GrowGeneration Corp. Q2 FY2023 Earnings Call

Hello, and welcome to GrowGeneration's Second Quarter 2023 Earnings Conference Call. My name is Chris, I'll be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts and with instructions to be given at that time. I'll now hand the call over to Clay Crumbliss with ICR. Clay, please go ahead.

Good afternoon and welcome, everyone to the GrowGeneration second quarter 2023 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 second quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration's website at ir.growgeneration.com. 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 the 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. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please reenter the queue and we will take them as time allows. Now, I will 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 second quarter 2023 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for their continued support of GrowGen. I'm grateful to our entire team for stepping up to every challenge and for being steadfast in executing our company's strategy. I am pleased with GrowGen's second quarter results. I'm happy to discuss the great progress we have made against some of our key initiatives to drive future growth and profitability, including the official launch of our new ERP system on July 1st. In the second quarter of 2023, we generated net revenue of $63.9 million, which represents a 12% sequential improvement over the first quarter of 2023, consistent with the expectations we communicated earlier this year. Recall that historically the second quarter is the strongest quarter of the year due to seasonality of the planting and growing cycle. I'm especially pleased that we generated positive adjusted EBITDA of $856,000 in the quarter, which represents a significant improvement versus the prior quarter's adjusted EBITDA loss of $1.8 million. As we've detailed on previous calls, we made significant progress rightsizing our cost structure over the last year, and we're encouraged that those efforts are now bearing tangible results in our P&L. Additionally, we ended the second quarter with $71 million of cash, cash equivalents, and marketable securities, no debt and $77 million of inventory on our balance sheet. And year-to-date, we have generated more than $7 million of operating cash flow. All this to say, despite the ongoing challenges in our industry, GrowGen remains in a strong financial position to continue investing for growth, while putting profitability at the forefront. I'll reiterate that we are happy with our second quarter results that represent the progress we've been striving to achieve. However, the broader cannabis industry continues to face headwinds, and GrowGen is not immune to these issues. With capital availability and investment at an all-time low, and interest rates reaching their highest points since 2007, growers simply aren't building out capacity, which means demand for durable products has slowed beyond what we expected. In addition, the federal legislative agenda has not moved in our favor and, in fact, seems to be getting less favorable. On a positive note, we are seeing continued market acceptance of our private label brand strategy and growth in our consumable products, including our recently launched nutrient and additives line, Drip Hydro and our cocoa line of products, Char Coir. What remains true is that we believe we've made significant progress, transforming our business to be more nimble, efficient and better positioned for profitable growth in 2023 and beyond. And we're certainly not backing away from the priorities we outlined last quarter. We're singularly focused on managing our business despite what's happening in the cannabis industry that may continue to weigh on the balance of the year. While we maintain our cautious optimism about the next 12 months, it's fair to say we are now more on the cautious side about the back half of the year than we were last time we spoke. That said, investing for growth and searching out opportunities is what we're coming to work for every day. As we discussed last quarter, what that means in practical terms is we will continue building and growing our private label brand portfolio and expanding our distribution channels. We remain on the acquisition front with multiple acquisitions in the second quarter, and most importantly, we are putting profitability at the forefront, focusing on margin expansion and profitable growth. Briefly on each of these. First, we remain committed to the expansion of our proprietary and distributed brands, and we are very satisfied with the results of our private label products. Private label accounted for $7.6 million of retail and e-commerce sales in the second quarter of 2023, which is around 15% of our overall retail and e-commerce sales, up from 10.7% in the second quarter of 2022. In addition, GrowGen is currently working on an expansion initiative that will enhance the shopping experience for all garden enthusiasts. In 2024, we expect to add dedicated gardening sections in select retail stores to attract the home gardening consumer. This development will feature traditional gardening products alongside our private label brands. Second, GrowGen is actively seeking accretive acquisitions where we believe they are complementary to our current business. We believe we're one of the few companies that is well-positioned and well-capitalized enough to take advantage of the attractive valuations in the hydroponics and garden center space. Our track record of execution with prudent balance sheet management and controlling expenses allows us the flexibility. So for this year, we acquired a store in Traverse, Michigan in January. We entered our 17th state with the acquisition of a store in Bozeman, Montana in early April. We acquired a retail store in Jackson, Michigan, in April and added our 18th state with the acquisition of two retail locations in Alaska and Maine. Third, we are prioritizing profitable growth, which we believe we will attain through our continued efforts to expand revenue and execute our margin expansion strategies. We are constantly analyzing the business for additional optimization and cost-cutting opportunities and expect to continue benefits to flow through our margins through the remainder of 2023 and 2024. As part of these efforts, we are constantly assessing the performance of our stores with respect to redundancies in the footprint. Separately and importantly, I'm pleased to announce that we have fully rolled out and implemented our new ERP system with Oracle, NetSuite and point-of-sale and warehouse management systems with Manhattan Associates during the second quarter. This represents a tremendous milestone for GrowGen and our supply chain management capabilities, and will directly benefit our company in terms of better freight and logistic rates, optimize order timing and filling and ultimately improve customer service and relationships. Like many other ERP rollouts, ours has not been without its challenges, and it will take time before benefits fully materialize, but we are confident in our internal team and their ability to manage through the transition. Encouragingly, most of the issues we've encountered have been relatively minor, and we are pleased with the progress that has been made to date. We are continuing to work through solutions to some of the more disruptive situations that we expect to have some impact on our third quarter results. This early in the quarter, we are not prepared to quantify those potential impacts if any, on today's call. Despite that, we are happy where we are in the process, and we look forward to updating you on our progress during our third quarter call in November. Turning to guidance for full year 2023. We are updating our guidance to reflect our view of the broader industry today, given our expectation of softer-than-expected demand in the third and fourth quarters of this year. We now expect net revenue in the range of $220 million to $225 million and adjusted EBITDA loss in the range of minus $4 million to minus $6 million.

