Hello, and welcome to GrowGeneration's First Quarter 2024 Earnings Conference Call. My name is Joanna, 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'll now hand the call over to John Mills with ICR. Please go ahead.

Thank you, and welcome, everyone, to the GrowGeneration's First Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. With us today are Darren Lampert, Co-Founder, Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGen Corporation. 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 on 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 provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. [Operator Instructions] Now I will turn the call over to our Founder and CEO, Darren Lampert. Darren?

Thanks, John, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 financial results. As always, I want to spend my gratitude to each one of our employees across GrowGeneration for their dedication and hard work. Your commitment is fundamental and the backbone to our success. I am pleased to announce that our first quarter results are in line with our expectations with revenue of $47.9 million and adjusted EBITDA of a $2.9 million loss. Encouragingly, our retail stores in isolation were positive on a same-store sales comp basis in the first quarter, which represents the first time we've seen a positive same-store sales comp for retail stores in 9 quarters. This indicates the stabilization of sales, affirming the effectiveness of our strategic adjustments over the past 2 years. Our proprietary brand sales also continued to grow, supported sequential gross margin improvement from fourth quarter 2023. Lastly, through our continued focus on cost roles, we have achieved the lowest total expense base that the company has reported in 3 years. Based on this quarter's results, we continue to believe that our business is strong and poised for growth. And you have seen that confidence reflected in our stock repurchase program, which we announced last quarter to help support long-term shareholder value creation. Looking ahead, our strategic focus for 2024 remains on expanding our brand portfolio, growing and broadening our customer base and prioritizing profitability through rigorous cost control and margin expansion. I'm excited to discuss several key points today that underlines our strategic direction and future growth. We continue to see accelerated adoption of our proprietary brands, including Char Coir, Drip Hydro and a Harvest Company. In the quarter, 22.6% of our total Gardening and Cultivation sales were generated from our proprietary brand portfolio,…

Thank you, Darren, and good afternoon, everyone. Starting with our first quarter results, GrowGeneration is pleased to report revenue at $47.9 million versus $56.8 million in the first quarter of 2023, representing a decline of approximately 16% year-over-year. On an absolute basis, this measurement includes the impact of 15 fewer retail locations. Our same-store sales for the Gardening and Cultivation segment in the first quarter of 2024 was $38.2 million compared to $38.6 million in 2023, representing a 1% decline to the comparable year ago quarter. Our same-store sales metric includes e-commerce. Excluding e-commerce, retail and isolation was positive on a same-store sales comp basis for the first time since the third quarter of 2021. Our Storage Solutions revenue was $4.8 million for the quarter compared to $7.7 million in the year ago period, representing a decline of 37.9% year-over-year. While our Storage Solutions revenue did not perform to plan this quarter, we expect some pickup in the second and third quarters for this reporting segment. To offset Gardening and Cultivation sales were higher than planned, which is an encouraging development and in consolidation, first quarter revenue reported at the high end of guidance. Gross profit margin was 25.8% for the first quarter of 2024, a sequential improvement of approximately 230 basis points compared to our fourth quarter 2023 results. Although gross margin improved on a quarter-over-quarter basis, we observed a decline on a year-over-year basis, partially due to higher freight expense plan relative to costs associated with relocating inventory from store closures. Further, we observed some impact from segment reporting mix. More specifically, Storage Solutions, which boasts a 43% gross margin profile reported at approximately 10% of total company sales in the first quarter compared to an average of 14% of sales in 2023. As we look forward, we…

Thank you, Greg. As we continue our journey through 2024, our commitment to operational excellence, strategic market expansion and profitability remains unwavering. I am immensely proud of what our team has achieved and look forward to our continued growth and success. We remain optimistic about the future, backed by our robust business model and strategic initiatives that are set to drive our growth in the evolving market landscape. Thank you all once again for your continued support and interest in GrowGeneration. We will now take your questions. Operator?

[Operator Instructions] First question comes from Brian Nagel from Oppenheimer.

