Earnings Call Transcript - GRWG Q1 2026

Operator, Operator

Hello, everyone. And welcome to GrowGeneration's first quarter 2026 Earnings Conference Call. My name is Matthew, 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 Strategic Communications for introductions and the reading of the safe harbor statement. Please go ahead, Phil.

Phil Carlson, Communications Advisor, KCSA Strategic Communications

Thank you, operator. Welcome, everyone, to GrowGeneration's First Quarter 2026 Earnings Results Conference Call. With us today from GrowGeneration are Darren Lampert, Co-Founder and Chief Executive Officer, and Gregory Sanders, Chief Financial Officer. The company's first quarter 2026 earnings press release was issued after the close of market 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 will 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 reenter 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.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

Thanks, Phil, and good afternoon, everyone. Thank you for joining us to review GrowGeneration's first quarter 2026 financial results and to discuss our outlook for the rest of 2026. Over the past several years, we have transformed GrowGeneration into a more focused and efficient business. Our first quarter results reflect our continued progress, highlighted by our second consecutive quarter of year-over-year growth, improving profitability, and continued expansion of our proprietary brand mix. While the first quarter is typically our seasonally slowest period, revenue exceeded our expectations, driven by momentum in our commercial business and meaningful contribution from our Storage Solutions segment. As we move through 2026, we remain focused on three priorities: expanding our commercial B2B platform, growing our proprietary brands across additional channels, and continuing to improve operating efficiency. Through the cost reduction initiatives we have implemented over the past several years, these initiatives are helping improve revenue quality, support margin expansion over time, and position the business for more sustainable profitability. As I mentioned, our commercial B2B business remains the core driver of our growth strategy. Through GrowGen Pro, we continue to expand relationships with multistate operators, greenhouse growers, and other commercial cultivation customers across North America. In our commercial business, we continue to see increased adoption of proprietary brands such as CharCoir and Drip Hydro, as customers standardize around recurring consumable programs. At the same time, we continue to reposition our legacy retail footprint into commercial sales and service centers, allowing our technical sales team to deepen customer relationships and support larger commercial accounts more efficiently. Beyond our core commercial business, we are also expanding our proprietary brands into adjacent channels and new customer categories. Because these brands were developed for professional cultivators, we believe they are well positioned to expand into broader horticulture and consumer markets. Early adoption has been very positive. During the quarter, we continued expanding distribution into lawn and garden channels, into online big-box retail, and our direct-to-consumer platform, The Harvest Company. We will also continue expanding our commercial presence in Canada and advancing additional international distribution relationships. Importantly, these initiatives leverage the same proprietary brand portfolio and supply chain infrastructure already supporting our commercial business, allowing us to pursue growth opportunities without materially increasing complexity across the organization. We also continue to benefit from the structural cost reduction initiatives implemented over the past several years. Much of this work is now reflected in our operating structure, positioning the business to generate improving profitability as revenue scales. We also continue to maintain a strong balance sheet, ending the quarter with $41.1 million in cash equivalents and marketable securities, and no debt. This financial flexibility supports continued investment in our strategic priorities while maintaining a disciplined approach to capital allocation, including our share repurchase. Turning to the quarter itself, first quarter revenue exceeded our expectations and marked our second consecutive quarter of year-over-year revenue growth despite operating with a smaller and more efficient footprint. This performance was driven primarily by continued momentum in our commercial business, expanding proprietary brand penetration, and strong growth in our Storage Solutions segment. Proprietary brand sales represented 37% of cultivation and gardening revenue during the quarter, reflecting continued progress in shifting our sales mix towards higher-value recurring consumable proprietary branded products. We also saw strong performance from our Storage Solutions segment, where revenue increased 35.5% year over year. This segment continues to benefit from increasing capital investment activity across a broader range of end markets and contributed meaningfully to both revenue growth and profitability during the quarter. Overall, we believe the quarter reflects continued progress against our strategy to build a more focused, commercially driven, and profitable business. From a profitability standpoint, our first quarter results highlight our continued progress in improving the quality and efficiency of our business. While gross margins were impacted by factors related to store consolidation activity and product mix during the quarter, we believe these pressures are largely short term in nature. At the same time, we continue to see meaningful benefits from the cost reduction initiatives implemented over the past several years, which contributed to improved profitability during the quarter. As we move through 2026, we expect improving gross margins, continued operating discipline, and increasing operating leverage. Looking to the second quarter, we expect revenue in the range of $42 million to $44 million along with a return to positive adjusted EBITDA. For the full year, we remain focused on expanding proprietary brand penetration towards our approximately 40% target and achieving approximately breakeven adjusted EBITDA for 2026. Before I hand the call to Gregory, I would like to briefly comment on the regulatory environment. On April 22, the acting attorney general signed an order moving state-licensed medical cannabis to Schedule III of the Controlled Substances Act, providing immediate 280E tax relief to qualifying operators. This is a meaningful tailwind for our customers, and as their financial position strengthens, their capacity to invest in the cultivation infrastructure we provide grows with it. While the process remains ongoing, we believe GrowGeneration is well positioned to support our customers as the industry continues to mature and evolve. That concludes my remarks. Now, I will turn the call over to our CFO, Gregory Sanders. Thank you.

