Hello, and welcome to GrowGeneration's Third Quarter 2022 Earnings Conference Call. My name is Keith, and I will be coordinating the call today. I will now turn the call over to Clay Crumbliss from ICR. Please proceed.

Thank you, and welcome, everyone to the GrowGeneration Third Quarter 2022 Earnings Results Conference Call. Today's call is being recorded. With us today are Mr. Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration Corp. You should have access to the company's third quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website. 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 provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, we will take questions from research analysts. Now, I will turn the call over to our Co-Founder and CEO, Darren Lampert. Darren?

Thanks, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter 2022 financial results and our updated full-year guidance. To start, I'd like to thank each one of our employees across our corporate center and 58 retail locations for their continued support of GrowGen. It's been a challenging year, but I, along with the rest of the executive team, appreciate your continued hard work and dedication to our vision and strategic plan. We are pleased to report that our sales in the third quarter came in ahead of our internal plan at $71 million, bolstered primarily by stronger-than-expected demand within our distribution and private label business unit. While we expect broader softness across hydroponics to continue, we are encouraged that our efforts to rightsize the business are starting to show in our financial results, and we are optimistic that the work we are doing is putting GrowGen in a significantly better position going into 2023. As we detailed last quarter, the broader cannabis and hydroponic industry remains in a prolonged downturn that is negatively impacting all participants across the cannabis value chain from growers to suppliers to retailers. With the continued oversupply of cannabis in the marketplace and not enough demand to absorb it, we are not yet seeing growers add meaningful new capacity and therefore, hydroponic demand remains slow across the United States. While we are seeing some early signs of stabilization, we are still not prepared to definitely say that the worst of this cycle is behind us. With that in mind, we remain dedicated to controlling the areas of the business that we can control. We have made significant progress across many aspects of our company over the past nine months. We remain highly fiscally prudent with a hyper-focus on cost controls, improving profitability, and preserving and growing our capital base. As Greg will detail, excluding Q3 unusual expenses, we believe that the company would have been profitable on an adjusted EBITDA basis. As a result of these efforts, GrowGen remains on solid financial footing. We have a strong balance sheet, and we do not anticipate the need for external debt or equity issuance. We currently have $71 million of cash and cash equivalents with zero debt, representing a sequential increase of $6 million in our net cash position over the second quarter of 2022. We continue to feel very good about our liquidity position well into the foreseeable future. And I want to reassure you again the company has the ability to meet the ongoing operational needs of the business without additional capital even if the current market conditions persist. Now, I'd like to provide an update on some of our key strategic initiatives this year and where we stand on each. As you will recall, we recognized the need early this year to shift our focus towards cost control, store consolidation, inventory reduction, and cash generation. I'm proud that we have made excellent progress on those operational initiatives. And in addition, I'm excited about some opportunities to begin repositioning our company for the next phase of growth. As I think it's worth repeating, in the third quarter of 2022, we generated $6 million of cash, ending the quarter with more than $71 million on the balance sheet. We reduced inventory quarter-over-quarter by $10 million compared to the end of the second quarter 2022, which amounts to an aggregate reduction in our retail business of more than $24.1 million in inventory year-to-date since December 31, 2021. While our inventory reduction efforts have generally occurred at discounted prices, which clearly resulted in gross margin pressures in the third quarter, we believe it was a prudent thing to do in order to rightsize our working capital base and prioritize cash generation. We believe that the inventory reduction and SKU rationalization plan will be near completion by the end of