Hello, everyone, and welcome to GrowGeneration's Fourth Quarter and Full Year 2024 Earnings Conference Call. My name is John, and I will be your operator for today's call. 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 GrowGeneration's Fourth Quarter and Full Year 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 fourth quarter and full year 2024 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 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 provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, are 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 discuss our fourth quarter and full year 2024 results and talk about our outlook for 2025. Today, we reported full year 2024 results that were consistent with our expectations. This included full year 2024 net revenue of $188.9 million, which was in line with the preliminary results we reported in early February. Total 2024 proprietary brand sales were $39.5 million, representing 24.2% of total net sales compared to 18.8% in the prior year. 2024 marked a pivotal year for GrowGeneration as we successfully executed a strategic transformation to position the company for sustainable, profitable growth. With this extensive strategic restructuring plan, we have moved away from a focus on stores in order to transform GrowGeneration into a product-driven company with a business-to-business customer focus in order to drive revenue growth, improve margins and to build a more efficient, profitable company. For proprietary brands, I'm happy to report that 30.4% of our fourth quarter 2024 Cultivation and Gardening revenue was derived from sales of our proprietary products compared to 21.2% for the fourth quarter of 2023. This is very important because proprietary product sales not only drive higher margins but also create a stable and recurring revenue stream for GrowGeneration. Our goal remains clear for proprietary brands to reach 35% of Cultivation and Gardening net sales by the end of 2025. Our portfolio of leading brands such as Char Coir coco, Drip Hydro nutrients, the Harvest Company, and our Ion Lighting solutions continue to drive growth in proprietary brand sales. By integrating these proprietary brands into our commercial and e-commerce platforms, we are providing growers premium products that reduce input costs while maximizing yields. Starting the digital transformation of sales, our new B2B e-commerce platform was launched as planned in the fourth quarter of 2024. Since its launch, we've received extremely positive customer feedback. We will continue migrating transaction activity for our brick-and-mortar stores to our new digital platform, enhancing the customer purchasing experience while driving operational efficiencies across our supply chain. And lastly, in 2024, we made substantial progress in streamlining operations and reducing expenses throughout our entire organization. We proactively optimized our retail footprint, completing strategic store consolidations ahead of schedule, which significantly reduced operating expenses while preserving sales in key markets. Following these actions, we now have 31 operational stores and 2 regional distribution centers. Looking forward, we expect to reduce annual expenses by approximately $12 million. We've already made considerable progress. Gross profit margin was 16.4% for the fourth quarter of 2024 compared to 23.5% for the fourth quarter of 2023, primarily due to one-time inventory disposal costs and strategic discounting as part of restructuring efforts. With the increasing revenue contribution we are realizing from proprietary brands, we anticipate sequential margin improvement throughout 2025 with a margin target of 30%, which will drive overall profitability. Complementing all of this, we finished 2024 with no debt on our balance sheet and a strong cash equivalent and marketable securities position of $56.5 million. Additionally, in 2024, we completed a $6 million share repurchase program, demonstrating our commitment to returning value to our shareholders. This strong financial footing provides significant financial flexibility for future growth investments and initiatives as well as potential acquisitions. With our strong cash position, we can opportunistically acquire businesses that complement our proprietary brand portfolio, expand our market share, and increase our profitability. Lastly, before I discuss guidance, I want to talk about our Storage Solutions business, MMI. During 2024, MMI continued to exceed our expectations with full year 2024 revenue of $25.4 million and $6.3 million in operating profit. As previously communicated, in 2024, we engaged Lake Street Capital to explore strategic opportunities for this business. After a thorough evaluation process, the Board determined current market conditions do not support an optimal value creation scenario for a divestiture at this time. Instead, we will continue to focus on executing our long-term expansion plans for MMI, leveraging its strong profitability to drive additional value within the GrowGeneration portfolio. Turning to guidance. For the full year 2025, we expect net revenue to be in the range of $170 million to $180 million and adjusted EBITDA in the range of a $2 million loss to a positive $2 million profit. Before we take your questions, I want to briefly talk about investor concerns related to the impact of proposed global tariffs. We have already implemented measures to mitigate these effects. These include diversifying our material sourcing strategy, including optimizing costs, renegotiating with vendors, and exploring manufacturing options to improve supply chain efficiencies. In summary, 2024 was a transformational year for GrowGeneration, and we entered 2025 with a leaner, more efficient, and more product-driven business model. With our proprietary brands, digital transformation, and cost optimization strategies in place, we are confident that 2025 will be a year of revenue growth and innovation for GrowGeneration as we aim to reach profitability in the second quarter of 2025.

