Hello, and welcome to GrowGeneration's First Quarter 2024 Earnings Conference Call. My name is Joanna, I will be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. I'll now hand the call over to John Mills with ICR. Please go ahead.

Thank you for joining us for GrowGeneration's First Quarter 2024 Earnings Results Conference Call. This call is being recorded. We have with us today Darren Lampert, Co-Founder and CEO, and Greg Sanders, CFO of GrowGen Corporation. You should have the company’s first quarter earnings press release, which was issued after the market closed today, available in the Investor Relations section of our website. Some comments during this call will include forward-looking statements, which are protected under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations and beliefs regarding future events and are subject to various risks and uncertainties that could lead actual results to differ significantly from those described. For more details on the risks that could impact actual results, please refer to today’s press release and other SEC filings. During this call, we will also discuss certain non-GAAP financial measures to evaluate our business performance. You can find our SEC filings and the earnings press release, which includes reconciliations of non-GAAP to GAAP measures, on our website. Now I will hand the call over to our Founder and CEO, Darren Lampert. Darren?

Thanks, John, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 financial results. As always, I want to express my gratitude to each one of our employees across GrowGeneration for their dedication and hard work. Your commitment is fundamental and the backbone of our success. I am pleased to announce that our first quarter results are in line with our expectations with revenue of $47.9 million and adjusted EBITDA of a $2.9 million loss. Encouragingly, our retail stores in isolation were positive on a same-store sales comp basis in the first quarter, which represents the first time we've seen a positive same-store sales comp for retail stores in nine quarters. This indicates the stabilization of sales, affirming the effectiveness of our strategic adjustments over the past two years. Our proprietary brand sales also continued to grow, supported by sequential gross margin improvement from fourth quarter 2023. Lastly, through our continued focus on cost roles, we have achieved the lowest total expense base that the company has reported in three years. Based on this quarter's results, we continue to believe that our business is strong and poised for growth. You have seen that confidence reflected in our stock repurchase program, which we announced last quarter to help support long-term shareholder value creation. Looking ahead, our strategic focus for 2024 remains on expanding our brand portfolio, growing and broadening our customer base, and prioritizing profitability through rigorous cost control and margin expansion. I'm excited to discuss several key points today that underline our strategic direction and future growth. We continue to see accelerated adoption of our proprietary brands, including Char Coir, Drip Hydro, and The Harvest Company. In the quarter, 22.6% of our total Gardening and Cultivation sales were generated from our proprietary brand portfolio, the highest mix in our company's history and above the 18.8% we reported for the full year 2023. We are especially excited about the early signs of momentum within our Drip Hydro powdered nutrients, which are now in over 300 active trials with licensed cultivators around the country. We expect these trials to begin transitioning to sales and benefiting our profit and loss statements beginning late in Q2. Our margin expansion strategy continues to focus on increasing sales of higher-margin proprietary products and forging close strategic relationships with key best-of-breed manufacturing partners. We are also working to develop new vertical markets with our existing offerings, including the marketing and sales of The Harvest Company, a line of proprietary products, which is targeting home and edible gardening markets. Within The Harvest Company branded products include raised garden beds, organic seeds, and various gardening tools and accessories that are now available for sale online and in our stores. We are also actively seeking opportunities to enter the high-value greenhouse, nursery, and agricultural verticals with our proprietary products later this year. Lastly, our commitment to investing in our customer success remains unwavering. We continue to offer a complete suite of industry-leading products, competitive prices, and opportunities for financing and comprehensive inventory management and logistics solutions. Additionally, our soon-to-be-launched digital platform will enhance connectivity to our B2B portal, further empowering our customers' ability and convenience to do business with us. Now before turning to guidance, I want to briefly mention two additional points. First, I'd like to address the significant news last week that the DEA agreed with the Health and Human Services and FDA recommendation to reschedule cannabis from a Schedule 1 to a Schedule 3 controlled substance. This critical shift in the regulatory landscape is expected to ease restrictions on cannabis research and strengthen the cash flow and balance sheet of state-legal cannabis operators by allowing them to take Federal tax deductions for business expenses. While additional steps remain and challenges such as litigation may arise, we ultimately expect these developments to strengthen investor sentiment and broaden market opportunities for our products, as cultivators will have more capital available to invest back into their businesses, including building new facilities and refreshing existing ones. Regarding next steps, we expect a formal announcement by the DEA soon, following which the proposal will go to the Office of Management and Budget for review and then to a public comment period before being finalized. We are actively assessing how this regulatory change will impact our operations and strategic opportunities, and we will keep our stakeholders informed in future earnings calls as things progress. Second, continuing from our year-end discussions, we are continuing to seek opportunities to monetize our Storage Solutions segment, MMI, which remains a leader in providing mobile shelving and racking solutions. While we do not have any news to report this quarter, should a material update become available as it relates to the MMI business, we will issue an announcement accordingly. Moving on to our guidance. We are reiterating our previously communicated guidance for full year 2024. We anticipate net revenue to be in the range of $205 million to $215 million. Adjusted EBITDA is expected to range from a $2 million loss to a $3 million profit. This guidance underscores our confidence in our strategic direction and the underlying strength of our business model. I'm proud of the work and effort our team has put into getting us where we are today. As we look through the balance of the year, we are optimistic that GrowGen is on a solid platform for growth in 2024 and beyond. With that I'll turn the call over to our CFO, Greg Sanders. Greg?