My first question, Darren, I know you talked a little bit about this in your prepared comments. But with regard to the, I guess, let say, potential risk scheduling here. I know it's something we've talked about for a while. But is there any -- I recognize it's early and there's still a lot of unknowns, but this as you think about that in your GrowGeneration business. I mean, is there any parameters you can give us to how we should think about the size of the potential positive or even how this would play out for GrowGeneration?

I think the simple part is, Brian, with rescheduling, 280E goes away. And that is the tax penalty on licensed cultivators. Basically, the analysts are saying at almost between $1.5 billion to $2 billion, we'll come back to the balance sheet of the cultivators, which will go to shoring up balance sheets and also going into rebuilding facilities, updating facilities and going out and getting new products that are coming to market. So there will be a tremendously different views with our customers with money coming back in. Our customer we making money, reinvesting in their businesses. Over the last 3 years, with Wall Street pretty much pulling funding for most of the cultivators most of the public company, also the large private companies, these cultivators have not been able to refresh their facilities. They haven't put money into facilities. And so we've been in this place where our durable sales had been tremendously low over the last couple years. But in the first quarter, we did see a little -- we did see a little uptick in durables, and we are starting to see much more bidding out there. And we do believe that you will see the other part of our business, the durable side of it start picking up. And again, everyone still is waiting. It's a waiting game out there, Brian. We've been waiting 10 years since we started GrowGen. It is still the process is not complete right now. The DEA has agreed with the health and unit services to reschedule, but it could be another 4 to 6 months. And that's probably as quick as it can go. Massive litigation and other issues don't arise.

Second question, that's your business. But Look, you've done a very nice job of streamlining the model over the past several quarters, closing stores where appropriate. So as we look at the business now from from a store perspective, is the base of stores appropriate?

Right now we're happy with our portfolio, we probably will be closing under 3 stores this year. But our business has changed dramatically. We're seeing much more business to business opposed to business to consumer. We just opened up 100,000 square foot warehouse in Ohio. And as our business evolves, our stores are both marketing tools, for our private label brands, and also brands of our -- some of our top vendors. And the stores are a place for people to go -- people to go to -- our customers to go and learn and also purchased products from us. But we believe that we can service most of our customers from our distribution centers and our largest stores around the country. So right now, we will not be investing in new stores this year. And we probably won't be in the market buying stores. Right now GrowGen is investing in supply chain distribution of B2B portals. We're investing in our proprietary brands, which you see are growing very quickly. We're investing in our customers. We're using credit right now. And I think we've given out more credit in the last month to customers than we have in some time. And we're investing in GrowGen, we're investing in stock repurchase plans. So I think we're starting to see different use of our capital. And we're investing in getting GrowGen into the ITC world, the one and garden space. So GrowGen is definitely morphed into a different kind of company over the last couple of years since you've seen the slowdown in the cannabis space.

The next question comes from Scott Fortune at ROTH MKM.

Just kind of following up you put my emphasis on the proprietary products and the success of that segment and moved up very nicely here in the quarter. But just want to kind of get a sense for the potential for your Drip nutritional product that you're rolling out here sounds like a good interest from that level. And then just remind us to target a proprietary brands which you are targeting your own brands for the overall business segment and makes I believe it's about 30% but work in that that target potentially go here.

We believe you'll see anywhere between 30% and 40% on private label proprietary brands at a GrowGen in the future. We believe we end this year somewhere in the mid to high 20s, which is pretty aggressive and that is dependent upon the Drip launch on taking -- when you look at the amount of trials that we have around the country right now those turning into sales in the future and we do believe you start seeing those late in the second quarter. And we believe that it's -- the Drip powder brand could be anywhere from a $25 million to $50 million business for GrowGen in the future. We will keep you posted as as sales turn -- trials turn into sales.

Got it. Appreciate the color there. And just kind of from a geographic interest here and you mentioned stores rightsizing [indiscernible]. But I just want to see you mentioned you're seeing stabilization in the market overall. But can you provide a little more color on kind of the regions or the areas outside California Michigan's still seem pretty weak there. Just a little more color on certain states that they're driving the strength here and the 2Q trends as we look going forward here.

