GrowGeneration Corp. (GRWG) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrowGeneration Corp. Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Michael Salaman, you may begin your conference.

Thank you. Good morning. My name is Michael Salaman, Co-Founder and President of GrowGeneration. At this time, I would like to welcome everyone to the GrowGeneration second quarter 2020 earnings conference call. With me this morning is Darren Lampert, our CEO and Co-Founder; Monty Lamirato, our CFO; and Tony Sullivan our Chief Operating Officer, who will all be participants on our call this morning. After our CEO, CFO, COO’s remarks, there will be a question-and-answer session. As always, we expect to make forward-looking statements this morning. But I want to caution you that our actual results could differ materially from what we have – what we say here. Investors should familiarize themselves of the full range of risk factors that could impact our results, and those are filed in our Form 10-K, which we filed with the Securities and Exchange Commission. I’d also remind everyone that today’s call is being recorded, and an archived version of our call will be available on our website later today. Let’s get started. We had an exciting quarter, looking forward to presenting. I would sum up our second quarter as a quarter where all sales channels came together and performed extremely well. GrowGeneration recorded its 10th consecutive quarter of record revenues and we achieved record adjusted EBITDA and net income for the quarter ended June 30, 2020. On August 10, we broke $100 million in revenues, a goal Darren and I set six years ago when we started the company. Our hydroponic garden centers experienced a 50% increase in walk-in transactions from the end of Q1 to the end of Q2, now surpassing over 10,000 per week. Online sales continue to increase, up almost 150% quarter-over-quarter, with our unique visitors now approaching 100,000 per month. The commercial division added a record 167 new commercial accounts in the quarter, with revenues up 142% quarter-over-quarter. That division, our commercial division now services over 700 commercial customers. Our follow-on public offering led by Oppenheimer was upsized due to demand and we raised $48 million in new capital. With approximately $60 million of cash on our balance sheet today, our company is actively pursuing several store acquisitions and looking at new markets for new store openings to continue to drive growth. GrowGen’s preparedness delivered record results this quarter, and this execution discipline continues to deliver positive results quarter-over-quarter. With that brief introduction, I will turn the call over to our CEO, Darren Lampert, who will present our second quarter 2020 results. Darren?

Thank you, Michael. Good morning, and welcome to our second quarter earnings call. Before we begin our Q2 earnings call, I’d like to begin by thanking our staff and customers for their hard work, dedication and loyalty during this time of uncertainty. As we continue to monitor the COVID-19 outbreak, GrowGen is considered an essential supplier to the agricultural industry, supplying the nutrients and nourishments required to feed their plants. Accordingly, all our 28 stores are opened during this difficult time and remain open. We have plans and procedures in place to ensure our customers and employees stay safe during this time of uncertainty. All of us at GrowGen remain committed to the safety and well-being of our customers and employees. On August 12, GrowGen entered into a partnership with Whole Cites Foundation, committing to donate product to develop urban farms across the United States. We’re excited to report another quarter of record financial results and performance by our company. As I reflect on the quarter’s results, I remind myself and our team that GrowGen is in the early stages of a multibillion-dollar industry, with tremendous growth ahead of us. GrowGen was built through hard work, limited capital and organic growth from 2014 to 2018. We built the foundation for growth in those early years. And in 2018, we raised $20 million that we invested in our business, driving sales from $30 million in 2018 to $80 million in 2019. On August 10, we surpassed the $100 million in sales, with over 18 weeks still to go in the year. The company’s Q2 2020 record financial results reflect our continued focus on revenue growth and adjusted EBITDA expansion. Q2 2020 was the company’s 10th consecutive record quarter of revenue. As we continue to outpace our guidance, we were increasing fiscal year 2020 revenue guidance to $170 million to $175 million and increasing adjusted EBITDA guidance for 2020 to $17 million to $18 million. We expect 2020 full-year GAAP pre-tax net income guidance to $7 million to $8 million. Revenue guidance for full-year 2021 is $245 million to $260 million and full-year adjusted EBITDA 2021 is $26 million to $28 million. Revenue was up 123% quarter-over-quarter to approximately $43.5 million versus $19.5 million for Q2 2019. Adjusted EBITDA was $4.6 million for Q2 2020, compared to $1.7 million for Q2 2019. Adjusted EBITDA for Q2 2020 was $0.12 per share basis. Net income from store operations was approximately $7.6 million, compared to $3.1 million for Q2 2019, an increase of 146%. Our same-store sales were 49% in Q2 2020 versus Q2 2019. Our online business, growgeneration.com, is projected to exceed $10 million in revenue in 2020, was up 149% for Q2 2020 versus Q2 2019 and up 163% for six months ended Q2 2020 versus six months ended Q2 2019. Our omni-channel strategy will connect all 28 of our store’s inventories to our e-commerce site, allowing for buy online and pick up in-store functionality. GrowGen’s just-in-time supply chain delivers our product safely and timely to our customers. Today, we offer will-call, curbside and direct-to-farm shipments from all our store locations and through our online e-commerce platform. We can ship to all 52 States. Recently, we have seen a surge in online revenues and we’re well prepared to fulfill these orders. Our commercial division is projected to do in excess of $30 million in annual revenues for 2020 and added $9.3 million revenues in the quarter, 142% increase for Q2 2020 versus 2019. To highlight our market-by-market growth, Colorado was up 18% quarter-over-quarter, 21% for the six months; California 19%, plus 32% for the six months; Michigan 322%, plus 299% for the six months; and Oklahoma plus 348%, plus 332% for the six months. Our weekly walk-in transactions are now over 10,000, increased by 50% from Q1 2020 to the end of Q2 2020. On June 16, the company successfully acquired H2O Hydroponics and consolidated with our West Lansing operations into a new 15,000 square foot super hydroponic garden center. The company believes that the combined business will generate over $8 million in annual revenue in 2020. This week, we closed on our store Emerald City Gardens, our 28th store located in the heart of the green zone in Concord, California. Our commercial revenues for the six months ended June 30, 2020 was $17.7 million, an increase of 181% over the six months ended June 30, 2019. We have generated more commercial sales in the six months than we did in the entire 2019 year. We continue to see strong demand for our products that include LED lights, nutrients, additives, soils and other products that outfit and feed grower’s gardens. Our newly launched private-label Sunleaves nutrients and additives line of product is now generating over $100,000 a month in sales. We are focused on margin expansion strategies that include furthering the deployment of more private-label products and driving more efficiencies at the purchasing level, as we continue to scale. We have new acquisitions and new store openings we plan to close during the remainder of 2020, as we continue to drive growth. Our mergers and acquisition pipeline is the most active it has been since our inception. We have set a corporate goal to reach 50 stores and 15 states in 2021. GrowGen has a tremendous team of essential employees who have made a commitment to our company and customers, and I couldn’t be any prouder. I’m inspired by their efforts and dedication that they have worked tirelessly to service our customers and communities. I will now turn the call over to Tony Sullivan, our Chief Operating Officer, who will brief everyone on our current COVID-19 risk mitigation procedures and key operation initiatives executed in Q2. And then to our CFO, Monty Lamirato, who’ll provide more detail on our Q2 2020 year results. Tony?

