Q4 2021 GrowGeneration Corp Earnings Call
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Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Girl Generation Corp, fourth quarter and full year 2021 conference call.
During todays presentation, all parties will be in a listen only mode.
During the presentation. The conference will be open for analyst questions. If you have a question, especially Starkey followed by the did you have one on your Touchtone phone.
If you'd like to withdraw your question from the queue. Please press the star followed by the did you too.
If you are using speaker equipment, please lift the handset before making your selection.
This conference is being recorded today March 1st 2022 in the earnings press release accompanying this conference call was issued after market close today.
I will now turn the conference over to Clay Congress. Please go ahead.
Thank you and welcome to the grow generation fourth quarter and full year 2021 earnings results Conference call.
Today's call is being recorded.
With us today are Mr. Darin, <unk> co founder and Chief Executive Officer, and Jeff Lasher, Chief Financial Officer of grow generation Corp.
Everyone should have access to the company's fourth quarter earnings press release issued after the market close today. This information is available on the Investor Relations section of grow generation website at IR dot grow generation Dot com.
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 forward looking statements made today.
During the call we will use some non-GAAP financial measures as we describe business performance.
The SEC filings as well as the earnings press release, providing reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website.
And now I will turn the call over to Darren Lindbergh cofounder and CEO Darren.
Thank you clay.
Good afternoon.
I'd like to start by thanking each one of our employees and customers.
Your continued support and dedication to the grow Gen vision and plan.
We had an outstanding 2021 as a company we are.
Added 24, new locations and now have 63 locations across 13 States, which includes our latest store and Ardmore, Oklahoma.
I would like to begin with sharing some of my views of the hydroponic industry.
Discussing 2021 fourth quarter and full year results.
2021 started off with tremendous strength.
With the expectation of federal cannabis legalization after the Democratic sweep in the November elections.
In addition, five new states unanimously voted to test new candidates was.
The term green sweep began circulating around the country.
As 2021 unfolded federal legalization became less clear and candidates legalization became a bargaining tool that pushed investors and the commercial industry to the sidelines and further investments.
Additionally, during the third quarter of 2021, the sort of supply demand imbalance in California, and other western states with a tremendous oversupply of outdoor cannabis, which was produced during the summer months.
The oversupply put pressure on candidates pricing and caused many cultivators T. The shutdown their facilities were scaled back on their production and expansion plans.
And as a result of these events, we have seen a slowdown in led lighting and capex projects coming out of the third quarter 2021 into 2022.
In addition, there has been a slowness to build new legalized states.
Cultivate is wait for the rollout of rules and regulations, which are behind schedule.
We're hopeful that some of these issues will start to stabilize by the second half of 2022.
Well, we are planning for a challenging sales environment in 2022.
It should be noted that industry saw weakness in 2018, which corrected itself within six months.
We continue to think federal legalization of cannabis is a likely eventuality.
It's just a matter of when and our view on that.
That time comes <unk> is well positioned to service and sell to the millions of new craft and commercial growers, who went through the market.
Despite the market segment headwinds <unk> had a record 2021 with revenue of $422 million versus $193 million in 2020.
A 118% increase year over year with a 24% increase in same store sales.
Gross profit margins were 28% in 2021 versus 26, 4% for the prior year, an increase of 160 basis points.
Full year net income was $12 8 million or <unk> 21 per share in 2021 versus $5 3 million or <unk> 11 per share in the prior year, an increase of 140%.
Justice EBITDA grew 83%.
$34 5 million for the full year 2021 or.
57 cents per share versus $18 9 million or <unk> 41 per share for the full year 2020.
In total 8% of 2021 revenue came from brands that we own.
Including private label sales in our retail stores and proprietary brands sold to other retailers.
With our recently announced the acquisition of <unk> G <unk>.
Our products now have access to the <unk> channel and over 750 hydroponics store locations in the United States and several distribution platforms across multiple countries around the world.
<unk> is well positioned to take advantage of the growth in indoor vertical farming driven by both new candidates cultivation licenses and a growing trend in the agricultural markets as more and more states face the challenges of climate drought water shortages experienced with outdoor grilling.
To execute and accelerate this strategy, we acquired mobile media, a 35 year old company specializing in the manufacturing and selling a vertical benching and racking systems, both the retail and agricultural markets.
Our initiatives in 2022 are geared towards positioning the company for success in 2023 and beyond.
We're investing resources and attention to scale key areas of the business and infrastructure.
Five key initiatives include.
First building, new greenfield locations across new states.
To open 15 to 20 new locations.
<unk> network of retail stores to 80 locations across almost half of the country's states.
Investing in company wide technology to drive operational excellence to deliver our Omnichannel strategy.
Third establishing a network of five distribution centers in key locations to serve our retail stores e-commerce and commercial customers.
Driving sales of proprietary brands and private label revenue. This includes investments in resources provide customer service product development and distribution excellence.
