GrowGeneration Corp.
Q3 2019 Earnings Call Transcript

Published: 11 Nov 2019

[Operator:]

Good morning. My name is Joanna and I'll be your conference operator today. At this time, I would like to welcome everyone to the GrowGeneration Corp Third Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.Mr. Salaman, President and Co-Founder, you may begin your conference.

[Michael Salaman:]

Thank you. Good morning. My name is Michael Salaman, Co-Founder and President of GrowGeneration Corp. At this time, I would like to welcome everyone to the GrowGeneration third quarter 2019 earnings conference call.With me this morning is Darren Lampert, our CEO and Co-Founder; and Monty Lamirato, our CFO, who will both be participants on our call this morning. After our CEO and CFO's remarks, there will be a question-and-answer session.Let's move on to today’s call. As always, we expect to make forward-looking statements this morning. But I want to caution you that our actual results could differ materially from what we say here. Investors should familiarize themselves with the full range of risk factors that could impact our results and those that are filed in our Form 10-K, which we filed with the Securities and Exchange Commission. I would also remind everyone that today's call is being recorded, and an archived version of our call will be available on our website later today.Let me begin. GrowGeneration is the largest and fastest growing chain of hydroponic garden centers in North America. Today, GrowGen is a service provider, have a wide selection of supplies and equipment for commercial and home growers. Today, GrowGen has 25 locations in eight states, over 300,000 square feet of retail and warehouse space, that is today generating over 7,000 weekly transactions.Our online store now receives over 50,000 unique visitors per month. And our commercial division is now servicing thousands of commercial customers and some of the largest multistate operators in the U.S. Our third quarter numbers reflect our team's execution and focus on revenue and EBITDA growth. Q3 is our third consecutive profitable quarter. You will hear today from Darren and Monty that all of our financial metrics continue to be positive, all the while investing in technology and infrastructure.This week Tony Sullivan was appointed Executive Vice President and Chief Operating Officer of GrowGeneration. Tony is a seasoned and private equity backed executive with years of proven experience in operating large multi-store chains. Tony's appointment follows our third quarter announcement of the appointment of Bob Nardelli, the former CEO of Home Depot who was appointed Senior Strategic Advisor.In the third quarter, we added four analysts, who all initiated by recommendations from investment banks that include ROTH Capital, Ladenburg Thalmann, Lake Street Capital Markets and Alliance Global Partners. Our balance sheet is strong allowing us to continue to execute our plan, purchasing the best-of-breed hydroponic operators and aggressively opening new GrowGen locations.I will now turn the call over to Darren Lampert, who will present our third quarter 2019 results. Darren?

[Darren Lampert:]

Thank you, Michael. Good morning and welcome to our third quarter 2019 earnings call. I would like to begin our call by thanking our troops who protect our country every day and our veterans who served our country on Veterans Day. I would also like to thank the Veterans who work for GrowGen for their service as well as our shareholders, management and employees for their continued support and belief in the mission, Michael and I set forth five years ago to build the largest national chain of hydroponic garden centers in the United States. With 25 locations in eight states today, GrowGeneration is a leading marketer and distributor of nutrients, growing media, advanced indoor and greenhouse lighting, ventilation systems and accessories for hydroponic gardening.GrowGeneration is executing on all fronts; increasing revenues, gross profit margins and adjusted EBITDA for the third consecutive quarter. We've accomplished these financial goals, while aggressively investing in technology, infrastructure and human resources. This past week we hired Tony Sullivan as our Chief Operating Officer, one of our country's most experienced and proven multi-store operators. His initiatives will include, but not be limited to providing unwavering support to the 25 GrowGeneration stores, adding new locations, integrating our e-commerce and store supply channels and leveraging synergies among interconnect departments, working to drive more cost efficiencies across all areas of our company.Joe Prinzivalli will be stepping away from his role as the Chief Operating Officer and moving into a new role as Chief Technology Officer. Under Joe's leadership, our company has grown into the premier hydroponic chain in the country and successfully rolled out a robust ERP system.We saw a triple-digit growth in Colorado, Michigan and Nevada, and double-digit growth in all other markets, including HeavyGardens, our online business.GrowGeneration Management Corp., our commercial division is now approaching $5 million in sales per quarter and we added over 60 new commercial accounts in the third quarter of 2019. The newly acquired stores and new store openings are all performing better-than-expected and have been successfully integrated into the operations of the overall company.With our success in Oklahoma, which is now at $10 million annual sales and growing. The company assigned two new leases and is opening its 24th location in Oklahoma City on November 15, and 25th location in Tulsa, December of 2019. Our private-label program under the [indiscernible] brand will hit our shelves and online in Q4. Our initial private-label lineup includes a one part in micro and macronutrient plus Cal-Mag [ph] powder line for both the Cannabis and Hemp farmers, a [indiscernible] plus micronutrient booster and a root stimulant, all added that can be used with any nutrient regimen.Addition -- additional private label products that will be on our shelves in Q4 include

