GrowGeneration Corp.

Hello, everyone, and welcome to the Grow Generation's second quarter 2025 earnings conference call. My name is John, and I will be your operator for today's call. At this time, participants are in a listen-only mode. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. This conference call is being recorded, and a replay of today's call will be available on the Investor Relations section of Grow Generation's website. I will now hand the call over to Phil Carlson with KCSA for introductions and reading of the Safe Harbor Statement. Please go ahead.

Thank you, and welcome, everyone, to Grow Generation's second quarter 2025 earnings results conference call.

With us today are Darren Lampert, co-founder and chief executive officer, and Greg Sanders, chief financial officer of Grow Generation. The company's second quarter 2025 earnings press release was issued after the market closed today. A copy of this press release is available on the investor relations section of the Grow Generation website at ir.growgeneration.com. I would like to remind everyone that 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 risk 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'll use some non-GAAP financial measures as we describe business performance, the SEC filing, as well as the earnings press release, which provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following prepared remarks, management will be happy to take your questions. 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 hand the call over to Grow Generation's co-founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. And thank you for joining us as we review our second quarter 2025 results. In the second quarter, we continued executing on our strategic plan to transform Grow Generation into a leaner, more profitable, product-driven business with a strong focus on business-to-business customers. The results are beginning to show, with sequential improvements for revenue, gross margin, and operating expenses. We've also continued investing in high-growth initiatives, such as building our B2B e-commerce platform and expanding our proprietary brand portfolio. These efforts are essential to our long-term vision of sustainable, profitable growth. We are fortunate because we have a solid foundation to build on, as Grow Generation remains one of the largest hydroponic suppliers in the United States, and our mission is clear, to deliver the best selection, service, and solutions to cultivators, retailers, and garden centers. First, let's look at the second quarter. Our Q2 net revenue came in at approximately $41 million, which was an improvement of $1 million to our second quarter guidance. This performance underscores the resiliency of our commercial and B2B-focused business. However, our focus is not only on growing revenue, but also improving the quality of it. That includes increasing our proportion of higher margin proprietary brand sales. In the second quarter, proprietary product sales accounted for nearly 32 percent of total revenue, up from 21.5 percent in the same period last year. This increase shows the growing strength of our proprietary brands, including Charcor, Drip Hydro, The Harvest Company, Ion LED Lighting, and most recently, Viagro. This improved product mix combined with enhanced procurement discipline contributed to gross margins expanding to 28.3% in the second quarter compared to 26.9% for the same period in 2024. Complementing this, we've continued our shift to a more flexible, fulfillment-centric model. During the quarter, store and other operating expenses decreased 23 percent, and SG&A was reduced by 13.4 percent, reflecting our disciplined cost execution and progress toward sustainable profitability. We continued executing our infrastructure resizing plan during the second quarter and subsequent weeks by closing two stores in the second quarter and two additional stores so far in the third quarter. This brings our current total retail locations to 27. In addition, we are in the process of closing another two stores, which will bring our store count to 25 by the end of the third quarter, in line with our broader strategy to consolidate and streamline operations. Another key initiative is our ongoing digital transformation of sales. In April, we formally launched our digital B2B platform. the GrowGen Pro Portal. This e-commerce portal continues to gain traction with commercial customers and has already shown tremendous adoption by our wholesale customers well beyond our original expectations. Our goal remains to migrate more commercial transactions from brick and mortar onto our B2B portal as we continue to improve operational efficiencies across our supply chain. As I mentioned earlier, we've taken other steps to increase our growth prospects. One of these is our recent expansion into the home gardening market through our acquisition of Viagro, a domestic brand with distribution across retailers such as Amazon, The Home Depot, Walmart, Lowe's, and Tractor Supply. This transaction strengthens our proprietary portfolio and provides a scalable platform to serve home gardeners and hobbyists, cultivators across national retail channels. We continued expanding internationally in the second quarter. In June, we signed a distribution agreement with V1 Solutions to support commercial sales across the European Union. We also launched a proprietary product line in Costa Rica, where the government has issued more than 50 hemp and cannabis licenses over the past year. positioning us in one of Central America's most promising cultivation markets. These new markets allow us to scale with minimal capital investments by leveraging strategic distribution partnerships to grow our brand presence. In our MMI Storage Solutions segment, we posted $8.1 million in revenue for the quarter, up over 69 percent sequentially. This growth was fueled by increasing product diversification including our mobile luggage solution that we debuted in partnership with the Waldorf Astoria. We are pleased with MMI's performance and expected to remain a strong revenue contributor through the remainder of the year. Beyond our operating results and other achievements, we've continued to maintain a strong balance sheet. We ended the second quarter with $48.7 million in cash, cash equivalents, and marketable securities, and no debt. This gives us the flexibility to support working capital, inventory investments, and opportunistic growth initiatives. In terms of guidance for the third quarter of 2025, we currently expect revenue in excess of $41 million. While we're not providing full-year 2025 guidance at this time through the ongoing tariff uncertainty, we remain focused on gross margin expansion, EBITDA profitability, and execution of our transformational plan. Before I turn the call over to Greg to review our financial results, I want to briefly talk about a recent development related to cannabis reform that we've been watching closely. This is the confirmation of Terence Cole as administrator of the DEA. Cole was appointed by President Trump to play a pivotal role in the potential rescheduling of cannabis from Schedule 1 to Schedule 3. While this does not directly affect GrowGen today, we believe any regulatory shift would be a net positive to the entire cultivation ecosystem. Thank you. And now we'll turn the call over to our CFO, Greg Sanders. Greg? Thank you, Darren.

