GrowGeneration Corp. (GRWG) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the GrowGeneration Corp 2021 Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for analyst questions. [Operator Instructions]. This conference is being recorded today, August 12, 2021, and the earnings press release accompanying this conference call was issued this morning. On our call today is Darren Lampert, our CEO and Co-Founder, Michael Salaman, President and Co-Founder, Jeff Lasher, our CFO, and Tony Sullivan, our COO, and GrowGeneration's Head of Investor Relations, John Evans. I would now like to turn the call over to John Evans.

Good morning. I would like to welcome everyone to the GrowGeneration second quarter 2021 earnings Conference Call. After management remarks, there will be a Q&A session. As always, we expect to make forward-looking statements this morning, but we want to caution you that our actual results could differ materially from what we say here. Such statements can be identified by the terms such as believe, expect, intend, and may. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties included in the section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, filed with the SEC, and any subsequent Form 10-Qs and Form 8-Ks filed with the SEC. Following prepared remarks today, we will open the call for questions. I'd also like to remind everyone that today's call is being recorded and an archived version of our call will be available on our website later today. I will now turn the call over to our President and Co-Founder, Michael Salaman.

Thank you, John. And good morning. Our Second Quarter record results exemplify our continued focus on the execution of our business plan. And we're very proud of the results our team achieved. For the year we have closed 12 transactions and have added a total of 20 new locations to our portfolio of Garden Centers that now totals 58. Our Company continues to attract the best of breed and largest chains of hydroponic operators, as evident with our recent signing of HGS Hydro, the country's third largest chain of hydroponic stores, with 7 locations across the state of Michigan. In the quarter, we hired Paul Rutenis as Chief Merchant Officer, and Dennis Sheldon, Senior VP of Global Supply Chain and Systems, who, along with Jeff Lasher, our Chief Financial Officer, and Tony Sullivan, our Chief Operating Officer; have tremendous experience at the C-suite level to lead our team and execute our plan. Our strategies, set forth several quarters ago, have begun to pay dividends with better margins achieved from a wider product mix of private label and proprietary products. As we navigate through construction delays, our new store openings planned for Q3 will be Q4 events. In 2021, 4 states passed legalization, New Mexico, Virginia, Connecticut, and New York. Additionally, New York is expected to have licensing starting in 2022. Today, we operate 12 of the 18 states that have adult-use laws, with a goal to expand our operations to 14 states by the end of the year. I will now turn the call over to Darren, who will present our Second Quarter 2021 results. Darren?