Thank you, Darren, and good afternoon, everyone. Today, I'll review the highlights of our fourth quarter and full year 2024 financial results, and then I'll discuss our outlook for 2025. During the fourth quarter, we continue to place heavy emphasis on rapid execution of our restructuring plan in order to position the business for 2025. We will highlight proprietary brand sales, which outpaced our expectations, delivery of our second consecutive quarter of same-store sales growth, additional improvements to our expense base, and measures taken to right size inventory. Fourth quarter net revenue was $37.4 million compared to $49.5 million in the year-ago period. The decline was mainly due to the closure of 19 retail locations during 2024. As anticipated, these store closures and consolidations impacted overall net revenue. This was partially offset by an increase in same-store sales, which rose 1% year-over-year. The fourth quarter represented our second consecutive quarter of positive same-store sales growth, which was primarily driven from consolidation efforts along with year-over-year growth of our commercial customer base. Cultivation and Gardening net sales were $32.9 million for the fourth quarter of 2024 compared to $41.7 million for the comparable year-ago period. Proprietary brand sales increased to 30.4% of Cultivation and Gardening sales for the fourth quarter of 2024 compared to 21.2% for the fourth quarter of 2023. Our fourth quarter proprietary brand sales outpaced our internal expectations and provide us with confidence in our long-term ability to expand gross margins. Net sales of commercial fixtures within our Storage Solutions segment decreased 41% to $4.5 million for the fourth quarter of 2024 compared to $7.7 million in the comparable year-ago quarter. This decrease was largely due to timing of revenue recognition on various large projects that went into the third quarter of 2024. Gross profit margin was 16.4% for the fourth quarter of 2024 compared to 23.5% for the fourth quarter of 2023, a decrease of 710 basis points, primarily due to inventory disposal costs, which was a component of our restructuring plan. We continue to lower expenses in the fourth quarter. Store and other operating expenses declined 21.1% to $9.3 million compared to $11.8 million in the fourth quarter of 2023. Selling, general and administrative expenses for the quarter were $6.8 million compared to $7.9 million in the fourth quarter of 2023, a 13.3% improvement. We expect to recognize additional cost improvements into the first quarter of 2025 and beyond. Depreciation and amortization was $7.1 million for the fourth quarter of 2024 compared to $4.1 million in the comparable year-ago quarter. This increase was due to an acceleration of certain depreciable assets resulting from our restructuring initiatives through year-end. In addition, the company recognized a noncash impairment of $6.7 million of certain intangible assets and goodwill from acquisitions completed in prior years. Net loss was $23.3 million for the fourth quarter of 2024, or negative $0.39 per share, an improvement of $4 million compared to a net loss of $27.3 million or negative $0.44 per share in the fourth quarter of 2023. The improvement in net loss was primarily due to improvements in expense structure and lower impairment offset by gross margin. Adjusted EBITDA, as defined in our press release, was negative $8.1 million compared to negative $3.7 million in the same period last year. The decrease in adjusted EBITDA was primarily driven by sales mix and one-time inventory adjustments of more than $3 million that we believe address the alignment of our inventory mix to meet go-forward proprietary brand expectations. Now I will provide a quick overview of our results for the full year 2024. Net sales were $188.9 million compared to $225.9 million for 2023. As mentioned, this was mainly due to the closure of 19 retail locations. In 2024, proprietary brands accounted for 24.2% of Cultivation and Gardening sales, up from 18.8% in 2023. Additionally, proprietary brand sales increased on an absolute basis from $36.5 million in 2023 to $39.5 million in 2024, an 8.4% improvement. Gross profit was $43.7 million for the full year 2024, a decrease of $17.5 million compared to gross profit of $61.3 million for the full year 2023. Gross profit margin was 23.1% for the full year 2024 compared to 27.1% for the full year 2023, a decrease of 400 basis points. Net loss was $49.5 million for the full year 2024, or negative $0.82 per share, an increase of $3 million compared to a net loss of $46.5 million for the full year 2023, or negative $0.76 per share. Adjusted EBITDA, as defined in our press release, was negative $14.5 million for the full year 2024 compared to a negative $5.6 million for the full year 2023. The decrease in adjusted EBITDA was primarily driven by the pivot that we took in the third quarter of 2024 to restructure the business. The fluctuation was primarily due to softer revenues along with the decrease in gross profit margin resulting from inventory disposal costs and inventory sales discounts resulting from 19 store closures and rationalizing our product mix. Turning to the balance sheet. As of December 31, 2024, the company had $56.5 million of cash, cash equivalents, and marketable securities and no debt. During the full year 2024, we utilized $6 million to repurchase company shares at an average share price of $2.38 per share. As of December 31, 2024, we had completed all purchases available under the share repurchase program. We continue to maintain a strong cash position and do not foresee any near-term financing needs. Now I'll discuss our guidance for 2025. As Darren mentioned earlier, for the full year 2025, we expect net revenues to be in the range of $170 million to $180 million. We expect full year 2025 adjusted EBITDA to be in the range of a $2 million loss to a positive $2 million profit. Further, with the improvements made in our inventory base, we anticipate gross margins for the full year 2025 to be in the range of 29% to 31%. Our updated guidance assumes a softer first quarter with profitable second and third quarters emphasized by the outdoor cultivation season, along with continued improvements in gross margin and a lower operating expense base as we emerge into 2025 with a cleaner and more strategic model that better aligns our business to current industry conditions. In closing, during 2024, we made significant progress in streamlining our operations and restructuring our business for long-term profitability. We ended the year with a strong balance sheet and the financial resources to support our continued strategic growth. In 2025, we will remain focused on driving further margin expansion, managing our costs, and focusing our attention toward opportunities that we expect will deliver long-term profit to our shareholders.