Thank you, Darren, and good afternoon, everyone. Starting with our first quarter results, GrowGeneration is pleased to report revenue at $47.9 million versus $56.8 million in the first quarter of 2023, representing a decline of approximately 16% year-over-year. On an absolute basis, this measurement includes the impact of 15 fewer retail locations. Our same-store sales for the Gardening and Cultivation segment in the first quarter of 2024 was $38.2 million compared to $38.6 million in 2023, representing a 1% decline to the comparable year-ago quarter. Our same-store sales metric includes e-commerce. Excluding e-commerce, retail in isolation was positive on a same-store sales comp basis for the first time since the third quarter of 2021. Our Storage Solutions revenue was $4.8 million for the quarter compared to $7.7 million in the year-ago period, representing a decline of 37.9% year-over-year. While our Storage Solutions revenue did not perform to plan this quarter, we expect some pickup in the second and third quarters for this reporting segment. To offset, Gardening and Cultivation sales were higher than planned, which is an encouraging development and in consolidation, first quarter revenue reported at the high end of guidance. Gross profit margin was 25.8% for the first quarter of 2024, a sequential improvement of approximately 230 basis points compared to our fourth quarter 2023 results. Although gross margin improved on a quarter-over-quarter basis, we observed a decline on a year-over-year basis, partially due to higher freight expense relative to costs associated with relocating inventory from store closures. Further, we observed some impact from segment reporting mix. More specifically, Storage Solutions, which boasts a 43% gross margin profile reported at approximately 10% of total company sales in the first quarter compared to an average of 14% of sales in 2023. As we look forward, we expect sequential improvements in consolidated gross margins in the second and third quarters resulting from higher planned Storage Solutions revenue as well as less impact from store closures. The company's total expense base was $21.8 million in the first quarter compared to $23.7 million in the first quarter of 2023. Withstanding any further improvements that management executes over the remainder of 2024, this was the lowest total expense base that the company has reported since Q1 of 2021. We believe that the current cost model is sustainable going forward, and it highlights our commitment to driving a more nimble and profitable business long term. Store operating costs and other operational expenses declined to $10.6 million in the first quarter compared to $11.8 million in the fourth quarter of 2023. The company closed and consolidated four locations in the first quarter of 2024, of which one-time closure costs were included in our first quarter results. We believe that the closures and consolidations align our operating model to future strategic priorities and allow for stronger operating leverage. Selling general administrative costs were $7.9 million in the first quarter compared to $7.9 million in the fourth quarter of 2023. Within our first quarter SG&A results were a few significant non-recurring expenses, including $900,000 in severances and legal settlements, and $250,000 in marketing samples, primarily attributed to the nutrient powder launch from our proprietary brand, Drip Hydro. Depreciation and amortization of intangibles was $3.7 million in the first quarter of 2024 compared to $4.1 million in the prior quarter. As it relates to income tax with a full valuation allowance in place, we did not recognize a significant tax benefit or expense in the period. Net loss for the first quarter of 2024 was $8.8 million or negative $0.14 per share compared to a net loss of $6.1 million or negative $0.10 per share for the comparable year-ago quarter. Compared to the fourth quarter of 2023, the company improved net income from a net loss of $27.3 million to a net loss of $8.8 million. Adjusted EBITDA, as defined in our press release, was a loss of $2.9 million for the first quarter of 2024 compared to a loss of $1.8 million in the first quarter of 2023. The change in year-over-year performance is primarily related to a $3.9 million decline in gross profit dollars. Compared to the fourth quarter of 2023, the company improved adjusted EBITDA by approximately $800,000. Now moving to the balance sheet. As of March 31, 2024, the company had total cash, cash equivalents, and marketable securities of $61.3 million, a decrease of $3.6 million from December 31, 2023. Within working capital, inventory increased by $1.1 million, driven by first quarter bulk inventory purchases to support Q2 sales demand for which we expect favorable seasonality. We believe that the cash position of the business is in strong health, which was evidenced by our recent announcement of the company's share repurchase program. As Darren mentioned earlier, we are reiterating our full year 2024 guidance with revenue to be between $205 million and $215 million and full year adjusted EBITDA to be in the range of a $2 million loss to a positive $3 million profit. Our guidance assumes higher second and third quarter revenue from a seasonality perspective, along with stabilized improvements in our operating expense base from our strategic operating initiatives. That said, we are optimistic about the 2024 fiscal year and how our cost control initiatives have translated into the lowest expense base that we have reported in several years. Our balance sheet remains strong with a healthy cash position from which we see opportunities to deploy resources towards customer growth initiatives, product development, market expansion, and accrued pathways such as the share repurchase program to drive shareholder value. Our daily mandate remains centered on executing the business strategy to drive future growth and profitability. With that, I will turn the call back over to Darren for closing remarks.