Thank you, Michael. Good morning. And welcome to our Second Quarter 2021 Earnings conference call. Before I begin with my prepared remarks, I would like to thank each and every one of our staff and customers for their continued hard work, dedication, and loyalty. Our best-in-class staff is now over 600, with over 500 of our teammates experience grow pros. We have created the largest sales team of hydroponic product specialists in the country. The Company generated revenues of a 126 million in the quarter, a 190% increase year-over-year, with a 60% increase in same-store sales. The Company reported second-quarter 2021 GAAP pre-tax net income of approximately 9.6 million compared to pre-tax net income of 2.7 million in the same period last year. Earnings per share, inclusive of tax expense, was $0.11 compared to $0.06 in the same period last year. Adjusted EBITDA grew 230% to 14.5 million for second quarter 2021, compared to 4.4 million in the same period last year, for $0.24 per share. As we continue to expand our operations and serve more customers, we are raising our Fiscal Year 2021 revenue guidance to 455 million to 475 million and maintaining adjusted EBITDA guidance for 2021 of 54 million to 58 million. The Company continues to balance store acquisitions with the delays in timing of commercial buildouts and new store openings. It should be noted that in Q2 we experienced a higher sales mix of seasonal outdoor products based upon recent acquisitions of West Coast Garden Centers. We operate 58 locations across 12 states today. With the addition of HGF, we'll have added 27 new locations this year. When these transactions closed, Company will have 68 Garden Centers across the country. We strive to finish the year with over 70 locations and over a 100 locations by 2023. In addition, these new locations will enable us to optimize our supply chain for both private label and distributor products to ensure that we have the right product when and where the customers need them, either to the store or directly to their grow operation. We have over a 100,000 walk-in customers per month to our hydroponic garden centers. Our e-commerce channel grew from 3.3 million to 12 million in the quarter. Transactions were up 55% over same period last year. And we attracted approximately one million unique visitors to growgeneration.com. We continue to see strong growth coming from our e-commerce website. We continue to focus on margin expansion strategies that include furthering the deployment, more private label products, acquisitions of proprietary products, and driving more efficiencies at the purchasing level as we continue to scale and grow top-line revenue. Our private label and proprietary brand sales were over 8.9 million in the second quarter of 2021 compared to 408 thousand same period last year. In the first half of the year, our sales of private label are up from 557,000 in 2020 to 14.8 million in 2021. Our steadfast focus on rapid strategic growth in key markets, both organically and through acquisitions has resulted in our record revenue in EBITDA. With the anticipated addition of HGS, we'll operate 1 million square feet of retail and warehouse space. GrowGen has a tremendous team of essential employees who made a commitment to our Company and customers. I cannot be any prouder. I'm inspired by their efforts and dedication. They have worked tirelessly to serve our customers and communities. I will now turn the call over to Tony Sullivan, our Chief Operating Officer, who will brief everyone on our key operating initiatives executed in the second quarter 2021. And then turn the call over to our CFO, Jeff Lasher, who'll provide more financial details on our second quarter 2021 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. In 2021, our Company purchased a total of 20 locations and we have integrated the acquisitions of 2 leading proprietary product companies, Canopy Crop Management, acquired in December of 2020 and Char Coir acquired in March of 2021. Both companies support our important private label strategies moving forward. Also, we have now integrated Agron.io, our B2B online sales platform for our commercial customers. We have developed a documented and consistent team approach to acquisitions and integration of the companies we are purchasing. Our proven process allows us to close multiple transactions in any given month and book the revenue on the day of closing. Our proven GrowGen model ensures we leverage our scale and size to increase sales, improved customer service, and efficiencies throughout the process. Most importantly, we plan and spend the necessary time to onboard, teach, and train our newest GrowGen family members. We have developed a real estate and 2-year growth strategy that is targeting the best greenfield opportunities throughout the U.S. We are building a D.C. hub multichannel fulfillment and spoke model to better serve the rapid growth we are experiencing in our industry. Today, we operate distribution and fulfillment out of our 60,000 sq. ft. location in Sacramento, California, and 40,000 sq. ft. in Tulsa Oklahoma. Earlier this year, we announced the additional a 122,000 sq. ft. in Southern California that will serve as distribution and fulfillment locations for the Company. We are in the process of building additional locations that will serve as fulfillment service centers that include 25,000 square feet in Phoenix, Arizona, and 58,000 square feet in Medley, Florida. We expect these locations to be fully operational and contributing by Q4. Turning our attention to the Omnichannel and our new capabilities in E-commerce. We have invested significantly in our new website, launching BOPIS, improving design, navigation, speed and functionality. At GrowGeneration.com, we are currently testing buy online pick up in store, Pick, Pack and Ship, and Curbside Pickup Solutions. As a multi-channel retailer, nothing is more important than understanding your customer shopping needs. We have just completed a detailed brand tracker and customer segmentation analysis that will enable us to better identify, serve, and target customers where they consume information. We will be optimizing through mobile and digital solutions to drive additional traffic to all segments of our business. I will now turn it over to Jeff, our CFO, to review the financial highlights. Jeff.

