Hello, and welcome to GrowGeneration's Fourth Quarter 2023 Earnings Conference Call. My name is Jenny, and I will be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. I will now hand the call over to John Mills with ICR. Please go ahead.

Thank you, and welcome everyone to the GrowGeneration’s fourth quarter and full year 2023 earnings results conference call. Today's call is being recorded. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration. You should have access to the company's fourth quarter earnings press release issued after the market closed today. This information is available on the investor relations section of the GrowGeneration’s website at ir.growgeneration.com. Certain comments made on this call include forward-looking statements which are subject to Safe Harbor provisions of the Private Securities Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subjected 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'll use some non-GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release which provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following 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?

Thank you, John. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2023 financial results and our full year 2024 guidance. As always, I want to thank each one of our employees across our company at GrowGen. I'm grateful to our entire team for their continued hard work and dedication. We are pleased that our full year 2023 net revenue of $226 million exceeded our previously communicated guidance range of $220 million to $225 million. Adjusted EBITDA for the year came in at a loss of $5.6 million within our previously communicated guidance. We remain encouraged by the progress that we made last year in further right-sizing our business and positioning us for long-term profitable growth. I'm also happy to report that 2024 is off to a strong start. As we noted, a 19% improvement in gardening and cultivation sales in January from December. Further, we observed private label sales as a percentage of revenue, eclipsed 20% in January. Because of our hard work and strategic focus, we are seeing areas of year-over-year growth and are optimistic that these efforts will continue to enhance our results. I also want to address our new segmentation that you will see in our 10-K. Moving forward, we’ve separated our reporting into two segments. First, Cultivation and Gardening; and second, Storage Solution. Our Cultivation and Gardening segment represents our core hydroponic and organic gardening business. Our second segment Storage Solution represents our MMI acquisition that we made over two years ago to help build out our benching and vertical racking offerings. MMI has grown substantially since acquisition and has become a thriving business in its own right. Looking forward to 2024, we are focused on three main initiatives. Number one, we are continuing to expand our…

Thank you, Darren, and good afternoon, everyone. First, I will address our fourth quarter and full year 2023 financial results, and then I will discuss our preliminary outlook for the 2024 fiscal year. Starting with our fourth quarter results, GrowGeneration generated revenue of $49.5 million versus $54.5 million in the fourth quarter of 2022, representing a decline of approximately 9%. Our same-store sales for the Gardening and Cultivation segment in the fourth quarter of 2023 were $35.6 million compared to prior year sales of $37 million, representing a 3.6% decline against the comparable year ago quarter. Our sales of consumable products in the fourth quarter outperformed prior year on an absolute basis, which we believe is a favorable performance indicator. Our Storage Solutions revenue was $7.7 million for the quarter compared to $7.8 million in the year ago period. Gross profit margin was 23.5% for the fourth quarter 2023, an increase of approximately 600 basis points from the prior year. As a reminder, the fourth quarter has historically lower margins due in part to end-of-year sales initiatives and any true-up adjustments from full physical inventory counts that coincide with year-end. In the fourth quarter, Shrink had a 480 basis point impact, which was partially to do with inventory discards from 12 store consolidations that were finalized from an operational perspective in the fourth quarter. Store operating costs and other operational expenses declined to $11.8 million in the fourth quarter compared to $12.8 million in the year ago period. The company closed and consolidated 12 locations in the third and fourth quarter of 2023, of which one-time material closure costs were included in our fourth quarter results. We believe that the closures and consolidations align our operating model to future strategic priorities and allow for stronger operating leverage. Selling, general and…

Thank you, Greg. Before we open the line for your questions, I want to reiterate that GrowGen is on solid financial footing with a strong balance sheet, healthy liquidity, and a solid cash position. We continue to manage our business prudently through the current industry landscape with an emphasis on sustainable growth, margin expansion, and profitability. We are encouraged for our continued progress and remain laser focused on continuing to build a stronger, nimbler, and more profitable company. Thank you for your time today and thank you for your interest in GrowGeneration. We will now take your questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Scott Fortune from ROTH MKM. Please ask your question.

Yes. Good afternoon, and thank you for the questions. Just wanted to kind of hone in on the guidance a little bit. I know you've lowered three more stores in this quarter. Kind of what's that -- kind of store base that you're looking for in the guidance here moving forward from that standpoint? And then I’ve follow up question. Just kind of a little more picture on what you're seeing opportunities for stores in new states coming on board versus kind of replacing or kind of shuttering down some old stores in some of the more mature markets. A little bit of color on that would be great.

