Hello, everyone, and welcome to the GrowGeneration's Fourth Quarter and Full Year 2024 Earnings Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions] This conference call is being recorded, and a replay of today's call will be available on the Investor Relations section of GrowGeneration's website. I will now hand the call over to Phil Carlson with KCSA for introductions and the reading of safe harbor statement. Please go ahead.

Thank you, and welcome, everyone, to GrowGeneration's Fourth Quarter and Full Year 2024 Earnings Results Conference Call. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration. The company's fourth quarter and full year 2024 earnings press release was issued after the market closed today. A copy of this press release is available on the Investor Relations section of the GrowGeneration website at ir.growgeneration.com. I would like to remind everyone that 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'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 available on our website. Following prepared remarks, management will be happy to take your questions. We ask that you please limit yourself to 1 question and 1 follow-up. If you have additional questions, please re-enter the queue and we will take them as time allows. Now I will hand the call over to GrowGeneration's Co-Founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. We appreciate you joining us today as we discuss our fourth quarter and full year 2024 results and talk about our outlook for 2025. Today, we reported full year 2024 results that were consistent with our expectations. This included full year 2024 net revenue of $188.9 million, which was in line with the preliminary results we reported in early February. Total 2024 proprietary brand sales were $39.5 million, representing 24.2% of total net sales compared to 18.8% in the prior year. 2024 marked a pivotal year for GrowGeneration as we successfully executed a strategic transformation to position the company for sustainable, profitable growth. With this extensive strategic restructuring plan, we have moved away from a focus on stores in order to transform GrowGen into a product-driven company with a business-to-business customer focus in order to drive revenue growth, improve margins and to build a more efficient, profitable company. For proprietary brands, I'm happy to report that 30.4% of our fourth quarter 2024 Cultivation and Gardening revenue was derived from sales of our proprietary products compared to 21.2% for the fourth quarter of 2023. This is very important because proprietary product sales not only drive higher margins, but also create a stable and reoccurring revenue stream for GrowGen. Our goal remains clear for proprietary brands to reach 35% of Cultivation and Gardening net sales by the end of 2025. Our portfolio of leading brands such as Char Coir coco, Drip Hydro nutrients, the Harvest Company and our Ion Lighting solutions continue to drive growth in proprietary brand sales. By integrating these proprietary brands into our commercial and e-commerce platforms, we are providing growers premium products that reduce input costs while maximizing yields. Starting the digital transformation of sales, our new B2B e-commerce platform was launched…

Thank you, Darren, and good afternoon, everyone. Today, I'll review the highlights of our fourth quarter and full year 2024 financial results, and then I'll discuss our outlook for 2025. During the fourth quarter, we continue to place heavy emphasis on rapid execution of our restructuring plan in order to position the business for 2025. We will highlight proprietary brand sales, which outpaced our expectations, delivery of our second consecutive quarter of same-store sales growth, additional improvements to our expense base and measures taken to rightsize inventory. Fourth quarter net revenue was $37.4 million compared to $49.5 million in the year ago period. The decline was mainly due to the closure of 19 retail locations during 2024. As anticipated, these store closures and consolidations impacted overall net revenue. This was partially offset by an increase in same-store sales, which rose 1% year-over-year. Fourth quarter represented our second consecutive quarter of positive same-store sales growth, which was primarily driven from consolidation efforts along with year-over-year growth of our commercial customer base. Cultivation and Gardening net sales was $32.9 million for the fourth quarter of 2024 compared to $41.7 million for the comparable year ago period. Proprietary brand sales increased to 30.4% of Cultivation and Gardening sales for the fourth quarter of 2024 compared to 21.2% for the fourth quarter of 2023. Our fourth quarter proprietary brand sales outpaced our internal expectations and provides us with confidence in our long-term ability to expand gross margin. Net sales of commercial fixtures within our Storage Solutions segment decreased 41% to $4.5 million for the fourth quarter of 2024 compared to $7.7 million in the comparable year ago quarter. This decrease was largely due to timing of revenue recognition on various large projects that went into the third quarter of 2024. Gross profit margin was…

Thanks, Greg, and thank you for everyone for joining us today. Over the past year, we have taken actions to fundamentally transform GrowGeneration into a leaner, more efficient and product-driven business. As we move forward, we will continue to expand our high-margin proprietary product offerings, refine our B2B e-commerce platform and leverage our optimized cost structure to deliver stronger financial performance. With a debt-free balance sheet and strong cash position, GrowGen is well positioned for sustainable revenue growth and profitability as we move throughout 2025. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Aaron Grey from Alliance Global Partners.

