Hello, and welcome to GrowGeneration’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is JP, and I’ll be coordinating your call today. I will now hand the call over to Clay Crumbliss with ICR.

Thank you, and welcome, everyone to the GrowGeneration Fourth Quarter and Full Year 2022 Earnings Results Conference Call. Today’s call is being recorded. With us today are 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 fourth 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’ll 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.

Thank you, Clay. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for your continued support of GrowGen. The last year has been extremely challenging, but I, along with the rest of the executive team, appreciate your continued hard work and dedication to our vision and strategic plan. Regardless of the market challenges throughout the year, and really over the last three years since we entered the pandemic, the team has been steadfast in executing our business model. I commend our entire team for stepping up to every challenge that has come at us over this time period. We were pleased that our full year 2022 net revenue, $278 million, was in line with our previously communicated guidance range. We are also encouraged that our efforts in 2022 to rightsize the business are starting to show in our financial results, and we are optimistic that the work we’re doing is putting GrowGen in a significantly better position going into 2023. Further, for the first time in seven quarters, we believe GrowGen will see sequential revenue growth in Q1 2023 versus Q4 2022. In addition, we believe that gross margin will normalize in the mid- to high-20s, beginning in Q1 of 2023. In 2022, we invested in our stores, product portfolio, supply chain, technology, and other strategic initiatives as part of our long-term strategy to enhance profitability. In the fourth quarter, we added three members to senior management in the hydroponic industry, in the areas of commercial sales, supply chain, and product development. We also have significantly increased our volume of our private label products driven by our Drip Hydro and Char Coir brands. Private label accounted for $26 million for retail and e-commerce sales in the full year 2022, which is around 12% of our overall retail and e-commerce sales, growing 6% year-over-year as a percent of sales. Our team also continued to make advancements in our supply chain through the expansion of our distribution centers and fulfillment hubs, now totaling eight locations, with our newest center in Columbus, Ohio expected to be operational before summer. With that as a backdrop, our day-to-day strategy is generally the same since we last spoke. We remain hyper-focused on controlling costs and generating cash, and we made significant progress in 2022. While some of these efforts have come at the short-term expense of our gross margin, especially in the fourth quarter, we firmly believe these decisions are putting GrowGen in a better place to be stronger and more nimble than ever before. It’s important to reiterate that GrowGen remains on solid financial footing. We have a strong balance sheet, and we don’t anticipate the need for external debt or equity issuance. We ended the 2022 fiscal year with $72 million of cash and cash equivalents and marketable securities and no debt on our balance sheet, representing a sequential increase of $1 million in our net cash position since the end of the third quarter of 2022. This marks the second consecutive quarter that we have grown our cash balance despite the incredibly challenging industry conditions. Now, I’d like to provide a brief overview of some of our key business initiatives throughout 2022, and how we see those going forward in 2023. We recognized the need early last year to focus our organization on cost control, store consolidation, inventory reduction, and cash generation. In 2022, we reduced inventory by $28 million compared to the end of 2021, including a sequential $12 million reduction in the fourth quarter from the end of the third quarter. These inventory reductions have generally occurred at discounted prices, which clearly pressured our gross margin in 2022, but we believe it was the prudent thing to do as we optimized our working capital base and prioritized cash generation and balance sheet preservation. Partially offsetting the negative impact of our gross margin contraction, we made significant progress rightsizing our expense structure in 2022. We made the difficult decision to reduce our payroll base by a total of $12 million throughout 2022. In terms of our store footprint, we made considerable progress eliminating market redundancies and overlaps by closing eight stores in total for 2022. We also continued to expand into markets where we see long-term value, opening five new stores in four new states where we didn’t previously have retail operations. These new locations, including Virginia and New Jersey stores branded as GrowGeneration, Hydroponic and Garden Center, represent an opportunity to provide a broader in-store product assortment that should allow us to increase store traffic and productivity by attracting new customers. Next, we reduced our store count by three stores and ended the year on December 31st with 59 locations in operation. We expect these initiatives in 2022 to continue benefiting our company well into 2023, including cost savings flowing through from store consolidations, reduced payroll expenses, improved shipping costs from declining ocean freight rates, and reduced headwinds from inventory discounting on our margins, all of which will have a positive impact on adjusted EBITDA dollar generation and margin. Going forward, we expect to continue seeking acquisitions in white space markets where we think it makes sense. We’ll also continue product development around our key brands and private label offerings. We’re focused on monetization of our one million square feet of retail space, including merchandising and product education with key partners, and we are laser-focused on the execution of various business transformation initiatives centered around supply chain and enhancing our customer journey. GrowGen is a unique, highly differentiated retailer. We are the leader in a large, fragmented market. Our customers have a passion for our GrowPro lifestyle. GrowGen is more than just a retailer. We are a developer of market-leading brands and private label products. We’re distributors supporting the entire hydroponic growing community, and we are above all a passionate and dedicated partner to our customers. We live our mission and values, and our culture defines our relationships with our customers. We’ll be celebrating our 10th anniversary in a year. As we begin the New Year ahead, we take great pride in our past, and we’re equally excited about our future. Turning to guidance for full year 2023, we expect net revenue in the range of $250 million to $270 million, translating into adjusted EBITDA in the range of a $4 million loss to a $1 million profit. As part of that, in the first quarter of 2023, we expect net revenue in the range of $55 million to $57 million, translating into adjusted EBITDA in the range of a $2 million loss to a $4 million loss.