fiscal year 2022. On the expense side, we've reduced payroll by an incremental $1.7 million in the quarter and $11.7 million year-to-date. This equates to a 28% payroll reduction and a 41% headcount reduction during 2022. We also closed five stores during the quarter and opened two new stores, bringing our total store count today to 58 locations. Recall that most of these store closures have been to correct overlaps in the retail footprint, where we expect very little lost sales, but to also lean into our new ERP platform and DC supply chain model, which we believe will deliver more efficiencies and lower costs across the enterprise. As we enter into the 2023 fiscal year, cost savings from store consolidations, reduced payroll expenses, improved shipping costs from declining ocean freight rates, reduced headwind from inventory discounting on our margins, and a greater percentage of private label sales will all have a positive impact on EBITDA and profitability next year. Looking ahead for a moment, with the hydroponic market and consolidation, there are growth opportunities for GrowGen beginning to emerge. A strong balance sheet, along with strong distribution capabilities, allows us to selectively take advantage of these opportunities. We believe there are compelling opportunities to acquire stores and fill in white space throughout the country in areas where GrowGen does not currently have a physical presence. In that regard, we're excited about the addition of two new stores in the fourth quarter in Missouri and New Jersey, which represent strategic markets for GrowGen. In 2023, GrowGen aims to begin exploring possibilities in a nascent indoor vertical farming market with our own proprietary fertilizers and indoor farming solutions that are natural extensions of our cannabis business. We were especially excited to announce that we recently entered into an agreement with Dr. Jorge Vivanco of Colorado State University, one of the country's leading horticulturists, who is focusing on indoor farming for specialty crops, craft genetics, and water-soluble fertilizers and additives. In fact, we are positioning our newest store that opened in Richmond, Virginia in September as the hydroponics and garden center. We think this small shift in branding, along with a broader in-store product assortment will allow us to drive increased store traffic by attracting new customers who are interested in growing produce indoors. Our private label strategy remains one of our top initiatives, and we see this as a key enabler of growth and margins going into next year. We are driving sales of proprietary brands and private label products, and we are investing in resources to provide customer service, product development, and distribution excellence. Private label accounted for $7.1 million of retail and e-commerce sales in the third quarter, which is around 14% of our overall retail and e-commerce sales, growing 8% year-over-year as a percent of sales. As a reminder, our private label products generally enjoy higher gross margins. So as we increase our private label sales mix relative to our branded sales, we expect the accompanying margin benefit to help drive our profitability improvements. On the legislative front, we continue to monitor and support actions at the national level towards the passage of the SAFE Act with the ultimate end goal of federal cannabis legalization. We were encouraged by President Biden's recent unilateral action to pardon those convicted of federal cannabis possession or usage, and his urging of states to do the same for state-level convictions. We think it's indicative of the American public's overwhelming support of federal cannabis legalization. While the outcome of tomorrow's midterm elections could result in a setback towards federal legalization, if control of the center were to change, we continue to believe it's only a matter of time. In other words, when, not if. And as we said before, our business model does not depend on legalization. As Greg will detail for you shortly, we are increasing our full-year guidance for both net revenue and adjusted EBITDA. On the top line, the updated guidance reflects stronger third-quarter sales and embeds a seasonally slower fourth quarter. I want to welcome Greg to his first public earnings call as the CFO of GrowGen. Greg has been with the company for over five years as our controller. He's intimately familiar not only with the numbers, but also with our entire organization and our executive team, and I am thrilled with how quickly he has embraced his new role and the positive impact he is contributing to the corporation. With that, I will turn the call over to our CFO, Greg Sanders.

