Hello, and welcome to GrowGeneration's First Quarter 2023 Earnings Conference Call. My name is Joelle, and I'll be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts and with instructions to be given at that time. I'll now hand the call over to Clay Crumbliss with IR.

Thank you, and welcome, everyone to the GrowGeneration First Quarter 2023 Earnings Results Conference Call. Today's call is being recorded. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration Corp. You should have access to the company's first quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release, which provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, we will take questions from research analysts. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please reenter the queue and we will take them as time allows. Now I will turn the call over to our Co-Founder and CEO, Darren Lampert. Darren?

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2023 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for their continued support of GrowGen. I'm grateful to our entire team for stepping up to every challenge and for being steadfast in executing our company's strategy. GrowGen is more than just a retailer. We are a developer of market-leading brands and private label products. We are a distributor supporting the entire hydroponics growing community, and we are above all a passionate and dedicated partner to our customers. As we mentioned last quarter, we celebrate our 10th anniversary in a year. As we continue into the year ahead, we take great pride in our past, and we are equally excited about our future. I'm pleased to report that GrowGen's first quarter results performed at the high end of our expectations, which further increases our optimism for 2023. In the first quarter, we generated net revenue of $56.8 million at the high end of our guidance, which, as expected, represents a sequential improvement over the fourth quarter of 2022. Furthermore, gross margins in the first quarter of 2023 were 28.7%, above our expectations. We generated an adjusted EBITDA loss in the first quarter of $1.8 million, which represents significant improvement versus the prior quarter, which had an adjusted EBITDA loss of $10.2 million and outperformed our previously issued first quarter guidance. We also ended the first quarter with $72 million of cash, cash equivalents and marketable securities, no debt and $75 million of inventory on our balance sheet. We've spoken about it extensively in previous quarters, so I won't dwell on the challenges of the past other than to say this,…

Thank you, Darren, and good afternoon, everyone. First, I will address our first quarter 2023 financial results, and then I will discuss our full year 2023 guidance. For the first quarter, GrowGeneration generated revenue of $56.8 million versus $81.8 million in the first quarter of 2022, representing a decline of approximately 31%. Our same-store sales for the first quarter of 2023 were $37.7 million compared to prior year sales of $59.5 million, representing a 36.6% decline against the comparable year ago quarter. Our e-commerce revenue declined on a comparable basis from $5.3 million to $3.3 million, representing a decline of 37.7%. Our distribution and other revenue was $14.2 million for the quarter compared to $12.2 million in the year ago period, representing an improvement of 17%. Gross margin was 28.7% for the first quarter of 2023, up approximately 1,110 basis points sequentially from the fourth quarter of 2022. Gross profit percent in the first quarter increased 160 basis points from the comparable year ago quarter. The improvements in gross margin in the first quarter of 2023 are largely attributed to the completion of our 2022 inventory rationalization initiatives in the retail segment and a healthy margin contribution from our distribution and other segments. Store operating costs and other operational expenses declined from $14.5 million in the first quarter of 2022 to $12.9 million in the first quarter of 2023, representing an 11% reduction. The savings year-over-year were primarily attributed to payroll reductions. Further, we expect that the reductions executed over the prior year are sustainable as we move forward into future reporting periods. Selling, general and administrative or SG&A costs were $6.8 million in the first quarter, of which $600,000 were derived from stock-based compensation. This compares to $8.6 million in the fourth quarter with $1 million of stock-based compensation.…

Thank you, Greg. Before we open the line for your questions, I want to reiterate that GrowGen is on solid financial footing with a strong balance sheet, healthy liquidity and a solid cash position. In 2023, we were putting profitability at the forefront, focusing on margin expansion and profitable growth. We are encouraged that we made significant progress during a year of transition to rightsize our business, and we're ready to move forward as a stronger, nimbler and more profitable company. Thank you for your time today, and thank you for your interest in GrowGeneration. We will now take your questions. Operator?

[Operator Instructions]. Your first question comes from Brian Nagel with Oppenheimer.