Thanks, Greg, and thank you for everyone for joining us today. Over the past year, we have taken actions to fundamentally transform GrowGeneration into a leaner, more efficient, and product-driven business. As we move forward, we will continue to expand our high-margin proprietary product offerings, refine our B2B e-commerce platform, and leverage our optimized cost structure to deliver stronger financial performance. With a debt-free balance sheet and a strong cash position, GrowGen is well positioned for sustainable revenue growth and profitability as we move throughout 2025. That concludes our prepared remarks. Operator, please open the line for questions.

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

So first question I want to ask is just on the gross margin. You guys are targeting a lot of improvement there. So I just want to talk about the cadence we should expect. You alluded to it a little bit. It seems like a little bit softer 1Q and then a lot more improvement in 2Q. I don't know if that was more broad profitability versus just the gross margin. So just curious there, should we expect some level of a step-up in one of the quarters there or were there's a more gradual improvement throughout relative to where we came for 4Q?

Greg, would you like to take that?

Yes, I'll take that one. So Aaron, I think when we look at the first quarter, we're coming off of a fourth quarter where 30.4% of our Cultivation and Gardening net sales were driven from our proprietary brands. In our model, we're assuming a continued ramp throughout the course of the year, which will help support greater gross margin as we proceed through the duration of the year. Traditionally, Q3 is our strongest quarter from a gross margin perspective. Q2 tends to perform quite well also. But we are expecting an immediate lift in the first quarter on gross margin. We're seeing it in our results already as we're looking at reporting on a monthly basis, and we're excited to talk about the first quarter in May in our next earnings call. But as we get throughout the year, I think you will see continued improvements. We're targeting 30% for the full year in terms of gross margin. So our range on the guidance side is from 29% to 31%. So hopefully, that helps.

That's very helpful. Second question for me, just high level, as you guys look to shift a little bit more to the e-commerce versus stores, can you talk about some initiatives you're taking to help transition some of those sales? And with the store fleet at 31 today, are you comfortable with that? Or potentially, if you get more traction on shifting sales to e-commerce, is there a potential for that to slow down even more?

If I can start, Aaron. Our restructuring is largely complete when it comes to the store side of it. We're down to 31 stores, focusing on the higher-performing markets and driving operational efficiencies. But as always, we'll continue to evaluate performance and market conditions, and we're always looking to optimize if we can. The B2B portals launched in the fourth quarter; they're up and working well. We are transferring our commercial customers over the portals as we speak with direct shipments out of our hubs and also out of our warehouses. So what we're seeing right now is from GrowGen, we're just much more of a business-to-business company than business to consumer. So the necessity of overlapping stores in the same areas are just starting to disappear. So we will continue to rationalize, but I will say that the majority of it is over today.

Your next question comes from the line of Mark Smith from Lake Street.

First question for me is just looking at the proprietary brands. Can you talk about the sales within different channels? What's going through e-commerce, B2B business versus in the stores?

Greg, would you like to take that?

Yes. So I think when you look at the different channels, right now, you're seeing our retail and commercial group really accelerating the penetration of our proprietary brands. Our wholesale business at this point is almost entirely our proprietary brands. So we are distributing very little of other organizations' products. It's mostly our own products at this point. And e-commerce is picking up as well. We have spent a lot of time building up brand pages and prioritizing Amazon in recent months. We moved that business to FBA as well. So that's all of our proprietary brands. We are no longer distributing other companies' products on Amazon either. So you're seeing really growth from all of our channels right now on the proprietary brand side of things with some of the channels almost exclusively focused on those products right now as we look at the pivot from being a retailer, which we still have 31 retail locations that are very important to our business, but doubling down on our products and finding additional verticals to sell through those products into. And I think you'll see more diversification from us in 2025 above and beyond what we've already executed.

