Q3 2021 GrowGeneration Corp Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by.
I'll come to grow generation Corp, 2021 third quarter conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation. The conference will be opened for analyst questions. If you have a question. Please press the star followed by the one on your Touchtone phone. If you would like to withdraw your question. Please press the star followed by two.
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This conference is being recorded Tuesday November 11th 2021, and the earnings press release accompanying this conference was issued this morning.
I will now turn the call over to John Evans Investor Relations.
Good morning, I would like to welcome everyone to grow generation third quarter 2021 earnings conference call with US. This morning is Daryl Byrd, our co founder Chairman and CEO, Michael element co founder and President and Jeff Lasher.
CFO after management remarks, there will be an analyst Q&A session.
Always we expect to make forward looking statements. This morning, but we want to caution you that our actual results could differ materially from what we say here such statements can be identified by terms such as believe expect intend and May you should not place undue reliance on forward looking statements actual results may differ materially from those forward looking statements.
But we do not undertake any obligation to update any forward looking statements. We make today for more information about factors that may cause actual results to differ materially from forward looking statements. Please refer to the press release, we issued this morning as well as risks and uncertainties included in the section under the caption risk factors and Madden.
It's much discussion and analysis of financial position and results of operations in our annual report on Form 10-K filed with the SEC and any subsequent form 10, Qs and form eight Ks filed with the SEC. Following prepared remarks today, we will open the call for questions I'd also.
So remind everyone that today's call is being recorded and an archived version of our call will be available on our website later today.
I'll now turn the call over to our CEO David Leppert.
Thank you John.
Good morning.
Before I begin with my prepared remarks, I'd like to thank each and every one of our employees and customers for their continued hard work dedication and loyalty.
Our best in class staff is now over 740 <unk>.
500 over teammates experienced grow approach.
We have created the largest sales team of hydroponic product specialists in the country.
We had a strong record sort quarter with revenue of $116 million in the quarter.
111% increase year over year with a 15, 7% increase in same store sales.
The company earned seven cents per share on GAAP net income of $4 million, which is burdened by amortization and income taxes.
Adjusted EBITDA grew 63% to $10 8 million for the third quarter 2021, or <unk> 18 per share versus $6 6 million for the third quarter 2020, or <unk> 13 per share.
Inventory increased to $113 million and we ended the quarter with cash and marketable securities on hand of $93 million.
Like all commodity products in emerging industries, you see from time to time, an imbalance in supply and demand.
Experienced these imbalances before in California, Colorado, and Oregon, and now once again these states, California, and the west are dealing with oversupply positions that have created downward pressure on the cost per pound of flower.
This is a short term issue as growers will either sell through their inventory or have to dispose of it as a flower has a freshness and effective exploration date.
<unk> chain headwinds had an impact on shipping container costs and securing some products, but <unk> purchasing team has gotten ahead of the inventory.
So we were in a very strong inventory position heading into Q1 2022.
Despite supply chain of construction delays, we opened two new superstores in L. A that service logistic hubs for the important southern California market.
We are building for the future and have 37 states of growth in front of US However, customers in a few key states, including California, Colorado, and Oregon are taking a wait and see approach on building and outfitting cultivation facilities as the market sells through excess cannabis.
Sorry.
In addition, there has been a slowness to build a new markets and legalized states as cultivators wait for the rollout of rules and regulations, which are behind schedule.
We believe the majority of these issues will be rectified by the second half of 2022.
Accordingly, we are adjusting our annual revenue outlook to $435 million to forge, a $40 million and adjusted EBITDA guidance for the year of 41 million to $43 million.
Evidence that our growth pro strategy is working is the explosive success, we're having selling our lineup of private and proprietary brands.
Power Si chart core Oi in Leds Zara, Bruce fans also of market acceptance and growth in 2021.
<unk> is now in over 500 independent hydroponics locations across the U S and cells now in Canada, U K and Europe.
Our ability to distribute our proprietary brands beyond our retail footprint as a future driver for our company.
What excites us as the leader in the hydroponics and indoor gardening space is the future we see over the next several years.
This week Congresswoman, Nancy Mace announced a Republican back proposal, so Lee legalized cannabis nationally treating cannabis as an agricultural product.
<unk> like alcohol.
States are allowing home growing as previously announced in New Mexico, Virginia, Connecticut with strong support for proposals in New York and Florida.
At present, we operate stores in 13 of the 18 states that have adult use laws and we plan on expanding our states to 18 in 2022.
Yes.
Throughout 2021, we've been building for the future and we're in this for the long term.
No company is better positioned to take advantage of federal legalization of cannabis than grow generation.
We see a tremendous opportunity in the vertical farming agricultural market as more and more states face the challenges of climate drought water shortages without door growing <unk>.
<unk> has built garden centers for a new generation that are growing for their own personal consumption food.
Food production and plant medicine.
This demographic group seeking the latest technologies to grow indoors, and our energy and conservation conscious.
Zing hydroponics is a better way to grow.