Gregory Sanders, Chief Financial Officer (CFO)

And good afternoon, everyone. I will begin with a review of our first quarter 2026 results and then provide additional context on our outlook for the year. Overall, our first quarter performance was consistent with our expectations and reflected continued progress on our key operating priorities, including proprietary brand mix expansion, cost discipline, and improving adjusted EBITDA. For 2026, GrowGeneration reported net sales of $38.4 million, up 7.5% compared to $35.7 million during the same period last year. This year-over-year revenue growth was led by our commercial B2B business. Net sales in our cultivation and gardening segment were $31.9 million for the quarter, compared to $30.9 million in the same period last year. Proprietary brand sales represented 37% of cultivation and gardening revenue, up from 32% in the prior year. This was largely driven by our strategic initiatives to increase our sales mix of higher-margin proprietary products, which remains one of the primary drivers of our margin expansion and long-term profitability strategy. In our Storage Solutions segment, net sales were $6.5 million for the quarter, up from $4.8 million in 2025. Growth in the segment is being driven by increasing capital investment across a broader set of end markets. As customers continue to invest in infrastructure, automation, and facility expansion, this trend is supporting both volume growth and a more diversified demand profile. Gross profit was $9.7 million for 2026, consistent with the same period last year. In cultivation and gardening, gross profit declined year over year primarily due to inventory-related charges from four store closures and a higher mix of lower-margin durable products. Excluding these items, margins would have been generally in line with the prior year. This was partially offset by strength in Storage Solutions, where higher volume and a 200 basis point improvement in gross margin to 39.6% drove a 42.7% increase in gross profit dollars. Total company gross margin was 25.4% for the quarter compared to 27.2% in the prior year period. Now turning to expenses. In 2026, store and other operating expenses declined approximately 27.2% to $6.4 million compared to $8.8 million in 2025, reflecting the benefits of our cost reduction initiatives. Selling, general and administrative were $6.9 million, a 2.6% improvement compared to $7.1 million last year. Total operating expenses decreased by $4.6 million or 23.4% to $15 million compared to $19.6 million in the comparable 2025 period. Depreciation and amortization totaled $1.6 million, down $2.0 million or 55.1% compared to $3.6 million in the same period last year. The decrease primarily reflects asset retirements related to cost reduction initiatives and certain intangible assets reaching the end of their useful lives. GAAP net loss decreased to $4.9 million, or negative $0.08 per share, a $4.5 million improvement compared to a net loss of $9.4 million, or negative $0.16 per share in the prior year period. The improvement was primarily driven by higher revenues, reduced operating expenses, and lower depreciation and amortization, partially offset by lower gross margin percent. Non-GAAP adjusted EBITDA, as defined in our press release, was a loss of $1.6 million, a $2.4 million year-over-year improvement compared to a loss of $4.0 million in the prior year, primarily reflecting the impact of our cost reduction initiatives and improved operating leverage. Now turning to the balance sheet, we ended the quarter with $41.1 million of cash, cash equivalents and marketable securities and no debt. This reflects our continued focus on liquidity, working capital discipline, and inventory quality. Our balance sheet strength provides us with the financial flexibility to execute our strategic priorities while maintaining a disciplined approach to capital allocation. During the first quarter, our Board of Directors authorized a share repurchase program of up to $10 million of the company's outstanding common stock, reflecting our view that the current share price does not reflect the long-term value of the business. We intend to execute the program opportunistically, subject to market conditions, capital allocation priorities, and applicable securities laws. Now turning to our outlook, we are reaffirming our full year 2026 guidance. We continue to expect net revenue in the range of $162 million to $168 million and approximately breakeven adjusted EBITDA for the full year. Our outlook reflects a continued focus on revenue quality, proprietary brand mix, and disciplined cost management. For the second quarter, we expect net revenue in the range of $42 million to $44 million with a return to positive adjusted EBITDA. To summarize, our year-over-year revenue growth in the first quarter was driven by continued strength in our commercial business and a meaningful contribution from our Storage Solutions segment. We also delivered improved profitability reflecting the impact of our cost reduction initiatives and a more efficient operating structure. We ended the quarter with a strong liquidity position and no debt, providing flexibility as we continue to execute our strategy. Looking ahead, we remain focused on driving revenue quality, expanding proprietary brand penetration toward our approximately 40% year-end target, and delivering breakeven adjusted EBITDA for the full year. With that, I will turn the call back to Darren for closing remarks.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