Thank you, Darren. I'm honored to serve the company and its shareholders. First, I will address our third-quarter financial results, and then I will discuss our updated full-year 2022 guidance. For the third quarter, GrowGen generated revenue of $71 million versus $116 million in the third quarter of '21, representing a decline of approximately 38.9%. Our same-store sales for the third quarter 2022 were $39.9 million compared to prior year sales of $95.4 million, representing a 58% decline against the comparable year-ago quarter. Our e-commerce revenue declined on a comp basis from $10.5 million to $3 million, resulting from decreased CapEx demand from the commercial markets. This was partially offset by a $15.1 million increase in our distribution business, including the acquisition and integration of HRG and MMI, which positively contributed to the year-over-year change. As Darren mentioned, our net revenues in the third quarter exceeded our internal expectations due to stronger-than-expected sales within the distribution segment, as well as modest developments in new state-level cultivation markets within the retail segment. Gross profit margin was 25.9% for the third quarter of 2022, down approximately 250 basis points sequentially from the second quarter. Gross profit dollar generation in the third quarter decreased 3.5% from the prior year, including the impact of additions of acquisitions in the trailing 12 months. Our retail gross margin in the quarter was down 782 basis points compared to last year, resulting from our inventory reduction plan and clearance events, which we expect to be near completion by the end of the year. The offset in margin performance in Q3 was positively driven by the distribution segment, which had meaningfully more favorable gross margins. Store operating costs and other operational expenses declined sequentially from the second quarter. Overall, the store operating expense declined from $14.5 million in Q1 to $13.8 million in Q2 to $13.6 million in Q3. We anticipate further cost decreases in the fourth quarter from our store consolidation efforts. Selling, general and administrative or SG&A costs were $8.8 million in the third quarter, of which $1.3 million was derived from stock-based compensation. This compares to $10.6 million in the second quarter with $1.1 million of stock-based compensation. This represents a 17% improvement quarter-over-quarter. Depreciation and amortization of intangibles was $3.9 million in the third quarter of 2022 compared to $3.5 million in the year-ago period. Total SG&A expenses were impacted by a $321,000 of severance-related expenses. Compared to the same period last year, SG&A expense decreased $1.7 million in the third quarter of 2022, with overall savings being driven primarily by payroll reductions and increased cost controls over a broad range of categories. As Darren described earlier, we have taken a number of steps to rightsize operating expenses, including resizing the payroll, consolidating e-commerce web stores that had competing operational expenses, rationalizing our store count as well as other operational improvements. Throughout the first nine months of the year, we've reduced our general and administrative expense base by roughly $7 million through management rationalization, workforce reduction, and tighter day-to-day expense controls. In total, we estimate that our annual expense run rate in the third quarter has already decreased by over $14 million annually when compared to the Q4 2021 pace. On an absolute basis, this is inclusive of the expenses added into the business during 2022 for the acquisitions of HRG and MMI. Income tax was a benefit of $718,000 in the quarter. For 2022, we are forecasting a financial loss for tax purposes, but with a full valuation allowance, we do not expect significant income tax provision benefit or expense for the remainder of the year. Net loss for the third quarter was $7.2 million or negative $0.12 per share compared to net income of $4 million or $0.07 per share for the comparable year-ago quarter. Adjusted EBITDA, which excludes the expenses associated with interest, taxes, depreciation, amortization, and share-based compensation, was a loss of $2.6 million for the third quarter of 2022 compared to income of $10.8 million in the third quarter of 2021. We estimate this quarter's adjusted EBITDA loss includes roughly $4.1 million of one-time and controllable items that we expect should either become less impactful or will not repeat going forward. These items include third-quarter clearance and sale events that had an estimated $1.5 million negative impact on gross margin. One-time store closure expenses cost the company approximately $800,000 in the third quarter, which does not include the forward-looking expense savings from discontinued store operating costs, increases to the company's inventory allowances of $720,000 for obsolete inventory in the quarter, $400,000 in excess supply chain and storage costs for third-party logistics. The Resell segment recognized $373,000 in accounts receivable bad debt expense. Lastly, the company accrued $321,000 in one-time severance expense. Excluding these items, we estimate that our adjusted EBITDA would have been profitable in the third quarter. Related to the balance sheet, the company ended the quarter with $71 million in cash. Within working capital, the company reduced inventory by $10 million, offset partially by a $1.8 million increase in high creditworthy accounts receivable. We also leveraged approximately $2.2 million for payments associated with technology and distribution investments. Cash generated from operations in the quarter was $8.3 million, primarily attributed to the reduction in inventory and measures taken to strengthen the balance sheet. I will now discuss our updated expectations for the remainder of the year. In the third quarter, we observed relative flatness in retail same-store sales on a percentage basis from the second quarter of 2022 and an actualized sales revenue decline of $8 million. Further, the third quarter included an uplift from our distribution segment and a quarter-over-quarter sequential increase in sales revenue of $7.8 million. The company expects further seasonality and a sequential decline in overall sales into the fourth quarter, as well as continued industry and economic-related headwinds that will continue to impact the sales performance. We are now expecting full-year 2022 revenue to be between $270 million and $280 million and full-year adjusted EBITDA to be a $10 million to $13 million loss. The middle of our guidance range embeds a continuation of the current trends we are seeing today, and the low end contemplates a further deterioration in the operating environment. We expect gross margins to remain under pressure throughout the remainder of the year due to lower sales volume as well as discounting sales and elevated freight costs. We expect operating expenses to be controlled and sequentially down in the fourth quarter, as we are now planning for fewer retail store openings than we previously expected. We are planning for total capital investments outside of acquisitions, primarily for new store buildouts and technology investments of $2 million, which is below previous assumptions. Thus far, we have spent $11 million in 2022. We are continuing to take steps in executing our business strategy to focus on generating cash from operations. As we mentioned earlier, we expect that our headcount reductions are largely complete, and we see some additional opportunities at least through the end of the year to continue reducing our inventory to clear slower-moving and obsolete product. With that, I will turn the call back over to Darren for closing remarks.