So first question I want to ask is just on the gross margin. You guys are targeting a lot of improvement there. So I just want to talk about the cadence we should expect. You alluded to it a little bit. It seems like a little bit softer 1Q and then a lot more improvement in 2Q. I don't know if that was more broad profitability versus just the gross margin. So just curious there, should we expect some level of a step-up in one of the quarters there or were there's a more gradual improvement throughout relative to where we came for 4Q?

Greg, would you like to take that?

Yes, I'll take that one. So Aaron, I think when we look at the first quarter, we're coming off of a fourth quarter where 30.4% of our Cultivation and Gardening net sales were driven from our proprietary brands. In our model, we're assuming a continued ramp throughout the course of the year, which will help support greater gross margin as we proceed through the duration of the year. Traditionally, Q3 is our strongest quarter from a gross margin perspective. Q2 tends to perform quite well also. But we are expecting an immediate lift in the first quarter on gross margin. We're seeing it in our results already as we're looking at reporting on a monthly basis, and we're excited to talk about the first quarter in May in our next earnings call. But as we get throughout the year, I think you will see continued improvements. We're targeting 30% for the full year in terms of gross margin. So our range on the guidance side from 29% to 31% [indiscernible] midpoint. So hopefully, that helps.

That's very helpful. Second question for me, just high level, as you guys look to shift a little bit more to the e-commerce versus stores, can you talk about some initiatives you're taking to help transition some of those sales? And with the store fleet at 31 today, are you comfortable with that? Or potentially, if you get more traction on shifting sales to e-commerce, is there a potential for that to slow down even more?

If I can start, Aaron. Our restructuring is largely complete when it comes to the store side of it. We're down to 31 stores, focusing on the higher-performing markets and driving operational efficiencies. But as always, we'll continue to evaluate performance and market conditions, and we're always looking to optimize if we can. The B2B portals launched in the fourth quarter. They're up and working well. We are transferring our commercial customers over the portals as we speak with direct shipments out of our hubs and also out of our warehouses. So what we're seeing right now is from GrowGen, we're just much more business-to-business company than business to consumer. So the necessity of overlapping stores in the same areas are just starting to disappear. So we will continue to rationalize, but I will say that the majority of it is over today.

Your next question comes from the line of Mark Smith from Lake Street.

First question for me is just looking at the proprietary brands. Can you talk about the sales within different kind of channels? What's going through e-com, B2B business versus kind of in the stores?

Greg, would you like to take that?

Yes. So I think when you look at the different channels, right now, you're seeing our retail and commercial group really accelerating the penetration of our proprietary brands. Our wholesale business at this point is almost entirely our proprietary brands. So we are distributing very little of other organizations products. It's mostly our own products at this point. And e-com is picking up as well. We have spent a lot of time building up brand pages and prioritizing Amazon in recent months. We moved that business to FBA as well. So that's all of our proprietary brands. We are no longer distributing other companies' products on Amazon either. So you're seeing really growth from all of our channels right now on the proprietary brand side of things with some of the channels almost exclusively focused on those products right now as we look at the pivot from being a retailer, which we still have 31 retail locations that are very important to our business, but doubling down on our products and finding additional verticals to sell through those products into. And I think you'll see more diversification from us in 2025 above and beyond what we've already executed.

And then I want to follow up on gross profit margin. It sounds like there's a lot of kind of clear out sales type stuff to clean up the inventory in Q4. Do you feel like you got through all of that? Or is there some carryover still of inventory that needs to be cleaned up here in Q1?

