GrowGeneration Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

There are 6 speakers on the call.

Operator

Hello, everyone, and welcome to GrowGeneration's First Quarter twenty twenty five Earnings Conference Call. My name is Joelle, and I will be your conference operator for today's call. At this time, participants are in a listen only mode. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. 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.

Operator

I will now hand the call over to Phil Carlson with KCSA for introduction.

Speaker 1

Thank you and welcome everyone to GrowGeneration's first quarter twenty twenty five 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 first quarter twenty twenty five 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'd 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.

Speaker 1

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 all available on our website. Following prepared remarks, management will be happy to take your questions.

Speaker 1

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 hand the call over to GrowGeneration's Co Founder and CEO, Darren Lampert. Darren, please go ahead.

Speaker 2

Thanks, Phil, and good afternoon, everyone. And thank you for joining us as we review our first quarter twenty twenty five results. Our first quarter results reflect the progress we've been making in transforming GrowGen into a leaner, more profitable product driven company with a business to business customer focus. While we had expected to see some top line contraction from our reduced store count, sales in the first quarter tracked lower than our initial expectations, particularly in March. This was due to softness in durables and consumable demand as a result of regulatory and tariff concerns.

Speaker 2

In anticipation of top line contraction from our restructuring efforts, our focus has shifted to improving the quality of our revenue and building a leaner, more profitable operation. We're executing a comprehensive plan to right size GrowGen for sustainable profitability. We are reducing fixed costs, simplifying operations, and transitioning from a legacy retail footprint to a more agile fulfillment centric model. Several former stores have now been repurposed into regional just in time fulfillment centers, enhancing delivery speed and efficiency for our B2B customers. One of the key highlights this quarter was the continued momentum of our proprietary brands.

Speaker 2

Proprietary product sales accounted for 32% of total revenue, up 22.6 in the prior year. These include our leading brands like Drip Hydro, Tarkor, The Harvest Company, and ION LED lighting, all designed to serve the needs of professional cultivators. This shifts towards own brands is not only margin accretive, but also a core pillar for our long term strategy. Another highlight this quarter was our continued digital transformation of sales. In Q1, we formally launched the GrowGen Pro portal, our digital B2B platform built for commercial growers, greenhouse operators, and vertical farms.

Speaker 2

Following a successful soft launch and customer testing in late twenty twenty four, the platform is now fully operational and delivering value through features like real time inventory, automated quoting, and streamlined procurement. This portal represents the future of GrowGen, a digital first product led company focused on serving professional growers at scale. Our goal is to migrate more commercial transactions from brick and mortar onto our B2B portal, while driving operational efficiencies across our supply chain. Despite the revenue decline in Q1, we grew gross margins to 27.2%, up both year over year and sequentially, reflecting a stronger product mix and disciplined execution on procurement and freight. This is a critical validation of our strategy of increasing proprietary brand adoption and reduce low margin dependency.

Speaker 2

We ended the quarter with $52,600,000 in total liquidity and no debt, providing us with ample flexibility to fund operations, invest in core initiatives, and pursue tuck in acquisitions aligned with our brand portfolio. Our inventory position of 42,100,000.0 reflects strategic investments in proprietary products ahead of stronger seasonal demand expected in Q2 and Q3. Our MMI storage solutions segment remained flat year over year at 4,800,000.0 in revenue, while facing some margin pressure this quarter. While the segment remains an important part of our long term vision, we are actively managing costs and pricing strategies to protect margins and position the segment for future growth. As part of this, we continue to increase our product diversification as we expand into other areas, including the hospitality and recreation industries.

Speaker 2

An example of this is the recent launch of our new mobile golf bag system at Bonita Bay Club, Florida's largest member owned golf facility. The new system will revolutionize storage operations and drive greater operational efficiency at the club's existing bag room, which manages over 2,800 golf bags daily. Like many in our sector, we experienced volatility in March due to tariff related uncertainty. While the ninety day pause has brought some stability back to purchasing behavior, we remain cautious in our forecasting due to the ongoing macroeconomic climate. We've taken proactive steps to mitigate these impacts, including diversifying sourcing, renegotiating vendor contracts, assessing different supply chain options like using larger stores as fulfillment hubs, and reviewing pricing where necessary.