Thank you, Darren, and good afternoon, everyone. First, I will address our fourth quarter and full year 2022 financial results, and then I will discuss our preliminary outlook for the 2023 fiscal year. Starting with our fourth quarter results, GrowGeneration generated revenue of $54.5 million versus $90.6 million in the fourth quarter of 2021, representing a decline of approximately 40%. Our same-store sales for the fourth quarter 2022 were $34.3 million compared to prior year sales of $71.4 million, representing a 51.9% decline against the comparable year-ago quarter. Our e-commerce revenue declined on a comparable base from $7.7 million to $3 million. Our distribution and other revenue was $13.5 million for the quarter compared to $4.6 million in the year-ago period, representing an improvement of 195%. Gross profit margin was 17.6% for the fourth quarter 2022, down approximately 830 basis points sequentially from the third quarter of 2022. Gross profit dollar generation in the fourth quarter decreased 7.9% from the prior year, which includes the addition of gross profit from acquisitions of HRG, MMI, and St. Louis Hydro in the trailing 12 months. The Company sold over $12 million of overstock and aged inventory in Q4 clearance events that we estimate resulted in a total gross margin degradation of 332 basis points. Further, the Company increased its inventory reserves by over $2 million in the quarter, which had a 379 basis-point impact. The combination of these two strategic initiatives resulted in a one-time margin reduction of 7.1%. Our Q4 strategic initiatives to further rightsize the inventory of the business are largely complete as of December 31, 2022, and better position the Company as we move into 2023. Store operating costs and other operational expenses declined sequentially from the third quarter. Overall, store operating expense declined from $14.5 million in Q1 to $13.8 million in Q2 to $13.6 million in Q3, and finally to $12.8 million in Q4. The savings recognized throughout 2022 were primarily attributed to payroll reductions. We anticipate further cost decreases to continue into 2023, resulting from the execution of store consolidations in the latter half of 2022. Selling, general, and administrative or SG&A costs were $8.6 million in the fourth quarter, of which $1 million was derived from stock-based compensation. This compares to $8.8 million in the third quarter with $1.3 million of stock-based compensation. This represents a 2.3% improvement quarter-over-quarter to SG&A. Depreciation and amortization of intangibles was $4 million in the fourth quarter of 2022 compared to $4.1 million in the year-ago period. Compared to the fourth quarter last year SG&A expense decreased by $2.8 million in the same period of 2022, with overall savings driven from payroll reductions and increased cost controls over a broad range of categories. Income tax in the fourth quarter was a benefit of $248,000 for tax purposes, but with a full valuation allowance, we did not observe a significant income tax provision benefit or expense in the period. Net loss for the fourth quarter was $15 million, or negative $0.25 per share compared to a net loss of $4.1 million, or negative $0.07 per share for the comparable year-ago quarter. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and share-based compensation, was a loss of $10.2 million for the fourth quarter of 2022 compared to a loss of $1.7 million in the fourth quarter of 2021. We estimate this quarter’s adjusted EBITDA loss includes roughly $1 million in expense associated with the closure and consolidation of our Las Vegas, Compton, and Cotati locations, and nearly $4 million associated with the inventory clean-up measures taken in the fourth quarter. These areas of execution were strategic initiatives taken to position the Company for 2023. Cash generated from operations in the quarter was $2.6 million, primarily attributed to the reduction in inventory and additional measures taken to strengthen the balance sheet. Now, I will provide a quick overview of our results for the full year 2022. Net sales were down $144 million for 34%, totaling $278 million compared to $422 million in the full year 2021. Gross profit for the full year 2022 decreased by $48 million to $70.2 million, and gross profit margin was 25.3% in 2022 compared to 28% in the full year 2021. As Darren mentioned earlier, we have taken a number of steps throughout the year to rightsize operating expenses and reduce our selling, general and administrative expenses base by roughly $20.7 million through operational rationalization, workforce reduction, and tighter day-to-day expense controls. Related to the balance sheet, as of December 31, 2022, the Company had total cash, cash equivalents, and marketable securities of $71.9 million. Within working capital, the Company reduced inventory by $28.4 million, partially offset by a $2.6 million increase in high creditworthy accounts receivable. We also invested approximately $9 million for payments associated with technology and distribution investments. On a full year basis, the Company generated $12.5 million in cash from operating activities, primarily driven by the reduction of inventory and prepaid accounts payable. I will now discuss our guidance for the full year 2023. We expect 2023 revenue to be between $250 million and $270 million, and full year adjusted EBITDA to be in the range of a $4 million loss to a positive $1 million profit. Our updated guidance assumes quarter-over-quarter improvements in Q1 of 2023 and further revenue and profitability improvements continuing into the second and third quarters of 2023. The improvement in adjusted EBITDA expectations is primarily driven from the execution of our 2022 reductions to payroll and our eight store closures and our inventory optimization efforts. We expect gross margins to normalize into the mid- to high-20s in the first quarter of 2023. On a comparative basis to the fourth quarter, management expects modest improvements in revenue in Q1 of 2023, which would be the first quarter-over-quarter improvement to revenue since the second quarter of 2021. We expect operating expenses to be controlled and sequentially down in the first quarter as we recognize additional cost improvements from our strategic initiatives. We are positioning the Company and executing our business strategy to focus on cash from operations and EBITDA improvement. As we mentioned earlier, we expect that our headcount reductions are largely complete and the heavy lifting to correct our inventory position was mostly concluded in the last two quarters of 2022.