Thank you, Tony. As Darren previously discussed, revenue for the Quarter was $125.9 million compared to $43.5 million last year, an increase of $82.4 million or 190%. The increase in revenues is primarily attributable to a $45.4 million increase in revenue related to stores acquired since First Quarter of last year. An increase of $23.3 million from same-store sales, and an $8.7 million increase in e-commerce revenue as that channel grew from $3.3 million to $12 million. Sales from stores opened last year in the second quarter, increased from $38.9 million to $62.2 million. Our same-store sales comp base for the Third Quarter is over $50 million and grows to $55 million in the Fourth Quarter, as we anniversary acquisition and stronger 2020 sales. Gross profit margin was 28.4% for the Quarter, up 170 Basis points from prior year. Driving this margin expansion was an increase in revenues from both private label products and distributed products, which were 6.75% of revenues for the Quarter compared to less than 1% of revenues for the same period last year. Gross profit dollar generation was up 208% from prior year from increased revenue and margin expansion. Total operating expenses grew in line with revenue from $8.8 million to $26.1 million. Floor operating costs totaled $12.6 million for the quarter, compared to $3.9 million for last year. That was driven by the 190% increase in revenues and the addition of 29 locations acquired or opened after second-quarter 2020, and 1 location that was acquired during Q2 2020 that had full-quarter expenses in 2021. In addition, the Company has 6 locations under development that did not produce revenue in the quarter. These locations include 3 Greenfield locations that will open in 2021, 2 relocation s scheduled for Q4 2021, and 1 location that is under development. We did leverage selling general administrative costs as those expenses increased from $4.4 million to $10.6 million. Of 141% increase were $6.2 million. More than explained by support costs for the enterprise that includes the cost associated with the stashing the infrastructure necessary to continue to profitably grow the business in future periods. Amortization of intangibles increased from $93,000 in Second Quarter 2020 to $2.1 million in the Second Quarter of 2021. We expect amortization expense to continue as a result of intangibles acquired from acquisition. Income tax expense increased year-over-year from $156,000 in the second quarter of 2020 to $2.9 million in the same period, 2021. Effective tax rate was 30% in the quarter, as a result of disallowed deductions in federal taxable income from intangible Amortization and share-based compensation. Net Income for the Quarter, was $6.7 million compared to $2.6 million for the same period in 2020. Net income per share was $0.11. Adjusted EBITDA, which excludes the expenses associated with interest taxes, Deprecation, Amortization, and share-based compensation was $14.5 million for the Quarter compared to $4.4 million in 2020. The Company ended the quarter with $67.2 million of cash and $57.4 million of marketable securities that are mature and available for sale if needed. Total liquidity is $124.5 million at the end of June. The closing of HGS Hydro will result in a cash payment of approximately $55 million based on present inventory levels at that Company. Excluding the commitment that Company has made to acquire HGS Hydro, the Company retains $70 million of net dry powder for acquisitions or working capital needs. Net cash used in acquisitions and other investments totaled $48 million for the 6 -- for the first 6 months of 2021. In addition, the Company has issued a 100,000 shares in conjunction with acquisition activity to date, and we'll issue approximately 400,000 shares in connection with the HGS Hydro acquisition. As Darren discussed, we estimate that revenue for the year will be between $455 million and $475 million based on the 68 Garden Centers in the two proprietary brands that we operate now or will operate for the balance of the year. We estimate that EBITDA adjusted for share-based compensation with those operations will be between $54 million and $58 million. In total, we expect the revenue in the Second Half of 2021 to be between $234 million and $254 million compared to prior year of $117 million, of which 102 million is in the same-store sales base for the second half of 2021. Comp base in the first half of 2020 was $66 million. To add one bit -- more bit of clarity, included in this guidance is an assumption that we will close the acquisition off and begin to operate its HGS Hydro in the Fourth Quarter. We had a busy Quarter of business expansion announcements, including the acquisition of Downriver hydroponics, Michigan base Garden Centers, and the harvest Company, a northern California-based Garden Center with stores in the Emerald Triangle region of California. The second half of 2021 has already resulted in three acquisition announcements that are included in our guidance. This includes the acquisition of HGS Hydro, Michigan, Aqua Serene in Oregon, and Mendocino Garden Supply in California. These acquisitions will result in ten new to GrowGeneration locations. Now, I'd like to turn the call back to Darren for concluding remarks before Q&A.

Thank you, Jeff. The GrowGen team delivered another record Second Quarter. The entire enterprise generated more revenue in the first half of 2021 than all of 2020. Our adjusted EBITDA in the first half of 2021 is more than all previous periods combined. Our ability to attract and purchase the best-of-breed and largest hydroponic operators in the country was again evident with our signing of HGS Hydro, the country's third-largest hydroponic chain. The strategies implemented several quarters ago are now positively impacting margins. We increased our inventory positions across all key product categories to get ahead of price increases, as well as expanded more private label purchases. Our private label and proprietary product continue to grow. The Company continues to focus on building out a world-class supply chain with Omnichannel functionality that will allow the Company to continue to deliver just-in-time inventory for all types of growers and cultivating. Guidance for the balance of the year will be set after the Company closes the HGS Hydro transaction. Our leadership position is driven through our corporate mission statement, to be the largest chain of hydroponic garden centers in North America. As we look into future years, we think there is still tremendous opportunities to add to our network through acquisitions of independent retailers and open Greenfield location in markets that are expanding customer demand. We look forward to continuing to provide guidance as need be. And we're excited to share our successes with our shareholders, our management team and partners. Now we would like to turn the call over to the operator to take a few questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. [Operator Instructions] You'll hear a 3-tone prompt acknowledging your request and your questions will be pulled in the order they are received. [Operator Instructions] One moment for your first question. Okay. Your first question comes from Brian Nagel from Oppenheimer. Brian, please go ahead.

Hi. Good morning.

Good morning.

Congratulations on a really nice quarter. Really nice first half of the year.

Thank you, Brian.