Thanks, Gregory. And thank you again to everyone for joining us today. In closing, we believe the first quarter reflected continued progress against the strategic and operational priorities we have been focused on over the past several years. We delivered another quarter of year-over-year revenue growth, continued expanding proprietary brand penetration, improved profitability, and maintained a strong balance sheet. As we move through 2026, we remain focused on growing our commercial platform, expanding higher-margin proprietary brand sales, driving operating leverage, and executing with discipline across the organization. We believe these initiatives position the company well to continue improving profitability and creating long-term shareholder value. We appreciate your continued support and look forward to updating you on our progress throughout the year. That concludes our prepared remarks. Operator, please open the line for questions. Thank you.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. To decline from the polling process, please press star followed by the number 2. If you are using a speaker phone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Aaron Grey of Alliance Global Partners. Please go ahead. Your line is open.

Aaron Grey, Analyst, Alliance Global Partners

Hi, good evening, and thank you very much for the questions. First question for me, just on the rescheduling news, I want to talk about maybe some of the more near-term impacts through the lens of durables and some of the delays and refreshes, given some of the tough cash flow issues and balance sheet issues some operators have had. It might be a bit early, but could you talk about some potential impacts of now getting clarity on the 280E, on the go-forward, and potentially getting some forgiveness on the legacy taxes owed and what impact that could have to open up refreshes and your durables business? Thank you.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

We have been talking about this for a while. We certainly think it is a meaningful tailwind for our customers. As their financial positions strengthen and their capacity to reinvest money in infrastructure increases, we believe that will benefit GrowGeneration, particularly in durables going forward. We are starting to see it now. We have not been this active since 2021 in bidding out lighting, dehumidification, and infrastructure for facilities. So we are pretty excited about it. As we focus on the B2B side of our business, we are in a strong position right now, and we are able to finance. We think you will see continued movement on the durable side of the business throughout the year. There are some important conversations coming up in June on the recreational side, but the money that is coming back to these balance sheets will be spent. A lot of facilities right now need refurbishing, so we are pretty excited, and we saw the mix starting even in the first quarter. Our pipeline has not been this strong since 2021, and we certainly are looking for a long-term rebound on the durable side, which also drives consumable sales.

Aaron Grey, Analyst, Alliance Global Partners

Okay, great. That is helpful, Darren. Second question for me: as we look at Q2 and the remainder of the year, as we think about some sequencing of the gross margin, you talked about Q2 being positive EBITDA. How should we think about the role of gross margin potential step change there, and then how we should think about its sequencing through the year to get to the full-year guide? Thanks.

Gregory Sanders, Chief Financial Officer (CFO)

Thanks for the question. We were pleased with the first quarter results coming in at $38 million against our full-year goal of $162 million to $168 million in sales. As we look at Q2 and Q3, we see the business ramping: Q2 guidance of $42 million to $44 million in sales, and a margin profile moving back into that 27% to 29% range. What you saw in the first quarter was that we closed four stores, and that had about a 1.5 point impact on margin, so it was slightly lower than expectation. The good news is that as we look at the remainder of the year, we have fewer store closures scheduled at this point, so we expect less impact in future reporting periods from the closure activity. We think, with roughly $125 million to $130 million in revenue remaining in our full-year guidance, that we will be able to position the business back into that 27% to 29% range for the full year.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

On the other side of that, as we transition this company into a business-to-business organization, our private-label brands are growing quicker than we had expected, and we believe you will see those in the 40s before the fourth quarter of this year. We had some inventory issues with some products that had been sitting and become obsolete or slow-moving — not our brand, but other brands — so we were more aggressive in the first quarter marking some products and selling some products at discounts. You will see that moving positively through the rest of the year, and margins will start ticking back up.

Aaron Grey, Analyst, Alliance Global Partners

Okay, great. Appreciate the detail. I will go and jump back in the queue.

Operator, Operator

Thank you. Your next question comes from Brian Nagel of Oppenheimer. Please go ahead. Your line is open.

Brian Nagel, Analyst, Oppenheimer

Nice progress here. Congrats, and thank you. There are a few questions, Darren. I want to go back to the question that was just asked and, I recognize there are a lot of moving parts, both at GrowGeneration and within the sector, but as you think about— you mentioned you have seen the most build activity since 2021. Is that a function of the rescheduling, or is there another factor or combination of factors?