And fifth combining e-commerce sites by integrating agron without grow generation dot com marketplace, creating one common backend platform.
The management team, we've assembled over the past year is better suited than any other team in the industry to implement these initiatives and drive profitable growth over the next decade.
These initiatives as a backdrop, we are providing the following full year 2022 guidance.
Revenue to be in the range of 415 points of $45 million and adjusted EBITDA to be in the range of 30% to $35 million.
I will now turn the call over to Jeff Lasher, our CFO , who will give a little color to our initiatives some insight into our fourth quarter results and our views of what 2022 looks like.
Thank you Darrin, let me start by building on what Darrin discussed regarding our initiatives then I will address our fourth quarter results and what our business will look like in 2022.
As previously discussed we have five strategic initiatives in 2022 and have already made progress against each of them. Our first initiative in 2022 is our investment in Greenfield locations. We have signed seven indications of interest and are on track to open 15 to 20 new stores in 2022.
Assigned locations include a recently opened store in Ardmore, Oklahoma.
Our location in Jackson, Mississippi, and five other locations. These new store locations will range from five to 15000 square feet of retail space, along with outdoor facilities to serve bulk sales.
The capital investment will be about $2 million per location, including inventory needs. These.
These locations will be an emerging states, such as New Jersey, New York, Virginia, and Illinois.
Second our investment in new store locations in 2022 will be combined with an investment in technology to improve the operational metrics in the stores.
Our new integrated system is being tested in final development activities are in place to support our launch this spring.
Our retail technology stack will now be in line with best in class retailers with improved back end processes, coupled with point of sale order management and warehouse management systems integrated by Manhattan Associates.
The benefits will include better customer service, better internal controls and labor efficiencies.
Third retail locations will be fed with inventory from our network of distribution centers less than a day away from the site they serve.
These centers will also provide the vast majority of e-commerce customers with a shorter delivery window.
This will allow us to consolidate and inventory improved procurement cost and be more customer focused.
Progress already made against the initiative includes the positioning of our existing locations in Sacramento long Beach in Tulsa to improve operational metrics with the technology launch this summer and the relocation of our Miami facility to enable distribution capabilities, including servicing the expanded southern markets.
In the second half of 2022, we will be launching a new location in the Midwest to develop the last pillar of the distribution strategy for retail.
This new location will be within one day service for the Midwest mid Atlantic and New England markets.
With the addition of HRD, we have the need for additional distribution capabilities, and we will be focusing on integration of certain activities in coming quarters.
The acquisition of <unk> at 70000 square feet of distribution space for our proprietary brands and products that we distribute to third party retailers.
It also allows us to expand the markets for power ISI charcoal and other private label products.
As those businesses are integrated into HR G <unk>.
Historically <unk> has been sales agent for companies and to a lesser degree also provided distribution capabilities. Our goal is to expand that distribution capability, which will increase revenue and incremental EBITDA. We expect that <unk> will produce accretive earnings in 2023.
Following the 2022 investments.
The expansion efforts in HRD fit well to our fourth initiative of increasing mix of private label in our retail stores.
For full year 2021, the mix of owned brands in our retail stores was 4% and we plan on expanding by 50% in 2022. This does not include the revenue from owned brands sold to third party locations that represented an additional 4% of revenue in 2021.
Our final initiative is associated with E. Commerce, we have recently combined all e-commerce activities onto one website and backend operation powered by one E Commerce platform.
As a result of this conversion is an elimination of duplicate cost.
Unnecessary competition among divisions for the same customer.
Turning now to our results for the fourth quarter revenue for the fourth quarter was $90 6 million compared to $61 9 million in.
In the same period last year, an increase of 46% or $28 7 million.
The increase in revenues is primarily attributable to a $32 $5 million increase in revenue related to businesses acquired in the fourth quarter from 2020 and acquired during 2021.
A $3 $5 million increase in e-commerce revenue as that channel grew from $3 3 million to $6 9 million.
Those increases were partially offset with $5 $7 million degradation or 12, 3% from 26 comparable stores operated for the full quarter in both 2020 and 2021, our same store sales comp base for the fourth quarter was over $40 million.
In the fourth quarter, we rolled over the anniversary of several acquisitions that will increase the comp base of stores throughout 2022, However, our new location in the Miami area has been relocated and will drop out of the comp base.
Gross profit margin was 25, 5% for the fourth quarter down 30 basis points from prior year.
Full year margin improved 160 basis points from 26, 4% to 28%.
But margin dropped in the fourth quarter from Unrig captured freight expense dilutive.
Dilutive impact of pass through freight charge to customers at cost and higher volume of a discounted capital products, including lighting and discounting activities.
The opening of two new large locations and the competitive southern California marketplace also presented a headwind to gross margins.
Overall, our sales in southern California, where 10% of retail revenue and total, California exposure for 2021 was 30% of retail store sales.