So my first question, I guess as Darren or Jeff or whoever, really. Just with respect to guidance, and if you look at the trends you recorded here in Q2 and your articulation, those trend and the business is clearly strong, if not getting stronger, You've made a number of significant acquisitions. Why not whipped sales guidance more? Given the trends, given even what I perceive to be the beat the expectations in Q2, or then the same type of question for EBITDA. Why -- why only reiterate the previous guidance for EBITDA here?

I'll go first and then Darren will give some color. When you look at the same-store sales for the first half of the year, we were up to 60% in Q2. And the team really delivered a very strong Quarter in the last 90 days. In the First Quarter, we were up 52% on a same-store sales base. The comp base in that first half was $66 million from 2020, so when we look at the second half comp base in 2021, we had same-store sales in that comp base of a $100 million because of the expansion of sales last year in 2020 after the pandemic influenced First and Second Quarter. We feel pretty strongly about the business overall, and we're still in the same range of full-year expectations that we discussed earlier in the year of same-store sales increase of about 25% overall when you blend all 4 quarters together. But it's important to remember that the comp base in the second half does materially impact the same-store sales basis as we're comping against more strength in the second half of 2020, which we're proud of by the way. Darren?

Hey, Brian also, we're seeing certainly a tremendous slowness to market with new states coming on. The East Coast right now, when you look at New Jersey, you look at New York, and you look at some of the other states coming on board, we've seen very slow movement in licensing. Also we've seen slowness in building. We had 4 operations that we thought would be operational early third quarter, even late second quarter. We're sitting there really -- because of building supply issues is taking us longer to build stores. Certainly some of the larger stores that we have coming to market, we don't expect to come online until the fourth quarter. So we're being extremely conservative with guidance right now to Wall Street. We operate in 12 states. We have 38 states to go. This business has grown from $30 million back in 2018, and we're approaching a 1.5 billion in 2021. And that's with 12 states. We still believe that we have tremendous work to do in the 12 states that we're in. We have tremendous growth left ahead in these 12 states. But even more exciting is the 38 states coming to market. We will see same-store sales comping for many years. We've been comping off of tremendous same-store sales growth over the last 3 years. 2018, you saw again a $30 million business, and you saw a 37% same-store sales growth followed by 63% sales growth. And you're seeing us comping almost in the mid-50s this year. That's in mature states where we have stores that have been in business for over 10 years. So, like anything else, we guided Wall Street early this year to same-store sales growth really high 10s to 20, and we are beating those numbers. But there is no secret that in states that we've been in, that are maturing, that same-store sales growth can't continue at this incredibly rapid pace. So, we're taking a conservative look into the business throughout the remainder of the year, with supply chain issues, with container costs going up, and one of the more impressive parts, which you're seeing is an incredibly quick adoption of our private label brands, which were -- which is certainly balancing our EBITDA numbers and really balancing our margins, which are almost 2 points higher than last year. So I couldn't be prouder of what the team has done in the First Half of this year. I certainly expect a very strong Second Half of this year. But right now with COVID and with supply chain issues, we're taking a very conservative approach to guidance right now.

That's all very, very helpful. The second question I want to ask, this may be a little more strategic in nature, but you called out the e-commerce sales and then -- it seems like you're seeing some pretty rapid growth in e-commerce sales. So the question I have is, as I understand it, e-commerce has for the most part been kind of clearance mechanism for you when you buy storage as inventory, you're not going to be carrying -- you'd go through e-commerce. Is the strategy change in there to be more of a true sales channel?

Now I'm going to pass it over to Tony.

Yeah. So as you look at our eCommerce business, it may have started out, Brian as a little bit of a clearance, but it is definitely becoming twofold. We have a retail channel that is performing greatly. As you know, we just recently acquired Agron.io which gives us an additional sales capability within the B2B and the commercial side of the business. And combined, we're seeing significant growth on both.

Perfect. Well congrats again, thanks for all the color. I'll pass it over.

Thank you, Brian.

Thank you, Brian.

Your next question comes from Andrew Carter from Stifel. Andrew, please go ahead.

Yes. Thanks. Morning. What I wanted to ask was, you mentioned a lot of the stores that weren't open [Indiscernible] plan, so I guess my first question is, what are the costs kind of burdening this Quarter? And since they're not opening until the Fourth Quarter, I would expect that to expand. And within that, what's the delta in your expectations in contributions from those stores versus now a drag for the Third Quarter and not operational until the Fourth Quarter? Thanks.