Speaker 2

In terms of guidance for the second quarter of twenty twenty five, we currently expect revenue in excess of $40,000,000 While we are withdrawing full year guidance today, because of the current situation with tariffs, we remain focused on achieving profitability. ProGen is evolving from traditional retail model to a customer centric B2B focused business. As part of this shift, we're moving away from same store sales as a primary metric and focusing instead on building long term relationships with commercial growers proprietary brands and digital platform. Our success is now defined by customer engagement, product adoption, and operational efficiency, driven by a streamlined footprint of regional fulfillment centers and a growing share of digital transactions. We are also evaluating the closure of an additional 10 stores to further streamline operations and strengthen margin performance.

Speaker 2

Our focus is clear, transform GrowGen into a high margin product centric commercial business powered by our digital platform and a simplified physical footprint. With proprietary brands driving value, a leaner store base, and a strong liquidity position, we are confident in our ability to return to profitability and create long term shareholder value. Thank you, and I'll now turn the call over to our CFO, Greg Sanders. Greg?

Speaker 3

Thank you, Darren, and good afternoon, everyone. Starting with our first quarter results, GrowGeneration reported first quarter net revenue of $35,700,000 compared to $47,900,000 in the year ago period. The year over year comparison reflects the impact of 19 fewer retail locations. Sector wide, we continue to see pressure on business to consumer demand, while simultaneously seeing growth in our business to business customer base. Net sales in our cultivation and gardening segment were $30,900,000 for the first quarter of twenty twenty five, compared to $43,100,000 for the comparable year ago period.

Speaker 3

Proprietary brand sales increased to 32% of cultivation and gardening sales for the first quarter of twenty twenty five, compared to 22.6% for the first quarter of twenty twenty four. While first quarter net revenue reported within our previously issued guidance range, our first quarter proprietary brand sales surpassed our internal expectations, giving us further confidence in our long term ability to expand gross margin. Net sales of commercial fixtures within our storage solutions segment were 4,800,000.0 for the first quarter of twenty twenty five, which was flat to the prior year quarter. Based on more recent activity, we are anticipating quarter over quarter growth in the second quarter for our storage solutions segment. Total company gross profit margin was 27.2% for the first quarter of twenty twenty five compared to 25.8% for the first quarter of twenty twenty four, a 140 basis point improvement, primarily due to an increase in proprietary brand penetration, partially offset by lower installation margin from our storage solutions segment.

Speaker 3

We continue to lower expenses in the first quarter. Store and other operating expenses declined by approximately 17.3% to $8,800,000 compared to $10,600,000 in the first quarter of twenty twenty four. Selling, general, and administrative expenses for the quarter were $7,100,000 compared to $7,900,000 in the first quarter of twenty twenty four, a 10.1% improvement. As noted in our non GAAP footnote, we incurred approximately $1,100,000 in restructuring costs in the first quarter, which primarily impacted operating expenses in the period. We expect to recognize additional cost improvements throughout 2025 and beyond.

Speaker 3

Depreciation and amortization was $3,600,000 for the first quarter of twenty twenty five, compared to $3,700,000 in the comparable year ago quarter. We expect continued expense declines in depreciation and amortization in 2025 compared to 2024. Net loss was 9,400,000.0 in the first quarter of twenty twenty five or negative $0.16 per share compared to a net loss of $8,800,000 or negative $0.14 per share in the first quarter of twenty twenty four. Adjusted EBITDA, as defined in our press release, was negative $4,000,000 compared to a negative $2,900,000 in the same period last year. The decrease in adjusted EBITDA was primarily driven from lower sales volume, partially offset by improvements in gross margin, as well as improvements made to our expense structure.

Speaker 3

Now turning to the balance sheet. As of 03/31/2025, the company had $52,600,000 of cash, cash equivalents and marketable securities and no debt. We continue to maintain a strong cash position and do not foresee any near term financing needs. As Darren mentioned, we're withdrawing full year 2025 guidance due to macroeconomic uncertainty stemming from global trade policy changes, along with the potential fluctuations in consumer demand. Nevertheless, we are forecasting the second quarter to deliver net revenue greater than $40,000,000 and for both of our reporting segments to generate higher revenue in the second quarter than compared to the first quarter.

