Hello, everyone, and welcome to GrowGeneration's Third Quarter 2024 Earnings Conference Call. My name is Lovely 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. This conference call is being recorded, and a replay of today's call will be available on the Investor Relations section of GrowGeneration's website. I will now hand the call over to Phil Carlson with KCSA for introductions and the reading of the Safe Harbor statement. Please go ahead.

Thank you, and welcome everyone to the GrowGeneration's third 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 third 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 the GrowGeneration’s website at ir.growgeneration.com. 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 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 GrowGeneration's Co-Founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. We appreciate you joining us today as we report our third quarter performance. I'm pleased to share that our results were consistent with our internal expectations, reflecting the solid progress we've made under our restructuring plan. In particular, we met our targets with store closures and exceeded our targets for proprietary brand and same-store sales performance, all of which I will provide details on shortly. Throughout the quarter, we remain focused on driving operational efficiency, enhancing our product offerings, and positioning GrowGeneration for sustainable growth as we look towards 2025. Our entire team's commitment has been instrumental, and I want to extend my thanks to them for their hard work and dedication. We believe that the foundational improvements we're making today will not only strengthen our current performance, but will also serve as a springboard for our growth initiative, with an emphasis on high margin, proprietary brands, digital expansion, and a leaner, more efficient retail footprint. Our third quarter results included net revenue of $50 million, slightly down from $53.5 million in the second quarter of 2024, as we had anticipated due to store closures as part of the restructuring plan. We're balancing our focus on profitability as we execute on our key growth initiatives. These actions are positioning GrowGen for profitable, sustainable revenue growth. They should enable us to increase sales in high-growth areas targeting commercial and B2B customers, as we enhance margins and optimize efficiencies across our organization. We are pleased with our progress and believe these actions will improve profitability and reduce expenses by a minimum of $12 million on an annualized basis. I'll briefly recap the three major components of our restructuring plan that we announced during the third quarter: one, a focus on proprietary brands with goals of adding approximately 50 new products to a proprietary brand lineup over the next 12 months, and for these brands to account for 35% of total sales by the end of 2025. Further, we continue to focus on preferred partners who bring best-of-breed products to our customers. Two, the digital transformation of sales throughout our organization, focused on B2B customers. This includes the launch of a B2B e-commerce portal, which we expect to launch in the fourth quarter. Three, we continue to streamline our operations and right-size GrowGen’s retail footprint to align with current market dynamics. We expect to retain the majority of our commercial customers through adjacent locations, our commercial sales force, and the B2B portal. We've been making substantial progress across all these areas. As previously stated, the plan included closing 19 stores to prioritize our best-performing locations serving higher customer values. When we last spoke, seven store closures had already occurred; since that time, the 12 additional stores we noted have also been closed. As of today, the company retains 31 operational stores. Digging a little deeper into our third quarter results, we want to highlight that our same-store sales grew by 12.5%. It is of paramount importance to note this marks the first quarter of positive same-store sales in three years. We think this growth shows the high performance of our core store locations and reinforces the rationale behind our restructuring plan. Our third quarter results also display the strength of our proprietary brands. As a percentage of cultivation and gardening sales, proprietary brand sales grew to 23.8%, up from 19.4% last year. This growth was mainly driven by several new product launches during the quarter. Our strong performing proprietary brands and a consistent pipeline of innovative new products are on track to reach our target for proprietary brands comprising 35% of total sales by the end of 2025. This growing portfolio of proprietary offerings is essential to our profitability strategy, enabling us to provide differentiated, high value products that meet customer needs and contribute to stronger margins for GrowGeneration. As part of our strategic transformation, we are fully embracing a digital-first approach across our sales channels with a strong focus on our B2B customers. This quarter, we made substantial progress on launching our new B2B e-commerce portal, which is set to go live in the fourth quarter. This platform will serve as a central hub for our commercial clients, enabling them to seamlessly place orders online, view real-time inventory availability, and access tailored product recommendations and pricing, all designed to simplify and streamline their purchasing experience. As we finish the year and move into 2025, we will further sharpen our focus on profitable growth and maintaining a strong balance sheet. Our cash position remains very solid, with $55.2 million and no debt as of September 30, 2024. Our cash position and strong cash reserves reflect our financial resilience. We also repurchased an additional $1.8 million of stock during the third quarter, as we continue to believe our equity has compelling value. Moving on to guidance, we are reiterating our full year 2024 estimate of net revenue between $190 million to $195 million. We continue to review our outlook for adjusted EBITDA in light of our ongoing restructuring actions and the resulting cost savings we anticipate. We will have greater visibility when we close our full year results and expect to provide full year 2025 net revenue and adjusted EBITDA guidance on our year-end earnings call. I would now like to provide a brief update on MMI, our storage solutions business. As we have previously discussed, we believe there is a significant opportunity to further monetize this business. Lake Street Capital is currently assessing strategic opportunities related to MMI. We are in the process of receiving and reviewing bids. The process is ongoing, and we will provide any further updates when appropriate. To summarize, our third quarter results were consistent with our expectations and show the progress of restructuring measures. GrowGen is strategically positioned in the evolving cannabis industry, especially with the upcoming rescheduling discussion and new leadership pro-cannabis ban to capitalize on industry growth opportunities. I will now hand the call over to our CFO, Greg Sanders. Greg?