Thank you, Darren. We had another successful quarter with record financial results, and we are very proud of our team’s continued growth, execution and performance in the second quarter. As Darren stated, our top priority is the safety of our team, their families and our customers. Currently, all 28 of our locations are open and operating efficiently. We have been relentless and one step ahead with all safety protocols throughout this pandemic. We’re classified as an essential business supply chain for agricultural and medical. And COVID-19 city, county, state and federal mandates, we have updated and consistently been aware of all changes, monitoring them several times daily, and making sure our teams are aware daily. We have deployed remote working environments for all nonessential store personnel across multiple departments. And we currently have two out of the 10 States we operated in, who have lifted the stay-at-home mandate. And even though they have lifted the stay-at-home mandate, we continue all our protocols and maintain the safety protocols in place regardless of the change in the states. All stores we wear mask, we follow the six-foot distancing rule. There is no more than 10 gathering at any time. And being that this is a fluid, ever-changing situation, we continue to manage, monitor and communicate daily. We will continue to maintain and communicate our safety and cleaning protocols and work towards our new normal business practices. We are monitoring and have a significant cleaning and safety supplies in all locations. We will continue to stay one step ahead operating with stricter protocols to ensure we keep our team and our customers safe. A couple of key takeaways with COVID. Our relentless proactive safety communication and approach has paid off. We have had no reported COVID positive tests, and we’re very proud of that. Considering the COVID-19 impact, we have continued to produce record results in Q2. As stated earlier, we are able to deploy and test critical omni-channel functionality, including buy online, pick up in-store, curbside pickup, will-call and pick, pack and ship, providing multiple channels for our customers to shop safely and efficiently. We are ready to deploy proven additional safety operating levels, if and when necessary, by location. Most importantly, we are prepared to maintain our highest safety levels protecting our team and our customers. Now for a few key operating initiatives and accomplishments in Q2. We have developed a real estate and two-year growth strategy that will strengthen our multi-channel supply chain and our state-by-state ownership plan. Omni-channel and new website. We are currently testing buy online, pick up in-store, pick, pack and ship, curbside pickup solutions as we wrap up the final development to launch our new site. In our private-label strategy. Our newest product offerings have exceeded expectations and phase two expansion is underway. Few rationalization and new store planogram project. We have selected one of the top industry partners in the space. We anticipate significant learnings and data to improve our inventory turn and optimization of inventory and profit. Brand Reset and Refresh, this is our first 25-feet strategy. We have started our rebrand strategy, where we will rebrand, re-sign and develop a consistent customer experience across our multiple channel sites and stores. GrowGeneration West Lansing, as Darren shared with you. We recently purchased H2O. We have consolidated the market into a 15,000 square foot super garden store with outstanding results. GrowGen Grand Rapids. We are currently relocating and expanding into a 20,000 square foot super hydro garden center store, and this will be our Midwest fulfillment center opening in early September. And on August 10, we have completed the acquisition of Emerald City Garden, located in Concord, California, our 28 location. At this time, I’ll now turn it over to Monty, our CFO, for – to review our financial highlights. Monty?