I'll start off with the cost side and then I will turn it over to Tony to discuss kind of what we expect out of the new store openings. But in the cost side, as we talked about, the units that we plan on opening in the Second Half, that two in LA, the one in Oklahoma and we have a unit down in Mississippi. We also have some relocation of existing operations and there is a burden on the business SG&A and other components of store operating cost while we're opening those locations. We are excited about those locations and coming on online in the Second Half of this year. We continue to build those locations. We hit some constraints like everybody else, but we do anticipate that those locations will be up and generating revenue in the second half of this year. The overall cost burden in the first half was less than a million dollars, but it will mitigate itself in the second half as we continue to work toward opening those locations.

And just to add to that, guys, as you guys know and everybody else's reporting, there are supply chain logistics disruptions. There are lingering COVID effects going on. As you guys know, cities are trying to get back up and running, they're slow to get permits, they're slow to get licensing. And those impacts are impacting us as well, but as Jeff said, our plan to stores, whether they were new stores, relocated or expanded stores, they were planned for late Q2 or into Q3 will be Q4 events.

Okay. I mean, I was asking for the costs, but I guess a second cost for the third quarter as well. But I guess the second question I would ask is and you mentioned the same-store sales base for next year, are you seeing any, number one, what's the variance in the store performance? And then in that $100 million same-store sales base you're talking about. I know you mentioned slower builds. Could you give a mix of how much of that is durables versus consumables, because if it's slower build then I wouldn't expect your durables performance to be kind of under pressure in the second half of the year? Thanks.

So you're referring to our product mix in the second half. Our forecast what the second half has about the same level of durables and consumables. As you know, about 60% of our sales comes from the consumable side and we still see a strong pipeline of commercial activity in the back half of the year. We're up against more difficult times as we've talked about, where the first half to second half in 2020 grew by 50%, but we're still excited about the growth of the business in the second half of 2021.

Andrew we've also seen we're certainly having issues on the building side, getting up some of our new operations up and running. We're seeing the same from some of our customers who are starting to cease pushed back and buildings, its not up pushback in building, but it's push back and completing building. So when you want to grow a facility, usually equipment that we sell as last in especially on the lighting side. So you're seeing a little slowing and benching coming in in certain products to get some of these facilities done. So we're seeing a little pushback right now. It's not slowing, it's getting pushed back. So we will see facilities that we thought would be done in the third quarter, will be done in the fourth quarter. Not withstanding that we saw an extremely powerful June, coming out on the building side of it, which was probably our strongest month that we've ever seen at GrowGen. It's not that we're seeing a slowing, we're certainly seeing some pushback, longer length time to get some of these facilities built. We are seeing absolutely no slowdown on our consumable products.

I'll pass it on.

Your next question comes from Eric Des Lauriers from Greg-Hallum Capital Group. Eric, please go ahead.

Great. Thanks for taking my questions and congrats on another strong quarter from you guys here. So e-commerce, certainly picking up, especially with this Agron acquisition. I'm wondering if you can help us understand how that's impacting the business from a margin perspective. It's great to see that line item expanding here with private label, but just wondering if you can help us understand how we should think of e-commerce from a margin perspective. Thanks.

Hey guys, this is Michael. The Agron acquisition was done strategically to add a business-to-business marketplace. And what we're very proud of and excited about with the Agron acquisition is that it's demonstrating a higher dollar per transaction versus our growgeneration.com website, which is attracting more of a craft consumer. So, when you look at a blended strategy between growgeneration.com and agron.io, we're really attracting the widest and broadest reach of growers in the marketplace. And margins are coming in right on target and right on plan. So, we're very excited that Agron is now fully integrated and contributing to both revenue and EBITDA to the Company.

Okay, great. And then just -- I guess any comment there on the margin -- on the margin dynamics of Agron or just the eCommerce business overall?

I mean, margins are coming in right in line, Eric so it's coming in in the mid-20s. So we're very satisfied with the performance of both websites in a very much -- in alliance with the budget and the plan that we've set forth for both of those assets of the Company as operate both channels.

Yeah. Eric, just to be more specific, our E-commerce is running usually about 4% to 5% lower than our margin that you're seeing in the overall business.

Okay. Yeah and I think that's to be expected, but [Indiscernible] I appreciate that. And then I guess just last from me on the M&A outlook here. So presumably plenty of more hydroponic stores I guess both from an acquisition and organic expansion perspective, especially with more states legalizing here, but maybe as we look beyond new stores, whether it's something like Agron or e-commerce or maybe other verticals even. Anything else in the pipeline that we should be expecting looking out for? Or should it be more of the same continued store acquisitions here. I'm just wondering how you're thinking about your M&A pipeline as the business is evolving as you guys continue to pull away with market share on the retail level here. Thanks.