Thank you, Darren, and good afternoon, everyone. First, I will address our second quarter 2023 financial results and then I will discuss our updated full year 2023 guidance. For the second quarter, GrowGeneration generated revenue of $63.9 million versus $71 million in the second quarter of 2022, representing a decline of approximately 10.1%. Our same-store sales for the second quarter of 2023 were $44.7 million compared to prior year sales of $52.6 million, representing a 15.1% decline against the comparable year-ago quarter. The decline in same-store sales in the second quarter represents a significant sequential improvement over prior quarters. Specifically, we observed a 21.5% sequential improvement in the second quarter compared to the first quarter year-over-year same-store sales percentage. Our e-commerce revenue showed a 9 basis point increase year-over-year and remains normalized at $3.7 million. Our distribution and other revenue was $13.3 million for the quarter compared to $12 million in the year-ago period, representing an improvement of 10%. Gross profit margin was 26.8% for the second quarter of 2023, down approximately 185 basis points from the first quarter of 2023. The decrease in gross margin in the second quarter of 2023 was largely attributed to a 133 basis point impact from shrink and obsolescence expense, primarily driven by the restructuring of our distribution facilities, as well as a 32 basis point impact from margin pressure on lighting, primarily driven from vendor price reductions. The restructuring was a one-time event and related to the closure of our Ogden distribution facility and set-up costs associated with the pre-opening of our Columbus, Ohio distribution facility. Store operating costs and other operational expenses declined from $13.8 million in the second quarter of 2022 to $12.3 million in the second quarter of 2023, representing a 10.9% reduction. The savings year-over-year were primarily attributed to the rationalization of store count as well as payroll reductions. We believe that the expense reductions to date are sustainable, and we expect to execute upon further reductions in the back half of 2023. Selling, general, and administrative or SG&A costs were $7.5 million in the second quarter, of which $947,000 was derived from stock-based compensation. This compares to $6.8 million in the first quarter with $567 million of stock-based compensation. This represents a 10% increase quarter-over-quarter to SG&A, primarily driven by share-based compensation. Compared to the second quarter last year, SG&A expense decreased by $2.3 million in 2023, with overall savings driven from payroll reductions and increased cost control over a broad range of categories. Depreciation and amortization of intangibles was $3.8 million in the second quarter of 2023 compared to $4.8 million in the year-ago period. In the second quarter of 2023, the company did not recognize an income tax benefit or expense. GrowGeneration is using a 0% tax rate as its deferred tax assets are not expected to be realizable. As such, the company has established a full valuation allowance, primarily resulting from the 2022 impairment of goodwill. The net loss for the second quarter was $5.7 million or negative $0.09 per share compared to a net loss of $136.4 million or negative $2.24 per share in the year-ago period. Compared to the first quarter of 2023, the company improved net income from a loss of $6.1 million to a net loss of $5.7 million. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, restructuring charges, and share-based compensation was an $856,000 profit for the second quarter of 2023 compared to a loss of $3 million in the second quarter of 2022. Compared to the first quarter of 2023, the company improved adjusted EBITDA from a loss of $1.8 million to an adjusted EBITDA profit of $856,000, primarily resulting from the increased revenue as well as sustainable reductions in expense. In the second quarter, the company included $1.2 million of expenses related to store consolidations and restructuring costs of establishing a distribution center in Columbus, Ohio. Related to the balance sheet, as of June 30, 2023, the company had total cash, cash equivalents and marketable securities of $70.6 million, which was a decrease of $1.3 million to the first quarter of 2023. The company leveraged $3.2 million of cash in the second quarter for investment in acquisitions. From a year-over-year perspective, cash and cash equivalents increased by $5 million mainly due to inventory rationalization measures and other strategic initiatives. Within working capital, the company executed on quarter-over-quarter improvements within accounts receivable, prepaid and accounts payable from a cash flow perspective. As such, the company generated positive cash from operations of $3.9 million in the quarter. In the second quarter, the company increased inventory by approximately $1.1 million compared to the first quarter. The increase in inventory position was largely due to stocking orders of a more seasonally active second quarter. Further, with the rollout of the new ERP on July 1, 2023, the company increased inventory to hedge potential risk on a short-term basis with regards to change management of new technology. As we contemplate the back half of 2023, the company will aim to reduce its overall inventory position, while ensuring that we continue to meet the procurement needs of our customers. Now moving to our full year 2023 outlook. As Darren mentioned, we are changing our previously communicated guidance with full year 2023 revenue to be between $220 million and $225 million, and full year adjusted EBITDA loss to be in the range of minus $4 million to minus $6 million. While we are pleased with our second quarter results, we have not yet seen the industry improvements in the third quarter to date that we initially expected. Within our second quarter results, we observed continued stabilization in our expense structure and believe that we achieved sufficient alignment on cost of sales. As we contemplate the back half of 2023 and the lower sales demand, we expect to execute on further opportunities for cost savings. As Darren mentioned, we expect continued industry headwinds in the latter half of 2023 and are cautiously forecasting revenue and adjusted EBITDA to slow sequentially through the balance of the year compared to our second quarter results. That said, we remain confident in our ability to navigate the industry and will continue to stay focused on managing the balance sheet and controlling costs in our efforts to return the business to profitability, while driving long-term shareholder value, positioning the business for long-term profitability continues to be a top priority in 2023. Our approach to capital allocation remains focused on a disciplined approach to return on invested capital. We completed three M&A transactions at desirable valuations in the second quarter, and we'll continue to execute upon the right opportunities to sustainably grow our business. We are investing in transformational technology that will help propel our company through future business cycles. Lastly, we continue to invest capital in our development of private label products and initiatives that expand our value proposition to a broader base of customers. To close, I'll reiterate that our daily mandate is executing our business strategy with a sharp focus on long-term profitability and shareholder value.