Thanks, Tony. Let’s go over the Q2 2020 financial highlights. Some of these items were previously discussed by Darren, so some of them might be a little repetitive. Revenues up 123% to $43.5 million for Q2 2020 versus $19.5 million for Q2 2019. The revenue increase is the result of, one, an increase in same-store sales of 49% quarter-over-quarter. The addition of six new retail stores opened or acquired after June 30, 2019, that contributed no revenue in quarter two 2019, compared to $13.5 million in Q2 2020. Two stores opened in May 2019 that contributed $2.25 million in revenue this quarter ended June 30, 2020, compared to $1 million for the quarter ended June 30, 2019, and a 142% increase in commercial business comparing Q2 2020 to Q2 2019 and a 149% increase in our online sales comparing Q2 2020 to Q2 2019. Sales in the 19 stores opened for all of Q2 2020 and Q2 2019 contributed revenue of $25.1 million for Q2 2020 versus $16.9 million for Q2 2019, a 49% increase. Gross profit was $11.6 million for the second quarter Q2 2020, as compared to $5.8 million for Q2 2019, an increase of $5.8 million, or 99%. Gross profit as a percentage of sales was 26.7% for Q2 2020, compared to 29.9% for Q2 2019. The decrease in the gross profit margin percentage is due to, one, commercial and e-commerce revenues accounted for 27% of total revenues for Q2 2020, compared to 25% of total revenues for Q2 2019, resulting in a reduction of margin of approximately 0.8 basis points as a result of lower margins for the e-commerce and commercial sales. Two, in 2019 – in the first quarter of 2019, we acquired a significant amount of inventory from a vendor at a very substantial discount. Sales of this product in Q2 2019 accounted for 5% of overall revenues and we have very high margins, resulting in a 1.3 basis point increase in margin in 2019. Operating expenses as – are comprised of store operations, primarily payroll, rent, utilities, and corporate overhead. Operating costs were approximately $8.8 million for Q2 2020 versus approximately $4.6 million for Q2 2019, an increase of approximately $4.2 million, or 89%. Store operating costs were approximately $4 million for Q2 2020, compared to approximately $2.7 million for Q2 2019, an increase of approximately $1.3 million, or 46%. The increase in store operating cost is directly attributable to the increase in the number of stores, as previously discussed in the revenue section. Store operating costs as a percentage of revenues was $9.2 million – excuse me, 9.2% for Q2 2020 versus 14% for Q2 2019, a 35% reduction. Store operating costs are positively impacted by the opening of new and acquired stores throughout the second-half of 2019 and new stores in 2020, which have lower op – percentage of operating cost of revenue due to their larger size and higher revenue volume and a 49% increase in same-store sales. Corporate overhead, which is primarily comprised of share-based compensation, depreciation and amortization, general and administrative costs and corporate salaries and related expenses was approximately $4.8 million for Q2 2020, compared to approximately $1.9 million for Q2 2019. Corporate overhead costs were 11% of revenue for Q2 2020, compared to 9.8% for Q2 2019. The increase in corporate overhead as a percentage of revenues for the quarter ended June 30, 2020 was due to the increase in non-cash share-based compensation from approximately $390,000 for the quarter ended June 30, 2019 to approximately $1.2 million for the quarter ended June 30, 2020. The increase in non-cash share-based compensation was a result of several new executive employment agreements, which became effective January 1, 2020, for which share-based awards and option awards vested over a two-year period. The increase in salary expense from approximately $821,000 in Q2 2019 to approximately $2 million for Q2 2020 was primarily due to the increase in corporate staff to support expanding operations, including purchased store manager integration, accounting and finance, information systems, purchase and commercial sales staff. Corporate salaries and related costs as a percentage of sales were 4.5% for the three months ended June 30, 2020, compared to 4.2% for the three months ended June 30, 2019. G&A expenses comprised mainly of advertising, promotion, travel, entertainment, professional fees and insurance was approximately $1.2 million for the three months ended June 30, 2020 and approximately $549,000 for the three months ended June 30, 2019, with a majority of the increase related to advertising, promotion, travel, legal fees, and bad debt valuation allowances. General and administrative costs as a percentage of revenues were 2.6% for the three months ended June 30, 2020 and 2.8% for the three months ended June 30, 2019. As noted earlier, corporate overhead, which includes non-cash expenses, consisting primarily of share-based compensation and depreciation and amortization. The non-cash expenses were approximately $1.6 million for Q2 2020, compared to approximately $542,000 for Q2 2019. Net income for the three months ended June 30, 2020 was approximately $2.6 million, compared to net income of $1.1 million for the three months ended June 30, 2019, a positive change of nearly $1.5 million. The increase in net income for the quarter ended June 30, 2020 was primarily due to, one, 123% increase in revenues, while store operating costs increased only 99%. Net income from store operations, which was approximately $7.6 million for the quarter ended June 30, 2020, compared to $3.1 million for the quarter ended June 30, 2019, an increase of 146%. The increase from – income from store operations were offset by increased corporate overhead, which was approximately $4.8 million for the quarter ended June 30, 2020, compared to approximately $1.8 million for the quarter ended June 30, 2019, an increase of $2.9 million, of which non-cash share-based compensation and depreciation and amortization was $1.1 million of that increase. Increase in G&A and salaries for the quarter ended June 30, compared to the quarter ended June 30, 2019 accounted for the remaining increase. Adjusted EBITDA was $4.6 million for Q2 2020 versus $1.7 million for Q2 2019. The increase in adjusted EBITDA comparing Q2 2020 to Q2 2019 was due to: one, increase in net income of approximately $1.5 million; and two, non-cash add-backs, primarily depreciation amortization and share-based compensation, which were approximately $1.6 million for Q2 2020 versus $540,000 for Q2 2019. Adjusted EBITDA per share was $0.12 for Q2 2019 versus $0.06 – excuse me, was $0.12 for Q2 2020 versus $0.06 for Q2 2019. Cash at August 12, 2020 was approximately $59 million. Working capital at June 30, 2020 was $35.2 million, compared to $30.6 million at December 31, 2019. During the quarter, we had proceeds from the sale of warrants of approximately $282,000. I’ll now turn over the call back to Darren for some further comments.

Thank you, Monty. In conclusion, GrowGen recorded its 10th consecutive record quarter of increased revenues and we achieved record adjusted earnings. GrowGen achieved the sales milestone, surpassing $100 million in sales on August 10. Our commercial team did more business in the first six months of 2020 than we did in the entire year 2019 and our e-commerce division is growing at over 140% in the same period quarter-over-quarter. Our store foot traffic is up 50% from end of Q1 2020 to the end of Q2 2020. Our company has tremendous growth momentum built into the remainder of the year. Our store acquisitions and new store openings continued to drive growth, while we delivered double-digit same-store sales results quarter-over-quarter. We set a goal to own and operate over 50 locations in 15 States during the year 2021. Today, we own and operate 28 locations. All stores will be connected to our e-commerce platform in September, providing our customers to buy online and pickup in-store option. GrowGen’s preparedness delivered record results. And this execution discipline will continue to deliver positive results quarter-over-quarter. GrowGen has built an essential supply chain to the agricultural industry. Our leadership position is driven through a corporate mission statement to be the largest chain of hydroponic garden centers in the USA. We continue to cultivate the best and most knowledgeable staff in the country. We’re focused on world-class customer service and commitment to our customers. We continue to invest in our supply chain and technology, creating more efficiencies across all departments. Execution of our financial goals and guidance is evidence with our Q2 2020 numbers we reported, with revenue up 123% quarter-over-quarter and adjusted EBITDA earnings $4.6 million, or $0.12 a share. Our second quarter 2020 was strong as we successfully added H2O Hydroponics to the portfolio. This week, we added our 28 store Emerald City Gardens located in Concord, California. We completed a $48 million institutional follow-on public offering led by Oppenheimer, which was oversubscribed three times. On June 29, GrowGen was added to the Russell 3000 Index. We believe our Russell 3000 listing will increase long-term shareholder value by improving awareness, liquidity and appeal to institutional investors. Our balance sheet is strong with approximately $60 million in cash, which allows us to continue to execute our internal growth initiatives, while we continue to purchase the best of breed hydroponic operations and open new GrowGen locations. We have increased fiscal year 2020 revenue guidance to $170 million to $175 million, adjusted EBITDA guidance for 2020 to $17 million to $18 million and full-year GAAP pre-tax net income guidance of $7 million to $8 million. Revenue guides for full-year 2021 is $245 million to $260 million, adjusted EBITDA full-year 2021 guidance is $26 million to $28 million. We look forward to continuing to provide guidance as need be, and we were excited to share our successes with our shareholders, our management team and partners. Now we will answer a few questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good morning, guys.