Speaker 3

We plan to revisit our full year guidance once we have greater visibility in the broader economic outlook. Having said that, during the first quarter, we continue to make progress in streamlining our operations and restructuring our business for long term profitability. Just as important, we have maintained a strong balance sheet and have the resources and financial flexibility to support our future growth. As we move throughout 2025, we will continue to focus on expanding our margins, controlling costs and exploring opportunities to increase our revenue growth and profitability for our shareholders. With that, I will hand the call over to Darren for closing remarks.

Speaker 2

Thanks, Greg. And thank you to everyone for joining us today. Even with a difficult environment, we continued to implement our strategic restructuring plan during the quarter. This includes the official launch of our online B2B portal and increasing revenue from our proprietary branded products, which drove further margin improvements in the quarter. Simultaneously, we've been improving operating efficiencies and reducing costs throughout our business.

Speaker 2

We continue to maintain a strong debt free balance sheet. And given today's environment, we think that's important more now than ever. We remain committed to executing on our growth plans and look forward to keeping you updated on our progress. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Mark Smith with Lake Street. Your line is now open.

Speaker 4

Hi, guys. I want to ask first off just a little bit around tariffs and proprietary products. Can you just give any additional insight on how much products may be coming out of China versus other countries? And then any other steps that you've taken thus far in mitigation process?

Speaker 2

Yeah, I'll take that, Mark. Currently on our proprietary brands, less than 10% is coming from China. So we're in a pretty decent shape right there within our proprietary brand portfolio. We have products coming in from India, our charcoal brands. Drip, we're now hopefully switching manufacturing.

Speaker 2

We're manufacturing the liquids in The United States and the powders are coming out of Mexico. So we're in pretty decent shape when it comes to our proprietary brands. Our steps, we continue to negotiate with our vendors on pricing. We are starting as we spoke about within our conference call, starting to use more of a hub and spoke model. So products are getting delivered where they do belong and we're using some of our larger stores as storage and to fulfill customers' orders.

Speaker 2

So starting to save some money on shipping and fulfillment. And when necessary, we are increasing pricing.

Speaker 4

So it sounds like you have taken some price so far but there's maybe you can probably more to come on pricing.

Speaker 2

I would hope so. Like anything else it's very new. I think there's so much uncertainty right now Mark. We do have $42,000,000 of inventory sitting on our books right now, which do not have tariff issues with that. So I think we're waiting.

Speaker 2

We don't want to be the first to raise pricing, but we have raised pricing on certain products, but we've kept our most of our products still pretty consistent.

Speaker 4

Okay. And then lastly, I just wanted to ask about potential for these 10 closures. Is this something that you foresee being kind of spread out maybe at the end of lease terms or is this something that maybe you move on more quickly and close these stores sooner?

Speaker 2

We believe more spread out Mark. I'd say half of them probably will be with lease terms expiring and just not renewing. What we're starting to see in this industry is the consumers are walking away. There's certainly a vibrant commercial, you know, commercial industry right now in the cannabis space And the harder we look right now is proprietary brand penetration, working with vendors on best of breed products, getting best pricing for our customers, but using the portal as opposed to the stores. You know, we've seen a tremendous drop in store traffic, especially in areas that, don't have vibrant caregiver laws.

Speaker 2

So there are certain states that we will always have stores. We do use stores as distribution centers right now and hubs. So, you know, but you will see GrowGen continuing to cut stores and get into a place where, you know, where it makes sense for us and then certainly makes sense for the P and L and our shareholders. But I think the future of GrowGen will be, as we said, proprietary brand penetration and also just servicing the commercial customers, which just don't come to the stores anymore. Those days are over.

Speaker 2

Okay, thank you.

Operator

Your next question comes from Aaron Grey with Alliance Global Partners. Your line is now open.

Speaker 5

Good evening. Thank you for the questions. First one for me, just wanna keep going on proprietary brands, but instead think about, you know, total addressable market, continue to outperform, gaining mix. So I want to speak more about the incremental distribution opportunities that you see available in the near term as you look to expand the client base for who your products cater to? I know you're talking about putting more in the portal versus the stores, I'd love to hear more about maybe incremental distribution channels that might be available for your products.