Thank you, Greg. Before we open the line for your questions, I want to reiterate that GrowGen is on solid financial footing with a strong balance sheet, healthy liquidity, and a solid cash position. We continue to manage our business prudently through the current industry landscape with an emphasis on sustainable growth, margin expansion and profitability. We are encouraged by our continued progress and remain laser-focused on controlling what we can control and ultimately emerge as a stronger, nimbler and more profitable company. Thank you for your time today and thank you for your interest in GrowGeneration. We will now take your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Aaron Grey, Alliance Global Partners. Aaron, please go ahead.

Hi, good evening, and thank you very much for the questions. First one for me, I want to talk about the guidance as it relates to maybe the embedded gross margin expectations. So you talked about for this quarter, 130 basis points from the shrinkage restructuring. So I imagine that's more of a one-time event. So just how best to think about gross margin in the back half? You get that 130 back, that lighting reduction of 32 basis points. Is that going to remain within that? So just any of the gross margin expectations have the back half embedded in the guidance would be very helpful? Thank you.

Greg, do you want to take that?

Yeah. So, hey, Aaron, as far as the back half of 2023, we're anticipating gross margin to normalize in the mid- to upper 20s. And what does that mean for our business generally? We're looking at a gross margin profile in that 27%, 28% range. And we're continuing to focus on private label penetration as a long-term strategy to continue to expand our gross profit margin on a long-term perspective.