And then I want to follow up on gross profit margin. It sounds like there's a lot of clear-out sales type stuff to clean up the inventory in Q4. Do you feel like you got through all of that? Or is there some carryover still of inventory that needs to be cleaned up here in Q1?

The heavy lifting is really done on the inventory side of things, Mark. When we saw the industry start to turn in late '21, we had over $20 million in inventory that some companies may have discarded more rapidly. For us, we sold through most of it at a lower margin profile, sometimes at a loss throughout the last several years, and it really burdened our results. As we're looking at the heavy focus on restructuring in the back half of 2024, we made a pretty significant cut in the fourth quarter to go through all of our SKUs on a qualitative basis and move on from what no longer serves this business as we look at 2025 and beyond in focusing on our proprietary brands, cleaning up our warehouses and our distribution centers, and repositioning the business. So in short, there will always be continuous improvements made to inventory, but the heavy lift is gone, and that really reflects what we believe we'll achieve on a gross margin perspective for 2025.

And Mark, what you also saw during the cleansing of the inventory, you saw 19 stores closed in the last 6 months of the year. So there was a lot of inventory running through those 19 closed stores where we put products on sale to better serve our customers instead of spending additional capital on moving the products from store to store. So I think it was twofold. One, it was cleansing of the inventory, but it was the amount of stores that were closed in such a short period of time is why you saw 16% margins in the fourth quarter. And again, we do believe that you'll see those numbers even in the first quarter in the high 20s and certainly reaching the 30s, hopefully, by the second quarter of this year.

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

This is William Dawson. I'm on for Brian Nagel. So very broadly, I just wanted to ask about demand in the space. And with respect to your 2025 outlook, I wanted to just understand better growth and demand assumptions embedded within that outlook.

Greg, you can go over the outlook, and then I'll take the other part of it.

Yes. So when we look at 2025 from a demand perspective, we foresee a rebound from our MMI business. It dropped from $30 million to $25 million in the prior year. We expect some growth back in that business into 2025, more diversification in revenue streams. The largest part of that business from a revenue perspective in 2024 was on the retail side of things, and we're seeing more and more opportunities within retail but in other places as well. So we're optimistic about MMI, and that's part of the basis of why we believe the valuation is worth holding on to long term and continuing to double down on that business. But within the Cultivation and Gardening side of things, which is our core business, I think we're seeing most of the growth coming in from our proprietary brands and our ability to service the B2B customers. Over the last several months, we rolled out B2B portals for both our wholesale business as well as our commercial customer base, and we're beginning to see very strong adoption within the portals and more interest in our proprietary brands. We launched the Drip powder line in Q2 of 2024, and we're starting to see a lot more conversion as time progresses. Char Coir continues to evolve and become a higher demand product. So I think when we look at our business, we're focused on the demand of our proprietary brands as much as anything right now. We continue to stay focused state by state and in different markets just based on how the laws are structured in the U.S. around cannabis and cannabis growers. And then lastly, we're continuing to place emphasis as well on diversifying our revenue streams outside of cannabis into lawn and garden, nurseries, greenhouses, and eventually big box as well. So there are a lot of moving parts, but we feel good about really our brands and our ability to drive more sales through those brands.

I appreciate that. My next question was going to be on the regulatory environment. A lot has changed since we last spoke. And just wanted to see if there's been any updated thinking around cannabis reclassification, banking policies, SAFE Act, that type of thing.

As of today, I think most of us are still very confused. We are waiting. We still do believe that it's not if, it's when the administration certainly has signaled prior to the election that they would stand for rescheduling it state by state. But most of it has been pushed back without any certain date. We do believe that if you see rescheduling or safe banking, it will bring tremendous capital into the industry, which will flow down to GrowGeneration on the build-out side and also on the consumer side of it. So we are waiting like the rest of us. Our numbers that you see today, $170 million to $180 million are based on nothing happening with our federal government this year. But we still remain optimistic. We remain optimistic that the administration will reschedule as promised in this pre-election campaign.

There are no further questions at this time. I will now turn the call over to Darren Lampert. Please continue.

Thank you for joining us on the call today. We look forward to updating you on our progress in our first quarter call in May. Thank you.

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