Yeah, Scott. I think right now, we're pretty happy with our portfolio of stores around the country. I do believe you'll see another two to three store closings within the first six months. And then we will be -- we're still looking around the country and dependent upon what we see on the legislative side, the legalization side, and the store side, we're a buyer for the right price if there's something that will be accretive to our portfolio. And as you know, we've just finished building out 100,000 square feet of distribution in Ohio, coupling with our 55,000 square feet of distribution in Sacramento. So we feel pretty comfortable right now that we can pretty much service the country with a portfolio that we have right now. But if building starts up again and candidates get talked, we will be back in the market. But right now, we're pretty comfortable with our portfolio.

Okay. And a follow-up on that. I appreciate that Darren. Just touching base, kind of, at some point, there's going to be a replacement cycle here, obviously, need for the lights, you're seeing some of the top MSOs, the large MSO partners you work with generating cash flow. If we get the elimination of 280 and rescheduling boosts, and there's going to be some CapEx kind of maintenance needed here and replacement cycle needs. Just kind of step us through kind of what you're hearing from your partners as far as the replacement cycle and maintaining kind of, top grows from -- for those partners going forward here.

Scott, as you probably know and have seen, earnings from the MSOs have been pretty good this quarter. On the legislative side, we're also waiting on 280E. And I certainly I’m one that does believe that you will see, reclass the schedule of three and hopefully something with [indiscernible] Act by the end of the year. We do believe a refresh cycle is coming. There was tremendous growth in 2020 and 2021. And you're coming up on that three to five year reclass cycle. So we believe we will start seeing plenty of action on the durable side of it. The nice side is that we're seeing growth right now on a consumable side of it, which is 75% to 80% of our business right now, which is much more predictable business. It's weekly, monthly business, as opposed to one-time build-outs. So we're really comfortable where we are right now on the consumable side of it. But we are starting to see much more quoting from our commercial team on lights, dehumidification and also control systems. So we do believe this is the start of it. And with some help from our government, I think it'll probably make it go that much quicker. So we're pretty excited about 2024 and beyond. I think we've done a tremendous job restructuring this business and getting it to where it is today. And I do believe that you will see a strong ear from GrowGen.

Thanks. I appreciate the color.

Thank you.

Thank you, Scott.

Your next question is from Eric Des Lauriers from Craig-Hallam Capital Group. Please ask your question.

Great. Thank you for taking my questions. I was wondering, if you could comment broadly on some of the differences in same-store sales that you're seeing in different geographies. Obviously, you don't have to go through all the states here, but if there's any sort of outliers to comment on? And then in relation to that, could you comment on the geography of the three consolidated stores that you've consolidated year to date? Thank you.

Yeah, Eric. Thanks for the question. Sorry, go ahead, Darren.

You can go. [indiscernible]

Okay. Eric, I think when you look at our comp sales over the last handful of quarters, where we landed in the fourth quarter was down 3.5% year-over-year. And that comes from, when you look at our same-store sales comps last year, we were in the 50s. So we've made a lot of improvement both from a consolidated basis, but also within the geography and in various localities. There's areas of strength and there's a few states that are still going through a lot of consolidation. So we're comfortable with our overall performance on things as it relates to the comp sales. When you look at the three locations that we consolidated in the fourth quarter or the first quarter, we consolidated Brownstown, which is in Michigan, Traverse City, which is in Michigan, and Salinas, which is in California. We believe those two markets between Michigan and California are very mature in nature, and we have the opportunity to generally service the same customer base out of locations that were in close approximation. So we expect some decline from those consolidations, because not every customer we have in the portfolio will continue to shop at the new location that is retaining the large scale of the customers. We don't expect a material difference in our 2024 results as a result of that. And the updated assumptions around those closures is included in our guidance for the year.

Okay. Great. Yeah. I mean, it sounds like, I would think Michigan and California are probably two markets where you're seeing some more consolidation, so I think that, that should help improve even further, obviously, if same-store sales going forward. And then just a quick follow-up, a point of clarification for me. Was the guide for positive same-store sales -- was that referring to just fiscal ‘24 as a whole or was that Q1 or both? If you could just clarify that for me, that would be great. Thank you.

Yeah. We're confident that that metric will change in the year of 2024. We're not ready to call out the period in which that will convert, but we are optimistic around what we're seeing so far year-to-date and how that will progress throughout the rest of our results that we report this year.