Yes. Aaron, with that, what we are seeing and what we saw in the second quarter is tremendous discounting coming out of some of the vendors in the industry to move inventory. And with that, we've taken some one-time lumps on certain products that we're holding in inventory. And we do believe that will alleviate through the back half of the year. But on a normalized basis, we still do believe that you will see margins normalizing in the high 20s. And we do believe when this all shakes out, you will see margins that GrowGen in the low 30s, but certainly not in the back half of this year?

Thanks. I really appreciate that detail. And then going more towards the top line lowering the back half expectations like 2Q, it sounds like it came roughly in line with what you were expecting and certainly Wall Street was. So looking towards the back half and what you're seeing, are you seeing just more of a shakeout maybe within the cultivators and you might have been expecting less managers is just same clients, but then they're buying less? Maybe some more color in terms of what's driving that and what you're seeing out there and then whether or not you think that might be protracted being more of a shakeout or if it's just the current customer base buying less and maybe it rebounds more in 2024. So more of what you're seeing in terms of that outlook would be appreciated. Thank you.

Currently, we are not observing an increase in capital expenditures as most cultivators are focusing on managing their finances and waiting for the industry downturn to pass. Many multi-state and single-state operators have indicated they are not expanding unless absolutely necessary. The prevailing strategy seems to be to wait and see. There is a slow adoption of new states entering the market, and many cultivators are satisfied with their current standing and are not looking to expand their cultivation capacity. While there is some investment in dispensaries, cultivation expansion is not a priority at this time. The industry could benefit from initiatives like the SAFE Act or legalization to provide much-needed support. Feedback from cultivators and larger operators highlights a lack of incoming capital. This trend is evident from various perspectives, and it’s clear that the industry is in need of investment. A significant number of facilities were established in 2020 and 2021, and currently, many operators are focusing on optimizing these existing facilities. Most advancements in lighting and modifications occurred during that time frame. Although we anticipate a refresh cycle in the coming years for the purchased products, it will take time for this to materialize. Our business showed a 12% increase quarter-over-quarter, which is encouraging. However, we do not see much excitement from our customers about building at this moment. Nevertheless, they continue to manage their cultivation facilities and purchase products from us regularly.

Really appreciate that color. I’ll go back in the queue.

Thank you. Your next question comes from Brian Nagel, Oppenheimer. Brian, please go ahead.

Hi, good afternoon.

Good morning, Brian.

To further address your question, Darren, while we've discussed the effects of our partners and the absence of aggressive infrastructure development, as you evaluate the landscape, do you notice any differing trends in states that have recently legalized compared to others, or is this observation consistent throughout?

I think what we're seeing is a much slower trend in newly legalized states, this late in the game, there are plenty of individuals that are still buying from the illegal markets. That's what they've done their whole lives. So it's just taking time to convert them over to the legal markets. But you're also seeing a lack of capital. Wall Street has not raised money for any of the multi-state operators recently, what you're starting to do seeing sale leasebacks here and there. But you're hearing it from the whole group. Everyone's optimizing their balance sheets and waiting it out and that's not necessarily bad for GrowGen. And again, we had a profitable quarter. We were up 12% quarter-over-quarter. And we've made tremendous strides in our private label brands, and we still do believe that you will see from GrowGen next year is us getting into the gardening space. We attended our first gardening show a few weeks ago, and we had tremendous interest in GrowGen products. We believe a lot of the products that we're selling into the cannabis space are changeable into gardening. And through customer segmentation and just what we're hearing and seeing from speaking with stores out there, that we believe the distribution centers that we're setting up right now, the leading ERP system that we just set up will give us the ability to sell GrowGen products into thousands of independent garden stores around the country.

And then my second question, you mentioned you talked more about the acquisitions here. So just given the ongoing struggles of the sector, are you seeing more acquisition opportunities emerge? And then I guess related to that, is the pricing for these targets becoming more advantageous for you?

The answer to that is yes and yes, Brian. But on the other side of it right now, we certainly are taking a cautious stance in a lot of ways, and we will only buy best-of-breed right now. So we've turned down a lot of acquisitions in the last couple of months. We're happy with our portfolio around the country right now. There still are some states that GrowGen needs to be in. We'd like to be in Maryland. We'd like to be in Ohio right now. We'd like to be in New York. So you will see stores in those states. But we don't believe right now that we need to go much deeper in the states that we're in.