Thank you, Greg. As we continue our journey through 2024, our commitment to operational excellence, strategic market expansion, and profitability remains unwavering. I am immensely proud of what our team has achieved and look forward to our continued growth and success. We remain optimistic about the future, backed by our robust business model and strategic initiatives that are set to drive our growth in the evolving market landscape. Thank you all once again for your continued support and interest in GrowGeneration. We will now take your questions. Operator?

First question comes from Brian Nagel from Oppenheimer.

My first question, Darren, you mentioned this briefly in your prepared comments. Regarding the potential scheduling risk, we've discussed this for some time. Given that it's still early and many unknowns remain, can you provide any parameters on how we should consider the size of the potential positive impact or how this might develop for GrowGeneration?

I think the simple part is, Brian, with rescheduling, 280E goes away. And that is the tax penalty on licensed cultivators. Basically, the analysts are saying that almost between $1.5 billion to $2 billion will come back to the balance sheet of the cultivators, which will go to shoring up balance sheets and also going into rebuilding facilities, updating facilities, and acquiring new products that are coming to market. There will be tremendously different views with our customers with money coming back in. Our customers will be making money, reinvesting in their businesses. Over the last three years, with Wall Street pretty much pulling funding for most cultivators, both public and private companies, these cultivators have not been able to refresh their facilities. They haven't been able to put money into facilities. In the first quarter, we did see a little uptick in durables, and we are starting to see much more bidding out there. We believe that you will see the durable side of our business start picking up. And again, everyone is still waiting. It's a waiting game out there, Brian. We've been waiting ten years since we started GrowGen. The process is still not complete right now. The DEA has agreed with the Health and Human Services to reschedule, but it could be another four to six months, and that's probably as quick as it can go. Massive litigation and other issues may arise.

Second question, that's your business. But look, you've done a very nice job of streamlining the model over the past several quarters, closing stores where appropriate. So as we look at the business now from a store perspective, is the base of stores appropriate?