Yes. We are seeing strength in California right now, Scott, contrary to what you are hearing. We are winning a lot of new business in the California market. We also seeing strength in Michigan right now. We're seeing considerable weakness out in Oklahoma and back east in the main in Massachusetts markets. But there's tremendous strength that GrowGen right now in California.

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

First one is just on the proprietary brands. How to think about margins here going forward? It's nice to see the increase in mix. Here, obviously, margins were down year-over-year. So just wondering how to think about the overall margin profile proprietary brands? And then if there's anything to comment on, sort of the sub segments within that, like, if Drip Hydro has a significantly different margin profile than some of the other proprietary brands? That'd be helpful as well. Just kind of looking to get a sense of the margin profile of the proprietary brands.

Yes. I'm going to keep it kind of basic for you, Eric. We're seeing anywhere from 40% to 50% average within our proprietary brands, you will see the highest margins coming out of out of The Harvest Company. And usually the lowest margins you'll seE-Coming out of our Ion brands, which are lighting brands, and our nutrients and Cocoa Char Coir brands or somewhere in between.

And then I'm wondering if you can comment a bit on some of the difference in dynamics, between E-Commerce revenues and brick and mortar. You called out E-CommercE-Comps that sort of masking the positive same-store sales growth that you saw retail. I'm just wondering how the sort of demand dynamics within those channels differ? And maybe how to think about those going forward as you are investing more in B2B?

I think as you see, the cannabis space turning more B2B than B2C. And what we've seen with our E-Commerce division, is some of our larger customers that started out in the E-Commerce division have switched over to our commercial team in some some of our stores where they get white glove service, where they're looking for credit, they're looking for account reps with more skills, opposed to just going on websites and buying. So it's not that stuff that our E-Com division has been slow. It's just again, it's just a mix of business is much smaller. And again, a lot of our largest customers that were that did come in through E-Com, that shop on E-Com have changed over to a different division of GrowGen. We have definitely pulled back expenses on our E-Com division, we pulled back on advertising, a lot of it is very price sensitive, opposed to service sensitive. So again, we will continue to monitor when we are starting to open up some B2B portals for our proprietary brands, which will go through the E-Com division, which should help drive sales through that division.

The next question comes from Mark Smith from Lake Street Capital.

I want to ask first of just about inventory came up just a little bit here, but looks good year-over-year. Just give us your thoughts around comfort levels and kind of the quality of your inventory today.

Greg, I'm going to send that over to you.

Yes. Mark, today we reported inventory at $66 million for the first quarter, which was up just incrementally to the fourth quarter. And primarily due to Q2 sales demand as we look at things, as we get through the year, we see opportunities to continue to take down inventory throughout the course of the year. I mean that might be 5 or 10, when we're working through in a more optimized model on the inventory side of things as we progress throughout the year. But we want to make sure we have the right inventory in the right locations for Q2, which is -- from a seasonality perspective, our best performing quarter. So that's a little bit around inventory. And to the quality of the inventory. We still have decent reserves on what we have in place. We feel very, very comfortable with what we have from a quality standpoint and a mix perspective.

And then second, just big picture, Darren, just as we think about capital allocation, you've got a good balance sheet with the cash here. How you've kind of way and think about investing back into business in stores or brands, versus share repurchases, or potentially acquisitions? Walk us through kind of how you think about capital allocation today?