Thank you, Darren, and good afternoon, everyone. We are pleased to report that our third quarter results were in line with guidance as we continue to execute the plan. As I will cover in depth, same-store sales growth, reduction in expenses, and the improvement in proprietary brand sales demonstrate the alignment of our results to our strategic priorities. Starting with third quarter sales; net revenue was $50 million compared to $55.7 million in the year ago period, a decline of 10.2% primarily attributed to 25 store closures in the trailing 12 months. Sequentially, revenue declined 6.6% from $53.5 million last quarter. The company closed and consolidated an additional 12 retail stores in the third quarter, which had an impact on overall sales. We could not be more satisfied to report that our third quarter same-store sales metric increased by 12.5% year-over-year; for GrowGen, this marks the first quarter of positive same-store sales in three years. We saw continued improvements in our business within the Michigan, Oregon, and California markets, while observing challenges in Oklahoma in May. Relative to the strength of the third quarter, same-store sales turned positive for the full fiscal year-to-date through September 30. Cultivation and gardening net sales were $41.4 million for the third quarter of 2024 compared to $48 million for the comparable year ago period. Proprietary brand sales increased to 23.8% of cultivation and gardening sales for the third quarter of 2024 compared to 19.4% with the third quarter of 2023, a 4.4% improvement. This was driven by continued market adoption of our proprietary brands, including Charcoir, Drip Hydro, and The Harvest Company. We remain laser-focused on delivering 35% of sales in 2025 to be driven from our proprietary brands. For the third quarter, the percentage of consumable product net sales in the cultivation and gardening segment generally remained flat at 73% compared to the prior year, which we view as a positive indicator of stability. Net sales of commercial fixtures within our storage solution segment increased by 12.9% to $8.6 million for the third quarter of 2024 compared to $7.6 million from last year's third quarter. This increase was largely due to the timing of revenue recognition on various large projects. Gross profit margin was 21.6% for the third quarter of 2024 compared to 29.1% for the third quarter of 2023. Within margin, we incurred a 381 basis point impact from inventory costs, closed store liquidation sales, and freight expenses related to the closures of 12 retail stores in the period. Additionally, we incurred a 227 basis point impact from heavily discounted sales of discontinued inventory in Q3, which also contributed to our ability to reduce inventory by $12 million in the period. Within our restructuring initiatives, we are revising our product mix to align the business to execute to 35% proprietary brand sales for next year. We expect that this initiative, which will carry into the fourth quarter, will impact fourth quarter margin as well but will allow the business to report sustainably higher gross profit percent in 2025. Another area worth noting is that we continue to realize steady improvements in expenses as a result of our strategic rationalization efforts. Store and other operating expenses in the third quarter declined 13.9% to $10 million compared to $11.7 million in the third quarter of 2023. Meanwhile, selling, general, and administrative expenses for the quarter were $7.4 million compared to $7.6 million in the third quarter of 2023, a 2.3% improvement. While SG&A was slightly up from the second quarter of 2024 of $7.1 million, this was largely due to expenses related to severance and other restructuring costs to further optimize our operating model. We expect to communicate additional cost improvements in Q4 as we position the business for 2025 and beyond. Depreciation and amortization was $5 million for the third quarter of 2024 compared to $3.6 million in the second quarter of 2024. This increase is due to the acceleration of certain depreciable assets from our restructuring initiatives through year-end, for which we expect to retire certain assets by December 31. In addition, we recorded a $220,000 impairment, which was fully related to leases of closed stores in the third quarter. Net loss was $11.4 million for the third quarter of 2024, or negative $0.19 per share, compared to a net loss of $7.3 million, or negative $0.12 per share in the third quarter of 2023. Adjusted EBITDA, as defined in our press release, was negative $2.4 million compared to negative $0.9 million in the same period last year. Turning to the balance sheet, as of September 30, 2024 the company had $55.2 million of cash, cash equivalents, and marketable securities, and no debt. During the quarter, we utilized $1.8 million to repurchase company shares. We continue to maintain a strong cash position, and do not foresee any near-term financing needs. As Darren mentioned, we are reiterating our full year 2024 guidance for net revenue to be in the range of $190 million to $195 million. We expect to provide full year 2025 guidance for net revenue and adjusted EBITDA on our 2024 year-end conference call. In closing, the financial position of GrowGeneration remains strong. We made significant progress towards restructuring the business for long-term profitability in the third quarter. Our primary focus is long-term margin expansion, cost reduction, and generating opportunities for positive top-line growth. We are dedicated to growing the business on a more sustainable and leaner footing, enabling us to deliver profitable growth for our shareholders. I will now turn the call back over to Darren for closing remarks.