[Monty Lamirato:]

Thanks, Darren. Net revenue for the three months ended September 30, 2019 increased approximately 13.4% -- excuse me, $13.4 million or 159% to approximately $21.8 million compared to approximately $8.4 million for the three months ended September 30, 2018. The increase in revenues in 2019 was primarily due to

[Darren Lampert:]

Thank you, Monty. GrowGeneration has built a national footprint with 25 locations in eight states. GrowGeneration is now the largest and fastest growing chain of hydroponic garden centers in North America. Selling nutrients, growing media advanced indoor and greenhouse lighting and ventilation systems and accessories for hydroponic gardening.Our leadership position is driven through a corporate mission statement, to be the largest hydroponic service provider in the world. Our company continues to achieve its financial goals and Q3 was our third consecutive quarter of net income within adjusted EBITDA or $2 million. Revenues were up 159%, margins up 4 to 20 basis points to 29.9%, adjusted EBITDA was a positive $0.06 per share, $0.14 per share to date was store operating expenses down 25% and corporate overhead down 25% as a percentage of revenue.Q4 has started out strong. We service thousands of growers and generate over 7,000 weekly store transactions. We recently added Tony Sullivan as Chief Operating Officer, following Bob Nardelli, the former CEO of Home Depot was appointed as senior strategic advisor. Our balance sheet is strong which allows us to continue purchasing the best-of-breed hydroponic operations and aggressively open a new GrowGen locations.The company continues the process of uplifting to a larger exchange. We are adjusting our guidance up for 2019 to $74 million to $76 million in revenue and $0.14 to $0.18 in adjusted EBITDA based on 36 million shares outstanding. We look forward to continuing to surprise guidance as need be and we're excited to share our successes with our shareholders, our management team and partners.We would now like to open it up for a few questions.

[Operator:]

Thank you. [Operator Instructions] Your first question is from Aaron Grey from Alliance Global Partners. Please go ahead, Aaron.

[Aaron Grey:]

Thanks for the questions and great to see the continued momentum on the top and bottom line.

[Darren Lampert:]

Hi, Aaron.

[Monty Lamirato:]

Thanks, Aaron.

[Aaron Grey:]

So first question I just have is on the new guidance that you guys put out today, specifically on the revenues. Can you provide some guidance on quarterly trends because it looks like the high-end of guidance will have revenues about flat, sequentially. So I just wanted to know is that more a function of some conservatism or have you seen some change in momentum in the business in the fourth quarter, particularly given the new store openings you plan on having in Oklahoma City? So any color there will be very helpful. Thanks.

[Darren Lampert:]

Right now, Aaron, we are taking a conservative approach. I mean -- our October numbers was very strong. The fourth quarter at GrowGeneration because of the holiday users slower period for us. So we’re taking an conservative approach to it, but as of now again, the quarter is tracking wonderful.

[Aaron Grey:]

Right. Great to hear. And then just looking a little bit longer term, not to get too far ahead of us. But Scott's the other week it did point to continued momentum and their own business through what they look to be about March next year, and then some decelerated growth beyond that as it face tougher comps. And just as we look at your business, maybe more so from a same-store sales maybe top line perspective. Would you expect something similar? Because you’re going to start to face tougher comps and 1Q. So how best to look at the business kind of going forward over the next kind of 6, 12 months, both top line and then specifically same-store sales.