And good afternoon, everyone. Starting with our second quarter 2025 results, GrowGeneration reported net revenue of $41 million, exceeding our guidance of $40 million, and compared to 53.5 million in the same period last year. The year-over-year comparison reflects our smaller retail footprint, consistent with our restructuring plan, alongside ongoing softness in business-to-consumer demand, which was partially offset by growth in our business-to-business customer base. Net sales in our cultivation and gardening segment were 32.9 million for the second quarter of 2025, compared to 46.1 million for the comparable year-ago period Proprietary brand sales increased to 32% of cultivation and gardening revenue for the second quarter of 2025, up from 21.5% for the second quarter of 2024. This increase exceeded our expectations and reinforces our ability to drive long-term gross margin expansion through higher private label penetration. In our storage solution segment, net sales of commercial fixtures reached $8.1 million, compared to 4.8 million in Q1 of 2025 and 7.4 million in Q2 of 2024. Both sequential and year-over-year growth reflects strong demand across product lines. While our core focus remains on the retail and agricultural markets, we're encouraged by the momentum in this segment. In the second quarter, we showcased our diversification strategy through new partnerships in hospitality and country club development, as highlighted in our recent press release. Total company gross profit margin was 28.3% for the second quarter of 2025, compared to 26.9% for the second quarter of 2024. The improvement was primarily due to higher private label penetration, partially offset by pricing compression on third-party vendor products. On the expense side, store and other operating expenses declined approximately 23% year-over-year to $7.9 million compared to $10.2 million in the second quarter of 2024. Selling, general, and administrative expenses for the quarter were $6.2 million compared to $7.1 million in the second quarter of 2024, a 13.4% improvement. As noted in our non-GAAP footnote, We also incurred approximately half a million dollars in corporate reorganization and consolidation costs in the quarter. We expect additional cost savings to be realized in the second half of 2025. Depreciation and amortization was 2.7 million, down from 3.6 million in Q2 of 2024, and is expected to remain stable for the remainder of the year. Net loss was 4.8 million in the second quarter of 2025, or negative 8 cents per share, an improvement compared to a net loss of 5.9 million, or negative 10 cents per share, in the second quarter of 2024. Adjusted EBITDA, as defined in our press release, was negative 1.3 million compared to negative 1.1 million in the same period last year. The decrease in adjusted EBITDA was primarily driven by lower sales volume, partially offset by gross margin percentage improvements, as well as reductions in our operating costs. Encouragingly, adjusted EBITDA improved by $2.7 million on a quarter-over-quarter basis, primarily due to progress made in our expense structure. Now, turning to the balance sheet, we ended the quarter with $48.7 million of cash, cash equivalents, and marketable securities, and no debt. We purposed $1 million of cash in the quarter for the purchase of Viagro. an undercapitalized lawn and garden business that has the potential for an attractive return on invested capital period. We continue to maintain a strong cash position and do not anticipate any near-term financing needs. As Darren mentioned, we are expecting sequential top-line growth in the third quarter but are not issuing full-year 2025 guidance given uncertainties in both global trade policy and cannabis reform. and the downstream potential variability in consumer demand. In summary, during the second quarter, we continue to rationalize our operations and execute our strategy to drive increased profitability as reflected in both our sequential and year-over-year improvements in gross profit margin and operating expenses. With a strong balance sheet and no debt, we remain focused on disciplined execution, margin expansion, in identifying revenue opportunities to drive long-term shareholder value. With that, I will hand the call over to Darren for closing remarks.