With that, I will turn the call back over to Darren for closing remarks. Thank you, Greg. Before we open the line for your questions, I want to reiterate, while 2022 was a challenging year for everyone in the cannabis value chain, GrowGen remains focused on the areas of the business that we can control. We continue to make strong gains against our priorities, drive cost control, consolidate stores, reduce inventories, and improve profitability, while preparing to capture the many growth opportunities that lie ahead, all of which we expect to drive incremental benefits in 2023. We remain committed to the expansion of our proprietary and distributed brands. We are very satisfied with our results for our private label products, including Char Coir and Drip Hydro. The addition of MMI strengthens our position to gain indoor vertical cultivation projects within their leading benching and racking systems. Controlled environmental agriculture and sustainable ag are only in the development stage. We believe that more companies will invest in sustainable indoor vertical farms for local production of leafy greens, tomatoes, fruits, and other food products. To close, while we expect a degree of continued uncertainty in 2023 and we are not planning for an imminent turn in the cannabis cycle, we remain nimble and well-prepared for a turnaround when it happens. Thanks to proactive management of the business in 2022, we believe GrowGen is on solid financial footing with a solid balance sheet, healthy liquidity, and a solid cash position. Thank you for your time today, and thank you for your interest in GrowGeneration. We’ll now take your questions.