[Darren Lampert:]

We are not seeing it as [indiscernible]. We’re seeing increased momentum in all markets right now. Our stores are winning business all over the country. Our tagline service supply solution, we’re winning although large MSOS and our business continues to increase. Our business model is not different than Scott's. We service the customers and we -- right now, our commercial team is firing on all cylinders, or online divisions firing and also new stores. So right now we see continued momentum going into 2020.

[Michael Salaman:]

And I would just -- this is Michael. Just adding that we're still very early in the development of legalization. We’ve 25 locations, we certainly see a strong pipeline of acquisitions going into 2020 as well as opening up new locations as well. And we're certainly following the legal footprint so there's tremendous growth and as Darren mentioned, this quarter and the previous quarter, you’re seeing tremendous momentum in our commercial business and that businesses is a year old. So we see tremendous growth continuing in that area as well as the expansion into new markets and continue to stay focused on same-store sales. So we certainly believe 2020 will be an equally growth market and year for GrowGen.

[Aaron Grey:]

All right. That's great to hear and also great to hear about hiring of Tony Sullivan as COO. Can you talk to us a little bit about how you plan to leverage Tony's retail expertise? I know it's still is very early days with the company just -- do you believe that present some opportunity for you to accelerate growth of retail store openings? And then could you just offer some color in terms of, I believe last quarter you had hired a national real estate company to help identify some strategic location opportunity. So just any update in terms of what you believe the opportunities are over the next couple of years in terms of new store openings.

[Michael Salaman:]

Yes. I mean, we see the similar growth and we opened and acquired 10 new stores this year. We see similar activity in 2020. Tony brings such a seasoned veteran executive that has gone through ERP implementations, omni-channel execution, opening up new stores, planograms. The amount of efficiency is that Tony, I believe, will bring to the company is tremendous. So he is certainly just getting his feet under himself just starting last week. But we see tremendous margin expansion, cost efficiencies and just standardization of the process of opening up new locations in his experience is a tremendous adder to our C-level executive team.

[Aaron Grey:]

All right. Thank you. I will jump back in the queue.

[Operator:]

Thank you. The next question is from Mark Smith from Lake Street Capital Markets. Please go ahead, Mark.

[Mark Smith:]

Hey. Good morning, guys. First off, can you give us an update on the two new stores here in Oklahoma. And also discuss what's driving such strong results from the stores in that state?

[Darren Lampert:]

Our first -- our new store in Oklahoma City grant opening is November 15. Tulsa should be opened sometime in mid December. What’s driving growth in Oklahoma is the amount of licenses that were issued -- over 3,000 licenses issued compared to certain other states is a tremendous amount. So as the growers continue to build out, our business continues to grow. And we are winning business all of Oklahoma right now. We can't service what’s going on in the two locations we have. So again, we're opening two large locations and we look forward to getting the stores opened and the business start flowing through to service the individuals of Oklahoma.

[Mark Smith:]

Perfect. And then I know that this might be tough with such a fast-growing company. Can you just talk about your comfort with your current inventory levels

[Darren Lampert:]

We are comfortable with current inventory levels, but like anything else, we would always like to bring them down. So certainly a initiative for 2020 with being on one ERP system. We find and we think it will be much easier to kind of get a handle on inventory. Tony just started with us as our Chief Ofc. We are meeting him in Colorado this afternoon. So certainly we’re going to start working on it. I think any company always wants the lower inventory and certainly it's an initiative for 2020.

[Mark Smith:]

Okay. And then similarly, can you talk about where you guys are at as far as purchasing power -- as you get larger and as you go -- maybe directly to some of the manufacturers.

[Darren Lampert:]

I think it will continue like anything else you have, we continue to grow our purchasing power, it continues to increase. And certainly gives us a couple more not just on our belt here and there. So we look forward to continuing to grow and continuing to get better pricing both for our company and for our customers.