Eric, as we always said when we target best-of-breed talent operator zone or dominate the markets we operate in, we stay very disciplined on our due diligence and modeling. To date we haven't seen any material change in acquisition multiples. You'll see more of the same from GrowGen, again going forth right through 2022 and 2023. Our pipeline remains large and continues to grow. And like anything else, I think you've seen multi different purchases from GrowGen this year from the product side, from the e-commerce side, from the store side, and also GrowGen opening new stores. So really -- there's certainly 4 buckets that you will see GrowGen continuing in. If we find niche products that we believe will fit GrowGen 's proprietary brand products, we certainly are out there bidding on them. And certainly on each and every store in the pipeline as large as you are seeing from the recent announcement of the HGS transaction, we're going to continue to do what we're doing. And once again, we're in 12 states, there's 38 to go. And almost a $0.5 million in business and growing in these 12 states. So, we couldn't be any more excited about the future of GrowGen, what we've built in the past 3 years, and really the future of this industry. This is the early stages of many decades' growth. This industry right now is a $20 billion industry, compared to the wine and spirits industry, we're seeing almost a trillion-dollar industry. Forecast for this industry, you're going to $100 billion by the end of the decade. You're going to see a lot buildings, a lot of new plans in the ground. You'll see a lot of opportunities for GrowGen on a go-forward basis.

Yeah. Darren, there's a lot of room for growth here. Well, congrats again, guys. Thanks.

Thank you.

Your next question comes from Mark Smith from Lake Street Capital. Mark, please go ahead.

Hi. Good morning, guys. First, I just wanted to ask a clarifying question. What does your guidance assume for ending store count here at the end of the year? And does your guidance revenue guidance in particular include HGS Hydro?

So I'll walk you guys through that. So as we said on the script today, we have 58 stores in the business today. All 58 of those are assumed in the revenue guidance. We have six stores that we will acquire from HGS Hydro, and we will have a 7th HGS Hydro location up and running right about the same time that we take over the business in Q4. And those 7 stores are assumed in our guidance as well. The guidance is the book of business that we own or have committed the Company to acquire for the balance of 2021.

Okay, the guidance does not include any additional acquisitions and what about the Greenfield Stores expected to open later this year?

It includes the Greenfield Stores, the two in Southern California and the one in Oklahoma and included similar to what we had in the First Quarter and acquisitions, that we have not committed the business for, are not included and we would do an update if there was a material change to the business' guidance.

Excellent. Second for me, private label sales are certainly coming along. Can you talk about the difference in private label sales at comp stores versus new stores, with the comp stores trending above this 7% system-wide average?

We're seeing consistent private label sales across the board. As you guys can see we are ending the quarter up around 7%. It's a significant increase over last year. And as we shared with you in first quarter, this was the beginning of building out our entire private label franchise, brand collection. We're looking at every department, every area of opportunity. And right now, we're seeing pretty consistent across the board selling both at our acquired stores, as well as our current comp base stores.

Okay. And then the last one for me is just looking at operating expenses. Maybe up a little bit here this quarter. What have you guys seen from a labor inflation standpoint and maybe called out supply chain other inflationary headwinds that you guys are seeing that maybe we should be keeping our eye on?

Yeah. Let me walk you through a couple of the headlines just to reiterate some things that we've said on the script. So the amortization expense, which is included in our total operating expense that you're looking at there, our amort expense was significantly higher than prior years as we talked about in the script where we went from less than a couple 100,000 of amort expense in 2020 to 2.5 million in 2021, we had total depreciation in amortization of 2.9 million in Q2 of 2021, and that compares to 2.1 million in the first quarter. That was a significant increase in more to expense that's backed out for adjusted EBITDA, but I didn't want to clarify that rolls through the net income line. And as we do acquisitions and add intangibles to the business, which gets expensed over time. And we do see that number continuing to increase as we increase the size of the business through acquisitions. As far as our labor cost, if you look at store operations as a percentage growth relative to our revenue, we're in line with that and we're pretty excited about our maintenance of cost controls in the stores. We have paid our employees a fair wage for quite some time and we continue to review that was wages. We continue to look for opportunities to reward our employees. We consider ourselves a good store of their career progress and we continue to look for opportunities to improve their career prospects with us and continue to profit from our growth. We're very excited with our employees and we not only try to treat them well, but we also value those employees and our associates throughout our 58 stores we have today. And as we acquire the HGS store into the family, we are excited to welcome them into the family as well.

