Hello, everyone, and welcome to GrowGeneration's Second Quarter 2024 Earnings Conference Call. My name is Nic and I will be your operator for today's call. At this time, participants are in a listen-only mode. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. The conference call is being recorded, and a replay of today's call will be available in the Investor Relations section of GrowGeneration's website. I will now hand the call over to Phil Carlson for introductions and the reading of the safe harbor statement. Please go ahead.

Thank you, and welcome everyone to GrowGeneration's second quarter 2024 earnings results conference call. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration. The company's second quarter earnings press release was issued after the market closed today. A copy of this press release is available on the Investor Relations section of GrowGeneration's website. I would like to remind everyone that 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 filing as well as the earnings press release which provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, management will be happy to take your questions. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue and we will take them as time allows. Now, I will hand the call over to our Co-Founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2024 financial results. Today, we reported solid second quarter results that were consistent with our expectations, as we continue to leverage our strong portfolio of proprietary brands. As always, I want to thank our GrowGen team members. All of our employees have worked tirelessly to help drive our results, and we appreciate all their hard work and commitment to our company's continued growth. GrowGen's second quarter results included net revenue of $53.5 million, an increase of 11.7% sequentially from $47.9 million in the first quarter. In addition to sequential sales growth, adjusted EBITDA loss was $1.1 million for the quarter, a $1.7 million improvement from Q1. Importantly, proprietary brand sales remain relatively flat as a percentage of cultivation and gardening net sales during the quarter, but increased from 21.5% compared to 16.7% in the same period last year. It is important to note that proprietary brand sales increased in July with the increase of sales of Drip Hydro, Charcoir and The Harvest Company as customers migrate from trials to sales. As some of you may know, we have been taking actions to expand sales of these higher margin proprietary products. This percentage increase highlights the growing market adoption of our proprietary brands and the success of these initiatives. In addition to our top line success, gross margins for the second quarter stood at 27%, a 110 basis point improvement over last quarter. These results reflect the growing percentage of our proprietary brand sales as well as ongoing focus on streamlining our business with margin expansion and cost reductions front of mind in all our operations. Before Greg takes you through our second quarter financials in more detail, I'd like to talk about our recent announcement regarding our strategic restructuring plan and expected path to profitability. Last month, we provided details on a comprehensive restructuring plan that is designed to fundamentally reposition our company. Over the past few years, we have already been delivering on our key strategic priorities, which include expanding our proprietary brand portfolio, maximizing operational efficiencies while improving our cost structure and driving increased profitability through margin expansion. This new restructuring plan is the next phase in this process to position GrowGen for sustainable, recurring revenue growth driven by our commercial and B2B customers as well as long-term profitability. This plan has three major components: One, a focus on proprietary brands. We have a clear target for our proprietary brands to account for 35% of total sales by the end of 2025. We also intend to add approximately 50 new products to the proprietary brand lineup over the next 12 months. Two, a digital transformation of sales throughout our organization with a B2B customer focus. We expect to launch a B2B e-commerce portal in the fourth quarter of this year. Three, continuing streamlining of our operational infrastructure. Most importantly, we will continue to right-size GrowGen's national retail footprint to align with current industry-wide conditions by closing 19 redundant or underperforming stores in 2024. This process is well underway as seven of these locations were already closed in the first half of the year. Following these closures, going forward, the company will have 31 operational stores. We intend to retain the majority of our commercial customers and direct walk-in customers during this transition. Although there will be near-term impacts to margins and expenses as we execute on these initiatives, we expect that in the future, they will generate margin gains, improve profitability and reduce expenses by approximately $12 million on an annualized basis. Our cash position remains strong, evidenced by the company's share repurchase program. Throughout the quarter, we repurchased more than $4 million in shares. Switching to the topic of guidance, as a result of this restructuring plan and the actions we've outlined today, we are adjusting our full year 2024 net revenue and adjusted EBITDA guidance. We're estimating full year 2024 net sales to be in the range of $190 million to $195 million. As for our previously stated adjusted EBITDA guidance, we are removing this guidance altogether, as the timing of actions may cause results to differ. Lastly, I want to briefly discuss the latest updates on our segment, as well as cannabis reform and Federal rescheduling. We are encouraged by the rescheduling process and we will continue to monitor events as they unfold. In summary, our second quarter results were in line with our expectations and reflect the considerable progress we have made. We are confident that the measures we've outlined will lead to sustainable revenue growth and long-term profitability. I will now turn the call over to our CFO, Greg Sanders.