Thank you, Greg. Before we open the line for questions, I want to reiterate that while 2022 has been challenging for everyone in the cannabis value chain, GrowGen remains highly focused to ensure that we are in the best place possible to emerge stronger than ever when the industry eventually turns around. We are actively focused on the areas of the business that we can control, and we continue to make strong gains against our priorities to drive cost controls, consolidate stores, reduce inventories, and improve profitability while preparing to capture the many growth opportunities that lie ahead. We remain committed to the expansion of our proprietary and distributed brands. We are very satisfied with the results of our private label products, including Charcoir, Power Si, and Drip Hydro. The addition of MMI strengthens our position to gain indoor vertical cultivation projects with their leading benching and racking systems. Controlled environmental agriculture and sustainable agriculture are only in the developmental stage, and we believe that many companies will invest in sustainable indoor vertical farms for local production of leafy greens, tomatoes, fruits, and other food products. In addition, I do want to mention something that's really important to us. GrowGen remains committed to the community we serve, and we work closely with organizations like Harvest 360, an accelerator program based in New Jersey that focuses on social equity license holders. GrowGen and Harvest 360 Technologies launched a new national program to support education and training for social equity applications, regulations in both New York and New Jersey, and other new markets seeking to create a framework to regulate cannabis in these states in a manner that promotes social equity and economic development, placing an emphasis on promoting inclusion of diverse populations in the medicinal and recreational cannabis industries. GrowGen together with Harvest 360 is committed to delivering solutions to these operators and supporting their communities. This program with Harvest 360 gives GrowGen a direct method to help new companies grow their businesses. These microgrow licenses in the New Jersey adult-use cannabis market represent a new generation of growers that GrowGen believes will be the next generation of entrepreneurial shifts to expand the cannabis industry. To close, GrowGen remains on solid financial footing with a strong balance sheet, healthy liquidity, and a solid cash position. We are confident that when the cannabis cycle turns and the excess supply in the marketplace eventually normalizes, GrowGen will be well positioned to recover quickly with a more attractive expense structure on a lower G&A base from which to build. Thank you for your time today, and thank you for your interest in GrowGen. We will now take your questions.