Thank you. Your first question comes from the line of Mark Smith from Lake Street Capital.

First question is really around inventory. You did a good job getting those levels down, but it sounds like you had to clear some stuff out to kind of get there. Can you just talk about your comfort with inventory levels today? And do you still have any inventory that you think still needs to maybe be cleared out here in 2023?

Hey, Mark. This is Greg. We reduced inventory by $28 million in the year, $22 million in the last two quarters of the year. At this point in time, we’re carrying $77 million in inventory as we concluded the year. We believe that the volume of inventory that we have is appropriate for the business on a forward-looking basis. Our inventory isn’t completely perfect, but we think it’s in a very good position at this point with all of the efforts that we’ve taken, primarily over the last two quarters. We don’t expect any major changes in our inventory volume as we move forward.

Excellent. And then just following up on that, can you talk a little bit about kind of the mix of consumables versus more kind of capital equipment? And Darren at the end, you talked a little bit about we’re maybe not seeing improvement yet in the industry, but are you seeing signs of that? And your guidance for the year, does that include the beginning of more build-outs of kind of new growth facilities?

Yes, Mark, I’ll start from the beginning. Currently, we have significantly reduced our non-consumable inventory in 2022, particularly in lighting, the DE segment, and products used in build-outs. We have ensured that our consumable inventory, which our customers require regularly, remains at a comfortable level. Regarding your second question, we have been at the lower end for the last three to four months, but March marks the first signs of improvement as we are noticing increased bidding for commercial products in the eastern regions and overall stabilization. We have also consolidated several of our stores across the country and feel well-positioned as we enter 2023. In California, we are observing stabilization in cannabis pricing, as reported by our customers, and we are noticing that the supply is beginning to decrease. We are monitoring the approaching outdoor season in April, but we have seen some stabilization in our business.

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

I want to start with my first question, following up on the previous one regarding the overall industry. Darren, you mentioned that we've been experiencing some stability after a prolonged period at the bottom. Considering the factors we've discussed affecting the industry for some time, such as oversupply and slower licensing, do you think it is becoming clearer whether these challenges are more temporary or if there has been a fundamental reset in the growth potential of the industry?

Yes. Brian, my belief is that on a go-forward basis, you’ll see much slower growth in the hydroponic and cannabis industries. I think the hyper growth, the 20% year-over-year compounded growth that people are expecting through the 20s, I don’t believe that to be true any longer. I think what you’re seeing right now is an industry that has tremendous potential. But I do believe that you will see slower growth in this industry. You’ll see tremendous consolidation in this industry. And I do believe that what you’ve seen over the last 20 months there were many reasons for it coming out of COVID. There was a tremendous amount of capital coming into the cannabis industry that has slowed in the last 20 months. And like most industries, in the early stages, you do run into these issues. And I think what you’re seeing right now is inventory is coming down, both on the cannabis side of it, but also more importantly on the hydroponic side of it. There was a tremendous amount of hydroponic equipment that was brought into this market to fuel the build-outs and the feverish build-outs that you’ve seen. And that has slowed to a much more normalized base. And forecasting will become much easier for GrowGen as we build out our distribution centers. So, we believe that you will see growth in this industry, but I think the hyper-growth that people thought, you will not see in the future.

As you evaluate the new markets and observe the progress with licensing following legalization, how would you describe the initial development in those markets compared to what you experienced in places like Michigan or Oklahoma?