I appreciate the color. Thanks, Darren.

You’re welcome.

Thank you. Your next question comes from Andrew Carter, Stifel. Andrew, please go ahead.

Thank you. Good evening. I wanted to ask about the guidance for the second half of the year, which appears to be flat compared to the first half. The store base was 64% at the end of the quarter, if I heard that correctly. Are you closing more stores, or are the new stores being built in line with your projections? What is the store closure target for the second half?

No, I'll start with the stores that we purchased this year, Andrew. They are in line with our targets and performing well. We have no issues with any of the purchases made this year. As mentioned in our script and press release, we will be closing some more stores. With the distribution system we've built in our new ERP system, there are certain stores that are close to others. Given the current state of the industry, we believe there is room for optimization around GrowGen and costs, and we will be working on cost structures over the next six months.

I would like to ask about the discounting you mentioned, particularly in lighting. How much inventory do you have that isn’t selling well, and has that been addressed? Is the discounting limited to lighting, or are you observing it in other product categories as well?

In the second quarter, it was mostly lighting that was affected. We had inventory from major vendors who discontinued certain models and reduced prices by up to 80% on some of those models. GrowGen was holding this inventory, which also lowered prices across the industry during those sales. Most of that inventory has now been sold, so we don't expect this issue to persist. We faced some challenges in the second quarter as a result. There is some sporadic discounting happening and stores closing across the country, indicating that there's always a challenge to address. However, our private label brands are doing well, accounting for 15% of sales in our stores, not including our distribution channels. We are selling into 500 stores nationwide. We believe that as we continue to introduce top-quality products, both margins and sales will improve. We are navigating a highly challenging time in this industry, and our team has been exceptional in handling these difficulties.

Thanks. I'll pass it on.

Thank you. Your next question comes from Eric Des Lauriers, Craig-Hallum Capital Group. Eric, please go ahead.

Thank you for taking my questions. My first question relates to the guidance, which appears to be primarily influenced by lower-than-expected durable sales. I’m curious about the trend in consumable sales so far this year and what is reflected in the guidance. You mentioned that private label sales, which are mainly in the consumable category, are showing some strength. Could you provide some insight into the outlook for the second half of the year, particularly in terms of durables versus consumables? Thank you.

Greg, do you want to try to unpack that for us?

Yes. Yes. So, Eric, for the back half of the year, we're looking at total revenue of somewhere in the range of $100 million to $105 million. We traditionally see more strength in the third quarter, of course, in the fourth. In terms of what does that mean for CapEx or consumables? And what we've been seeing from a trending perspective over the last several quarters is a mix of about 70/30 even as high as 75/25 on consumables versus CapEx. And like Darren alluded to earlier, we're just not seeing the build activity that we expected into many of the newer states that have come online recently. So, we're hitting the brakes a little bit on expectations in the back half and focusing on driving profitability from the base of revenue that we expect now in the back half. So, hopefully, that helps answer the question.

Could you help us understand how the current 70/30 consumable to durable split has changed since the peak periods of 2021 and 2022? I'm curious about where you think durable sales might stabilize. Is it fair to say that consumable sales are likely to keep growing, and that the decline in durables is more than offsetting this growth? Eventually, do you foresee durables reaching a bottom and allowing consumables to drive growth again? Is that the right way to look at it, or is there anything else you would like to add?

Yes, I can address that, Greg. The consumable aspect of our business has always been the stronger and more consistent part. In contrast, the durable sector often involves one-time sales with lower margins. At GrowGen, we plan to keep developing our consumable brands, which we believe can penetrate other areas of the gardening industry. That’s what truly excites us right now. We think the 70/30 or 75/25 ratio we see currently may experience fluctuations in certain quarters, especially on the durable side, but the overall trend may decline as market saturation occurs. This largely depends on the continued growth of the industry. A few years back, forecasts projected the legal market would reach $100 billion by 2030, yet currently, it's still below $30 billion, indicating a slowdown. The extent to which our durable business will grow relies significantly on the cultivator sector. However, we are confident that our consumable segment continues to cover our expenses. During the peak, the split was probably around 60-40, and now it seems to be closer to 75-25. We anticipate refresh cycles will emerge, resulting in future strengths in certain areas.