We'll take our first question from Brian Nagel with Oppenheimer.

I have a couple of questions. First, regarding sales, Darren, you mentioned the ongoing pressures in the market. However, as you noted, your sales have significantly exceeded expectations. Given this upside, especially considering the lower base and the revised guidance, are you seeing any indications of stabilization or improvement in parts of the business?

Brian, same-store sales are down 58% in the third quarter. So it's hard to say that we're seeing tremendous stabilization. We saw a tremendous increase in sales in our distribution and other divisions, which pretty much fueled the third quarter. But what we are seeing right now going into the end of the year, we're starting to see more quoting. We're starting to see more business and backlog coming in the eastern side of the country in the Mid-Atlantic. So we are starting to see some capital builds in New Jersey, in New York, and on the East Coast in the Mid-Atlantic states, which gives us certain optimism. We haven't seen a further deterioration going into the fourth quarter. And in 2023, we'll be going against a very low comp base. So we feel pretty good about where we are right now, bringing down our cost structures tremendously in 2022.

As a follow-up to that, Darren, we've been discussing the headwinds we've faced over the last several months, particularly the ongoing oversupply situation. We have also noted the slower than expected licensing following legalization state-by-state. Are you starting to observe any increase in licensing activity, especially in states like New York, which recently legalized?

We definitely are. We're seeing a pickup along the Eastern states. And we're starting to see a pickup in Mississippi. We opened a store in Mississippi about four months ago. The store went profitable last month. We have the lion's share of the business in the Mississippi market right now, albeit smaller than we thought. But we're starting to see a tremendous pickup of business in Mississippi, also starting to see a pickup in business in New Jersey. Our Mount Holly store will be opening next month, and we're pretty excited about that. Also, our Missouri store will be opening this month. So we are starting to see a pickup in the new states, and we're seeing stabilization in certain areas in California where we're starting to win business. So the question we always have, we're starting to see new business, which we certainly believe are coming from other stores. We're starting to see right now that the market is doing the work for us in certain places. You're seeing a tremendous amount of closings of some of the smaller, less capitalized stores around the country.

We'll take our next question from Connor Jensen with Lake Street Capital Markets.

This is Connor Jensen for Mark Smith with Lake Street. I was just wondering if there's any specific ballot initiatives tomorrow you're watching that you think could have a direct impact on your sales?

We're opening a store in Missouri, which is set to legalize adult use. We're closely monitoring that situation. We're also looking at markets in Arkansas, South Dakota, and North Dakota, where we currently don't have any stores; however, we are actively exploring opportunities in Arkansas. We're opening a store in New Jersey, and we have a strong presence on the East Coast. Therefore, you can expect to see developments in Maryland as well. Additionally, there's a ballot in Oklahoma coming up, but that won't be until March.

Okay. Yeah, definitely makes sense. And then just a follow-up. How are you guys feeling with your inventory levels? I know you said you brought them down in your earlier remarks, but how do you feel about those right now?

We've done a tremendous job bringing inventory down this year. We saw the industry turning going into 2022. And one of our initiatives this year was to generate cash and bring inventory down. And we've done a wonderful job at it, albeit, as Greg said earlier, within his comments, some of it has deteriorated some of our margins. But we believe we're pretty far along with our inventory reduction and SKU rationalization. And we do believe that we enter 2023 with a much cleaner inventory going forward and a solid balance sheet, which gives us the opportunities to buy in bulk and buy cheaper in the markets. Our private label products have been performing above expectations.

We'll take our next question from Aaron Grey with Alliance Global Partners.

This is Remi Smith on for Aaron Grey. You mentioned private labels a few times and how strong they've been this quarter. So in terms of the initiative, what impact are you seeing kind of at the ground level from the broader environment? Cultivators more likely to move to private label for the savings or the inventory levels of some branded products driving promotional activity? Any color on that dynamic and how you're managing price gaps of the private labels would be great.

Yes, I believe you're seeing both trends. We have some top-quality products available, such as Charcoir in our cocoa line, our Power Si Silicic Acid product, and the recent launch of Drip Hydro, a nutrient line introduced three months ago. Currently, growers are seeking the best products for the best prices. We're starting to notice an uptick in our private label products in the market, and we're excited about our recent and upcoming launches in 2023. Additionally, MMI, our vertical racking company acquired at the beginning of the year, had a stellar quarter.

We'll take our next question from Scott Fortune with ROTH Capital Partners.

You mentioned a little bit, Darren, on the competitive landscape. Can you just kind of step us through what you're seeing on that? I know you've got store expansion and these new states coming on board, Missouri, New Jersey, and Virginia. But how is kind of the competitive landscape with potential opportunistic M&A shaping up with maybe stores under stress? And what percentage of these stores are kind of good stores that you can look at for potential M&A. Just kind of that environment would be helpful for potential growth in 2023 when the market turns here.

Scott, I think it's nothing more than you've seen in other industries. You saw years ago in the hardware stores in Home Depot and Lowe's. You're seeing a market in distress. When markets are in distress, you see consolidation. The hydroponic market right now is in consolidation. There are many small and medium-sized stores are closing. They just can't compete in this marketplace when they don't have the financial wherewithal to do it. GrowGen has a strong balance sheet, $71 million in cash, strong distribution capabilities, which allows GrowGen to take advantage of basically filling in gaps around the country. And you will see more of that from GrowGen. We're seeing very cheap prices out there right now, and certain places are selling for inventory. And with GrowGen's private label division and really with our financial wherewithal, we have the opportunities to certainly add to our base and pick up stores that are immediately accretive to GrowGen's base. You're seeing a new ERP system rolling out at GrowGen on January 1 on NetSuite in Manhattan, which will certainly help us in building this business back in 2023.