Mark what you've also seen is we've built the C-suite out as we certainly have told Wall Street. We have brought a world-class team into GrowGen. So, certainly in the last quarter or two, you've seen an increase, certainly on the C-suite side of GrowGen. Our C-suite is build out right now and we couldn't be any prouder of the team on a go-forward basis.

Okay. Yeah. I mean it sounds like you guys, this year and recently, have been building a base for continued future growth. As we look at the DCs, building out the C-suite, is that kind of a fair way to look at some of the expenses this year?

100%.

Yeah, absolutely, but again, there is leverage there. I mean, last year, if you look at our SG&A the percentage of revenue was 10.2% in the second quarter this year was 8.4% in the second quarter. So we are leveraging our SG&A as we grow our business. But there is infrastructure needs of the business and we continue to look for opportunities to fill in the holes in the business that were created because of our exceptional growth that we've had Year-over-year. We've done more revenue in the First Half than we did in all of 2020. And that means that we need to bring on both executives as well as associates within the office staff and look for ways to service the business better through people, processes, and technology and invest it back into the infrastructure of the business to build the business for the future and continue to grow this business in '22 and '23.

Excellent. Thank you, guys.

Your next question comes from Mike Grondahl from Northland Securities. Mike, please go ahead.

Hi, guys. This is Owen, on for Mike. I just have a couple of quick questions. How is the expansion of the commercial customer base going, and are there any material updates from the previous Quarter?

Commercial continues to be a focus for the Company. We continue to acquire new commercial customers and our commercial division expands quarter-over-quarter. We're adding more MSOs quarter-over-quarter. We're adding single-state operators. And I think what we're most proud of is the service. Not only we acquiring, we're retaining customers and providing end-to-end solutions for these commercial customers that are demanding. We're able to customize and provide them a personalized high-tech solution for all their product needs. So the commercial division is certainly a huge growth engine and a major sales channel for the Company.

Got it. And then are there any other improvements to the customer experience? I think you guys mentioned curbside pickup and other improvements on the E-commerce channels. Anything else to call out here?

Yeah, as you guys know when we updated each of you both in the first quarter and now in the second quarter, we have launched our BOPIS - buy online pickup in-store. And as you guys know, we are building and have built a multi-channel approach. Through our business. So we want to be able to get that product to the customer any way they need it, whether it is buy online, pickup in-store, curbside, pick pack and ship, last mile, we are working through all of those efficiencies and solutions. And as we also noted, we just brought on Dennis Sheldon, our SVP of Global Supply Chain and Systems, who is going to take that technology even further. So, we're really excited about the new initiatives and where we're headed.

Great, thanks, guys and congrats on the Quarter.

Thank you.

Your next question comes from Aaron Grey from Alliance Global. Aaron, please go ahead.

Hi, thanks for the questions and congrats on the Quarter.

Thank you.

So just quickly I just want to know, maybe to crack some color on, maybe some geographic performance during the Quarter. And also how that baked into your outlook for the back half of the year. Certainly appreciate the commentary on what might be some conservatism there, but and obviously going against a different comp base. I just want to know maybe if you could talk about some specific geographies to where you might believe going against that tougher comp base. Any color there would be helpful. Thanks.

Yeah, when we look at the geographic performance of the business, it is not terribly different across the country. We're still seeing growth in Michigan. Obviously, because of our investment in HGS. We're very bullish on the state of Michigan, and We continue to see growth in other markets that are less mature than California, and Colorado, and Oregon and Washington, such as Oklahoma and Massachusetts in the northeast corridor. So we're excited about those opportunities. And as we look at the pipeline for acquisitions going into 2022, we are focused on building out a network of in the North East as to build on our geographic presence on the west side of the U.S.

Great. Thank you. That's helpful there. I may just want to dive back into the private label initiative at 7%, say, less than 1% last year. Just wanted to know in terms of, with COVID, being able to talk to more people in the stores, any color in terms of you can get through it, how much of a lift you might have seen as store starts to open back up and enable to just talk to customers coming in and how that's helped with your private label initiative, modern ground level and how you think is that continuing to improve as people continue to come to the stores and you have more of that educated assisted sale? Thank you.

I will take that as a two-part question. From the COVID side as you guys [Indiscernible] bullish on our private label. And as this continues to come into the back half, we expect equally a strong sales.

Aaron, the only thing I would add to that is that the acceptance at the store level, at the customer level has been certainly on plan. We're seeing that the Company strategy of bringing these private label products to our customers at a great price, as well as a high-quality product is certainly not only helping us on the margin side, but it's offering GrowGeneration back product and we're seeing tremendous acceptance from the customers. And that relationship between our GrowPro and our customers in delivering private label products is working out extremely well for the Company.