Speaker 5

Thanks.

Speaker 2

Yeah. And I think it's all encompassing. You know, one is one is certainly outside our country. We are working with certain, you know, countries right now, starting to ship both trip and trucker outside the country right now. It's been a slow process, but certainly starting to gain traction.

Speaker 2

We are working with some of the largest stores around the country in distribution, again, outside of the GrowGen stores. We do have, again, a growing clientele on that side of it that now distributes to their own clients. So as you see, we're starting to close stores. But even with our store closures, still seeing tremendous penetration. Right now, DRIP is still in a tremendous amount of trials around the country, so is Charcot.

Speaker 2

And we have a true you know, we have new products coming out of GrowJET on a monthly basis right now. So, you know, we do believe that our relationships are strong through distribution, other distribution channels. And we do believe that there's many countries and growers outside our country that will be using our products in the future.

Speaker 5

Okay. That's helpful color there. And just in terms of some of the trials that you just alluded to, you know, bigger question. Given the current challenges in the cannabis environment, which has obviously impacted hydroponics, you know, can you speak to how you're positioning those proprietary brands in terms of, you know, the value proposition that they offer and how you're finding the best success in getting those cultivators and operators to switch over to your products, given there's some stickiness to a brand with cultivators once they find one that works? Thanks.

Speaker 2

I think to start with, Aaron, we have a tremendously talented commercial team. And we also have facility advisors at GrowGen. So we have a team that goes into the facilities and works with the facilities on changing over our products. Most of our products go through extensive trials in some of the biggest facilities around the country right now to the point where you will see lab results and, you know, again, comparing our products to other products and our products are coming out tremendously favorable. And we do have some of the largest MSOs and single state operators switching over to trip and sharper as we speak.

Speaker 2

Both products are, again, continuing to penetrate the markets and gain market share. But I think it's the team at GrowGen. It's very seasoned. Again, it's into the facilities. It's trials.

Speaker 2

And it takes a long time, Aaron. The DRIP powders were launched over a year ago. And we're starting to see a lot of trials ending up in purchasing.

Speaker 5

Okay, great. That's helpful color. Last one for me, just touching back on tariffs. I know you gave some color on proprietary brands. But just more broadly, in terms of the tariff impact, can you dig into any potential impacts on the business that you're seeing and how to mitigate those impacts?

Speaker 5

You know, do you feel comfortable with your ability to maybe, pass on some pricing to the customer? Or I know you have removed guidance, but is that gonna potentially have more of a margin impact? You say 29 to 31% gross margin in the past. So if you can maybe quantify or or maybe speak to how you might be able to absorb or pass on those incremental costs, that'd be helpful.

Speaker 2

Yeah. I think in the first quarter, Aaron, we saw more margin pressure on the MMI side of it than we did on the GrowGen side of it. I think if the MMI margins were consistent with what we've seen in the past, we would have probably our margins would have been probably 28.5%, close to 27% apiece. So we continue to negotiate with vendors. Our vendors have picked up part of the tariff hit on us.

Speaker 2

So we are negotiating. We are starting to switch around manufacturing in certain areas, certain of our products. The distribution side of it, we're getting better. So cost of distribution is starting to come down for GrowGen. So I think it's a little piece from each pie.

Speaker 5

Okay, great. Thanks for the color there. I'll jump back in the queue.

Speaker 2

Thank you, Larry.

Operator

Your next question comes from Brian Nagel Your line is now open.

Speaker 4

Hey, guys. Good afternoon. Brian, I want to ask, and

Speaker 5

I think it's a bit of

Speaker 4

a follow-up to maybe the prior two questions. But Darren, if could just talk a little bit more about what you see from a consumer standpoint. I mean, we're definitely hearing broadly pressures on consumers out there, particularly as the macro environment weakens or the trade war gets going, whatever. But is there something just talk about what sounds like incremental weakness in your consumer you've seen here lately, how that's manifesting itself and the drivers behind it?