Got it. I appreciate the color there. And then real quick on the e-commerce side. I know you're kind of rebuilding or changing the website from that standpoint. But can you provide a little color on the efforts there of that mix and kind of what the e-commerce versus retail mix and kind of the potential focus there? Is it more do-it-yourself craft growers versus commercial? Just kind of thoughts on e-commerce as that's come off a lot on the growth side, but where you're at with that kind of rebuild of that web focus.

Yes, it's been a challenging year for our e-commerce division since we launched Agron.io last year, a platform for commercial ordering. With commercial builds down 80% this year, we encountered some expense challenges. This year, we merged Agron and growgeneration.com into a single website, and we just launched our new site. We believe this will lead to growth in 2023 for our online presence, which is an exciting opportunity for GrowGen. We are investing but also cutting costs by operating one website instead of two, using the same marketing, software, and employees. As the markets recover going into 2023, we expect a strong performance for growgeneration.com. Our new website is live and improving, and we are optimistic about its potential. We see a mix of customers, with a focus on hobbyist do-it-yourselfers, but we also have commercial clients engaging with our website.

We'll take our next question from Eric Des Lauriers with Craig-Hallum Capital Group.

I was wondering if you could comment a bit on overall pricing dynamics, just with your ability to sort of be a price leader in your markets? I know that previously, that was one of your core strategies, sort of being able to sort of match or beat on price and help take share through that strategy. I'm wondering if that's still one of your core strategies for gaining share, especially in these new markets, and just kind of talk about the overall competitive dynamics along the pricing and discounting side?

The only thing, Eric, when it comes to that, we certainly aren't the price leader. We won't beat on price. So like anything else, we still believe we deserve a fair price for the products that we sell. But when an industry is in distress, some of the smaller stores, and there's an overcapacity in hydroponics equipment, which you've seen in 2022, there has been a tremendous amount of discounting in the markets, and it has not been led by GrowGen. But with that, GrowGen will not be beaten on price. And we've done a wonderful job lowering inventory by almost $25 million this year, together with discounting where we have to discount to sell through overstock inventory. And also, we've spent the last 12 months SKU rationalizing products that we've picked up through a lot of acquisitions at GrowGen. So that part is coming to an end this year, but we will continue to be aggressive on pricing where we have to. Our balance sheet and really our distribution capabilities gives us the ability to do that.

We'll take our next question from Andrew Carter with Stifel.

Good evening or afternoon, depending on where you are. I wanted to ask about the current plans for store openings, which seem very different now compared to the beginning of the year. You mentioned previously about reducing savings and scaling back operations. Is there anything that you did not spend on or postponed that will need to be addressed in 2023? Additionally, are you considering repositioning the business to operate in a more efficient, asset-light manner, meaning fewer stores in new markets? That's my first question.

To start, you will see that GrowGen is focusing on smaller stores and increasing our distribution. We are currently expanding to 100,000 square feet in the Ohio market, which, along with our Sacramento warehouse, will enhance our distribution across the country and at our larger hubs. We plan to rely more on that distribution network. The size of our stores will be reduced to align with current industry trends. Two years ago, all products in our stores were selling well, but the cannabis and hydroponics industries are realizing that while there will be growth for many years, it will not maintain the previously expected 20% year-over-year increase. Consequently, we've recognized that our stores do not need to be as large as we originally thought. This year, we have consolidated seven stores and may consolidate a few more next year. Moving forward, you will see smaller stores at GrowGen and a stronger focus on our distribution capabilities.

Second one, regarding the implied fourth quarter guidance, does that include any more potential charges, i.e., inventory, just on restructuring anything or is that a clean number or is that a pro forma number?

I'm going to send that over to Greg.

Yeah. So the Q4 number itself is assuming a revenue range of $57 million to $47 million with some level of cleanup as we get through our inventory reduction efforts in Q4. We are still continuing to run sale and clearance events to rightsize our inventory within the business and expect some margin degradation as a result of those efforts.

So just to be clear, you've all been pretty good about presenting like a real number for EBITDA versus pro forma. What you've given us in applied guidance is a real number versus a pro forma number, correct?

Yes, that is correct.

We have no further questions at this time. This will conclude today's conference. We appreciate your participation. You may now disconnect.