Right now, we're happy with our portfolio; we probably will be closing under three stores this year. Our business has changed dramatically. We're seeing much more business-to-business opposed to business-to-consumer. We just opened up a 100,000 square foot warehouse in Ohio. As our business evolves, our stores serve both as marketing tools for our private label brands and brands from some of our top vendors. The stores provide a place for our customers to learn and purchase products from us. But we believe that we can service most of our customers from our distribution centers and our largest stores around the country. So right now, we will not be investing in new stores this year. We probably won't be in the market buying stores. GrowGen is investing in supply chain distribution and B2B portals. We're investing in our proprietary brands, which you see are growing very quickly. We're investing in our customers. We've given out more credit in the last month to customers than we have in some time. We’re investing in GrowGen and our stock repurchase plans. We're starting to see different uses of our capital as we invest GrowGen into the ITC world, the one and garden space. GrowGen has definitely morphed into a different type of company over the last couple of years since you've seen the slowdown in the cannabis space.

Just kind of following up, you put my emphasis on the proprietary products and the success of that segment, which moved up very nicely here in the quarter. I just want to kind of get a sense for the potential for your Drip nutritional product that you're rolling out here sounds like a good interest from that level. And then just remind us to target a proprietary brands which you are targeting your own brands for the overall business segment and makes I believe it's about 30%, but what can that target potentially go here?

We believe you'll see anywhere between 30% and 40% on private label proprietary brands at GrowGen in the future. We believe we will end this year somewhere in the mid to high 20s, which is pretty aggressive and that is dependent upon the Drip launch taking off. When you look at the number of trials we have around the country right now, we believe those will begin converting to sales in the future, and we expect to see those late in the second quarter. The Drip powder brand could be anywhere from a $25 million to $50 million business for GrowGen in the future. We will keep you posted as sales turn from trials into sales.

Got it. I appreciate the color there. And just kind of from a geographic interest here, you mentioned store rightsizing but just want to see if you can provide a little more color on certain states that are driving the strength here and the Q2 trends as we look forward.

Yes. We are seeing strength in California right now, Scott, contrary to what you are hearing. We are winning a lot of new business in the California market. We are also seeing strength in Michigan right now. However, we are witnessing considerable weakness out in Oklahoma and back east in the Massachusetts market. There's tremendous strength that GrowGen is currently experiencing in California.

First one is just on the proprietary brands. How do you think about margins here going forward? It's nice to see the increase in mix. Obviously, margins were down year-over-year. So just wondering how to think about the overall margin profile of proprietary brands? And if there's anything to comment on, sort of the sub-segments within that, like if Drip Hydro has a significantly different margin profile than some of the other proprietary brands. That would be helpful as well.

Yes. I'll keep it basic for you, Eric. We're seeing anywhere from 40% to 50% average margins within our proprietary brands. You will see the highest margins coming from The Harvest Company. Usually, the lowest margins will come from our Ion brands, which are lighting brands, and our nutrients and Coco Char Coir brands are somewhere in between. I think as you see the cannabis space turning more B2B than B2C. Our E-Commerce division has seen some of our larger customers that started out with our E-Commerce division switch over to our commercial team within some of our stores. They are looking for white-glove service, credit, and support on products, rather than just purchasing online. So it’s not that our E-Commerce division has been slow; it's just that the mix of business has changed. We've definitely pulled back expenses on our E-Commerce division, including a pullback on advertising as much of it has become very price-sensitive. We will continue to monitor this as we are starting to open up some B2B portals for our proprietary brands, which will go through the E-Commerce division to help drive sales.

I want to ask first about inventory, which came up just a little bit here, but looks good year-over-year. Just give us your thoughts around comfort levels and kind of the quality of your inventory today.

Greg, I'm going to send that over to you.

Yes. Mark, today we reported inventory at $66 million for the first quarter, which was up just incrementally from the fourth quarter. This increase was primarily due to Q2 sales demand as we look at things. Moving through the year, we see opportunities to continue to decrease inventory as we work through a more optimized model. However, we want to ensure we have the right inventory in the right locations for Q2, which is our best-performing quarter from a seasonality perspective. The quality of the inventory is good, and the reserves are decent. We feel very comfortable with what we have from both a quality standpoint and mix perspective.