Okay. Great. That's very helpful. But it sounds like this 70-30, 75-25 is kind of sustainable for the status quo, which is good to hear. My last question is just on how to think about OpEx in the second half of the year. Obviously, there was some commentary on continued rationalize expenses and more store closings. But I just wanted to see if perhaps there will be any impact from the ERP implementation. I may have missed a comment there. So just wondering, if you could kind of flush out the OpEx implication for the second half of the year? Thanks.

Yes. Eric, I think what you saw from us in the second quarter is we took down total expense, $600,000 compared to the first quarter. So we did see some improvements in the second quarter itself. And we believe that we'll continue to see expense improvements, both in SG&A and operating expense in the back half of the year. We're continuing to execute on store consolidations, so where we'll see improvements directly in operating expense. And we have some improvements in SG&A that we expect as well in Q3 and Q4. So you'll see continued improvement from us from a cost perspective as we get through the remainder of the year. And that's important to us as we look at profitability against a lower base or aiming for that metric against a lower base.

Good afternoon, and thank you for your questions. I would like to follow up on some of your major markets, specifically California and Michigan. Certainly, we anticipate challenges across the board in the second half of the year. Could you provide insights into those states, particularly in relation to our greater exposure, and discuss the expected turnaround in California and how everything fits together?

Yes, when we examine California, we observe that Northern California is currently stronger than Southern California, despite the growth of our store in downtown L.A. Areas such as the coast and Temecula, including Anza and Lake Elsinore, are experiencing significant weakness. It appears that the situation is inconsistent, particularly among outdoor growers, although our Santa Rosa store is performing well. Overall, while we see some strength, we also note weaknesses within the state, and we anticipate closing an additional two to three stores in California during the third and fourth quarters, particularly in the San Diego area. The performance tends to vary significantly depending on customer preferences and comfort levels regarding growth locations. Some historically strong areas in California have declined, especially concerning outdoor cultivation. In Michigan, our business remains steady; we are not witnessing growth, but there is no additional decline either. The business back east continues to flow steadily. As for our same-store sales, they were down 15% in the second quarter, an improvement compared to a 37% drop in the first quarter and a decline of around 50% a year ago. We are approaching breakeven for same-store sales with a slight uptick, although it is less than we had hoped for. We expected a stronger recovery in the third and fourth quarters. One reason for our revised outlook is that our team, equipped with over 600 employees, is actively engaging with cultivators and not seeing an influx of new projects on the construction side. Nevertheless, it’s worth noting that customers are still purchasing soils and new seeds consistently. We have about 75,000 customers visiting GrowGen each month.

Got it. I appreciate the color there. And then just real quick, obviously, one of your peers or supplier or you call them as mentioned in quarterly earnings, maybe it's time for the hydroponic market to kind of start getting more combinations together strategically, I know you can't really talk about it specifically, but how are you looking at the competitive or kind of the partnership opportunity in the hydroponic market kind of going forward here overall?

We built this business from zero revenues in 2014 to $30 million in 2018. Our balance sheet is the strongest in the industry, providing us with significant flexibility to expand our business model. We are very enthusiastic about introducing our products into the home and garden sector. At our first Garden Show, we received considerable interest from independent garden retailers, which is exciting. We are launching top-quality products to the market. There's no need for GrowGen to consolidate, but we will always consider what is best for our shareholders. We have developed a solid business with a newly built ERP system that took us two years and significant investment. Our distribution network is in place, allowing us to offer leading products across various markets, from cannabis to gardening. Currently, there is a gap in the market for an independent gardening chain that possesses the expertise of GrowGen.

Got it. I appreciate the color. Thanks, Darren.

Thank you. Your next question comes from Mark Smith, Lake Street Capital Markets. Mark, please go ahead.

Hi, guys. My question is really just first off around the comfort with the current inventory. You talked about some tough weakness with Lighting? Is there anything out there that you've got an inventory that you're a little nervous about, or how do you guys feel about it today?

Yes, Mark…

Go ahead, Greg. I'm sorry.