The heavy lifting is really done on the inventory side of things, Mark. When we saw the industry start to turn in late '21, we had over $20 million in inventory that some companies may have discarded more rapidly for us. We sold through most of it at a lower margin profile, sometimes at a loss throughout the last several years, and it really burdened our results. As we're looking at the heavy focus on restructuring in the back half of 2024, we did make a pretty significant cut in the fourth quarter to go through all of our SKUs on a qualitative basis and move on from what no longer serves this business as we look at 2025 and beyond in focusing on our proprietary brands, cleaning up our warehouses and our distribution centers, and repositioning the business. So in short, there will always be continuous improvements made to inventory, but I mean, the heavy lift is gone, and that really reflects what we believe we'll achieve on a gross margin perspective for 2025.

And Mark, what you also saw during the cleansing of the inventory, you saw 19 stores closed in the last 6 months of the year. So there was a lot of inventory running through those 19 closed stores where we put products on sale to better serve our customers opposed to spending additional capital on moving the products from store to store. So I think it was twofold. One, it was cleansing of the inventory, but it was the amount of stores that were closed in such a short period of time is why you saw 16% margins in the fourth quarter. And again, we do believe that you'll see those numbers even in the first quarter in the high 20s and certainly reaching the 30s, hopefully, by second quarter of this year.

Your next question comes from the line of Brian Nagel from Oppenheimer.

This is William Dawson. I'm on for Brian Nagel. So very broadly, I just wanted to ask about demand in the space. And with respect to your 2025 outlook, I wanted to just understand better growth and demand assumptions embedded within that outlook.

Greg, you can go over the outlook, and then I'll take the other part of it.

Yes. So when we look at 2025 from a demand perspective, we foresee a rebound from our MMI business. It dropped from $30 million to $25 million in the prior year. We expect some growth back in that business into 2025, more diversification in revenue streams. The largest part of that business from a revenue perspective in 2024 was on the retail side of things, and we're seeing more and more opportunities within retail, but in other places as well. So we're optimistic about MMI, and that's part of the basis of why we believe the valuation is worth holding on to long term and continuing to double down on that business. But within the Cultivation and Gardening side of things, which is our core business, I think we're seeing most of the growth coming in from our proprietary brands and our ability to service the B2B customers. Over the last several months, we rolled out B2B portals for both our wholesale business as well as our commercial customer base, and we're beginning to see very strong adoption within the portals and more interest in our proprietary brands. We launched the Drip powder line in Q2 of 2024, and we're starting to see a lot more conversion as time progresses. Char Coir continues to evolve and become a higher demand product. So I think when we look at our business, we're focused on the demand of our proprietary brands as much as anything right now. We continue to stay focused state by state and in different markets just based on how the laws are structured in the U.S. around cannabis and cannabis growers. And then lastly, we're continuing to place emphasis as well on diversifying our revenue streams outside of cannabis into lawn and garden, nurseries, greenhouses and eventually big box as well. So there's a lot of moving parts, but we feel good about really our brands and our ability to drive more sales through those brands.

I appreciate that. My next question was going to be on the regulatory environment. A lot has changed since we last spoke. And just wanted to see if there's been any updated thinking around cannabis reclassification, banking policies, SAFE Act, that type of thing.

As of today, I think most of us are still very confused. We are waiting. We still do believe that it's not if, it's when the Trump administration certainly has signaled prior to the election that they would -- they stood for rescheduling it state by state. But most of it has been pushed back without any some certain date. We do believe that if you see rescheduling or safe banking that it will bring tremendous capital into the industry, which will flow down to GrowGen on the build-out side, on the -- and also on the consumer side of it. So we were waiting like the rest of us. Our numbers that you see today, $170 million to $180 million are based on nothing happening with our federal government this year. But we still remain optimistic. We remain optimistic that President Trump will reschedule as he promised in this pre-election campaign.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Darren Lampert. Please continue.

Thank you for joining us on the call today. We look forward to updating you on our progress on our first quarter call in May. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.