Speaker 2

Yeah. I think, Brian, there's been tremendous weakness within the industry and pricing of cannabis over the last few years. So what you're seeing right now, I think, a shift towards the whether you want to call it the illegal growers that have been around for many years, the outdoor growers where the price per pound is down tremendously, or just the individual consumer growing are starting to go away. I think on the business to business side of it, it's still strong. But what you're seeing on the business to business side of it is the companies are managing their balance sheets, as they also are taking a long term outlook in this industry, you know, hoping for 280E and certainly some change in the regulatory side of it.

Speaker 2

So we're starting to see is push backs on capital bills. We aren't having issues on the consumable side of it. It's more the durable side of it that certainly is dropping. But the consumable side is the higher margin side of it. It's the side that it's the stickier side of it where our customers are using our products and they come back in on a weekly, monthly basis.

Speaker 2

So, you know, that's what we have confidence in. What we're doing right now is we're starting to cut costs again. You know, we thought that we got there a year ago, but unfortunately, the industry, you know, has not strengthened as of yet. You know, we're just starting to see just a lack of consumer penetration. They're not shopping anymore.

Speaker 2

So when we take a hard look at the portfolio, prices, rent goes up every year, cost of employees go up every year. We're taking a hard look, I think, at every piece of GrowGen right now. And what we're starting to see is with the portal penetration right now, individuals shopping on the portals, we've moved over 500 of our customers over the portal, and it's gaining traction on a weekly basis, that we can service the same customers without the expense of the stores. So there is a there is certain areas that we need our stores where there still are 50 customers coming in every day. But there are certain stores where you're seeing five to 10 customers and more drop ships.

Speaker 2

And you don't need the stores for drop ships. We do that out of our warehouses.

Speaker 4

That's helpful, Darren. I just want to touch on the balance sheet a bit. Mean, it seems like your cash position relative the size of your business is actually quite substantial. But are you I guess the way I want to ask the question is, as you're going through this continued transformation, how do you view the capital position of the business? I mean, is there a baseline amount of capital you want to keep on the balance sheet just to run the business?

Speaker 2

I don't think we look at it that way right now, Brian. I think the one way we do look at it, that this industry is going to be around for many years to come. It's almost taken when you look back at coming out of the, you know, the wine spirits industry. And, you know, we're only eleven years, you know, we're eleven years in right now. 02/2014 was, you know, was was was Colorado's legalization of cannabis.

Speaker 2

So the one thing for us right now, you know, we just don't know the legislation why, why is where where the industry is going. So we believe, you know, keeping keeping capital on our balance sheet is important right now. But on the other side of that, we are actively looking for acquisitions, for product acquisitions, distribution acquisitions, and also acquisitions in the lawn and garden. And hopefully, we'll have some, you know, some to share with you guys in the next six months or so, maybe sooner. But we are looking at companies on a daily basis.

Speaker 2

And if it's accretive to our shareholders and to our company, we have certainly the back office staff to handle probably another 50,000,000 to $100,000,000 worth of business right now. So we're in a really great spot when it comes to that. So we are looking, and hopefully we'll have something to share with you guys in the near future.

Speaker 4

Thanks. Appreciate all the color.

Speaker 2

Thank you, Brian.

Operator

There are no further questions at this time. I will now turn the call over to Darren for closing remarks.

Speaker 2

Thank you for joining us today for our first quarter earnings call. We look forward to updating you on our progress on our second quarter call in August. Have a beautiful day. Thank you.

Operator

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

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Key Takeaways

  • GrowGeneration is transitioning from a legacy retail footprint to a fulfillment-centric B2B model by closing or repurposing underperforming stores into regional distribution hubs.
  • Sales of proprietary brands such as Drip Hydro, Tarkor, The Harvest Company and ION LED made up 32% of revenue, up from 22.6% last year, boosting gross margins.
  • The GrowGen Pro portal launched in Q1 as a digital B2B platform for commercial growers, offering real-time inventory, automated quoting and streamlined procurement.
  • First quarter net revenue was $35.7 million with a 27.2% gross margin—both impacted by reduced store count and softer demand—while maintaining $52.6 million in liquidity and zero debt.
  • Management expects Q2 revenue above $40 million, has withdrawn full-year guidance amid tariff uncertainty and plans to close up to 10 more stores to improve profitability.
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Earnings Conference Call
GrowGeneration Q1 2025
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