Yes, Mark, I think when you look at our inventory, we ramped up inventory slightly in the quarter, largely due to some risk associated with the ERP launch. I think the ERP launch from a practical standpoint for us went pretty well at the beginning of July here. So we're working on bringing inventory back down a bit in the second half now that we're comfortable with kind of where we're at on that initiative. In terms of our inventory itself, we look at it from an obsolescence lower cost of market, overstock position frequently every single quarter at a minimum. So we feel good about our reserves and how we look at our inventory. But we're certainly looking to make some incremental improvements through the back half of the year, particularly as it relates to the updated sales forecast that we have. Hopefully, that helps.

That's helpful. Other question is just as we think about the store count and kind of big picture here, Darren, it sounds like a couple of more closures coming probably in some of the more mature bigger states for you. Can you talk two things, which states you really like? I think you mentioned New York, Ohio, where you really want to expand. And then also, as you look at peers, you'd mentioned some peers going out of business were hurt just as they kind of liquidate their inventory. Does that present a good long-term opportunity as you move into the market somebody else kind of goes out of business and then it gives you opportunity to really take share over time? Maybe talk about where you're seeing opportunities, whether it's from closures from peers or states where you really want to expand?

It works both ways. For instance, when we entered the Missouri market, we established a store in St. Louis. Before we opened, a competitor went out of business, allowing us to purchase their inventory and hire their staff for our GrowGen store. This approach provides a significant advantage compared to gradually building a store from scratch, especially if you can acquire an existing location that aligns with your strategy. We actively consider opportunities like this, even looking at stores nearby for their inventory and customer database. The industry can be unpredictable; many customers still prefer shopping at their longtime hydro product sources where they have established connections. Therefore, we are cautious and have declined several acquisitions that didn't fit our strategy. We believe that with our distribution and GrowGen private label products, we have strong customer relationships that we prefer not to compete against at this time. We evaluate everything carefully, prioritizing what is best for our company. Currently, we are not in a hurry to open a large number of stores. That urgency was present a few years ago when the industry was thriving. Now, we are focused on managing our operations, balance sheet, private label projects, and distribution, which means we will be adding stores at a much slower pace than anticipated. We are waiting to see how the industry evolves while concentrating on enhancing our distribution and introducing private label products in additional locations.

Excellent. Thank you.

Thank you. Your next question comes from Glenn Mattson, Ladenburg. Glenn, please go ahead.

Yes. So private label, I saw 15%. I know that's kind of like flat line from last quarter. I think last quarter was around that same level, up big year-over-year. Can you just talk about what do you do to push that a little higher over the medium term? You've talked about it a little bit, but just some detail maybe on like new product innovation. I mean, you talked about the gardening space that's interesting, but I imagine it's going to take some time to build progress there? And where you touched on that also in the gardening space, could you hit on what kind of investment you need to make to go after that space given that there's other incumbents and all that kind of thing? Thanks.

Good question, Glenn. We have many new products launching with our existing brands, including line extensions for our Drip Hydro and Char Coir brands. We are committed to innovation, and we expect to introduce another line extension soon in the powdered side of our liquid brands. Private label has been growing, starting from nothing a couple of years ago, though we may experience some stagnation in certain quarters as we introduce new products. We are pleased with this progress. Regarding the gardening sector, Glenn, it's a work in progress, and we are developing a plan that we will share with Wall Street likely in the fourth quarter during an event in the second quarter of next year.

Okay. And any other comments you can make on the top line in terms of seasonality in the back half? Because I'm just going back historically like in 2022, which was not necessarily a banner year, it was flat Q2 to Q3 2021, which is a different environment. Obviously, it was down maybe 10% or something Q2 to Q3. Is that Obviously, Q4 is the weakest, but can you just give us any sense of the magnitude from one quarter to the next?

In previous years, we added stores in the second and third quarters, which boosted sales towards the end of the year. The second quarter is typically the planting season, and the third quarter is the harvest season for outdoor sales. As a result, the strongest part of the season generally occurs in the second quarter, although the third quarter still remains robust. We are currently evaluating our ERP system, as the rollout has presented some challenges. There has been some sales loss associated with this, but we believe it is progressing positively. However, we are not seeing the capital expenditure growth we anticipated in the third quarter, which is still early. Consequently, we thought it was wise to adjust our projections downward. We certainly hope to exceed these projections, but as it stands, the third quarter seems to be slower compared to the second, and the fourth quarter is typically the slowest of the year.

Okay. Great. Thanks.

Great. Thank you for joining our second quarter earnings call today, and thank you for your interest in GrowGeneration. That concludes the call, and we'll speak to you again in November. You may disconnect.

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