward. 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 24 as a whole, or was that Q1 or both? If you could just clarify that for me, that would be great. Thank you.

Yeah, 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.

Yeah, Eric, just also for reporting, you know, with our segments, as we put MMI inputs on segments, We've also put HRG, which is our distribution company, will be reporting in our store segment. So you may see a little weakness in our HRG for the first six 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 first six months.

Okay, thank you for that clarification.

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

Hi, good afternoon. Good afternoon, Brian. The first question I have, Darren, in your prepared comments earlier, you talked about, you know, just the business in, I think you said January. So I give, the question I have is maybe just repeat that. I mean, the trends you talked about earlier here in 24, And then as a follow-up to that question, you outlined the guidance for Q1. I mean, to what extent is that strength you've seen early in 24 reflected in that guidance?

Brian, as you've known, we've gone from 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 million in the first quarter last year. So, you know, guidance is particularly, you know, we believe pretty strong right now. We're off to a good January. We saw our consumable business very strong. We do believe durable business will, you know, become strong at the end of the year, probably 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, you know, from guidance for the first quarter, we're conservative as always. but we do believe you will see a steady rise to the second and third quarters, which are usually our strongest two periods of the year with the outdoor growing season coming upon us.

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

You know, it's hard to say, Brian. It's hard to, you know, to get a feel of when the MSOs and the single-state operators and the commercial customers are going to go back into the market and start building again and also start, you know, start taking a hard look at their facilities and starting the refresh cycle with lights and dehumidification. You know, there may be a lag. There may not be. You know, what's going on right now, as you've seen from GroGen, we've been very, very careful with our balance sheet over the last couple of years during, you know, very difficult times in the industry. And that kind of equates out to the MSOs also. They've been protecting their balance sheets. And I believe that once they get the go-ahead and, you know, with 280E 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, you know, companies starting to build for the future. But the last couple of years, I think, have been unprecedented. Andrew Carter calls it the great hydroponic depression. And, you know, it's hurt everybody. But I think we've come out much stronger. 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 BroGen right now.

Okay. I appreciate it. Thanks, Darren. Thank you.

Your next question is from Andrew Carter from CFO. Please ask your question.

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've referred to the store closures, but can you give us a sense of how much lost revenue there is from those stores? 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?

Yeah, 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 three more this year. So it's a handful of locations that we've closed where we do believe we can generally retain the revenue from The larger customers, 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 the best in 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 the same store sales comps. And we feel very comfortable with guidance coming in at that 205 to 215 range as we look at 2024.

And just to be clear, does guidance include MMI, number one? I assume it does. And then the second part of it is, I guess I want to better understand the rationale of selling this business. Does it just not fit with the rest of the portfolio? Are there inventory requirements above and beyond MMI? Is it just getting a nice mark? I believe you bought it for $9 million, if I'm not mistaken, and it's tripled. Anything you can help us out with there?

You know, Andrew, I think there's many different reasons right now. And the one thing you have to understand is, you know, we're looking, we're seeking to monetize the asset. That doesn't mean that we're going to. A large majority of the sales from MMI is in typical retail and 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. 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 the vertical racking and benching. So, you know, 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. So, you know, it was bought for the hydroponic and gardening space. And we built up the other side of the business. But, you know, it's probably 90% of our business is into typical retail, rebuilding, you know, back of warehouses. And, again, for the right price, we're a seller. And if not, we will keep it.

Thanks, I'll pass it on. Thank you.

Your next question is from Aaron Gray from Orleans Global Partners. Please ask your question.

Hi, good evening, and thank you for the questions here. Just one for me, a couple of mine have already been answered. Just, I think it's been touched on more specifically, but in terms of the broader market, you talked about your own consolidation of some of your stores. Can you speak to what you're seeing more of 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 that legal in terms of cap expense by some of the operators? So just in terms of what you're seeing in terms of broader environment would be helpful. Thanks.

You know, I think, Aaron, you're still seeing the wild west out there. You know, 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, you know, the industry still is in disarray. You're still seeing tremendous amount of discounting, people selling for, you know, under wholesale, trying to hang on. But you're also on the other side of seeing, you know, stores closing around the country, also the smaller stores that 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. They are growing. And people are shopping at GrowGen every day. And even with the 17 store closures that you saw out of GrowGen right now, you know, we still believe that, you know, we will have an up revenue, you know, hopefully a strong year to build on and to start really regaining, you know, the 2020 to 2023 mantra that we want to add. We do believe that you'll see state and store sales positive this year. We're seeing some strength in some stores around the country. 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, you know, GrowGen is certainly seeing business coming back to the stores. We're seeing quoting, we're seeing quoting go to sale. And we do believe that you will see a great second half of GrowGen as we start going into a seasonal stronger period.

Okay, great. Thanks, Zakhar. Then I'm going to jump back in queue.

Thank you. Ladies and gentlemen, once again, please press store once you do wish to ask a question. Your next question is from Mark Smith from Lake Street Capital Market. Please ask your question.

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

Yeah, Mark. You know, 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 press releases over the past few quarters, newer distribution partnerships that we've identified in the space with Quest and Grodin and others. So those have had meaningful lifts to our gross margin as well. You know, from a 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. 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. 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.

similar question is, as we look at GNA 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 line?

Yeah, I think there is more opportunity there for us. You know, part of, part of what you've seen from us through the last few quarters, you know, you take Q3 and Q4, that's, that's, you know, 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 in the fourth quarter. So we do expect some level of cost improvement into the first quarter of 2024 and to continue forward into the rest of the year.

Perfect. Last one for me is just, I don't know, Darren, if you want to take it, just get a 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. You know, but any, you know, if you want to kind of rank or talk about kind of where you expect to put cash to work, and then, you know, if you get a deal done here on MMI, if that changes your thinking at all on use of cash.

You know, again, we're always looking, Mark, whether it's, you know, I doubt it's going to be on the store side of it because there's nothing out there large enough, you know, 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. And as we spoke earlier, we're getting more involved in the gardening side, getting products into IGC around the country. And we just also opened a website. And again, we are making pushes. We do believe that the hydroponic space, the gardening space, there's 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 or we see a tremendous turn in the industry, we will keep our balance sheet strong unless there's something that we can't resist.

Sounds great. Thank you. Thank you.

There are no further questions at this time. I will now hand it over to Gavin Lampert for the closing remarks.

Thank you for your time today, and thank you for your interest in Growth Generation. Have a wonderful evening. Thank you.

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