Good morning, Brian.

Great quarter. Congratulations.

Thank you.

So the first question – I have a couple of questions. First, maybe a little bigger picture in nature. But obviously a lot of – you spent a lot of time, say, talking about just the ongoing COVID-19 crisis and the efforts on the part of GrowGen to contend with this. The question I have is, as you look at the results in the quarter recently from the sales, maybe in the expense part, could you help us understand better kind of the – sort of say, the puts and takes as it relates to COVID-19? I mean, are – to what extent are your sales – phenomenal sales growth could it be held back where you actually, to a certain extent, benefiting in the crisis in a similar type dynamic or expenses?

Yes. I’ll take that, Brian. I think it’s twofold. First is really difficult to ascertain. Our growth was continuing right up into COVID. So what you really saw during our fourth quarter and first quarter was really the increase in our same-store sales within our organization, as you saw probably, again, trending through last year. So the only thing that we’ve really seen through COVID is the continued increase. What you’re starting to see right now on, I think, is the resurgence of the cannabis markets in the United States. I mean, what you’ve seen from certainly earnings calls from the big MSOs that business is booming. And you’re starting to see, again, a lot of conversation going on in fed – with federal legalization and certainly, states following up, though. even back East. So I think you’re just seeing a lot of positives throughout the market. But what we’ve seen specifically during COVID is that we’re outpacing our peers. We’re better stocked. We’re better equipped. Our stores are open and clean. I think, through Tony’s guidance, we’ve done a tremendous job handling COVID. Expense-wise on COVID, certainly, you’re seeing certain expenses flow through the cleaning supplies, certainly, we’ve been giving bonuses to employees. We’ve been – we have not missed – we’ve paid employees extra posted docking employees who are not working. So you’re certainly – you’re probably seeing $150,000 to $200,000 of expenses flowing through probably in the quarters based upon COVID that we hopefully see subsiding going into the future.

Got it. That’s very, very helpful. Then my follow-up question. Monty, in your comments, you discussed gross margin and what was essentially a difficult comparison with last year. Within the context, you all lifted guidance for 2020, then introduced very compelling guidance for 2021. But how should we think about just the growth – the gross margins going forward, particularly in light of the continued outsized growth in commercial, private-label efforts and such?

In commercial – go ahead.

No, Monty, you take it. Go ahead.

Yes. The – certainly, the increase in commercial and e-commerce as a percentage of total revenues has an impact on our overall margin. But with the increased effort that we have for private-label, we hope to not only offset that, but to increase our margins as a result of the introduction of additional private-label products in 2021 and beyond.

Brian, this is Darren. What you’re also seeing, you’re seeing a tremendous increase in foot traffic in our stores. You’re seeing almost a 50% increase quarter-over-quarter. When you’re looking at a blend of margins from GrowGeneration, it’s threefold, it’s commercial, it’s e-commerce, and then it’s foot traffic coming through the stores, which is also commercial, but not large MSO business. So what you’re seeing in the – in our second quarter, about 27% of our sales was basically MSO and commercial business that’s flowing through in the low-20s. And we see as GrowGen continues to grow more foot traffic coming through the stores. And certainly – and with more purchases out there, we’re just seeing more customers are shopping. So you’re seeing our margins right now pretty consistent where they are in the 26 to 27 point range. But we see when we start focusing on flowing through private-label products, which is certainly a work in progress, but some it’s the biggest initiative at GrowGen right now. You’ll see private-label products going through anywhere from 60 to 100 basis points. So you will see a kick up in margins slowly, but we are – we certainly are the belief that, our margins right now are certainly consistent throughout the year. But we think you will see these margins creeping up over the following years, as private-label becomes a bigger part of our business. I mean, right now, you’re looking probably at 1% to 2% private-label initiatives. Hopefully, by the end of next year, we’ll be again in the double-digit number. So you’ll see it slowly, gradually increasing.

That’s very helpful. I appreciate all the color. Congratulations and best of luck in the future quarters.

Thanks, Brian.

Thanks, Brian.

Your next question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Hi, thanks for taking the question and congrats on a nice quarter. So curious a little more color on the commercial division. I know we’ve talked about it a bunch in the past, but it’s really solid account growth.

Thank you.

So number one, maybe can you just give us some more detail around that segment. Can you talked about the sales force, if you’re growing that, can you talk about if there’s any, maybe region of the country that seen – that’s driving it, maybe the nature of the accounts, the size of that, maybe if there’s any churn in that base at all or anything, just some more detail around, that’d be great?

Michael, I’m going to send it over to you.

Sure. Thank you. Thank you, Glenn, for that question. It’s a good question. We’re constantly building our commercial book of business. And as we announced today, we had a significant increase in number of commercial accounts, up 167 for the quarter. We’re now servicing over 700 commercial customers. We look at commercial business as a segment of the business, where a commercial customer is defined for us as someone that’s spending over $50,000 or more with the company. We have a dedicated sales force. We have a dedicated customer service division that works directly. And we think we’ve perfected the way the interface efficiently with these large multi-state operators and large regional commercial customers. And the evidence is based on the success that we’ve had. I mean, quarter-over-quarter, we were up in our commercial division 142%, six months 181% and we’re leveraging. And I think what’s really working really well for the company is that, we have this interconnectivity between our commercial sales team that is selling in, based on a product selection that is personalized to that particular growth. GrowGen has the capability to really supply exactly what that grower wants. I think one of the things that we really understood very early on, that every commercial grower – every commercial cultivator grows a little bit differently and you have to provide the ability to deliver what they are actually looking to use that they’re used to use from a nutrient perspective, a lighting perspective and GrowGen supply chain and inventory system is able to manage that. And that’s what’s closing business. And then you tie that together with a just-in-time inventory system with the supply chain that we’ve created through the 28 locations. We’re able to reach commercial customers same day and just-in-time. We have their inventory stocked at any one of our 28 locations, which is certainly expanding as we look at new markets coming on. So GrowGen is in a very strategic and unique position to not only acquire customers, but to service and manage those customers on an ongoing basis with a local presence, combined with our commercial division, which is made up of – right now, we have about 20 individuals and that division has grown significantly. As Darren mentioned in his comments, our commercial division in the first six months in more business than we did in the entire year for 2019. So it’s a constant lead generation to quoting to closing and then leveraging the supply chain to service those customers on an ongoing basis. And then personalizing the offerings and our ability to deliver exactly what they want. That’s what’s acquiring these commercial customers and retaining those commercial customers.