Thank you, Greg, and thank you to everyone for joining us today. As we wrap up our third quarter call, I want to emphasize our excitement and confidence in GrowGeneration's path forward. The progress we've made through our restructuring efforts has put us on a stronger footing to drive revenue growth, optimize margins, and build a leaner, more profitable company. Our focus on expanding high margin proprietary brands, advancing our digital transformation, and streamlining our retail footprint is already showing results, and we're committed to maintaining this momentum into 2025. Our entire team remains dedicated to executing on this strategic plan, and I'm deeply grateful for their hard work and adaptability as we position GrowGeneration for long-term success. I'd also like to thank our investors for their continued support and confidence in our vision. We're excited to deliver meaningful value to our shareholders by building a more resilient and sustainable business. We look forward to keeping you updated on our progress as we move into the New Year. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. Your first question comes from the line of Brian Nagel from Oppenheimer.

I have a couple of questions. First, regarding the ongoing rationalization of the store base, could you remind us where you aim to be and when you expect this process to be completed? Secondly, on a broader note, Darren, could you discuss the performance of the new proprietary brands as they are being rolled out? How do the sales of these new brands compare to the legacy brands? Are you reaching the same customer base, or are you introducing products that target different customers? Thank you.

Yes, I can begin. We currently have 31 stores, down from around 65, having closed 19 this year. Compared to last year, we're down by 25 stores. I believe we are in a comfortable position with 31 locations, though it's possible we may close a few more stores next year. GrowGen has undergone significant changes as we adapt within the industry and has become a preferred name for many cultivators. The number of stores is no longer a necessity nationwide as we develop our distribution and B2B network. We're able to serve our customers effectively from our existing locations, especially our larger ones. I expect there will be a few additional store closures next year, but that should be the extent of it. Regarding our private label, GrowGen has invested the last three years in R&D and testing cultivation products nationwide. We are now starting to see these efforts come to fruition. The testing phase for many products takes six months to a year, during which we encourage customers to switch or adopt our new offerings across different categories, including nutrients, soil, lighting, and our new ancillary brand, Harvest CO. We're providing our customers with more options, and this is reflecting in increased sales from both our customer base and distribution channels. As for our margins, GrowGen is moving toward a 40% margin business, compared to the low 20s for many other products we sell. We anticipate that by 2025, our margins will stabilize in the high 20s to low 30s, particularly as we expect private label products to account for 35% of our sales next year. We continue to collaborate with top distributors and manufacturers while offering our customers a range of choices. We recognize that our products may not always be the preferred option for every customer, so we remain attentive to what we offer.

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

So the first question for me, I just wanted to hear more in terms of your efforts to build out the commercial business, increasing your sales with some of the larger players, MSOs. That sounds like there's still a lot of whitespace opportunity. So, any color you could give on that initiative would be helpful there. Thank you.