And then second, just big picture, Darren, as we think about capital allocation, you've got a good balance sheet with the cash here. How do you weigh and think about investing back into the business, stores, or brands, versus share repurchases or potentially acquisitions? Walk us through how you think about capital allocation today.

Yes. I think I started off when I answered a question from Brian Nagel, but we'd go over it again. There are five different buckets that we look at right now, especially for 2024 as we go into 2025. It's mostly organic investing in GrowGen as opposed to investing outside of GrowGen. Our first bucket is investing in the business. That includes our supply chain distribution; we just built out 100,000 square feet in Ohio. We are also building B2B portals for our proprietary brands so customers can go online and purchase from different portals. Secondly, we're investing in proprietary brand launches as you've seen, our private label went from 18.6% last year to 22.6% this year. We have over 300 active trials right now with Drip and have already provided over $250,000 of product last quarter for our Drip launches. Additionally, we have a full team of salespeople focused on Drip. We're also investing in new products coming from Char Coir and other brands. Thirdly, we’re investing in our customers. We’re increasing credit to numerous customers and investing in build outs for customers. We believe the days of individuals just waking up and deciding they want to become growers are over. Those who have survived the tougher parts of the market over the last four years are becoming our long-term customers. We are also investing in GrowGen. We recently announced a $6 million share repurchase program that started on April 1st. We will update Wall Street in our second-quarter event. We're also exploring acquisitions, and if we find something that aligns with our shareholders' best interests, we will evaluate it seriously. So this five-step process is what we are looking at on a daily basis.

This is Remy Smith on for Aaron Grey. So my first question, can you provide commentary on how Q2 is looking quarter-to-date? I know it's historically been a strong quarter for you guys, so any color? And if you're seeing a typical seasonal benefit would be helpful.

I think the only color I can give you right now is we're reaffirming guidance for the year, which is a $2 million loss to a $3 million profit. As you saw, our first quarter EBITDA loss was $2.9 million. We're looking for a positive back half of the year starting in the second quarter. We also reaffirmed our revenue guidance, which was $47.8 million for the first quarter. If you were to annualize that, we would be considerably behind our guidance numbers. We are looking for a tremendous pickup in the second quarter, third quarter, and for the remainder of the year.

And then on my second question, you called out pricing pressure weighing on gross margins in the quarter. Can you speak to how you're seeing pricing in the segment going forward? Do you expect it to continue to weigh on margins, and offset the benefits from increasing private label mix, or do you see this as transitory and expect to return to higher gross margins?

Yes. I think when you look at the first quarter margins improved compared to the fourth, which was positive, but they are down year-over-year. There were two primary drivers to consider. The first was Storage Solutions revenue, which came in less than planned. For the quarter, Storage Solutions accounted for about 10% of revenue. If we averaged it to where it was for the duration of 2023, nearing 14%, we would see a mid-27% gross margin profile at current revenue levels. This is a big lever we expect continued improvement from in the second and third quarters. The other issue is we have closed six locations in the fourth quarter and four more in the first. This required the movement of a certain amount of inventory around the country, incurring costs that impacted our results. Considering these factors, it pushes us into that 28% to 29% range. We're hopeful that Drip powders will take off for us, particularly in Q3 and Q4, perhaps with some small impact in the second quarter yet to be determined, as most trials are still ongoing throughout the country. Thus, there are numerous promising indicators to drive a stronger gross margin profile throughout the rest of the year.

And then my last question, if time allows. With the cannabis reform in Germany that recently occurred in April and broader legalization efforts around Europe, do you see an opportunity to capitalize on some of these developments?

Yes. We believe there is opportunity. We have not taken advantage of it yet, but we are actively speaking with certain distribution companies about getting some of our proprietary brands into the European market. However, nothing has been finalized as of yet.

Thank you. At this time, we have no further questions. I will turn the call back over for closing comments.

I'd like to take the opportunity to thank all our shareholders for their continued support of GrowGeneration. I wish you all the best for a happy summer, and we look forward to updating you on our second quarter in August. Thank you.

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