In order to position the company for 2022 and beyond we have made several strategic decisions.
Most importantly, we've organized the management team to focus the enterprise around key deliverables over.
Over the past several months, we have brought on key leaders, including Paul Route tennis to take over as chief merchant and lead the private label and proprietary brand growth Dennis Sheldon to run technology and supply chain, Becky Gephardt, Turan ecommerce and marketing.
These individuals bring exceptional talent expertise and experience they are leading the organization into 2022 and beyond.
This shift allows our chief operating officer to focus exclusively on new store development retail store acquisitions and execution of retail operations to drive that segment of our business to higher cash generation in order to fund growth initiatives.
All four of these leaders reports of my co founder Michael Solomon.
In addition, we've established an industrial sales organization to exclusively work with large cultivation operations there'll be serviced outside of our retail store system.
This industrial sales team will also report to Michael.
As we focus on the long term growth plans, we've established efforts across the portfolio of the business. The following five customer focused initiatives will be key to EBITDA generation efforts to improve results.
First we.
We have focused our energies for 2020 to a new greenfield locations across new states and new store Greenfield growth.
There are still acquisition targets that will be added over the next couple of years, but in emerging states. We believe our greenfield strategy will produce higher returns on investments.
Second we're.
We're investing in company wide technology to drive operational excellence in our retail stores.
Our president ERP system is limiting our ability to scale and keep up with our growth.
Our third initiative is related as we plan on establishing a network of distribution centers in key locations to serve our retail stores at.
At present, most of our product is shipped directly to stores. Our proprietary brand fulfillment is handled by third party logistic providers, who will be using best in class technology to drive order management and warehouse management systems integrated with new Pos and ERP systems launching before summer of two.
<unk> thousand 22.
Our fourth initiative is driving sales of proprietary brands and private label sales in our retail stores.
This includes investments in resources to provide customer service product development and distribution excellence.
Over the long term this will provide a platform for penetration and our goal in 2023.
Is that 25% of sales coming from private label and proprietary brands.
Finally, we plan on integrating our three main ecommerce web stores into one common backend platform that will serve our customers better with improved product selection.
Common pricing product availability and the resources to assist customers with solutions to their problems.
All of these initiatives will require a team oriented approach and we believe the management team in place now is better suited than any other team in the industry to drive profitability growth over the next decade.
I'll now turn the call over to Jeff Lasher, our CFO, who will give a little color to our initiatives. Some insights into Q3 results and our views of what 2022 looks like Jeff.
Thank you Darrin, let me start by building on what Darrin laid out for future initiatives.
I will address Q3 results and what our business looks like in 2022.
Our investment focus in 2022 will shift toward Greenfield locations.
We were very pleased with the customer reactions.
Through our new locations in California.
And believe we can modify the size of these locations, while keeping the selection and service.
Our 15% to 20, new locations will range from 5000 to 15000 square feet of retail selling space.
Along with outdoor facilities to serve book sales.
That capital investment will be $1 million to $2 million per location, including inventory.
These locations will be an emerging states, such as New Jersey, New York, New England, Pennsylvania, and Illinois.
Overtime, this will reduce our reliance on California, which.
Which presently represents 26% of sales in mature markets, including Colorado, Washington, and Oregon, which represent 13% of sales.
The investment of $15 million to $30 million in 2022 will be combined with an investment in technology to improve operational metrics in the stores.
Our revenue has grown 153% over the same period in 2020, and our store operating expenses have grown 185%.
To drive profitable growth in 2022.
We recognize the need to invest in efficiency of store operations.
The key initiative of technology in 'twenty two.
<unk> has been an organizational effort that spans across functions.
We will be moving to a new solution powered by Oracle and Manhattan associates to replace our existing systems.
We will have a retail technology stack in line with best in class retailers of similar size with Oracle Netsuite ERP, coupled with point of sale order management and warehouse management systems integrated by Manhattan Associates.
We have partnered with the best providers in retail to use technology as a customer centric competitive advantage.
This will result in additional operating costs over the next 180 days as we prepare for an early second quarter launch and add to our fixed asset base by about $5 million, but we believe the project will produce substantial ROI.
The new smaller retail locations will be serviced by a network of distribution centers that will feed the retail stores with inventory.
And be less than a day away from sites they serve.
This will allow us to consolidated inventory.
Improved procurement cost of goods.
And be more customer focused and stores.
Our existing locations and sacramental long beach in Tulsa will be the foundational pillars of this new strategy.
In 2022, we will bring on online additional facilities to serve the Midwest and east coast locations.
At present, Michigan represents 15% of sales in new England is over 10% of sales for the company, but neither are served with a distribution center.
Alongside the retail store plans, we have established a strategic plan to grow private label offerings.
And proprietary brands.
At present, we have two proprietary brands powered psi in charcoal.
Along with our exclusive private label brands sold only in grow generation locations that represented about 9% of our sales in the third quarter.
Our plan is to be 25% of sales by 2023.
This will produce a meaningful impact on gross margins.