Thanks, Greg, and thank you, everyone, for joining us today. In the second quarter, we continued to execute our business plan, position GrowGen for increased profitability and long-term revenue growth. We've increased our proprietary brand sales, launched our online B2B portal, streamlined our operations, and reduce costs across our entire enterprise. Combined with the recent growth in our MMI storage solution segment, the acquisition of Viagrow, and our expansion abroad, we have multiple growth levers across our business. To support our future growth, we continue to preserve cash and remain debt-free, which we think is extremely important in today's environment. We'll keep implementing our growth plans and look forward to providing you with more updates as we continue to execute. That concludes our prepared remarks. Operator, please open the line for 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 the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. The first question comes from the line of Aaron Gray from Alliance Global Partners. Your line is now open.

Hi, good evening, and thank you for the questions. First one for me, I just wanted to talk a little bit about the Viagro acquisition and the broader opportunity there in the gardening space. Are you seeing that acquisition, you know, more so of dipping your toe into the category and kind of feeling how things go? Do you feel like there's more robust near-term opportunity for you guys to, you know, dig your feet deeper into that type of category? I know you guys have been talking about it for some time, you know, saw the acquisition in June. I just want to get some more color in terms of, you know, why you felt like this was the right acquisition and where you feel like the opportunities are more broadly for that category over the near to medium term. Thank you.

Yeah, and I think that there's tremendous opportunity within the lawn and garden space, and we have been speaking about it for a few years. You know, Viagro brings some incredible relationships to GrowGen on the big box side of it, and also brings some tremendous products that we believe have crossover into the cannabis space, and we certainly believe that a bunch of our products have crossover into lawn and garden. So I think it was a really, you know, again, it was an effective acquisition in a lot of ways. It was a undercapitalized company that was built over the last 10 years that came with very little inventory and very little operational expenses. We've already shut down their warehouses and molded them into our warehouses. And we're in the midst of building up inventory and, you know, relabeling certain of their products and bringing our marketing in. But we do believe that you'll see tremendous growth out of the Viagro acquisition next year. Right now, it's certainly moving slowly as we build our relationships and we also build up inventory to go into a lot of garden markets.

Appreciate that color.

Second question for me, on the gross margin, saw some nice improvement sequentially there, Andy, over a year. Last quarter, we did talk about some of the tariff risk. You guys mentioned more so exposure to Mexico and India versus China. So if you could just walk through maybe how we should think about the gross margin. I know you're not giving guidance now, but as you think about the different dynamics of tariffs and also sales mix that you have, how best to think about the gross margin going forward. Thank you.

Yeah, Aaron, thanks for the question.

We are still aiming as a company to get into the 30% range as a total reportable company. In the second quarter, we saw some amount of impact, probably in the tune of half a million in terms of import surcharge tariffs that came into play after that April 2nd announcement. But I can tell you, we are continuously monitoring and adapting to changes right now in the global trade environment, particularly in India, as news was updated last week. Tariffs introduce additional cost pressures into the business. We've implemented a handful of strategic measures to mitigate their impact and to maintain competitive pricing where the industry still needs it. First, we diversified our sourcing strategy across the board and are continuing to work through that. We're working closely with our suppliers to optimize costs and explore alternative manufacturing options where feasible. Additionally, we're leveraging our scale and purchasing power to negotiate better terms and minimize cost increases across the board. Next, we've enhanced our supply chain efficiency by optimizing logistics and fulfillment strategies, ensuring we reduce the necessary costs and improving operational margins where possible. Part of the benefit of the closure of stores that we've been engaged in over the past couple of years, we did two in the second quarter, we announced two more in the third already, is it helps lower our costs from that perspective as well. And then lastly, while tariffs present challenges, we remain well-positioned due to our strong supply relationships, our vertically integrated approach, and our ability to adapt. We're continuing to evaluate all opportunities to offset costs where possible, particularly in India right now, and ensuring that we remain a leader in providing high-quality products at competitive prices for the long term.

Okay, great. Really appreciate that, Kyle. I'll go ahead and jump back to the queue.

Your next question comes from the line of Mark Smith from Lake Street. Your line is now open. Hi, guys.

I wanted to just hit on some of the expense reductions, really solid improvements quarter to quarter here. But curious kind of where you are in the plan today. Are you mostly done? Is there still some more cuts that you think can be made? Would love kind of any insights that you can give us.

Hey Mark, thanks for the question. We are continuing to cut costs and we will in the back half of the year.

We brought our store and other operating expense down below 8 million, which was in line with the goals that we've discussed historically. SG&A was down closer to 6 million as of the second quarter. You know, quite frankly, we were down year over year in terms of total expense in the neighborhood of $4 million plus. We think there is additional improvements that you'll see into the third and fourth quarters of this year, both on the SG&A side of our business as well as store operating expenses as we continue to rationalize our footprint. So hopefully that helps.