I guess, Darren, I just want to start. I mean, we talk a lot about -- we've talked a lot lately about the backdrop for GrowGen, the space. Your comments on sales suggest your game, maybe I get a little more optimistic here, l guess. So the question I have is like maybe it's kind of on the ground level, what are you seeing? How has -- have there been any meaningful changes in kind of the interaction with your customers? Are you seeing different trends across geographies that type of thing?

Yes. I think to start with, Brian, as you probably know, we've had 6 sequential quarters of down revenue, which was certainly out of the ordinary for GrowGen, at least, for the first 6 quarters since we started back in 2014. What we're starting to see is pick up from our customers. We're starting to see consolidation and price stabilization in mature markets. The supply/demand is normalizing out West. New states are starting to roll out and CapEx is increasing in new states. We're also seeing activity in the outdoor markets, which we didn't see in 2022, which should be a positive boost in sales for GrowGen in both the second and third quarters. So again, this is really the first time we've seen it. We saw back in 2018, there was about a 6-month downturn. This has lasted 6 quarters. So we're seeing stabilization, Brian, albeit off a very low number. You saw same-store sales, which were down in the mid-50s during 2022. They were down 36% first quarter in '23. And we certainly look for that to be much better in the second quarter going forward.

Got it. And then that's helpful. And then just on the gross margin side, I guess I'll tie it together gross margins and inventory. So you did a lot of aggressive corrective action last year with your inventories. You came into '23 clean. So -- and you're seeing -- you saw the better gross margin performance here in Q1. I mean I guess how should we think about just that trajectory in gross margins, the kind of trajectory in inventories from here?

I'm going to send it over to Greg. Greg?

Yes. So I think the impact of the last 2 quarters in '22, as you mentioned, had a significant impact on the overall gross margin in those periods. We reduced inventory by $20 million in the last 2 quarters of 2022. And we felt that inventory was in a much better position coming into 2023. We did make sequential improvements to inventory in the quarter, but nothing of significance. We reduced our inventory balance by $1.5 million in the quarter. I think what you saw in our results for the first quarter was a gross margin profile of 28.7%, which we believe is in the more normalized range as we look forward at the business in the future reporting periods. We're still continuing to communicate that our expected gross margin profile for 2023 will be in the mid- to upper 20s on a normalized basis.

Brian, you also saw -- yes, Brian, you also saw a bump in our private label division from 10% up into that 16% range. Our private label products carry a much higher margin than our normal products. And we are buying better right now also. So I think it's all factoring into what you're seeing normalization of our margins in that mid- to high 20s.

Your next question comes from Mark Smith with Lake Street Capital Markets.

First question that I have is just looking at valuations on M&A transactions. You've been -- you've gotten a little bit busier here the last couple of months. Can you just talk about, Darren, what you're seeing as far as pricing as you look at buying some new stores?

Yes, I can -- I'm going to stay with an exact pricing with you, Mark. But the one thing I can tell you is when you take a hard look at GrowGen's balance sheet, when you look at our inventory and cash position and our asset value and fixed assets, GrowGen is trading with very little goodwill on our balance sheet right now. And when we're going out to market, we look at the same from individuals that we're looking to buy right now. So the goodwill portion of these transactions are very minor right now.

Okay. And then you spent some time talking about private label goods. It seems like that's certainly a push for you. Any additional insight into kind of how you feel about the brands that you have now? Is this something where you still want to be active and maybe acquire new things and what it takes to continue kind of ramping sales of these private label goods?

I feel that we have the right team in place right now to continue ramping our private label products on both Char Coir and dripper are performing above our expectations. We do have product extensions coming out on both lines as we speak. So our private label products are taking hold in the industry, and we're having wonderful results. And we will continue with our private label penetration, and we feel very good where we are right now with our private label products and the increase in sales that we're seeing from them and margins.

Okay. And then the last question, similar here, as we look at e-commerce, sales are sitting today, is that just really a function of kind of where the cannabis industry is? And are there any levers you can pull to turn on a little more digital sales?

We are trying. We're feeling more comfortable we'll be increasing our advertising spend on our online division. The one positive that we did see, Mark, is our private label -- I mean, our online division was up quarter-over-quarter. So we had a 7% bump from the fourth quarter on to the first quarter. So that was the first positive time we've seen in a while with our online division.