We see our ability to connect with customers with best in class products, including quality grow Gen exclusive offerings as the best win win for customers and the company.
We intend to increase turnover through SKU rationalization and utilizing the distribution center strategy, which allows us to rightsize inventory.
This will result in better operational results increased gross margin and increased inventory turnover.
That drive materially better cash from operations as early as spring 2022.
However, this strategy in 2021 has resulted in an investment in the long lead time supply chain.
Our inventory at the end of Q3 was $113 million and has grown $59 million this year.
Of that growth $13 million was acquired in acquisitions.
And $13 million was associated with growing the offerings of private label.
In addition, we have used our capital capabilities to secure production of product overseas through prepaid inventory purchase commitments with long lead times in advance of spring 2022 needs.
Our final initiative is associated with e-commerce.
At present, the company has a variety of backend processing software.
Our core system is run on Adobe's magenta platform.
And we will be migrating all of the sites to that engine over the next few quarters.
We do not expect any material impact from this change for our customers, but it will lower the cost of operation and drive profitability in this area.
Turning attention to the quarter revenue for the quarter was $116 million compared to $55 million for last year and.
An increase of 111% or $61 million.
The increase in revenues is primarily attributable to a $29 million increase in revenue related to stores acquired since first quarter 2021.
A $6 $6 million increase in e-commerce revenue.
As that channel grew from $3 9 million to $10 $5 million.
And $8 million or 15, 7% from 25 comparable stores operated for the full quarter in both 2020 and 2021.
Sales from stores stores opened last year in the second quarter increased from $51 2 million to $59 2 million or same store sales comp base for the third quarter was over $55 million.
In the fourth quarter, we anniversary several acquisitions that will increase that base of stores throughout 2022 <unk>.
However, our location in the Miami area has relocated and will drop out of the comp base.
Gross profit margin was 29, 4% for the quarter up 290 basis points from prior year.
Driving this margin expansion was an increase in revenues from both private label products and distributed products.
Which were 9% of revenues for the quarter compared to less than 1% of revenues for the same period last year.
Gross profit dollar generation was up 134% from prior year from both increased revenue and margin expansion.
Total operating expenses in stores grew from $5 million in prior year to $14 $8 million in Q3 2021.
Included in that spend as Preopening spending for all of our new large format locations in southern California, and Oklahoma as well as Preopening relocation expenses for Miami in Arizona.
This represented a one time expense of over of about $1 million that will not reoccur as we move to smaller locations in future years and.
And we expect the investment into new stores and relocations for 2021.
We will pay dividends in the future.
In addition, we have modified labor hours in the fourth quarter in line with revenue.
On a year over year basis, we added 37 locations.
The quarter over quarter increase in store operations expense was $2 $2 million and was primarily explained by these investments and preopening costs.
Labor initiatives and additional locations owned for the full quarter.
Selling general and administrative costs increased from $4 million to $11 million in Q3 2021 more.
More than explained by support costs for the enterprise, including the costs associated with establishing the infrastructure necessary to continue to profitably grow this business in future periods.
Included in this quarter SG&A was in expense associated with the HTS acquisition, and we expect another 500000 expenses associated with that termination in the fourth quarter.
Of the $11 million of SG&A $2 $1 million was associated with stock based compensation.
Amortization of intangibles was $2 $5 million in the third quarter.
We expect $2 7 million of amortization in Q4, along with $1 million of depreciation in part from new store openings that have added to our depreciable base.
It is important to remember that as we grow in size and scope depreciation and amortization expense will continue and we forecast that amortization will be $11 million in 2022 associated with acquisitions over the last couple of years.
The company and interest income of $450000 associated with notes receivables that were settled in Q4 and investment activity in marketable securities in the quarter.
Income tax expense was $1 $1 million in Q3.
And for the fourth quarter and in early 2022, we expect that our effective tax rate will be higher than statutory rates as a result of disallowed deductions in federal taxable income from intangible amortization increases in noncash provisions and share based compensation.
This is an impact of growth.
As we shift to new store development in lieu of acquisitions to grow the store count we will benefit from bonus depreciation of asset additions for tax purposes in late 2022.
Net income for the quarter was $4 million compared to $3 3 million for the same period in 2020.
Net income was <unk> <unk> per share.
Adjusted EBITDA, which excludes the expenses associated with interest taxes, depreciation amortization and share based compensation was $10 $8 million for the quarter compared to $6 6 million in 2020.
As discussed earlier, we had expenses associated with new store additions relocations expansions and other expenses in excess of $1.5 million for the quarter.
The company ended the quarter was $63 million of cash and $29 million of marketable securities that are mature and available for sale if needed.
Total liquidity is $93 million at the end of September.
Net cash used in acquisitions and other investments totaled $24 million for the third quarter of 2021.
As discussed we estimate that revenue for the full year will be $435 million to $440 million.
Based on recent trends and our 62 garden centers and two proprietary brands.
We estimate that EBITDA adjusted for share based compensation with those operations will be between 41 and.