Great. Thanks for the color there, Michael. And then just as a – if I could, on a follow-up. Curious just about if you’re seeing any change in the competitive landscape at all? I mean, I know in the past, it’s been kind of like a niche market and it’s maybe not been big enough for like the big national guys and stuff like that. But now the pace of the growth that is significant, you’re talking about a quarter $1 billion in revenue next year. Just curious if you’re seeing any new entrants from below or above on the competitive landscape? Thanks.

Hey, Glenn, we have not at all. There’s – that we’ve seen zero.

Okay, great. Thanks. That’s it for me. Thanks.

You’re next question comes…

Thank you, Glenn.

…my apologies. Your next question comes from Mark Smith with Lake Street Capital Markets. Please go ahead.

Hey, good morning, guys. Thanks for taking some questions. First question for me is just looking – can you talk a little bit about the multiples that you’re seeing and paying right now on some recent acquisitions and kind of your expectations going forward, as we look at M&A as COVID maybe created some more opportunities and how long do you think that?

Yes. I’ll take that. Mark, we’re still seeing pretty consistent multiples as we – as we’ve seen in the past few years. We’re seeing anywhere from two to three. Certainly, the larger acquisitions may go to four to five, but it’s been pretty consistent throughout the years that we’ve been in business. And as we’ve stated earlier during our conference call, our acquisition pipeline is big and getting bigger. One of the interesting parts about that, because there’s a lot of work for GrowGen still to do on the existing states there we’re in. We’re seeing tremendous growth in the California markets right now. GrowGen still does not have a large presence in Southern California. We see more work to do in the Michigan markets right now. We see some work to do in the main markets in the Washington markets. So the interesting part is besides, again, GrowGen is forecasting 15 states next year and probably in excess of 15 States, but you still will see work at a GrowGen in existing States that we’re in.

Okay. And that kind of leads to my next question. As we look at this goal of 50, can you talk about the mix of acquisitions versus built new stores?

It’s a hard question right now, again, because like anything else, our acquisition pipeline is fluid and it changes, again, when we start doing due diligence on certain stores out there. But right now, we see still, for next year, more purchases, more stores being added through acquisition than through those new store openings through GrowGen.

Okay. And then…

Yes. Mark, I’ll just…

Yes.

...I’ll just add a little color to that. What we’ve done over the years is look at acquisitions in mature markets and the new emerging markets, which are – we were very excited about what we think is going to happen during this election year with Pennsylvania, New Jersey, Arizona. Those are markets where there’s really nothing for us to acquire. And those are markets that GrowGen will open up a new location, a super hydroponic operation to really take advantage of legalization. So, we’re very much – and as Tony mentioned, we have a two-year real estate initiative to look at locations, where these licenses are being granted. Combining that with, as Darren mentioned, a very aggressive acquisition program in the more mature markets, Michigan and California. So you’re combining both the acquisition strategy combined with the new markets that are opening up. And our ability to open up a new location in 90 days really gives the company tremendous first market mover position to take advantage of legalization as it occurs. So it’s really – those strategies that we really implemented, you can see it in the results in Oklahoma. We were the first company to really take advantage of legalization, opened up four locations, each one of those locations are approaching $1 million a month of business. So, we have the staff, the infrastructure, and the expertise. They’re not only acquired, but to certainly open up new locations as these markets legalized themselves. And we think there’s going to be a number of these new states coming on Board in the fall.

Hey, Michael, if you don’t mind, Tony, I’d like to add a little bit to that, too. So with our two-year roadmap, it’s broken out into really three phases, guys: one is our acquisition strategy; two is our new store, new state strategy; and three is our supply chain fulfillment center strategy, really putting in the stick hub and spoke stores. So the exciting thing is with 40 States of growth, we have the ability to go in and acquire, open up new and position our supply chain. So it’s nice to have a three-phased approach in our two-year roadmap.

Excellent. That is helpful. Thank you, guys. Last one for me, I guess, is just any update on the ERP system kind of how the implementation has gone and throughout all the stores and maybe where that has helped you as you’ve seen some of this growth, especially in building out some new systems like buy online, pick up in-store?

Tony, would you like to take that?

Yes, I’ll take that. So good news guys. Our ERP system is fully deployed in all our stores that we operate in today. Secondly, it goes into all new acquisitions and new stores. And the exciting thing right now is, we are connecting it with Magento and our omni-channel approach as we speak. We’ve been testing it very successfully with the focus, pick, pack and ship, and we’ll play a significant part as we roll it out in September with our new website. So good news is, ERP is up and running, fully deployed across the chain, fully deployed across anything we knew and acquire and fully deployed with our new omni-channel approach and new website that we’ll launch in September.

Perfect. Thank you, guys.

Thank you, Mark.

Your next question comes from Scott Fortune with ROTH Capital Partners. Please go ahead.

Good morning. Congrats on the solid quarter, again. Real quick the follow-up on the real estate side of things. These acquisitions, are you looking kind of with the average size footprint you’re looking for? These acquisitions, most recently, you’ve moved up into the larger super centers kind of more fulfillment centers. But step us through kind of the store numbers with the kind of smaller footprints versus the larger footprints where you’re looking for there?

I think, Scott, you’ll see a mix dependent upon states we’re in, where the stores are located, what communities they’re in, whether we’re looking for a distribution center versus an add-on store in certain states we’re in. So right now, again, within our portfolio, certainly within our – again, our acquisitions that we have, we will be closing. They range in a tremendous amount from low to high. I can’t really discuss the numbers with you right now what the size of some of these acquisitions until we complete them. But you’ll see, again, anywhere from – again, 10,000 square foot stores and all.

Okay. [Multiple Speakers]

Hey, Scott, one of the things you’ll see is, most stores that GrowGen are acquiring, you won’t see stores doing under $4 million in revenue.

Got it. Thanks. And then real quick shifting kind of private-label, you get this – put a focus on that, but sentence flow to really adopt and develop kind of step us through more of the timing you say 2021, we can get the double-digit of overall revenues. But kind of step us through kind of niches you’re looking at? And then a little bit color on the inside, are you seeing, what are you seeing on the MCV side as part of the business here?