Yes. I think there's a tremendous amount of opportunity. As this industry grows and evolves, and gets more commercialized in various ways, GrowGen becomes a go-to option, whether it's accounting, credit, product, or distribution. We've built a network around the country right now where we sell best-of-breed products, either GrowGen products or vendor products. On the other side of it, we have a very vibrant software system, the GrowGen accounting systems. We give credit to all our customers. So, it’s about making it easier for our customers to shop. That's what it's about in this day and age—getting products to our customers in a timely fashion, best pricing with credit, and just making their jobs easier. Our accounting department consolidates their bills from facility to facility. When we work with our customers, we have a very big balance sheet; we have $55 million in cash on our balance sheet right now. We have the largest inventory positions in the industry. So the plants never sleep, and our customers don't sleep. We're there 24/7 to fill orders and do what we can for our customers. On the other side of it, we have an extremely talented commercial team at GrowGen. Our commercial team is at the facilities on a daily basis, answering questions about new products coming to market, helping out if there are issues within the grow facilities. So it's not only that we're selling products to our customers, we're also helping them grow; we're helping them with yield and quality, from innovative products or again, our partners' products. We have a team at GrowGen that I believe is leading the industry right now.

Okay, great. Appreciate that color there, Darren. Second question for me, I know you touched briefly on the private label continues to perform well for you—24% of sales. So, can you just breakdown in terms of— as we think about where it is now, getting to that 35%? You said new products and expand distribution. Could you help us maybe quantify the drivers? How much of that should we think about being driven by the new products and innovation that you guys have versus just the legacy SKUs continuing to drive growth there in a higher mix of sales? Thank you.

I think it's a combination of both, Aaron. Again, we don't really look at it as legacy SKUs. Most of our SKUs are still growing, so there's not much legacy within it. Most of them have come to market in the last few years that are really driving sales, except for Charcoir. But Charcoir is coming out with innovative products, whether it's a 70-30 cocoa-prolate mix right now, and you're also seeing cocoa coins. As we told you, our drip powders are coming to market at the beginning of the year; that are starting to grow very quickly, and also hard-shell products. You're seeing growth in our products that have been out for a couple of years, but you're also seeing new products coming to market. I think you'll see a mix. We don't believe that products we launched a couple of years ago are stagnating; I think they're all still growing. I think you'll see a nice number within the fourth quarter on growth of our private label division; it's tracking much higher than it was last quarter. So we believe that 35% is attainable next year. And from there, we still do believe that you may see it in the 40s a couple of years later. We couldn't be more excited with where we are on the private label products. I think it certainly helps with sales, and our commercial division is out selling it. We have individuals who go to facilities; our facility managers and facilitators are out there right now. I think you know more than anyone how hard we're working on the business. We've spent the last three years restructuring GrowGen. Closing close to 40 stores, half our stores, and really building what we believe is the wave of the future. So 2025, we believe will be a tremendously different year compared to 2024.

Your next question comes from the line of Eric from Craig-Hallam Capital Group.

Thank you for addressing my questions, and congratulations on the restructuring progress and strong same-store sales growth. My questions relate to the B2B portal. Firstly, could you elaborate on what is new in this B2B portal compared to your previous e-commerce capabilities? Is this based on a centralized or company-wide strategy for inventory availability and pricing, resulting in a simplified approach? Ultimately, should we view this B2B portal as an initiative aimed at expanding gross margins, or are there additional revenue opportunities that you foresee with its adoption?

I think it’s both, and we’ve put a lot of effort into it. We’re initially opening it up to our commercial customers, providing them individual pricing. Many of our customers have different pricing schedules for various products. They will have access to pricing and availability. Currently, when individuals want to place orders with us, our commercial customers rely on our team, which is a manual process. This portal will alleviate that burden on our staff; they’ll have visibility into product locations and pricing, enabling them to spend more time visiting facilities, collaborating with customers, and seeking new ones. We believe this is the future; the industry is rapidly evolving, and this is essential. This system is similar to what’s common in most industries, where individuals typically order online unless they have questions. It’s about ease of use, finding the products they need, and providing GrowGen with greater insights. We’ll understand what’s coming in, allowing us to stock the right products and place them appropriately. This is essentially GrowGen 2.0, and we expect it to improve our margins since products will be where we need them. Shipping will be streamlined, and customers will appreciate the enhanced experience. Ordering and conducting business will be much simpler for our customers. Additionally, we’re beginning to launch the B2B portal for individual products, catering to growers of all sizes. Instead of searching through various websites, they can go directly to specific sites to learn how to use our products, with teaching materials available for them.