You’re observing a much slower recovery in the Virginia markets. It has taken a significant amount of time to get regulatory approvals and to complete property construction. One of the challenges you’re seeing, Brian, is that with the downturn in the Oklahoma, Michigan, and California markets, funding has diminished. This capital shortage has resulted in less construction activity and a lack of the rapid development we witnessed in previous years. What we have now is a much more measured approach to building. I believe this trend will continue in the future, and we’re already seeing it in the stores we’ve launched. Last year, we opened five new stores across four states: Virginia, New Jersey, Missouri, and Mississippi. While we used to see stores become profitable within the first month of opening, that has not been the case recently. We are showing improvements in all our newly opened stores, but they are not on par with the growth we experienced in 2018, 2019, and 2020.

Got it. Regarding your business, you closed several stores. Looking at the current situation, will there be more closures, or is it ready to grow from here? Additionally, the stores that you closed, were those ones you acquired rather than ones GrowGen opened on its own?

That is correct, Brian. On the other side of that, we still do believe that you will see a few more store closures from GrowGen this year, but not anywhere near the pace last year. We’re targeting anywhere from one to four store closures this year. And just so you do know, most of our store closures come when leases are up and we’re not renewing leases. So, the costs have been pretty tame for store closings. And we have kept a good portion of business, but not as much as we would have liked from these store closures.

Your next question comes from the line of Chris Carey from Wells Fargo.

Hey guys. Why do you expect revenue to increase quarter-over-quarter? Can you provide more details on March? You mentioned it earlier. Also, is the acquisition you made significant?

The acquisition that we’ve done in March was not material. They’re very small acquisitions. But we are seeing a little pickup in business in March over the fourth quarter of last year. And we are going into our seasonally strongest period, which is the second and third quarters. And what we’re hearing from our commercial team, our store team, and our customers is that business is starting to pick up and we’re starting to see it in our consumable side of it, and we are starting to see much more quoting on the commercial side of it back east and in new markets.

Okay. So, this is what you’re seeing, not necessarily what you’re projecting, just to confirm?

It’s what we are seeing.

Yes, Chris, and I’ll jump in as well here. One of the key reports that we use on a daily basis is our daily sales report. And we’ve seen revenue pick up across the country in Q1, on a comparative basis in our retail markets. And that’s part of the optimism that we have around the Q1 numbers and an improvement in the first quarter sales in comparison to Q4.

Okay, great. That makes total sense. Just on the daily sales comment that you just made, are you seeing daily sales stabilize and start to pick back up? Is that what you’re kind of referring to with the daily sales on a comparative basis?

Yes, exactly. We’re seeing improvement in Q1 versus last quarter.

Okay. Got it. And then just the final question is, if you could put it all together, why you think this is happening? Is it just because at some point the market has to bottom and stabilize? You highlighted pricing seems to be normalizing, inventory seems to be normalizing. Is it just like, do you have any theories about why it’s happening just in aggregate? That’s it for me.

We are 20 months into a downturn in a market that still holds great potential. This duration is significant for any cycle, and we're beginning to observe improvements in business starting in March and over the past couple of months. Conversations with our thousands of customers indicate that they are noticing price stability and even increases in California's markets. Furthermore, some illegal growers have exited the market, with reports suggesting that up to 15% of the California market has closed. This reduction in the number of growers is likely lowering supply in the cannabis sector. We are seeing similar trends in Michigan as well. Consequently, the businesses that remain are becoming stronger. However, we have yet to see a return of capital to the markets. We have been very cautious about lending to customers, ensuring our balance sheet remains strong. As the industry consolidates, we anticipate significant acquisition activity, and we expect some activity from GrowGen this year, although we do not anticipate any major acquisitions. We will keep everyone, including Wall Street, informed about smaller acquisitions that may occur as we fill in gaps nationwide.

Your next question comes from the line of Eric Des Lauriers from Craig-Hallum Capital Group.