Hey, Scott, I’m going to start off with that and I’m going to toss it over to Michael quickly. One of the issues with the slow adoption of our private-label, as we always say that from GrowGen, our desire was to build the stores, build the space, and then bring private-label. And COVID certainly has slowed down the implementation of private-label between China and getting things done right now. I can tell you that when you ask about COVID, COVID had slowed down. The initiation of our private-label getting into stores. But with that, I’m going to turn it over to Michael, who is going to discuss our private-label strategy.

Scott, it’s really twofold. You have brands that growers are sinking. We stopped every major brands. And then you have cost conscious growers that are looking for products at a lower cost, which really opens up the private-label opportunity for the company. As Tony, I think, mentioned earlier, we hired an expert to assist the company in sourcing private-label products. We’re doing a very deep dive right now into SKU rationalization and planogramming. So, we – and last year, we bought the assets of a variety of trademarks – product trademarks, that all will be populated with a private-label product coming into 2020, 2021. There’s tremendous opportunity. We’ve seen it with Sunleaves, which is approaching a $1 million brand. We brought in some products under the Pioneer brand. There’s just tremendous opportunity we see. Now that we build out the distribution. We have the supply chain to take advantage of the trademarks, developing new products, margin expansion, we will not bring a private-label product into the market unless we can pick up over 50% margins. And we’ve set a very aggressive goal internally to get to 10%, next year, 20%; the following year, 30%. And we think the grower customer is certainly looking at costs. There’s return on investment. And we think, through a cost-efficient and a high-quality private-label offering, with the expertise of our grow pros that operate within our store footprint, our commercial grow technicians, we can really develop a very profitable and broad-based private-label offering. And we just think there’s tremendous upside in terms of margin expansion and just providing another alternative to our customer. But we have to also be cognizant that there are brands and there are existing products that the growers are gravitating to – so we stock those products. GrowGeneration has built the largest selection of hydroponic products in the country. So, we’ve taken somewhat of an agnostic approach and a personalization approach. We drive our business based on what does the grower need? What products are they buying? And our ability to offer a complete solution is, why we’re able to acquire new commercial customers? Why are we getting more walk-in traffic coming into the store? Because we have the selection. You’re seeing more larger square footage, more selection, and then you combine that with our knowledge-based sales team, who understand the agricultural side of the plant. That’s what’s resonating. And that’s why this company continues to put up triple-digit growth and double-digit same-store sales growth. In regards to your hemp question, we certainly have our eye on the hemp market. I think, as everyone probably realizes, the hemp market has been really a slow to take market. Our opinion is until the FDA really puts out a very specific position on the efficacy of it, the safety of it, the market is still going to be relatively niche. We certainly have hemp customers that we work with. We have a product offering. We certainly have product in the nutrient area that’s specific for hemp farmers, but that market is still a very small part of the overall revenue pie of the company. But do we believe that, that market can take off? Absolutely. With COVID, we’re seeing a resurgence of individuals that are now embracing home gardening. We think there’s a tremendous upside in terms of the home market, where home – consumers are going to start to create their own gardens, their own edible gardens for food and produce and those kind of things. So GrowGen is well-positioned to market and attract those kinds of customers as well. So there’s so many opportunities in terms of different vertical markets that the company can enter into in addition to the cannabis market that will drive growth in the future for this company. And we’re certainly looking at how to attack it, how to acquire those customers, how to create the right suite of products, and curate the right suite of products for all of those different vertical markets, that are all part of this agricultural resurgence that’s coming into our society, that’s driven by many different influences and GrowGen is well-positioned to attack all those verticals. So, that’s our position. Hopefully, I answered your question.

No, perfect. I appreciate the color. I’ll jump back in the queue. Thanks.

Thank you, Scott.

Your next question comes from Peter Wright with Intro-act. Please go ahead.

Great. Congratulations, guys, and thank you for taking my question. What – my question is really, what is driving the better visibility in your business? And if we look at your guidance, which is embedding 35% better profits this year, 25% better sales growth and that continuing into 2021, what is it that gives you comfort, maybe kind of on a metric and a couple of things that I’m trying to think about is your customer value. So are you seeing more repeat customers? Are you seeing lower acquisition costs as you build out your footprint in bigger ways? What are really the drivers that are driving those two stick dynamics in your guidance, which is better visibility and better profit per dollar of sale? And then my follow-up question is really just on your 2021 guidance, does that include non-organic growth? Or is it only organic growth like you have guided before? Thank you.