Thank you.

Yeah, Eric. Just also for reporting, with our segments as we put MMI into its own segment, we've also put HRG, which is our distribution company will be reporting in our source segment. So you may see a little weakness in our HRG for the first six months of this year, which will also be included with our stores, but we will break that out so you get an understanding of the stores on its own through the first six months.

Okay. Thank you for that clarification.

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

Hi. Good afternoon.

Good afternoon, Brian.

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

Brian, as you've known, we've closed, we've gone from 55 stores down to 47. So what you're pretty much seeing is pretty similar guidance to what we guided to last year. I think we did $49 million in the first quarter last year. So, guidance is particularly, we believe pretty strong right now. We're up to a good January where we store our consumable business very strong. We do believe durable business will become strong at the end of the year, probably the back half of the year with build-outs resuming. But the consumable part of our business is much more important to us right now. So what you're seeing right now is, from guidance for the first quarter, we're conservative as always. But we do believe you will see a steady rise to the second and third quarters, which are usually our strongest two periods of the year with the outdoor growing season coming up on us.

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

It's hard to say Brian. It's hard to get a feel of when the MSO's and single-state operators and the commercial customers that would go and go back into the market and start building again and also start taking a hard look at their facilities and starting the refresh cycle with lights and the dehumidification. There may be a lag, there may not be. What's going on right now, as you've seen from GrowGen, we've been very, very careful with our balance sheet over the last couple of years during very difficult times in the industry. And that kind of equates out to the MSOs also. They've been protecting their balance sheets. And I believe that once they get the go ahead and with 280E and the reschedule and cash going back onto the balance sheets without paying the penalty to the government. I do believe you'll see a lot of movement in the industry, a lot of rebuilding, and companies starting to build for the future. But the last couple of years, I think, have been unprecedented. Andrew Carter calls it, the great hydroponic depression. And it's hurt everybody. But I think we come out much stronger. We've built our private label division from next to nothing to 19% last year. And we do believe you'll see that number in the mid-20s this year. So we're excited about a lot of new product launches and our consumable brands are becoming stronger by the week and it's something that excites us about GrowGen right now.

Okay. I appreciate it. Thanks, Darren.

Thank you. Your next question is from Andrew Carter from Stifel. Please ask your question.

Hey. Good evening. So thanks for the shout out. First thing, I wanted to ask though is in your kind of guidance for the year, I know you referred to the store closures, but can you give us a sense of how much lost revenue there is from those stores? Is that -- are you purely assuming that that revenue is gone for the year in your kind of initial cut of guidance, or are you assuming some kind of retention rate, therefore a boost to your same-store sales.

Yeah, Andrew. Thanks for the question. On the guidance itself in terms of revenue, we are forecasting that we will retain some of the revenue from the closures. Of course, we closed or consolidated 14 locations in 2023 and three more this year. So it's a handful of locations that we've closed where we do believe we can generally retain the revenue from the larger customers, certainly, when we go through a consolidation. Our aim is to retain the top 50 customers of that location. And you can imagine we're not closing the best-in-breed locations in our portfolio. We're usually consolidating the smaller ones into a larger footprint store. So within that, we do believe that at some point this year we will turn positive on the same store sales comps. And we feel very comfortable with guidance, coming in at that 205 to 215 range as we look at 2024.

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

Andrew, I think there's many different reasons right now. And the one thing you have to understand is, we're seeking to monetize the asset, doesn't mean that we're going to. A large majority of the sales from MMI is in typical retail, not the agricultural side of it. As the agricultural side for benching and racking has been extremely weak during the last couple of years because it's a build out product. So right now, we're trying to maximize value on this asset. And if we can, we're a seller. If not, we will keep it. So right now, we have other alternatives where we can use other companies that we do business with for their vertical racking and benching. So we do believe that MMI is a wonderful company. It's got many years of growth to it, but it's not in the gardening and hydroponic space. So it was bought for the hydroponic and gardening space, and we built up the other side of the business, but it's probably 90% of our business is into typical retail, rebuilding, back of warehouses. And again, for the right price we're a seller and if not we will keep it.

Thanks, I'll pass it on.

Thank you. Your next question is from Aaron Grey from Allianz Global Partners. Please ask your question.