<unk> $43 million included in that expectation is the burden of termination expenses associated with the HTS acquisition.
Of about $500000.
As we look out to 2022 for early planning efforts.
If we had owned all 62 locations are.
<unk> e-commerce businesses, and charcoal or for the full year of 2022.
That combination of business would have generated about $475 million in total revenue.
Included in that annual figure is $35 million and combined E. Commerce sales that are accelerating rapidly and should generate growth of 20% to 30% in 2022.
Our proprietary brands of power ESI and charcoal that we sell outside of our retail locations make up about $20 million of total revenue.
Should see growth next year in the teens.
We will add 15 to 20 new stores in the later portion of 2022.
That should generate incremental sales of $1 million to $2 million per location.
In 2022.
In total we expect our overall growth rate in 2022 will be in the high teens or better.
Just as importantly, we believe that our additional investments in technology distribution capability and private label sales will increase gross margins that were more than offset adjusted EBITDA margin impact of added SG&A and store operations expense.
I will now turn the call back to Darrin. Thank you Jeff.
Our third quarter record results were achieved only through the relentless efforts of the best team of professionals in our industry the strength of our supply chain and our commitment to provide the best of breed and latest innovative products to our customers.
<unk> is a tremendous team of essential employees, who have made a commitment to our company and customers that could not be any prouder.
I'm inspired by their efforts and dedication.
They have worked tirelessly to service our customers and communities.
Our future success revolves around execution efforts and new stores technology distribution centers product offerings and e-commerce user experience.
We believe we have the best team in the industry to deliver that execution I will now turn over the call for questions.
Thank you, ladies and gentlemen, as a reminder, please press star one to ask a question.
The first question today comes from Brian Nagel Oppenheimer.
Hi, good morning.
Good morning, Brian guys. My first question.
Just with regard to guidance.
Maybe Darren you spoke about this.
In your opening comments, but maybe just drill down a little bit more so we can understand better what really changed from the expectations that were revised and laid out I.
Yes. It was in October 13th with the HGS announcement, and then today's and now today's announcement, what both from a revenue and from an EBITDA perspective. Thank you.
Yeah, Brian I'll start and then I'm going to turn it over to Jeff come as you know <unk> had an exceptionally strong second quarter.
Which was fueled by the demand for what we saw was outdoor growing during the last year, our store concentration in California, and Colorado markets have increased 26% in California, 13%, Colorado, Oregon and Washington.
We are now seeing the impact of that oversupply position on candidates.
That we believe will be exaggerated in the fourth quarter.
You see the oversupply correcting itself in the second half.
But during oversupply positions cultivate has slowed down their purchasing of hydroponics equipment and.
In addition, we've seen a slowness in new states to rollout rules and regs to enact adult use and tissue cultivation licenses in new markets.
But on the flip side, we saw many positives in the third quarter revenue was up 111% at $116 million.
<unk> store sales were up 15, 7% gross profit margins 290 basis points to 29, 4%.
We successfully launched two flagship stores and in L. A and long beach. So there were many positives in the quarter.
But as you've seen from even the Scotts conference call with Hawthorne.
This has slowed going into the fourth quarter and we look back in our second quarter. This strength was incredible and it was a lot of the outdoor growing that is now coming back to bite us a notch what business remained strong the industry remains strong we are seeing a tremendous move towards towards legalization.
But I'm going to turn it over to Jeff right now and he will go over some of the numbers with you.
Hey, Bryan Thanks for the question, Yeah, I think when we look at the fourth quarter and our forecast for the full year.
We have incorporated recent trends that we've seen in the marketplace.
To influence our guidance as we look out for fourth quarter.
And into 2022.
And it also reflects on an EBITDA basis, the decisions that we've made as an organization to invest in the long term health of the business.
By bringing on the right management team the right people the right systems for 2022, and the right resources to drive Greenfield New store openings in the latter part of 2022. We've also had some timing of new store expenses that have influenced our guidance on the EBITDA basis as well those new store expansion.
Fences for Berry for fairly large stores.
And so Cal market will not be repeated when we get into smaller format stores like we talked about in the script today.
Got it that's very helpful. And then just a follow up.
Darren just with respect with regard to the these oversupply issues you've seen in the states you mentioned.
You've said that you view them as short term transitory type of nature, but are you seeing anything to see are you seeing anything right now to suggest that the pressures are abating or are you looking more kind of a history as a guide that they will abate.
Yeah, we're looking more at the history back in 2018.
As of now we have not seen the slowdowns abate and.
And a 26% in California on one of the one of the positives that we just opened two two superstores in the L. A markets that are performing well.
So we are optimistic and it's happened before out west.
And it will continue to happen, Brian, but as we spread this business out.
50 states, you'll see less seasonality.
Yes, but right now we are concentrated on what Youre seeing right now is in the fourth quarter of last year, we purchased nine outdoor.