[Michael Salaman:]

The other interesting part about our ability to purchase is also the fact that we now have a national distribution system. A lot of companies that are looking to introduce new products are coming to GrowGen. We have a staff, we have a large distribution system, we’ve plenty of retail showroom space with plenty of warehouse space. So we see GrowGen in a great position to also attract the latest technologies of new products that are coming into the market. In addition to the stable products that we continue to sell and get better pricing based on our purchasing. But products are changing as the market is commercializing. And our ability to sell through a knowledge-based sales force to provide demonstration in an experiential way within all of the locations puts GrowGeneration in a very unique position to establish exclusive distribution agreements with the cutting-edge companies that are coming into the market, that are already looking to introduce new products. And we're getting more and more of those types of relationships, which is also going to be a creative on many different levels.

[Mark Smith:]

Perfect. And then last one for me. I know that it's still really early, but how do you feel about kind of your private label initiative and the opportunity to hit 10%? And then maybe continue to grow the size of that business.

[Michael Salaman:]

Yes, I mean it's just beginning and it comes back to the fact that we've scaled the business. We have the distribution, we have customers. And then we certainly believe that there's opportunities within each one of our 10 product departments that we can have a private label product that is of the highest quality, but at a very attractive price for our customers. We’ve started in the area of some powders and additives and some of the stable products that we mentioned during the phone call. But we are certainly focused on developing additional private label products across all of our different product categories. And we do believe that we can hit at least 10% of our purchasing can be in the private label area. And that’s one of the major initiatives that Tony is going to execute and implement in 2020.

[Mark Smith:]

Excellent. Thank you, guys.

[Michael Salaman:]

Thank you.

[Operator:]

Thank you. The next question is from Scott Fortune from ROTH Capital Partners. Please go ahead, Scott.

[Scott Fortune:]

Good morning. Congrats on the quarter guys.

[Darren Lampert:]

Thank you, Scott.

[Michael Salaman:]

Hi, Scott.

[Scott Fortune:]

Real quick one, look over kind of states, the key states you guys kind of maybe look to go deeper into going forward, and then just [indiscernible] California on a basis, little bit lower kind of its California and [indiscernible] expanding from the state side or what are the other states are key come forward for you guys here.

[Darren Lampert:]

Yes, Scott, with regards to California. We will be expanding into California in 2020, and probably LA area where we don't have locations as of now, we’re down in Palm Springs. Our Northern California stores, I mean, Stanford [ph] sales were up, our largest store in Northern California [indiscernible]. Store will be coming online same-store sales this quarter. So you should certainly see a little political uptick in that. But again we continue to build, we continue to look at California. And that’s an initiative for 2020.

[Scott Fortune:]

Okay. Any other key states as look at that, obviously acquisition fronts with the cannabis industry coming off from a valuation standpoint. Are you seeing better opportunities or newer states that you might be targeting that pretty interesting here going forward.

[Darren Lampert:]

Yes. In this store openings we are targeting right now Missouri and Illinois. Still waiting on some of the back east [ph] states right now

[Monty Lamirato:]

Scott, the other thing to think about when you look at the company is that, we are customer focused, we are certainly working with a lot of the multistate operators that are growing, state-by-state. So we're organically growing through the servicing of these large MSOs. With our commercial division, which is now growing substantially quarter-over-quarter, we are able to really do business with anyone in any state. So as these commercial operators come on, small, medium or large GrowGeneration is able to service them from A-to-Z, from lighting to benching, all the way through their consumables and leverage the distribution and the store infrastructure to service those customers from a customer service perspective and a consumable perspective on an ongoing basis. So our vision is to look at the country, not just state-by-state. So we are getting business literally wherever there's commercial customers, we’re attacking and acquiring and servicing and retaining and that's a big part of the mantra that Tony is bringing into this company world-class service provider that’s what* GrowGeneration is. We are not just 25 locations. We are a company dedicated and servicing these commercial customers at the highest level. And we continue to do that, we will gain and we will retain, we will continue to grow our company organically and through the acquisition model that we have.

[Scott Fortune:]

Sounds great. Thanks for color and a real quick last question. I know its early, but kind of the hemp initiative and an update on kind of the hemp opportunity come forward here?