Yeah, absolutely. Next question for me is really just on industry outlook. Darren, you called out some of the recent reporting around kind of reclassification and rescheduling. Are you seeing any signs out there of kind of capital investments in the industry, or is it still kind of a wait-and-see approach, do you think, for most in the industry?

I think right now you saw, you know, guidance season for third quarter, you know, 41-plus, and that's with six less stores ending the third quarter. And we feel pretty confident with that number and pretty confident we will beat that number. We are probably seeing right now the largest backlog that we've seen in three years on the durable side of it, lighting, dehumidification, benching, and related products. So we are seeing certain of our clients jumping back in, starting to refurbish their portfolio, looking at some older equipment and bringing in new equipment. We are also seeing a bunch of new builds around the country right now, back on the East Coast and Minnesota, something in new states coming on. But we're pretty excited that, you know, that we're starting to see that durable side of our business starting to pick up a notch. And, again, as I said, our backlog is as big as it's been in a long time. And we are seeing, you know, tremendous adoption of our private label grants on the consumable side of it, both on the Charcor and Drip Hydro side of it. And we do believe that, you know, Viagra will start contributing, I would imagine, fourth quarter, first quarter next year. But we are, you know, we are seeing sales, you know, coming through Viagra. But we are, you know, refurbishing, you know, their portfolio also, rebranding certain of the products. So, you know, it's a wait and see on that. But we do see money coming back into the industry.

Excellent. Thank you. Your next question comes from the line of Brian Nagel from Oppenheimer.

Your line is now open.

Hey, guys.

Good afternoon.

Good afternoon, Brian. So the question, I guess a bigger picture question, Darren. So now we've been talking for, I guess, several quarters or at least a few quarters about the real significant repositioning of the business away from retail more to commercial. The question I want to ask is, how long will this take, the reposition? We recognize it's probably an ongoing process, but as you're looking at it with your team now, is there more of a clearer timetable? So from a time perspective, then what type of investments? I mean, you talked about an acquisition today, but what other type of investments will need to be undertaken in order to, so to say, reposition the company fully?

Believe it or not, I think we have most of what we need internally right now. You know, we continue to bring new products to market on a weekly, monthly basis. And we do believe that you'll see our private label portfolio into the 40% range next year. And with the acquisition of Viagro, you're going to see a whole new opportunity opening for GrowGen. As I spoke about a little earlier, you know, we are entering the European market right now and also Latin America. So there's a lot of levers right now that, you know, that certainly have tremendous upside to it right now. And as Greg discussed a little earlier, we're bringing down expenses, and we're bringing them down pretty quickly. I think you'll see, you know, probably, you know, by the end of the fourth quarter, you know, a tremendous amount of savings that we're going to realize over the next, you know, four months of the year. So there's a lot going on right now. We are always looking at tuck-in acquisitions on the product side of it. But we do believe, you know, GrowGen right now, you know, has the ability to start growing again. that we certainly have the portfolio of products within GrowGen that are high-margin products, and with the durable business coming back, and even with MMI, that we believe this company will be profitable with what we have in-house right now, and we'll start growing and growing nicely.

That's helpful.

And then the second question, and I think it's a follow-up to the prior question, but are you saying you're already starting to see some solidification in demand, particularly in the durable side?

We definitely are. Our backlog has not been this large since 2021. So we are starting to sign up deals. We have deposits in-house, and we have lights coming in from China. We have a new product coming out under Canopy Lighting right now under the Dialed In brand that we believe is going to be a tremendous success. Tremendous winner on Wall Street. We believe that it's going to bring yield to our customers. You know, we test products for months before they come out. You know, and again, we have some new products coming out under the DRIP name, you know, this month that have gone through registration. The registration process is quite timely. So, you know, the products are coming out. And I do believe, as I said a little earlier, that you'll see our private label divisions you know, in this year somewhere in that 35% mark, but I do believe you'll see it in the 40s next year, which will start increasing margins and getting this company profitable and sustainable profitability on a go-forward basis.

So in this improved demand or solidification demand, do you think that's more, is it more internal to what GrowGen is doing, or is there more of a kind of an industry dynamic out there?

There's an industry dynamic there. But, you know, the customers certainly have their choice where they shop, and a lot of them are our customers. We represent the largest customers in the industry right now. And as the industry goes, you know, from what you want to call the illegal market to the legal market, you know, and there will be certainly consolidation within the industry. Our customers will be the ones consolidating the industry, so we believe our business will grow with that.

Very helpful. I appreciate it. Thanks. Thanks. Thank you, Brian.

There are no further questions at this time. I will now turn the call over to Darren. Please go ahead.

I want to thank our shareholders for their continued support. I look forward to providing you with more updates as we continue to execute.

Thank you and have a beautiful day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.