Great. Thank you for taking my questions. Congrats on the strong balance sheet management here, pretty impressive. My question is kind of following up on some of these trends that you’re seeing. And if I’m understanding correctly, you’re seeing sort of continued weakness in the more durable CapEx products in your business, but seeing overall, I guess, consumable stabilization or maybe even quarter over to quarter growth in consumables in Q1. My question is, what, in terms of same-store sales growth, your guidance assumes. I guess mostly with respect to consumables, I mean, are you expecting to see sort of year-over-year growth kind of starting sometime midpoint in the year? I guess, if you could just sort of flesh out what your guidance implies from a same-store sales perspective, and then I guess maybe any color between durables and consumables within that would be great. Thanks.

To start with, Eric, we don’t break down the future of both consumables and non-consumables. Consumable is our everyday business. That’s what we guide to. We also do guide to some non-consumable build-out projects, which we saw very little of in 2022. So, when you look at guidance right now for 2023, it embeds three different divisions of GrowGen. We do believe we will see growth in our online division this year versus last year. We also do believe you’ll see growth in our commercial division year-over-year. And we do believe you’ll see growth in our underlying stores starting in the second quarter of this year. We’re still going against some decent comps out of January out of the first part of last year, which really slows down going into the second quarter of 2022. So, we do believe you’ll see a steady rise in decreasing same-store sales. And we still do hope that you will see a positive same-store sales number from GrowGen going into the latter part of this year. But at this point it’s just too early to forecast that. And if you look at our forecast for 2023, we’re forecasting increased sales going into the second and third quarter off guidance, which you’re seeing at that $55 million to $57 million mark in the first quarter. So, you will see continued increases, both on an EBITDA basis and also on a sales basis going into the second and third quarters.

That leads nicely to my second question. You've mentioned guidance, which suggests a quarter-over-quarter increase in revenues and EBITDA. I'm curious if this trend will carry over from Q3 into Q4, meaning if you're not anticipating the usual Q4 seasonality seen in the past. If that's the case, could you elaborate on why you don't expect that seasonality this year? Lastly, does your guidance factor in any contributions from potential M&A this year?

Yes, Eric. Currently, our guidance does account for the mergers and acquisitions we are pursuing this year. We will also experience a few store closures this year, which we see as a zero-sum situation. If we do make any significant acquisitions, which we are not anticipating at this time, that is not included in our guidance. As for the fourth quarter, it’s too early to provide an accurate forecast. However, we are confident that our same-source sales and overall sales will surpass those of the fourth quarter of 2022. At this moment, it is hard to determine if we will see quarter-over-quarter growth in the fourth quarter compared to the second and third quarters.

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

So, first one for me, I just want to dive a little bit deeper into California. Thanks for some of the remarks that you’ve had, Darren. So, we’ve seen a number of active cultivators kind of come down meaningfully as they opted not to renew over the past six months or so, down about 1,200 about or so, just wanted to ask if you had any insight in terms of the outlook on that. It looks like there are a lot more renewals coming up in the next six months. So, you talked about some stabilization of pricing in the state. Do you think there could still be some more trimming of the number of active cultivation licenses? Do you think that has stabilized as people are seeing some more stabilization within the pricing? Thank you.

It's a challenging question, Aaron. Much of it relates to financing and the current state of the balance sheets of some California growers. California remains the center of the cannabis industry. The balance between legal and illegal markets is crucial right now. Some larger companies that aren't profitable in California are choosing to focus on long-term outlooks instead of grappling with current tough margins and sales conditions. However, some of our California stores are performing well, like our downtown LA store, which is experiencing growth, and our Santa Rosa store is also starting to see growth again. There are significant challenges in California's outdoor markets, and we're closely monitoring the situation as we head into spring this year. We'll make further decisions after observing the performance of our stores, particularly those that are heavily influenced by the second and third quarters.

And then second question for me is just on private label, in case I missed it. Could you give me a target you might have for this year in terms of private label and then how that might impact you guys reaching the higher, low end of the mid- to high-20s gross margin guidance?