Nine garden centers out in California, and Oregon, and we're starting to see some of the some of the pushback in the third and fourth quarters are the California markets, Northern California markets are extremely seasonal we see that from the stores that we are and now looking back into that second quarter. When we start seeing the strength in the <unk>.
Second quarter caught us by surprise and.
It's coming to bite US right now so you know the one thing youre seeing from grow Gen. Our way above estimates for the year. Both on a same store sales rate and also a revenue guidance right, but youre seeing a little lumpiness.
And the Lumpiness as we get bigger it continue to grow and we go into states will smooth out.
Okay. That's helpful.
I will turn the call over to next next person. Thank you.
Thank you Brian.
And the next question comes from Eric <unk> of Craig Hallum Capital Group.
Great. Thanks, taking my questions.
Jack you called out.
<unk> mix.
California, and other states, which I really appreciate that very helpful. Just wanted to check on what period those sales mix percentages of FERC or was that a Q3 or more of a year to date figure just looking for some clarity there. Thanks.
Yes, those are year to date numbers as we look at them.
And we tried to give some guidance around the states without.
You know going into details by state.
When we look at the state of California.
It is as Darren just mentioned.
The increased percentage, but as we build our new stores in 2022.
In the mid Atlantic States of New Jersey, Pennsylvania, and New York.
New England as well as some Midwest Midwest States, such as Illinois will reduce our reliance on California and be more diversified in our portfolio.
Yeah, certainly makes sense to me and I think.
Our prudent strategy there.
Next question for me just on the ERP system.
How long of a process do you guys expect that to take and what kind of what kind of an increase in SG&A might we see as you guys implement that that process. Thanks.
So the process will take this quarter and next quarter with some learning curve issues in second quarter as.
As far as are the expenses that go into that we will absorb those into SG&A.
We have already absorbed some expenses associated with standing up that that system, both from an SG&A and from a capital spending perspective into intangibles as well as in prepaid.
For licenses the.
The moving parts there are in.
In a low digit millions.
They will be absorbed by the company, we don't issue adjusted EBITDA, excluding things like that.
We we just absorb those into our expense structure, but we're looking forward to going live in the second quarter of 2022 with both net suite in Manhattan Associates offerings.
Projects are going very well.
We anticipate that will help us with our internal controls over financial reporting.
As well as improve our operational excellence initiatives in the stores.
Okay, we'll look forward to some of those improvements.
Thank you Eric.
Our next question comes from Andrew character of Stifel.
Thanks, Good morning, so youre laying out a pro forma at 475, and saying at least high teens growth for next year, what I wanted to understand the M&A says it looks like it's about eight points additional you'll get next year from what's not this year. So just wanted to get an understanding of your sensitivity and meeting kind of the underlying sales growth targets. There in terms of opening openings.
I know you said 15 to 20, but could you give us like an effective number of stores that are in your kind of base plan at this point. Thanks.
Okay.
Let me break down the 2022 communication that we gave in the script again.
For everybody, we said that in 2021, we'll do about 435 to $4 40 of total revenue on a GAAP basis. The $4 75 is a pro forma or a run rate number of what our revenue would have been had we owned all of those profit centers for the full year 2022.
Included in that $475 million is $35 million of ecommerce and $20 million of proprietary brands, leaving $420 million for all of the store operations the commercial business as.
As well as the rest of the organization, we anticipate E com growing 20% to 30% proprietary brands growing in the high teens.
And overall, we anticipate growth in that.
10% to 20% without acquisitions.
As a as a blended number when you incorporate in 15 to 20 stores that will open in the back half of the year, primarily Q3 and Q4 are those.
15% to 20 stores are we have not signed leases, but we have identified markets that we are interested in going to and as we said those are the big mid Atlantic States, Pennsylvania, New York New Jersey.
As well as increasing our position in Massachusetts, and entering into the Midwest States such as noise. So we're excited about.
We're 22 can take us overall as an organization and we're excited about the opportunity to grow revenue in the back half of the year with Greenfield locations.
We will generate a lot of cash next year, we'll use that cash to invest in new stores.
We are not at this time talking about acquisitions for 2022, those would obviously be accretive to.
To these numbers that we're providing in 2022, if we find acquisitions.
That hurdle our investment criteria.
Add to our portfolio in an accretive way.
And it makes sense to us financially and operationally.
No I get it but my question was how many effective new stores or in their next year, you're saying 15 to 20 today in the stores. This year yet for they got pushed out maybe it's different next year or whatever but that's what I'm asking about whats built into the plan effective number of stores. Thanks.
15% to 20 opening in the back half of the year.
We anticipate those stores would generate $1 million to $2 million per store in calendar year 2022 on a GAAP basis.
Okay. Thanks second one to me is the inventory position Youre at 103 days I appreciate the call outs that that.
We're in the script and I'll look at that again, but just kind of wondering as you kind of assess the overall inventory what do you see any risk. This is a long shelf life product, but can you give us a sense of are there any products that are deflationary right now where you do have some risk and also how this longer inventory position could potentially support new stores next year. Thanks.