Your next question comes from Andrew Carter with Stifel.

I wanted to ask -- and this may be a little messy because I know stores have moved in and out of the base. But if you look at the 2-year same-store sales comp, you were down 61.6% in 1Q, which actually was the first time you had a 2-year improvement from 4Q -- if I look at 2Q '23 and I look at 2Q '22 being down 57%, you're implying like a down low single-digit kind of comp can you expect that kind of rate of improvement? Or is it just too noisy to think that you're going to have that much of an improvement potentially in same-store sales coming here in the second quarter?

I'm going to have Greg start with that, and I'll finish it.

Yes. So -- Andrew, nice to talk to you here. For us, we are expecting improvement on our comp sales number in the second quarter. In terms of guiding to what that number exactly will be, whether it's single digits or not. I don't think we're at a place right now that we could solidly make that statement. But we do expect improvement, and we expect a better Q2 than our first quarter. We're up against better comps in the second quarter versus the first quarter of last year as well, which is another advantage to help perform against that prior year number for us.

Andrew, on the other side of that, when you look at comps from our first quarter, we had a pretty strong first couple of months of our first quarter. We started sales deteriorating probably in that Feb March trend. So we do feel pretty comfortable on a go-forward basis with same-store sales.

Fair enough. Second thing I wanted to ask is, obviously, one of your peers suppliers, whatever you want to call them, last -- reported last week, and made several comments around looking at industry combinations. I know you're not going to speak to anything specifically. But how do you view yourself as if things happen in the industry, do you have to participate? Or is it just kind of you can execute your game plan? It looks like buying assets for inventory kind of bolt-on. Just any kind of commentary there would be helpful.

The other thing, Andrew, when you look at GrowGen, we have built tremendous brand recognition in this industry over the 10 years that we've been here. We're doing over 2,500 transactions a day with investors, and we're building out a wonderful private label division at GrowGen. GrowGen is an acquirer, we're back on the acquisition front. We've acquired 3 stores already this year, and the year is just beginning. So for us, we'll always do what's in the best interest of our shareholders. But right now, it's $75 million cash in the bank and $75 million of inventory, we believe we're in a wonderful position. And I still say if you were to close your eyes and look in 10 years, GrowGen will be the dominant force in both hydroponic and indoor gardening in the country we live in. So we're 100% comfortable with the position we're in right now.

Your next question comes from Aaron Grey with Alliance Global Partners.

I'll go ahead and jump off the back of that last question first. Just on the M&A front. So there's been some store acquisitions at the beginning part of this year, strong balance sheet. Are you looking at different verticals as well? Or what are you kind of seeing out there? Is it primarily the storefront when we see appealing acquisitions? Do you think there's something might be more the diverse first off more on the vertical front, either via hydroponics or indoor gardening? Just any further commentary you can give on that would be helpful.

Yes. I think, Aaron, to start with, GrowGen right now are #1 -- the #1 thing for GrowGen right now is getting this company back profitable. And it's getting back profitable in the hydroponic area, the CEA area. We do believe there's tremendous verticals out there on indoor gardening -- product side on the gardening side. But until this company gets profitable and gets back to growth, I'd be hard-pressed to see acquisitions outside our core competency right now. And there are a lot of acquisitions that we're starting to see within the hydroponics space on the source side of it. The industry, as you probably know, after a couple of years of just disastrous growth in this industry, there are a lot of players that went out, and it's getting harder to service the customers right now. And GrowGen has the skill and certainly the balance sheet to do it. We just finished building 100,000 square feet of distribution in Ohio to basically take care of our Midwest and East Coast customers. So GrowGen is building out distribution. We're launching our ERP system at the beginning of July. So we've built -- again, we've built an end-to-end for our customers. And again, we may look elsewhere, but I highlight that you'll see that this year.

Okay. Great. Thanks for that detail. That's helpful. Second question for me. You talked about being a rebound in some of the outdoor states, so I just want to get some further color on California, what you're seeing there, those number of licenses that are coming from renewal that were not renewed at the end of last year, and those are numbers that were also for renewal in the first half of this year. So just any further color in terms of what you're specifically seeing in California and some stabilization in your outlook there?