As we said earlier, our private label penetration in our stores online was up from 6% to 12% of sales this year. And we believe that will continue into 2023. One of the interesting parts, we launched Drip Hydro in the summer of 2022, so you’ll have a full year of growth on Drip Hydro, which is, we believe, one of the fastest growing, if not the fastest growing nutrient line in the country right now. So, we have extremely high hopes for that. We are also doing line extensions on Drip and Power Si. So, you’ll see some new products coming out of these brands that we’re very excited about. And the same thing with Char Coir. The biggest issue we had with Char Coir, a couple of years ago was really pricing coming in from indie on freight and we’re seeing freight pricing come down probably 70% in the last year. So, Char Coir, which we believe is the premium brand in the market right now on the coco side, is becoming much more competitive on pricing. And we’re starting to see a tremendous ramp in our Char Coir brand right now. And we are coming out with new products continually right now. And we just brought in an extremely talented individual on the R&D side, and that’s going to help our private label penetration in ‘23 in the future. So, again, we do expect a nice bump, the number we’re not sure right now, but we will keep you posted on a quarter-over-quarter basis.

Your next question comes from the line of Scott Fortune from ROTH MKM.

I appreciate the insights on the overall pricing in the industry, but could you elaborate a bit more on your capability to maintain your position as a price leader in your markets? It would also be helpful to hear about the pricing trends related to input costs and the current competitive landscape. There seems to be significant pressure from competitors, which could impact pricing in your stores.

I think what you're observing is related to our core business in the cannabis sector. There has been a significant oversupply of products, and with the considerable slowdown in our industry, GrowGeneration's same-store sales declined by 51% last year. It’s noteworthy that despite this drop, we managed to reduce inventory by $28 million. We effectively navigated inventory SKU rationalization, which is evident across the country. However, we are also witnessing numerous store closures within the cannabis market. Typically, when industries reach a low point, consolidation occurs, and we are beginning to observe that trend now. This year, pricing at GrowGen has largely stabilized. If we exclude the significant discounts applied during SKU rationalization, certain SKUs were reduced, particularly on the non-consumable side, where GrowGen and other companies had to adjust inventory levels amid challenging shipping conditions from China during COVID. Similar comments were mentioned by Bill Toler at Hydrofarm and also by Hawthorne. As we continue to manage our inventory, we anticipate that pricing will stabilize. Moreover, at GrowGen, our private label products and some of our higher margin offerings have been performing well, effectively offsetting the overall decline in margins from our sale products as we reduced inventory.

I appreciate that. Darren, you’ve experienced several cycles here, and we understand the challenges on the CapEx equipment side, which has clearly seen a decline with limited capital or production capacity being added. Beyond new states, this trend will persist, but can you help us understand when there will be a refresh cycle? Many operators are looking to enhance efficiency in their production processes. How do you view the CapEx spending, and what is the potential for an aftermarket for equipment like lights where you might see growth? Please walk us through this, even though the refresh cycle may not play a significant role at this moment.

We anticipate a refresh cycle approaching, possibly not this year but likely next year. Many facilities are still utilizing double-ended bulbs and fixtures rather than LEDs. It’s largely a capital issue; Wall Street has pulled back from the cannabis sector, but I believe we will see a revival. We’re even noticing discussions about the possibility of the Toronto Exchange in Canada being reopened to facilitate more liquidity and capital for these companies. There are numerous uncertainties involved. What we do know from our 2022 sales data is that the most significant decline occurred in the capital equipment segment, and we've been quite open about that. We feel very confident about the other part of our business, which has higher margins. With our private label products launching, along with Drip Hydro, Char Coir, and other brands, we believe our margin profile will be favorable moving forward. We have intentionally avoided selling used equipment from GrowGen and staying away from lower-quality items. This is not part of our current business model, as it seems more aligned with the lower-cost illegal side. We’re not seeing this approach being adopted by legal growers, so while it is a promising marketplace, we will not be engaging in it at this time.

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