I’ll start off and probably kick it off. 2021, our growth includes acquisitions and new store opening. So that’s, again, it’s early guidance. So again, right now, it’s what we’re seeing within our portfolio in connection with, again, acquisitions, new store openings, their projections and certainly very early on in the game. And just so, you do know, we had soft guidance out the Wall Street for $180 million for 2021. So, like anything else, we had to give – we had to change that number, and this is what we feel comfortable with right now. We certainly hope that number will go higher throughout the year. We’re extremely comfortable with that number as we spend. What we’re seeing in the industry right now is, you’re seeing the resurgence of the cannabis industry in the United States. Are you seeing an industry that went through certainly bumps and grinds took time to really get going? And what you’re seeing right now is, I spoke earlier about, as you look at the reports coming out from some of the large MSOs around the country, cannabis sales are up and they’re up tremendously and they’re continuing. So you’re seeing an industry where you’re starting to grow up. As the industry grows up, there’s always a leader on the side supplying that industry, and that’s GrowGeneration. We’re seeing our stores. We’re looking at in our acquisition pipeline, their sales are up to certainly not anywhere near the percentages that our sales are up. What you’re seeing right now from GrowGeneration is, you’re seeing foot traffic increasing, you’re seeing commercial sales increasing, you’re seeing online sales increasing, so you’re seeing it throughout. You’re not just seeing one small area of growth, you’re seeing the growth throughout the whole company. And what you’re is GrowGen building bigger stores, suppliers up, our service is getting better. And you’re seeing really a company that’s been built. And then in the last couple of years, GrowGen, from 2014 to 2018, it was a $30 million company. So you’re seeing guidance going from $30 million, up to $1.25 billion in three years. And you’re seeing it really through, I think, the experience of learning of a new industry. And again, GrowGen has taken advantage. We have a tremendous staff has been with us, source staff. Again, we have employees that have been with us from the start. And certainly, new stores that we purchase, owners have stayed on with GrowGen. So we have tremendous experience in the industry. And again, I think it’s just all starting to payoff, as we speak. And anything else, business just continues. We don’t see it stopping. We see a lot of verticals, one is private-label products, one certainly is the home garden markets for GrowGen. And you’ll see these things and you’re seeing pegboards right now. Tony is working on for every store. You’re seeing all our stores within the signage, the same. All GrowGen stores look the same, and you’re going to have a happy experience shopping at GrowGen for your gardening needs. And just to add to what Darren just said, Peter, and I think, it’s really, really important to focus in on the multi-channel sales platform. GrowGeneration has stores, garden centers, where we’re getting tremendous traffic coming in. And that’s only going to increase with new store openings, acquisitions. You have a growing commercial division, that’s continuing to grow through a dedicated sales team that’s calling on the multi-state operators and the local and regional commercial customers. And then you have e-commerce, which is a project that we’ve been working on for over a year to bring the optionality of ordering online and picking up at any one of our stores or ordering online and drop shipping direct to the home or the the farm. So when you look at GrowGen’s mix of sales, it’s multi-channel and we run our company that way. We’re constantly driving marketing and sales efforts and lead generation across those three platforms. And we think it’s very unique and very special to what we have. It’s that multi-channel approach that allows us to continue to grow across those multiple platforms. And I think that’s really an important point to understand how this company continues to grow at a top line triple-digit and continue to drive double-digit same-store sales. And with the omni-channel approach, which is just at the infancy of where we are relaunching it in September, the ability to give our customers optionality, on-demand ordering, business tools, which allows the commercial customers to truly understand their purchasing behavior, invoicing, tying them to our inventory, store location, giving them the ability to pick up at any one of our locations, all of that is going to continue, in our opinion, drive the results that we have experienced in this quarter and going forward. So multi-channel sales is a very important component to how we operate the business, how we continue to drive our business.

Your next question comes from Aaron Grey with Alliance. Please go ahead.

Hey, good morning, guys, and congrats on a quarter. The first question…

Thanks, Aaron.

Thank you, Aaron.

…Monty, you gave some great commentary and Darren, too, in terms of the private-label initiative. One thing I’m curious about in terms of as you kind of target your customer base in the early days, can you give some color in terms of whether or not this could be more so on the commercial side or the in-store, because, like I said, with COVID, it seems like it’s impacted the supply chain, but also wondering in terms of like consumer education in terms of your own product offerings beyond just the cost, but also the quality? And then also whether or not you believe there’s going to be more opportunity, potentially in the new stores in States that you have to enter to kind of bring in those private-label brands initially those customers versus kind of your legacy stores where you have to transition them from the current products they’re using? Thanks.

Michael, Tony?

Yes. So I’ll jump…

Yes. I’m going to turn…

Yes, Tony, take it.

Yes. So first of all, as you look at existing stores versus new stores, we’re doing one thing that, that I kind of mentioned earlier and that is we are going to rebrand, reset, every single store, so that customer experience whether you shop in a store in Rhode Island or California is the same. We’re in the middle of that right now. And that will be a very similar experience. Cash wrap, paid walls, positioning of our brand offerings and our private-label offerings. And it’s going to allow us to really enhance that customer experience when they walk into the store. So item one is, in the next six months, we will have a very similar experience in all stores. In new markets, it doesn’t allow us to build a little bigger store, a little better opportunity with our newest design right out the gate versus refreshing that design going forward. So we’re excited about new market growth. But we’re equally excited about refreshing, rebranding our existing growth, because we know that’s going to send the value proposition we’re after for customers no matter where they shop. So, hopefully, that answers that.

Hey, Aaron, I’ll just add to what Tony said. What’s exciting about the business model, when we look at these acquisitions, our purchasing power is increasing margin 5% to 6%, 7%. So there’s such accretion that comes just from the actual fact that we’re now taking over their business. Combining that with putting the right inventory mix, as Tony mentioned, putting the right SKU rationalization, the right planogram, putting the first 25 feet and really putting a GrowGeneration brand on that store has tremendous impact in terms of walk-in traffic and margin expansion. And most of these individual stores, even regional stores are not getting anywhere near the kind of margins that we’re getting based on the fact that we’ve created a national scaled hydroponic business. So there’s just – there’s margin expansion. There’s SKU rationalization, putting private-label in, expands the margin, putting our brand, putting our commercial team against those stores, adding more commercial business, all of it translates to increased sales, better margins, more profitability and consolidation of these markets that we’re entering into. And we see that across the Board, California, Michigan, Oregon, all the new markets that we just purchased, you look at the same-store sales, if you look at the market over market percentage growth, that’s because we’re increasing the inventory levels. We’re putting products that the growers really are looking to buy at margins that are increasing because of our purchasing power, plus adding the marketing and the sales is driving more revenue. So it’s the combination of all those activities that’s driving, both top line and bottom line results for this company.

Thanks for that color. That’s helpful. And then the second one for me is in terms of what you’re saying at the end in terms of margin and margin opportunity. You gave some color earlier on gross margin, as well as the SG&A with ERP system. So as we look at the guidance for 2021, it looks like it implies just above 50 basis points of margin expansion. Darren, I know you said you’re very confident kind of in that guidance there. So just as we look at the bottom line and the implied margins, just want to think about the puts and takes there as we think about, is it just that you’re a little bit more conservative? Is it more like margin opportunity, but you just don’t know where those acquisitions are going to fall and they might kind of bring down the margin near-term as you benefit from the scale you provide and implementing them into your own ERP system? And then on the gross margin side, is it just the puts and takes there in terms of private-label being able to offside some potential negative mix and channel mix coming from commercial sales. So just any kind of overall color on what you expect in terms of that margin guidance provided for 2021, compared to 2020? Thanks.