Yes. We are seeing stabilization in California. You have to understand when you're seeing closures on the growth side of it, you're also seeing closures on the hydroponic side of it. So we are taking business from stores that are going out of business and also from some of our -- some of the other stores within the California space. We are seeing a pickup in our outdoor stores in California. We also had positive same-store sales for a few of our California stores versus last year. So our California stores are starting to perform much better than we've expected, but we are highly surprised. And then certainly, we are hearing from customers that people are starting to grow and we see it from the sales of our products.

Your next question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

First one, focusing on same-store sales again. So you mentioned that you're actually starting to see some positivity in California. It seems like we'll see some nice improvement in same-store sales in Q2 as well. I'm just wondering if you can help parse that out between durable goods versus consumable goods. Not looking for a specific figure here, but just kind of anecdotally, when do you expect a lot of those more durable goods like lighting and HVAC? Like when do -- I guess, when did those really kind of drop off significantly last year? When should we get some easier comps? So just any kind of color on the same-store sales trends with respect to durables versus consumables? And since you mentioned California, I guess I'll ask if you're seeing any -- if there are any trends to call out on a geographic standpoint from same-store sales as well.

Yes. Right now, we're seeing about 70% on the consumable side, 30% on the durable side. It used to be 60-40 during our crazy growth periods. But we are starting to see on the East Coast build-outs in New Jersey and some other states. And we are starting to see, again, some refresh cycles. There's tremendous, tremendous rebates going on in the LED markets right now from the electric companies. So we're starting to see a pickup on LED lighting right now even. So it's kind of across the board. We did very little, again, build out last year. So we're comping us a very small number right now. But the more important part of our business, we always look at it is at 70% of consumables. Those are repeat customers every weekend on a weekly, monthly basis. So that's the more important part of our business, a higher margin part of our business. So we do believe that pickup going through this year with new states rolling out and always that hope of legislation. And you will start seeing refresh cycles on some of the legacy farms out there and cultivators that need new equipment. So it's kind of an ongoing situation, but we see it as getting better.

That's great to hear. My next question is on private label as well. I guess it's kind of a state of the union overall on the different sort of brands that you're seeing in different categories? I guess what I'm getting at is if you can kind of talk about how your private label brands are performing in different categories. And if there are other categories where you're seeing significant brand turnover where it might present a private label opportunity versus maybe some other categories where there just continues to be sort of dominant brands there. So I guess it's kind of an overall kind of state of the union on the different brands within categories and then your ability to kind of attack that with private label?

Yes. I think it's highly competitive in nature, unfortunately. Our private label division, we don't usually break down sales for category for Wall Street. But suffice it to say that our sales are up from 10% to 16% from 2022 to 2023. And we will continue to bring products to our customers as they want them. We have a tremendous R&D group at GrowGen, and we work with a lot of the firms out in California that do R&D for us. So again, we look bringing new options to our customers and always their choice, what brands they choose to grow. The one thing with GrowGen, as we always say, we're product agnostic in a lot of ways. We sell what our customers want, and we will continue to.

Okay. Great. And I guess if I could just kind of simplify the private label question. Should we expect GrowGeneration to kind of just put more weight behind its existing private label brands? Or should we expect new brands and new categories for this year?

You will see continued rollout of new products from GrowGen. That's what we do. So again, we service our customers to the best of our ability, and we have a wonderful relationship with our vendors. But we do have a private label division at GrowGen and we will continue to hopefully roll out innovative products that the growers want.

[Operator Instructions]. Your next question comes from Scott Fortune with ROTH.

Darren, you mentioned last quarter that you saw an uptick kind of in March in biddings and commercial projects back east. Just want to get a sense for how that's continuing to trend through here in April and kind of these new states coming on board in back east from that standpoint. And with that in mind, kind of do you expect the subsequential growth here in first quarter, but you expect a little bit more of a pickup in the second half. How do you look at this kind of going forward for us?