So our inventory as we discussed in the script, we've added inventory for acquisitions of around about $30 million since the beginning of this calendar year, we've added $13 million associated with inventory for our private labels Prada.
Products and we've added some prepaid assets.
To drive our label production.
And which has a long lead time and long supply chain. That's the usage of cash for this calendar year. The products that we do have in our inventory actually because we actually look at it as a positive because it positions us to service our customers with.
With a selection of products that are available to them, even even notwithstanding the supply chain challenges that the U S and spacing, we have the product available for our customers and we and a lot of that product was purchased before price increases from our vendors. So we're able to capture both the investment returns.
As well as produce a better scenario for our customers.
Pass it on.
And the next question comes from Max Smith of Lake Street Capital markets.
Hey, guys I, just wanted to dig into the E. Comm business, just a little bit if you can discuss Canada agron business and how that's trending and then we did see E com.
Have come down a little bit sequentially is that just you know.
A reflection of what's going on in the industry or just give us a feeling for how you feel about that E com business.
Yes, Marty this is Michael.
Right now, it's actually trending up we did 10 five versus $3 nine for.
For the quarter trending to $35 million for the year and really the initiative is too big right agron into our grow generation by Com.
Portal so that the two websites are really now integrated.
So that's a big initiative that Becky Gephart, who just recently joined US from Lands' end and Crocs is really leading so we see tremendous efficiencies and pricing consistency as.
As well as improving delivery and logistics.
And we see growth continuing in that 20% to 30% range.
Previously discussed.
So we actually see.
A tremendous.
Upside in our ecommerce business, creating these efficiencies.
Okay.
And then just big picture, if if you guys can just walk us through quickly.
Wrong goals for private label and kind of exclusive products just walk us through briefly if you can kind of have done the margin impact of kind of hitting those private label goals in 2023.
So just like other retailers, our private label opportunity exist and the gross margin benefit that we get from selling products that we source.
And we bring into the stores directly.
You know clearly other retailers see a margin improvement of 10% to 20% on a on a percentage of revenue basis. We're looking at similar kind of numbers for our private label enterprise that we're building and we're focused on for the future. We are investing in SG&A because it.
Does take people.
Processes and systems in order to drive the right allocation and the right inventory levels for private label, but net net debt EBITDA margin flow through was very strong from bringing in private label and proprietary brands and.
And we think that.
The growth from today's level of of eight 7% for.
For the third quarter to 25% will bring a meaningful impact to the margin basis of the business.
As well as provide our customers with a good selection of products.
Excellent. Thank you.
Yeah.
Now we can go to Aaron Grey of Alliance Global partners.
Yeah.
Hi, good morning, and thank you for the questions.
So back to California for a second.
I think he mentioned about potentially you know some of the pricing pressure you know, leaving leaving over there, but we've had two msos talk about pricing.
Pricing pressure, maybe continuing for the next 12 to 18 months in the state. So just curious you know because I know it might lead to some near term pressure on your guys side thinking more long term and the opportunity. The fact, you could put you guys made an advantaged position because your competitors not being able to compete there being some consolidation you know kind of a dynamic we saw a couple of years.
[noise] ago within Colorado, So just curious to ask your commentary you know there is some prolonged pressure in supply demand dynamics in California, continuing as well.
Be positioned versus the competition. Thank you.
Yeah. That's always you know that's always a positive like anything else, we're in a better position than any one of our competitors to.
Continuing to build out, California, and the rest of the country.
But as we see it our concentration in California will be dropping as years go by as we continue to build out the country. So, California will be they will probably go from 26%.
We'll be down to under 20% next year, the oversupply position, we look back to 2018, that's the only other.
No time in the history of candidates that you can look at and the oversupply position in Alaska, It's little over six months and in California, you six months to a year. So there is certainly nothing to define how long the oversupply position will take but what you do see during oversupply positions as people pull back on growing some people aren't.
The Orange building right now.
But on the other side are you seeing a tremendous push towards legalization as you saw from Nancy Mace. The other day, even though we don't believe it's imminent were certainly hoping for the interim elections in 2022 that you that we will see.
Some sort of some sort of push both from the Democrats and Republicans and hopefully some middle ground towards it all California is the largest market in the country and things usually do normalize out in California, We will continue to build the business out in L. A and the California markets, but we are concentrating right now coming back.
Which we believe will be a tremendously strong market next year, we're seeing a push towards homegrown rules.
In certain states and also homegrown rules adopted in Connecticut, Virginia, New Mexico, and also social equity rules. So we believe next year will be a really bullish year for grow Jen.
As we roll out our ERP system, and we continue to to expand throughout the country.
Okay. Thanks for that color. That's helpful. And then just on you guys kind of the label initiative, you said about 20% by 2023 and I'm just curious in terms of the mix in terms of opportunity for.
Brick and mortar and e-commerce.
Do you feel like there's more opportunity for you to increase that makes them private label e-commerce site or versus brick and mortar and just kind of curious in terms of just give some detail with your current mix today of.