That's very helpful color. In terms of the margin opportunity with this B2B portal, and I guess GrowGen 2.0 here, if we think of that versus the more traditional brick-and-mortar business, how should we think about the potential difference in margin? And obviously, I know you guys haven't launched this yet; so I'm not looking for an exact number, but if you can kind of help us understand maybe a reasonable range, whether that's on a gross margin or EBITDA margin basis, however you want to answer it. Just wondering if you can help give us a bit more color on what you're anticipating from a margin perspective with this B2B portal?

Yes. I think on the margin side, you're going to see cost savings, both for our customers and for GrowGen. We need more employees to do things manually than we do by portals. I think products will be selling for the same price, whether individuals are coming into the stores or shipping them out of our warehouses; so it's still to be determined. But once again, with dealing with GrowGen products, our proprietary brands opposed to other brands. The margins are certainly higher; they're in the 40s opposed to whether it's in 20s or teens. You'll see a balancing of margins going forward that we believe in 2025 will be either in the high 20s or low 30s. If you want to look at our margins in the third quarter, we sold through $12 million in products, bringing inventory down tremendously and selling a lot of products at a loss during the quarter to rationalize our inventory and get it ready for 2025 with all these store closures.

All right. Thanks for the color, and congrats again on the progress.

And the next question comes from Mr. Mark Smith from Lake Street Capital Markets.

Darren, first question for me is just around customer retention from the closed stores. Any idea of how much you were able to retain, and is that what really helped drive some of the comp as customer shifting over to these stores that are still in the comp base?

I think it certainly is, Mark. What we always said to Wall Street is we believe that we will retain a majority of the commercial customers, certainly not walk-ins. So, one of the reasons that we're opening these portals is for walk-in customers in stores that we close to create an easier way for them to purchase, and we will ship to them and make their lives much easier. But we are starting to retain customers from store closures. The 12.5% same-store sales in the third quarter was certainly a nice surprise for GrowGen, it was off a very weak quarter last year, but we believe the same-store sales growth will continue. We believe that we are starting to see a small turn in the industry right now, especially at GrowGen. So, we look forward to getting the restructuring behind us. We still have another couple of months, and we believe that we should have most of it completed by the end of the year. We look forward to sharing our progress in 2025. We did close all 12 stores within the three-month span and 19 stores in the last six months. We've been pretty hard at work, but we are starting to retain customers; they are buying our brands, and we feel comfortable where we are right now with same-store sales on a go-forward basis.

Perfect. Regarding your question, I'm interested in understanding the current state of our customers and their spending patterns, both commercial and walk-in. How do you think our customers are faring? Are we noticing a return to investments in operations and growth? Can you share any insights into the current health of the industry?

The positives are receivables have been good; we're collecting our receivables. We are increasing receivables, but having very few issues getting paid in certain areas. That's always a positive for GrowGen as you can see we haven't written off many receivables; we're pretty conservative in some ways. But with COVID-19, long-standing customers, we always try to help. The industry is tough; there's been very little money raised in the last couple of years. We're still looking forward to some positive news from the government. It's been extremely difficult when it comes to that. Every time you think things are turning on a legislative front, they don't. President-elect Trump has said that he believes in a state-by-state approach and that he will change the laws. We look back at the last four years under the previous administration, and nothing has gotten done. So, we are cautiously optimistic in many different ways. We do believe that it will bring money back into the industry, whether it's through rescheduling, whether it's the government staying out of it, and leaving it state by state. If you ask me, it's been tough out there. I think we've navigated it well. We've kept our balance sheet in a great place to go forward. We're certainly not happy with the price of the stock right now, but we certainly believe that performance will take care of that down the road. We just finished our share repurchase and bought back $6 million of stock, believing our stock was trading at a point where it didn't make much sense. We enter the end of the year very optimistic about what we've done over the last couple of years and where we're going in the future.

There are no more questions at this time. Please continue, Mr. Darren Lampert.

Well, thank you for joining us today. We look forward to updating you on our progress on our year-end call. I wish all our shareholders and employees a happy and healthy upcoming holiday season. Thank you for attending today. We look forward to closing the year and starting 2025 on a strong note.

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