I think right now, Scott, it's really hard to forecast this industry. We're 1.5 months into the second quarter. So the second quarter becomes much easier. So we're looking at comps of April and half of May. So it's kind of easy for us to get an understanding where we are right now and make a call that you'll see sequential growth in the second quarter. We much rather give it a couple of months before calling the third and fourth quarters. We've heard from certain of the other public companies in this industry, they believe that you're going to see a very strong back half to the year. We're not endorsing that as of yet, but we're certainly not saying it's not true. We shall see how it goes. It's just too early for us to call. We want to see a turn and really see that turn before I can tell you again that the year is going to continue to get stronger. I certainly do believe that you'll see positive same-store sales going into the end of the year. We're comping against very, very minimal sales. So we feel confident right now. But you'll hear us guide probably on our second quarter call in August.

Got it. And just kind of a follow-up on the kind of what are you hearing as far as commercial projects back east. And I take it kind of as you look at any new store opportunities, you'll be focusing on the Midwest, the Maryland, Connecticut, Georgia, Missouri have all come on board, right? And kind of your sense of building out that area, geographic area, if there are new store adds?

Again, we are quoting deals. We are working on deals in Jersey and back east. It's all incremental business to GrowGen because it wasn't there last year. So with that, we also get the consumable products once these facilities are built. So we are seeing a pickup in our commercial division. It's picking up every day. And we also are starting to see rebuilds. We are seeing, again, rebuilds in Washington and Oregon and in California also. So -- we are seeing business pick up. We saw very little durable business last year. We're seeing much more right now. We're seeing more month by month. So we are -- again, we are excited, but too early to get that too excited, Scott.

Your next question comes from Brian Nagel with Oppenheimer.

So just a follow-up. I mean a lot of -- I know we -- a lot of the Q&A, we spent time talking about this recent trajectory and sales. So I just want to see if we can -- to what extent we could just solidify it. We heard from some of the others kind of in the home-related categories that weather impacted sales and [indiscernible] the second half of March. I mean. So the question I have is, was there a weather impact at all at GrowGen? And then could you be a little more specific as to what you're seeing here, either through Q1 and then into Q2 as far as comp sales?

Yes. Brian, the one thing I can tell you is weather only impacts the outdoor growth season and the outdoor growth season was pushed back probably a month in the California areas and other areas out west. And we are seeing a pickup. Again, we're seeing a pickup this month right now on a lot of our outdoor stores, which we didn't see in March that we're starting to see late April and into May.

Darren, do you want to talk more -- you want to get more specifics on kind of the numbers that we're seeing?

I think it's just -- it's too early. We don't do -- again, we don't do same-store sales daily calculations, but we are seeing a pickup in our outdoor stores.

Your next question comes from Glenn Mattson with Ladenburg.

I'm just trying to get a sense of the -- we're kind of trying to model for cash for the rest of the year, you're not going to have the benefit of the working capital reduction and there would be some probably modest operating losses. And maybe you can give us a sense of what the CapEx is going to be? And then also just how aggressive -- you talked about making more acquisitions to getting more aggressive on that front. But just trying to understand how aggressive and what level of cash you feel comfortable with at this time?

Greg, do you want to start with that and I'll finish it?

Yes, absolutely. So quarter-over-quarter, cash was sequentially flat in the balance sheet. We generated $3.4 million from operations. We believe our cash position is very sufficient as we move through the year. We're investing capital where we believe we have excess right now in generating returns on investment income and interest income. We are looking at M&A transactions to fill white space within the organization and are going to continue to execute upon the right transactions that come to the table. We added in Bozeman and Jackson, Michigan this quarter already. So we'll continue to look at deals on that end. As far as CapEx, where our dollars are going towards at this point in time are primarily investments in technology to lower the cost of doing business and to continue to automate functions as best we can as we move forward in the businesses maturity. You could model a number between $2 million and $3 million a quarter. That's generally what we expect to spend, and we'll continue to be nimble in terms of our management of the balance sheet in terms of lowering inventory incrementally where possible and being tight in our management of the business. Darren, if you want to add to that?

Well, has the distribution center build-out complete? And can you just give us like a final -- that is complete kind of sense of what's been done there and how the footprint looks?

Yes, the Ohio distribution is complete.

Sorry, go ahead, Darren.

Glenn, Glenn, the Ohio distribution is complete.

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