[Michael Salaman:]

Hemp is a watch and see. I mean, we are certainly very focused and we developed our powder to be a powder that could be offered to the hemp market. I mean, this was really in our opinion the first year of a real successful, hemp harvest. And we certainly believe that it's a great opportunity, it's a vertical market, we are developing products specifically in the areas of drying, we made an investment with a group in Indiana. So we're looking at the market very carefully. It's certainly more of an outdoor versus an indoor market, but certainly there's a great opportunity to continue to keep our eye on the ball there and to leverage as these farmers continue to perfect. Their harvest, GrowGeneration will be positioned to offer them a supply chain and a solution of products for hemp farmers going forward.

[Scott Fortune:]

I appreciate. That’s it for me. Thanks, guys.

[Operator:]

Thank you. [Operator Instructions] The next question is from Glenn Mattson from Ladenburg Thalmann. Please go ahead, Glenn.

[Glenn Mattson:]

Hi. Good morning. Thanks for taking the questions. Nice quarter. So it was just mentioned, Scott asked about the California market. So I would be curious and I don’t know a couple of years ago you had some issues with the California fires affecting sales. Have you seen anything like that this time around?

[Darren Lampert:]

Our business remains strong in California, right now, Glenn. So we’ve not. One of our center Santa Rosa store was closed for four days this month because of the fire, but after that, I think business is picked right back

[Glenn Mattson:]

Okay. Good, good to hear. On the private label, great to see it coming -- starting to --product starting to come out in Q4 here. Question about what -- how that affects margins in the short run, but then also do you need to do any kind of brand awareness, spending to support the launch?

[Michael Salaman:]

We will. I mean, we certainly have our social media platform our internet, which is getting over 50,000 visitors is a great way to introduce new product. Our sales team is certainly being educated. We are bringing product out via [indiscernible]. Within all the stores and we are also going to be putting out an official press release and having our products on display at the big National MJBizCon trade show coming up in December, which we think is going to create a lot of interest and awareness around our private label products to the commercial growers. So it's a multifaceted marketing and sales campaign that we will start within the four walls of the store environment, our online and then certainly utilize our online digital marketing and social media. And also bring it out to all the existing commercial customers that we’re servicing.

[Glenn Mattson:]

Okay, great. And then there was a couple of times you guys mentioned that commercial business is doing well. I think you said added 60 new commercial accounts. Can you talk about if you added any large MSOs that you could call out. And then also just kind of give us -- refresh us on the number of sales to date. And if -- if maybe under the leadership, new COO here. Plans are to add bodies to sales force next year or what the outlook is*?

[Michael Salaman:]

Yes, I mean, we are constantly adding new qualified individuals and what's interesting about the company, we’ve have almost 200 employees we're able to look within the company. There's a lot of staff within the stores, in our purchasing department that are going to be redeployed into quarters and logistics step to service the commercial business. We continue to add new commercial business on a regular basis. We've created the infrastructure not just the pricing model, but we're also curating the products, which are different than a hobbyist market and putting that into a logistics and a customer service model, that’s giving us the ability to gain the largest MSOs to the small to medium-size commercial groups that we certainly are attracting as well.

[Glenn Mattson:]

Okay, great. Thanks, Michael. And then the -- curious, one point on margins that money brought up was that the sale of product acquired in bulk purchases. I assume that was from the acquisition of inventory from BWGS, correct me if I’m wrong. And can you just give us an idea of how much that impacted margin the quarter positively, and how much product is left in* that batch, that the low-cost inventory? Thanks.

[Darren Lampert:]

It was a $70 million batch and basically are forecast when* we picked up the inventory from BWGS, there is going to be a 3-year [leak] out of inventory. So you will see the next 3 years that inventory [leaking] out over time. We think that -- again, it may have been 1 basis points, but very little. I mean, our margins right now are being fueled by our ERP system better and better purchasing right now.

[Glenn Mattson:]

Okay, great. Thanks. That’s it for me, guys. Thanks.

[Michael Salaman:]

Thank you.

[Operator:]

Thank you. There are no further questions at this time. You may proceed.

[Michael Salaman:]

Well, I want to just thank everyone for their time and certainly wish everyone a happy Veterans Day, and we will be reporting our year-end numbers and thanks to our staff, management, executive team for all their hard work, and we look forward to reporting, as I said, our year-end results. Appreciate it and everyone have a great day. Thank you.

[Darren Lampert:]

Thank you.

[Operator:]

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