Private label between the two channels. Thank you.
Yeah, I'll start and then I'll kick it over to Michael to talk about the vision for the product line I think some interesting facts started to come together in the third quarter, where we are seeing.
Propensity of customers to come over to the E Commerce site as a percentage of our traffic as well as an increased penetration of our credit cards in our stores, which does have a short term impact on SG&A, but long term improves our control systems by using credit cards in store.
We're seeing this trend toward.
Utilizing a.
Payment solutions.
As well as migrating to the web as.
As we go through and mature as a business and as our industry. Overall, so looking forward to that and I'll kick it over to Michael to talk about the mix of products by <unk>.
By channel in the future.
We're certainly moving.
Our private label initiatives from the brick and mortar online.
See more margin expansion and also more awareness our online business generates over two and a half million unique visitors and that number is increasing so we're seeing tremendous adoption of our private label brands and we also see growth of our private label.
And proprietary brands, both internally within the grow Gen stores as well as outside as a growth initiative as we mentioned power side. For example is in over 500 locations across the United States as well as in international and three international markets as well.
So our initiative is working.
Our grow pros have demonstrated an ability to.
Present to our customers.
And it's and it's working.
Yeah. The last thing I would add to Michael's comments is that we are also building out the distribution center on the back side of this.
We look at the business going forward utilizing the investments that we're making right now in the systems.
Investments in 2022, and the distribution center capabilities, we'll be able to service our customers through a network of regional distribution centers.
To service those customers with lower shipping costs.
For us as an entity so looking forward to that coming online throughout 2022.
Alright, great. Thanks for the color and I'll jump back into the queue.
Hugh.
Thank you and our next question. Our next question comes from Mike Grondahl of Northland Securities.
Hey, Thanks, guys.
You guys have done a bunch of acquisitions.
Switching to the to the more Greenfield Newbuild strategy I understand how do we think about the potential for acquisitions going forward is it really low is it still just a small part of the strategy and where does that pipeline I guess, just a little bit more color there would be helpful.
Yeah, Mike I always think it will be an important part of our growth strategy. We will continue looking for opportunistic acquisitions.
Both next year and in the future.
Right now we have nothing to tell wall Street, but I do believe next year, you will see some acquisitions from grow Jen <unk>.
Including Greenfield Ing acquisition, including Greenfield stores in new States.
Peter will be hope Greenfield stores in Missouri, New Jersey, New York, Virginia, Connecticut, and Illinois, and hopefully Mississippi also so we have a pretty aggressive building strategy, but you will see tuck in opportunistic acquisitions, along the way next year.
Which will which will be which will be accretive to our revenue and EBITDA guidance.
And the only thing I would also add to Darren is on the capital allocation decision, making process here in the company, where we're spreading our capital allocation decisions across systems investments as well as greenfield that doesn't mean that we're not going to do opportunistic acquisitions, we have plenty of capital and dry powder to do acquisitions.
They present themselves to us in 2022.
And incorporate those into our business.
Got it and then just a quick one.
Private label, 25% in 2023 goal.
Talked a little bit about the margin benefit in the channels, but if theres just I'll say two things.
From eight 7% to 25.
What are those two actions you're taking to drive that.
I think the number one is to broaden our portfolio of brands.
Get a higher penetration of of offerings across the portfolio of products that we offer.
The second really is to increase the training in the stores and.
And getting our grow approach throughout our network.
To understand the benefits of our private label.
And communicate those benefits to our customers.
And the third is to have available product for <unk>.
Customers throughout our network and through our distribution centers.
There, we can really service the customers with private label.
Very efficiently and very quickly for their needs.
And Mike also when you take a look at this years growth in private label. So we came off of about $2 $5 million of sales in 2020, we were forecasting close to 10% this year, but the original forecast of 10% was off of about a $320 million run rate. So when you take it when you take a hard look at the numbers were coming in right now.
We're above that 10% on that on that $320 million of revenue were originally forecast.
So they're usually say.
The first growth is usually the hardest grub. So we've taken a two and a half million dollar sales division and no.
Private label on boarded up to almost $35 million. This year. So we're going in the right direction and this is this is during extremely hard times with supply chain getting containers in from China, and India. So we've had some very long lead times on products that are still coming in that.
We're starting to get a better cadence on the ordering and then really the timeframes of getting these products in from China. So as you're seeing throughout the year, our private label brands have been increasing quarter over quarter, and we see that continuing through next year in 2023 and into the future.
Great. Thanks for the color.
We can now go to Scott Fortune of Roth Capital partners.
Good morning, and thank you for the question its shift to kind of follow up on that one last thing on the private label side, you mentioned mix are there categories.
Main priorities on the nutrient side by the recurring side equipment kind of cash can you provide a little more color on the category kind of focus too to ramp up your private label and then follow up question after that.
Yes, Scott I mean, it's really across the board nutrients additives lighting, the high velocity products that our customers are demanding and we are investing in research development and bringing the best of breed products at the best price and then our ability to educate this is a knowledge.