All right, great. Thanks for the call. Congrats again.

Your next question comes from Scott Fortune, from Roth Capital. Scott, please go ahead.

Good morning and thanks for the questions. A lot of them have been answered, but real quick. Just as a reminder, bringing the timing of new Greenfield builds and how quickly you ramp to get that fully optimized at the store level with Company margins and a strong customer basis, take us through the timing of that full optimization for these new builds as we look out into 2022 here.

Yeah. So if you take the new process, we anticipate 60 days as we move into the project and have it up and running. We run big grand openings. As you guys know, COVID has impacted us a little bit on our ability to do grand openings. But the exciting thing about new builds, as you step through, we've got a pipeline of talent ready-to-go. We've got a proven process that takes us from 60 days out to the grand opening. And then we have a process of training, implementation, and getting it up and running with a customer the next 60 days. So we've seen a ramp and we saw it with Tulsa too. And we'll walk you guys through it. We've walked you through it before. But we saw a ramp in the first 30 days where it did significant volume, but by the next 30 days it was up and running doing 1 million a month. So we expect that it takes 60 days to lead-in and 60 days to get to the level we expect out the backside.

Perfect. I appreciate the color. That's it for me. Thanks.

Your next question comes from Glenn Mattson from Ladenburg. Glenn, please go ahead.

Hi, thanks for taking the questions. Quick. The Q3, is there -- as you're -- increased exposure to outdoors, is there any thoughts about seasonality? Is there any possibility that top line would be down sequentially or is it -- is that not really a factor?

Again Second Quarter, as everyone knows is outdoor season out West. We recently purchased GrowBiz, which is a Northern California-centric business and a few other shops in Washington and Oregon. So we certainly saw very strong outdoor season this year in both parts of -- in California and also Washington and Oregon. And it's one-time planting. So we certainly don't see that outdoor continuing into the third and fourth quarter.

Okay. Next on the -- some of the throttled back in the growth rate. It sounds like you're talking about some disruption in the process of putting on new facilities for some of your customers. So I'm just trying to get a sense of the balance between the temporary factor that that's involved and whether or not just to be like a snapback at some point next year or if it's -- how much of it is kind of like the law of large numbers or just the ability to comp against some of that stuff, like just the give and take between those 2 forces. Some color there would be great.

As we said previously the new store openings which were scheduled for Third Quarter are going to be pushed out to the Fourth Quarter. And I could tell you that our acquisitions are certainly in line and are as strong as they ever have been in terms of the pipeline.

Okay. And I guess lastly, just on the cash balance post the HGS acquisition, is that clearly it's enough to fund the business and continue to grow, but is that a number you're comfortable with in terms of your ability to expand over the next two years or do you have to increase that cash position to complete all the acquisition plans you expect over a multi-year period?

So I'll take that and then I'll turn it over to Darren for some comments about it. The Company ended the last second quarter with 67 million of cash and 57 million in marketable securities. When you add those 2 together,

We're sitting at a $125 million of total liquidity. Those marketable securities are mature and available for us to use, if necessary. So, it's a total of a $125 million of liquidity. We expect a cash outlay for HGS Hydro in the neighborhood of $55 million based on the present inventory levels. Excluding that commitment, we still have $70 million of liquidity to go after additional acquisitions. And we continue to generate cash over the next 6 Quarters to help fund the business, as we keep our options open for additional acquisitions over the next year-and-a-half. We have that opportunity. If there's a need for capital, we'll reassess and have a conversation about that internally and then communicate that externally.

We think that answers that, Jeff.

Yes. Well, thanks for that color. That's it from me, guys. Thanks.

There are no further questions at this time. I'll turn it back to Darren for closing remarks.

Thank you. I'd like to start by thanking our 600 plus employees for the tremendous job that they have done during very difficult times in our country. Our employees have worked tirelessly to serve our customers and giving back to our communities that we service. I'd like to thank each and every one of our shareholders for having faith this Company. The cannabis industry is not a short-term phenomenon. And we believe there's many decades of hyper-growth ahead. GrowGen currently operates in 12 states with incredible potential ahead. Even more exciting is GrowGen has another 38 states to build out. We have scaled this business from 30 million in sales in 2018 to revise guidance for 2021 of 455 million to 475 million. I remain as confident as ever in our business model. As for the future, the staff we're building, the executive team, and I couldn't be prouder to be the CEO, co-founder of GrowGen. Everyone, stay safe. And we look forward to updating everyone in November with our third-quarter numbers. Thank you.

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