Yes. I think I started off when I went on when I answered a question from Brian Nagel, but we'd go over it again. There's 5 different buckets that we look at right now, especially for 2024 as we go into 2025. And it's mostly organic, it's investing in GrowGen as oppose to growth -- investing outside of GrowGen. Our first bucket is investing in the business. That's our supply chain distribution where we just built out 100,000 square feet in Ohio. And we're just in the midst of also building up B2B portals for our proprietary brands so people can go online and purchase on different portals. Secondly, we're investing in proprietary brands launches, as you saw, we have private label went from 18.6 last year, up to 22.6 this year. We have 350 active -- over 300 active trials right now with Drip. We've given out over a $0.25 million of product last quarter for our Drip launches. Also, we have a full team of salespeople for Drip right now. We're also investing in new products coming out of Char Coir, some we believe will be the IGC world and also new products coming out of power assign The Harvest Company. So GrowGen is spending an enormous amount of money on these product launches, developing new products. And we believe will be the future of GrowGen. Thirdly, we're investing in our customers. We've increased credit to a number of of our customers right now. We're starting to invest in certain build outs for our customers. We're opening up credit as we see the industry starting to turn. We believe the days of people waking up and decided they want to become growers or over. The individuals that have made it through the harder parts of this market the last 4 years, we believe we're going to be here for a long time to come and be wonderful customers of GrowGen. And we are starting to open up credit at GrowGen and bringing in new customers and also helping old customers. We're also investing in GrowGen. We just announced the $6 million share repurchase that started on April 1st. We will update Wall Street in our second quarter to second quarter event. But we have been in the market buying back stock. And with that you're always looking at acquisitions. Again, if we find something that we believe is a creative, and in the best interest of our shareholders, we will take a hard look at it and if it's going to work for GrowGen, and we're a buyer. So we are always reviewing different products stores out there and looking what's in the best interest of GrowGen. So it's that 5-step process that we are looking at on a daily basis.

[Operator Instructions] Next question comes from Aaron Grey at Alliance Global.

This is Remy Smith on for Aaron Grey. So my first question, can you provide commentary on how 2Q is looking quarter to date? I know it's historically been a strong quarter for you guys, so any color? And if you're seeing a typical seasonal benefit would be helpful.

I think the only color I can give you right now is we're reaffirming guidance for the year, which is a $2 million loss to a $3 million profit. And as you saw our first quarter EBITDA loss was $2.9 million. So we're looking for a positive back half of the year starting in the second quarter. We also reaffirmed our revenue guidance that was -- we did $47.8 million for the first quarter. So if you took that and you times that by 3 -- that you times that by 4, we're considerably behind our guidance numbers. So we are looking for a tremendous pickup in the second quarter, third quarter and for the remainder of the year.

And then on my second question, you called out pricing pressure weighing on gross margins in the quarter. Can you speak to how you're seeing pricing in the segment going forward? You expected to continue to weigh on margins, and all set to benefit from increasing private label mix or do you see this as transitory, back to a higher gross margins [indiscernible]?

Greg, I'm going to send that over to you.

Yes. I think when you look at the first quarter margins improved compared to the fourth, which was a positive, but they're down year-over-year. And I think there was 2 primary drivers that I'll try to unpack. The first was Storage Solutions revenue, which came in less than planned. For the quarter, Storage Solutions was about 10% of revenue. If we look at it as 14%, which is kind of where we were for the duration of 2023. That brings us up to a mid-27% gross margin profile on the business, just at the revenue levels that we're at. So that's a big lever that we're expecting continued improvement from in the second and third quarters. And the other piece is we close 6 locations in the fourth quarter and 4 more in the first. And with that you get a certain amount of inventory that you have to move around the country, move from the closures to stores that are open and those costs had an impact on our results as well. So when you factor in those different pieces, it kind of pushes us up into that 28% to 29% range. So that's kind of the area that we're looking at, as we look through the duration of 2024, from a margin perspective. We're hopeful that Drip powders will really take off for us, as we look at really Q3 and Q4, maybe there's a small impact in the second quarter yet to be determined. Most of those trials are still ongoing throughout the country. So there's a lot of bright spots that we believe are out there right now, to kind of help drive a stronger gross margin profile through the rest of the year.

And then my last question, if I could if I have time. With the Canada's reform in Germany that recently occurred in April, and broader legalization efforts around Europe, do you see opportunity to capitalize on some of this reform?

Yes. We believe there is opportunity. We have not taken advantages as of yet. But we are actively speaking with certain distribution companies about getting some of our proprietary brands over into the European market. But again, nothing has been done as of yet.

Thank you. At this time, we have no further questions. I will turn the call back over for closing comments.

I'd like to take the opportunity to thank all our shareholders for their continued support of GrowGeneration. I wish you all the best for a happy summer, and we look forward to updating you on our second quarter in August. Thank you.

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