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

I think there are a couple of factors. First, many facilities need to be refurbished. A lot of our customers have been extremely conscious about their balance sheets, and they delayed refurbishment and building another year longer than they could have. So everyone's been managing balance sheets. With rescheduling, the amount of money coming back into this industry — anywhere between $1 billion and $2 billion back onto balance sheets — people are looking for more efficient ways to grow and there are more efficient products out there today. Most of our customers are growing much more efficiently than they used to, getting more pounds per light than before. GrowGeneration is well positioned from a balance sheet perspective to lend money to our customers and help them refurbish facilities. So the demand is coming from multiple sources. You are also starting to hear from MSOs that supply and demand are starting to come into balance, and with rescheduling on the medical side and potential export opportunities to Europe, some supply may come offline here, which could help stabilize prices. We have not seen the industry in this shape since 2021. I am a firm believer that most of the companies that are well capitalized will be around for a long time. You will see a tremendous sea change in this industry, and from the equipment side, GrowGeneration is positioned well. We have changed our business significantly: we have hired facility advisers and technical advisers, and groups of GrowGeneration employees go into facilities daily to help with grows and recommend products. The business is very different now. We are down to 19 facilities from 65, and what you saw in the first quarter was year-over-year growth with 12 fewer facilities. Typically when we close stores, we lose up to 50% of walk-in business, so seeing revenue growth with many fewer stores is notable. We believe you will see continued growth throughout the year. We have spent 2021 to 2026 resetting GrowGeneration, and right now we are in a position to return to prior performance levels over time.

Brian Nagel, Analyst, Oppenheimer

That is very helpful, Darren. Second question: if I am reading the numbers right, this is your second consecutive quarter of year-over-year revenue growth, and it looks like revenue growth accelerated rather significantly in Q4 and Q1. What happened between those two quarters?

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

It is twofold. We usually see year-over-year revenue growth from the fourth quarter to the first quarter, and then significant growth in the second and third quarters, which are usually our strongest. Last year's first quarter we had 31 stores; we are down to 19 locations now, and you are still seeing revenue growth with fewer locations. So the growth rate you see year over year with fewer stores is stronger than it appears. We expect to see continued revenue growth as the year progresses. One of the exciting parts is that expenses are coming down while revenue is starting to increase. We believe this is a reset. We have reset the company and now are positioned to show quarters of growth and improved financial performance.

Operator, Operator

Your next question comes from Mark Smith of Lake Street. Please go ahead. Your line is open.

Mark Smith, Analyst, Lake Street

Hi, guys. I wanted to dig in a little bit more on some of the inventory in the closed locations and related sales. I realize this puts some pressure on gross profit margin as you clear some of this out, but can you quantify how much of the sales came from these closing-location inventories, and is there still inventory out there to clear?

Gregory Sanders, Chief Financial Officer (CFO)

In the first quarter we closed four locations, and we included some detail on the adjusted EBITDA add-back schedule. We estimate that the actual impact on gross margin was about 1.5 percentage points. The impact is twofold: what ends up getting discarded and what is liquidated during pre-closing activity, plus incremental freight in certain situations. In terms of moving the inventory from those activities, we expect fewer closures in the next three quarters combined than we had in Q1, so we expect lesser impact from closures going forward. We have sufficient reserves on our inventory now, so we do not expect a similar impact throughout the remainder of 2026.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

Mark, on the other side of that, there were certain margin pressures from tariffs in the first quarter. One of our largest products, CharCoir, was affected by tariffs in the first quarter. Some products that came in typically in the third or fourth quarter had very large tariffs on them, and those pressures are still dissipating as new product comes into GrowGeneration. So besides the margin degradation from closed stores and some inventory, you also saw tariff impact in the first quarter.

Mark Smith, Analyst, Lake Street

Perfect. Tariffs was actually my next question. Curious about the impact of tariffs and if you can quantify it at all, and Gregory, any potential refunds that you can get on tariffs?

Gregory Sanders, Chief Financial Officer (CFO)

Like many companies that had tariff impact over the last year or so, we are actively pursuing claims that could be refundable to the business. It is too early to comment on what the impact might be. We are pursuing our tariff refunds and are hopeful that progress could help the business in the back half of the year or into 2027 depending on timing and how things continue to progress.

Operator, Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to Darren Lampert, Chairman, Co-Founder, and CEO, for closing comments.

Darren Lampert, Co-Founder & Chief Executive Officer (CEO)

Thank you. I would like to thank our shareholders for their continued support and we look forward to updating you on our second quarter results in August. Thank you very much, and have a beautiful night.

Operator, Operator

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