Thank you, Darren and good afternoon, everyone. As Darren mentioned, we are pleased to report that our second quarter results were generally in line with expectations and we made solid progress in several key areas. Starting with second quarter sales, GrowGeneration reported net revenue of $53.5 million compared to $63.9 million in the year ago period, representing a 16.3% decline. On a sequential basis, revenue increased from $47.9 million to $53.5 million, representing an 11.8% improvement. Same-store sales for the second quarter were $41.1 million compared to $43.9 million in the prior year, a decrease of 6.2%. While we saw signs of strength in certain markets, we felt continued pressure in others. Storage Solutions revenue for the second quarter was $7.4 million compared to $8.4 million in the prior year, a decrease of 11.3%. On a basis, private label or proprietary brand sales were $9.9 million for the second quarter compared to $9.3 million in the second quarter of 2023. Proprietary brands accounted for 21.5% of gardening and cultivation sales in the second quarter compared to 16.7% in the comparable year ago period. Gross profit margin was 26.9% in the second quarter of 2024, representing a sequential improvement of 110 basis points from the first quarter of 2024 and a 10 basis point improvement year-over-year. Store operating expenses decreased to $10.2 million in the second quarter compared to $12 million in the year ago period. Net loss for the second quarter 2024 was $5.9 million or negative $0.10 per share compared to a net loss of $5.7 million or negative $0.09 per share for the comparable year ago period. Adjusted EBITDA was negative $1.1 million compared to a $0.9 million profit in the second quarter of 2023. Our total cash position remains strong at $56 million, and we do not foresee any near-term financing needs. We are reducing our full year 2024 guidance for revenue to be in the range of $190 million to $195 million and we are eliminating our full year 2024 adjusted EBITDA guidance. These updates are a result of the restructuring announcement that was published in July. In closing, GrowGeneration remains in a strong financial position as we enter the second half of 2024. Our second quarter results demonstrate continued discipline with reducing expenses alongside our margin growth initiatives. During the back half of 2024, the execution of the strategic restructuring plan will be our focus. We believe that the business is poised to emerge in 2025 with a more robust operating model. With that, I will hand the call back over to Darren for closing remarks.

Thank you, Greg. We are very proud of the results we delivered for the second quarter, including sequential revenue growth and increased sales from our proprietary branded products. This drove margin and adjusted EBITDA improvement during the quarter. We recognize there is more work to be done as we look ahead to the remainder of 2024, implementing our strategic restructuring plan to expand our brand portfolio, accelerate revenue growth, reduce costs, and drive higher margins. Thank you to our investors for their continued support and to all our team members for their hard work that makes our success possible. That concludes our prepared remarks. I will now ask the operator to open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question is from Mark Smith from Lake Street Capital Markets.

Hi, guys. Greg, I wanted to just circle back first off on something that you had said. Just, is there any additional kind of guidance or insight you can give us on gross profit margin? Both kind of near-term and I know it's going to be choppy as you guys close some stores and maybe liquidate some inventory in those stores, but also kind of long-term if you guys have set kind of goals or an idea of where you would like to be longer-term on gross profit margin.

Yeah. Mark, as we work through the restructuring, we anticipate moving certain inventory products that will impact the third and fourth quarter of this year. We believe at this point the second quarter was our strongest gross margin period relative to what we have to do to prepare the business for 2025. We expect its probably in that low to mid-20s range as we work through the inventory reductions. However, we believe this will ultimately lead to a margin point in the high-20s, low-30s, particularly with our strategic goal in mind, increasing proprietary brand sales next year.

Perfect. And then the only other question I had, just any update on the timing of these closures? I think, Darren, you had said, do you expect to be done by early Q1. Should we expect this to be kind of fluid month to month, or will we see any lumpiness in the closures here over the next couple of months?

Right now, we're scheduling three for the next three months. So, we believe that all nine stores will be closed probably in that November timeframe. We believe everything will be closed before year-end. There may be some legacy leases that extend into 2025, but we’re working hard on managing leases and poses no material risk.

So, my question just with this restructuring, how should we think about the investment needed to execute this? I mean, both from maybe from a money standpoint, but then also just kind of even a process standpoint. I mean, how cumbersome or expensive could this be?

We believe not much, Brian. In prior closings, we've closed over 20 stores in the last couple of years, with costs ranging from $150,000 to $250,000 per store. You're looking at a total of around $3 million to $5 million across the remaining stores. We plan to tackle most of this before year-end, focusing on goodwill with customers and clearing out inventory through markdowns.

Got it. And I guess, beyond closing stores, the reposition of the real estate fleet, I would think there’s also some other reposition in the business, right, Darren?

100%. With 31 stores, we will be focusing on private label brands and really business to business. We're positioning GrowGen for new product launches, getting our private label division up to 35% of sales, which is our highest margin business. The industry has changed, and we believe coming out of this restructuring, you will see a leaner company with a different cost structure and increased efficiencies. We're excited about it.

Hi. Good evening and thank you very much for the questions. Just in terms of the digital initiative, could that also open up the ability to service new customers that might not have been in the vicinity of your prior brick-and-mortar stores?

Yes, we have opened a hundred thousand square foot distribution facility in Ohio this year. We have one out in Sacramento, enabling us to fulfill orders. We are capable of servicing customers more efficiently, cutting costs, and maintaining competitive pricing by enhancing our warehousing and B2B capabilities.

Second question on proprietary brands. How is your brand equity contributing to opportunities for your proprietary brands in third-party stores and distributors?

About 50% of our brands are going into other stores and through distribution channels. We are building brand equity daily, and we will launch another 50 products over the next 12 months. We have seen strong feedback from customers, and we are excited about our private label sales growth.

Could you kind of speak to what, at this revenue base of $195 million, what your EBITDA margin kind of prospects are, and do you need to grow significantly to achieve mid-single digit margins?

Greg, do you want to try to unpack that and then I'll finish up?

As we look at next year, it's too early for us to meaningfully say what our EBITDA is going to look like. We do anticipate revenue to be in the $190 million to $195 million mix, stemming from our strategic decision to close stores. We expect margins to return in 2025, aiding profitability.

The focus is on achieving a leaner operating structure post-restructuring and achieving our long-term goals. We're excited about improving our margins significantly by 2025.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Darren Lampert for final closing comments.

I'd like to thank our shareholders and our employees for their hard work and dedication to GrowGen. We look forward to keeping you updated on our restructuring progress, and we look forward to talking to everyone in September. 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.