Hi. Good evening, and thank you for the questions here. Just one from a couple of mine have already been answered. I think it's been touched on more specifically, but in terms of the broader market, you talked about your own consolidation of some of your stores. I can speak to what you're seeing more in the broader marketplace. I know it's tough for a lot of people have you seen an acceleration in terms of folks closing? Are people still trying to hang on in hopes of rescheduling, driving illegal in terms of CapEx spend by some of the operators? So, just in terms of what you're seeing in terms of broader environment, will be helpful? Thanks.

I think, Aaron, you're still seeing the wild west out there. You're seeing manufacturers, distributors selling to whoever they can sell to. You're seeing stores discounting right and left. You're seeing people closing. So, , the industry still isn't disarrayed. You're still seeing tremendous amount of discounting people selling for under wholesale trying to hang on. But you're also on the other side of seeing, stores closing around the country, also the smaller stores, they can't service the larger customers. But like anything else, when business is slow and people aren't making money, they do whatever they can to try to make a buck. But we still are the leader in the space that we're in. We believe that our private label brands are growing. They are growing and people are shopping at GrowGen every day. And even with the 17 store closures that you store out at GrowGen right now, we still believe that we will have enough revenue, hopefully a strong year to build on and to start really regaining the 2020 to 2023 mantra that we want to add. We do believe that you'll see state and store sales positive this year. We're seeing some strengths in some stores around the country, but even more exciting, we're seeing much more quoting coming out of our commercial team right now. We believe commercial sales will be up tremendously this year. So we're pretty positive right now. And I know you haven't heard it from some of our peers, but GrowGen is certainly seeing business coming back to the stores. We're seeing quoting go to sale. And we do believe that you will see a great second half from GrowGen as we start going into a seasonal stronger period.

Okay. Great. Thanks for the color. Then I'm going to jump back in queue.

Thank you. [Operator Instructions] Your next question is from Mark Smith from Lake Street Capital Market. Please ask your question.

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

Yeah, Mark. I think we see it from multiple angles on gross margin. I mean, to start, we see some benefit out of our private label products that we've continued to increase penetration on. We've also issued a couple press releases over the past few quarters on newer distribution partnerships that we've identified in the space with Quest and Grodan and others. So those have had meaningful lifts to our gross margin as well. From a margin perspective, I think the industry as a whole feels a lot of pressure to price things at the right price. You get some level of pressure from the customer side of things as well as the vendor side of things, particularly on the more distributed products that we land from other distributors in the space. So we're working hard every day to continue to hold our margins strong. We think there's opportunity this year to lower inventory in our business, which will have an impact on how we might look at Shrink, or overstock, or obsolete inventory. We believe we have the right reserves in place today, but maybe there's room to gain there and cost to continue to control more and more as we progress forward. So there's a lot to unpack within margin, but we feel comfortable with where we landed in 2023 at 27.1%. And we do believe that in 2024 there's room to build upon that number in a positive way.

Similar question is, as we look at G&A and kind of corporate costs, You guys have done a good job cutting there. Do you feel like you've kind of cut everything out? Maybe that's possible or is there more opportunities in that line?

Yeah, I think there is more opportunity there for us. Part of what you've seen from us through the last few quarters, you take Q3 and Q4, that's two periods in our business where we closed our consolidated 12 locations. A lot of the costs from those activities are still embedded in our results in the fourth quarter. So we do expect some level of cost improvement into the first quarter of 2024, and to continue forward into the rest of the year.

Perfect. Last one for me is just, I don't know, Darren, if you want to take it, just kind of big picture, use of cash, you've still got a really strong balance sheet. I know you've been conservative in how you've used it. But any, if you want to kind of rank or talk about kind of where you expect to put cash to work. And then, if you get a deal done here on MMI, if that changes your thinking at all on use of cash?

Again, we're always looking, Mark, whether it's, I doubt it's going to be on the store side of it because there's nothing out there large enough, that's going to take that kind of cash. So it very well could be on the product side of it, it could be on the gardening side of it. And as we spoke earlier, we're getting more involved in the gardening side, getting products into IPC around the country. We just also opened a website. And again, we are making pushes. We do believe that the hydroponic space, the gardening space is tremendous similarities. And we do believe that, the typical gardeners out there want new products, more approved products, healthier products and we have them. They're coming out of GrowGen every day. So we do believe that there could be acquisitions on the lawn and garden side of it. But as of now, until we either monetize MMI, no more we see a tremendous turn of the industry, we will keep our balance sheets strong unless there's something that we can't resist.

Sounds great. Thank you.

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

Thank you for your time today and thank you for your interest in GrowGeneration. Have a wonderful evening. Thank you.

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