<unk> sales process with our growth rose that gives us an advantage we have the ability to not only develop products that.
And we see the trends in the market because of our number of stores.
Servicing hundreds of thousands of customers, we're hearing what those customers what what the growers are one so we're able to take that data and convert it into a product development strategy, which is really working.
So it's really a broad based approach from the private label side in terms of product.
Got it I appreciate that and then real quickly you mentioned kinds of homegrown and more the do it yourself hobbyist as these new states come on board. We think this could be a very nice almost like the craft beer industry, right, where a hobbyist.
Really coming on board into this space, but you haven't niche now and obviously the commercial side has been growing it seems like online and private label would really drive more meaningful revenues.
That space or are they do you do it yourself kind of obvious side kind of talk to us what what percent comes from from that.
Demographics, and your online initiatives to target more of that demographics are higher margin products potentially.
Yes, it's Scott.
The homegrown rules excite growth and as do the social equity rules that you're starting to see rolled out.
The more growers really the better the business for drill Gen. So what excites US. In addition to the whole rules is also vertical garden Gordon is starting to make a push into the vertical and urban gardening markets also.
When you come to our stores, we can teach you to grill a plant whether it's a cannabis plant whether its fruits vegetables are lettuce, even though 90% of our business right now is into the cannabis industry, we see a tremendous opportunity on the vertical gardening side of it the home growth side of it right now youre looking at revenues of about <unk>.
$35 million online so you're talking about probably about 8% of revenue come online business, but we do believe through homegrown rules and more people growing.
That are that are online sites will continued tremendous growth into the future as you'll see growth coming out of our stores.
We also when we look at margin comparisons between our larger customers are msos and our smaller home growers, we're making more money on the home growers theyre spending more time in our stores and they they require more learning from our <unk>. So the one thing while we always believe where the stores will play such an important part.
They are the crown jewel of grow journey will continue to be as we spread out in 2023 over 100 stores is the learning aspect that an individual grower a new growth can come into a store learn how to grow both the cannabis plant and tomato plant and we do believe with homegrown rules people will be growing both.
In their backyards.
About a year ago, we went through a customer segmentation and we've learned from customer segmentation and the pulling of customers around the country that growers grow and whether they're growing or candidates plant to our fruits vegetables are lettuce.
Love to grow so we do believe that the other side of our business will continue to pick up as homegrown rules continue to continue to.
Ramp across the states.
Okay. That's it for me thanks for the color I appreciate it.
Thanks, Scott Thanks, Scott.
We can go to Glenn Mattson of Ladenburg Thalmann.
Hi, Thanks for the question. So curious about as you go into the newer markets in the East coast and mid Atlantic and.
I guess, a little bit the Midwest.
If there's anything different in the competitive landscape that you see like an inn in New Jersey. Some of these markets New York. It's these are obviously new markets. So there's probably a little in terms of existing competition, but in places like Illinois, and Pennsylvania, there a little bit more establish so.
Curious if there's anything different than what you've seen historically, but then also.
Does your relationships with Msos does that you know there's a lot.
Those people are opening stores in the store opening cultivation in these states and things. So does that give you an early advantage.
As they move into the northeast in particular.
Versus.
First whatever competition out there thanks.
Yeah, Yeah, Glenn we currently transact business in most states, where the Msos are located in the large single state operators. So it certainly does give us an advantage when you look at the competitive landscape in New States, Pennsylvania, whether it's New York, New Jersey, there's very little competition in those states and what <unk> will be doing as we stated.
Earlier, we'll be opening smaller stores with distribution centers.
Which will which will which will.
Which will bring down the cost of opening these stores I'm really bring up the profitability. There is very little competition back on the east coast uncertainties in mid Atlantic States that we will be going into and we look at quicker ramps in these states, especially the states with homegrown rules.
Great. Thanks, and one last one if I could squeeze it in just maybe you mentioned it I missed it.
Can you talk about any issues in the next say six months with the supply chain.
If there's any new issues or if you see that kind of subsiding over time and with that maybe a little bit on.
Commodity cost pressure and your ability to pass that on thanks.
So as far as the supply chain and the commodity cost increases.
Nothing really new to report there were still we're still.
Dealing with the same issues as the rest of the country on both sides of that we do think that our investments in inventory will help mitigate some of the reliance on.
Just in time delivery of products as well as mitigate some of the impact of.
Price increases for the short term for for Us as a company.
Ladies and gentlemen that concludes the question and answer session I would now like to turn the call back to Darrin Lambert for any additional or closing remarks.
I'd like to start by thanking each and every one of our veterans and military for everything they do everyday to keep our country safe, but also think I'd like to thank each and every one of our employees and shareholders and wish everyone, a happy and healthy holiday season.
Look forward to sharing our successes with you.
Within the next few months and we thank everyone for your continued support thank you.
Ladies and gentlemen that concludes today's conference call. We thank you for your participation you may now disconnect.
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