Yes. As you know, Aaron, and again, we certainly spoke about this, GrowGen has always been conservative with guidance. It’s really – it’s very challenging to force – the forecast guidance is such a fast-moving industry. And again, we keep outpacing guidance and we try our best to give guidance that we think is accurate. Again, business is growing much quicker than we think. With regards to margins, you probably see from our EBITDA numbers next year, next year is a long ways away. So right now, this is our best guess going into next year before we really get private-label up and running. Before we close – get these acquisitions closed and just get a better look into it. Again, we purchase – we purchased – we have limited purchasing larger stores and opening certainly want some color, a couple of months out to give us some indication really margins in new stores under GrowGeneration tutelage. So right now, it would be really difficult for us to start upping margin accretion next year without really seeing where next year is. So certainly, you’ll see us without a question after the first quarter of next year, certainly, refining guidance and again, if we’re seeing higher margins flowing through, higher EBITDA numbers flowing through, there you’ll see that – you’ll see certainly that an updated guidance in the first quarter of next year. But we’re still in August. We still do not know where COVID is going on. It’s just – we keep seeing sales increasing day-over-day. And again, one of the other interesting parts if you take a look even if you back out our $100 million number that we’ve kind of guidance the loss we were first 40 days were in the third quarter, and they were strong. So, we’re seeing continued strength into August right now, July was a wonderful month for GrowGen. So we’re not seeing business slowing. And it’s over again, as you probably see, again, we purchased three stores this year. And again, way under our target for this time, you will see a very aggressive next four months for GrowGen on the acquisition trail. So you will – hopefully, again, as we get these acquisitions completed and done and we understand the margins coming out of these stores. And really what we can do, you certainly you’ll see guidance updates from GrowGen.

All right. Great. Thanks, and best of luck.

Thank you.

Thanks, Aaron.

[Operator Instructions] Your next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

All right, great. Thanks for taking my question, guys, and congrats again on strong execution here.

Thank you.

I was wondering, can you help us understand the landscape for larger hydroponic stores, called stores doing greater than $10 million in revenues. I think you guys have mentioned, there’s roughly 1,000 hydroponic stores throughout the country. How many of these $10 million-plus locations are even out there in your estimation? And what kind of markets are they in?

I think what you’re seeing right now, Eric, is most of the larger stores, the larger chains are California base, Michigan base. That’s really where you’re seeing pockets, you’re seeing also in Colorado, very small in Washington. But absent that you’re seeing single stores, some – probably if you would ask me and this is extremely rough guess. It’s probably 20 stores doing over $10 million in business throughout the country right now. There’s a couple of larger chains out there. Besides that, you’re seeing a lot of individual stores, largest stores in the bigger States. What you’re seeing is, we keep speaking about is when you go into the New Jersey markets and the Pennsylvania markets and these smaller markets that are just emerging, you’re seeing stores that are small 2,000 square foot stores, GrowGen is selling into the states. One thing from looking at our numbers, you’ll see certainly the crazy numbers coming out of Rhode Island store, same-store sales. And the growth in Rhode Island has been spectacular. And people always ask the question, what’s going on in Rhode Island? Our Rhode Island store is located in a wonderful place in Warwick right off of 95, and we’re shipping into the Massachusetts market from our Warwick store. So, we have a lot of business in Mass right now on post opening a store, we’re using our Rhode Isla store basically for Massachusetts, licensing and Mass is very spread out. So certainly, one thing that we see is, we need to know where licensing is before GrowGen puts a store. We need ZIP codes, we need growers, and we really need to get a great understanding of where these stores belong. So right now, again, we know every single store in the country. We’ve spoken to every store in the country. And again, we understand where the strengths is, where the pockets of strength are, and you will see acquisitions coming out of GrowGen of some of the larger companies out there, some of our competitors.

Okay. That’s great to hear. I guess, just kind of following-up along those lines, can you help us understand your due diligence criteria for some of these large acquisitions? And I suppose kind of going off that, how many of these might fit your criteria? Just any color around how you go from identifying these companies to deciding whether it’s worth your cash, your shares and just worth acquiring? Any color would be great? Thanks.

Well, first, not as many years in business, where they’re located, same-store growth over the last five years, management – whether management staying on or not. Once of time of each employee that’s working at the store, concentration of sales. And also we look at, again, bigger purchases for GrowGen require two-year audits. So, there are stuff that we’re working on right now that going through audit processes. So anything, over a certain amount of money, we require two-year audits. And that’s really not urge of it. It’s certainly nothing that no one else looks at. It’s – again, it’s sales, it’s margins, it’s inventory levels of employees. It’s an earlier shift for GrowGen. Again, where the employees fit into the GrowGen family. And can we make that store better? What’s their product mix? What’s their customer mix? Where are they located? How close are they to a GrowGen store? Is it a place that we can put a store opposed to purchasing a store? What’s the return on investment opposed to opening a close to buyers? And we’re going through that right now in the Los Angeles market. Again, there’s some large stores out in LA. Does it makes sense for GrowGen to pick up an existing large store? Or does it make more sense to GrowGen could build an existing store the way we want it built? So there’s just – there’s a lot that goes into these acquisitions for acquisitions, certainly a much quicker on the Emerald Garden acquisition. We found this still, we bought it within a month. So certainly, we have a team that goes out, that assesses it, counts inventory, again, simple contracts, and they’re all APAs or Asset Purchase Agreements, don’t take any liability through these purchases. And we close them. And again, we’ve done a good job of it and certainly, we’ll see a tremendous amount of acquisitions over the next year.

That’s very helpful. Thanks.

There are no further questions at this time. Please proceed.

If there’s no further questions, I will conclude the call and thank everyone for their time and appreciate their support. It was a great quarter for the company, but I can tell you that GrowGen is certainly – doesn’t rest on its laurels. We’re looking at an even better third quarter and fourth quarter and looking forward to surpassing our guidance for 2021. I just wanted to thank everyone for their participation today and look forward to our third quarter earnings call, which right now is scheduled for November 13. Thank you, guys, for your time and support. I appreciate our employees, certainly, during this COVID time and couldn’t be more prouder for the results in GrowGen. Darren, you want to just say the last words?

Sure. Guys, in closing, everyone stay safe and don’t forget to smile a little, laugh a little, and have a little bit of fun each day. It’s certainly important. Like everyone knows, this too will pass. And again, stay safe. We appreciate all our shareholders, employees. Thank you for believing in our vision. We appreciate it and we look forward to keeping you guys up to speed on guidance. And certainly, thank you for everything you do for us.

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating, and ask that you please disconnect your lines. Have a great day.