California market continues to pressure revenue and margins into 2022, and we are planning for a reduction in comp sales in California retail store sales in 2022, but overall revenue from California is planned to increase from full year operation of 2021, new and acquired locations.
Gross profit dollar generation in the fourth quarter was up 45% from the prior year from increased revenue and margin expansion.
We are planning for an increase in full year margin for 2022, primarily attributable to increases in private label sales.
Pricing actions and strategic moves away from low margin sales channels.
Total operating expenses in stores grew from $6 2 million in the prior year to $14 million in the fourth quarter of 2021.
Modified labor hours in the fourth quarter in line with revenue on a year over year basis, we added 37 locations.
Notably in the quarter over quarter expenses and store operations was down $750000 and was primarily due to the drop in preopening cost and labor initiatives, partially offset by additional locations operated in the quarter.
Selling general and administrative cost increased from 6 million to $12 million in the fourth quarter of 2021, primarily from the increased support costs for the enterprise, including the cost associated with establishing the infrastructure necessary to continue to profitably control the enterprise and grow the business in future periods.
Included in SG&A. This quarter was a $500000 expense associated with the termination of the HTS acquisition and $1 million of severance expenses and charges for organizational changes.
The $12 million of SG&A in the quarter $1 $2 million of it was from stock based compensation.
Depreciation and amortization of intangibles was $4 1 million in the fourth quarter of 2021.
The breakdown is $2 7 million of amortization.
And $1 4 million of depreciation in part from new store openings that have added to our depreciable asset base.
It is important to remember that as we grow in size and scope depreciation and amortization expenses will continue and we forecast that amortization will be over $12 million in 2022.
Associated with the acquisition over the last couple of years, including the 2022 acquisition of <unk>.
Income tax provision was a credit of $3 million in the fourth quarter. Following a net loss in the quarter last year.
For 2022, we expect that our effective tax rate will be higher than statutory rates as a result, the disallowed deductions in federal taxable income from intangible amortization and increases in noncash provision.
This is an impact of growth however, as we shift to new store development in lieu of acquisitions to grow the store count we will benefit from bonus depreciation of assets additions for tax purposes in late 2022.
Net loss for the fourth quarter was $4 1 million or <unk> <unk> per share compared to net income of $1 5 million or <unk> <unk> per share for the same period in 2020.
Adjusted EBITDA, which excludes the expenses associated with interest taxes, depreciation amortization and share based compensation was a loss of $1 9 million for the fourth quarter of 2021 compared to income of $5 5 million in the fourth quarter of 2020 as discussed earlier, we incurred charges associated with terminated acquisitions.
And separation expenses that totaled $1 5 million in the fourth quarter of this year.
Our adjusted EBITDA calculation includes the burden of these expenses.
The company ended the quarter with $40 million of cash and $41 million of marketable securities that are mature and available for sale. If made it total liquidity was $81 million at the end of December 2021 the.
The company reduced inventory reduced receivables and managed other working capital needs in the fourth quarter, resulting in the generation of about $3 million of cash from operations.
Even with the previously mentioned adjusted EBITDA loss.
Full year cash from operations was over $5 million.
In 2022 of our business strategy and incentive programs will focus on generating cash from operations generally in line with adjusted EBITDA through inventory management and other balance sheet optimization efforts net cash used in acquisitions and property totaled a $100 million for 2021.
We are planning for total capital investments and cash investments in new store distribution capability technology, and the recently completed <unk> acquisition to total $30 million.
As Darren discussed we estimate that revenue for the full year 2022 will be $415 million to $445 million based on recent trends in our 63 garden centers and non retail businesses.
This includes the entire enterprise inclusive of <unk> and <unk> businesses.
We estimate that full year EBITDA adjusted for share based compensation will be between 30 million and $35 million.
Recent trends in retail and significant declines that we're seeing in capital investments of new grow operations continue to pressure revenue and profits in Q1.
At present for the first quarter of 2022, the company is projecting revenue of at least $80 million, including revenue from newly acquired enterprises.
We expect adjusted EBITDA results in Q1 of 2022 will be similar to those seen in Q4 of 2021.
We expect gross margins to sequentially improve in the first quarter and operating expenses to be just slightly up reflecting full quarter operating expenses for the new profit centers opened or acquired in the fourth quarter of 'twenty, one and in Q1 of this year.
Retail sales performance on a year over year basis will be materially impacted from a slowdown in capital belts and we will continue to be hampered on a year over year basis for the first three quarters of 2022, Accordingly revenue will be flat to down 10% in the first half with significant same store sales declines offset by inorganic growth and investments into new retail store.
Second half we are planning for a reported revenue to be up 5% to 10%.
As we look further out to 2022, our proprietary brands of power ESI in charcoal will benefit from the industry focus on yield and quality and products, but other areas, including lighting control systems HVAC invention products will be under pressure.
As such we have significantly constrained our inventory purchases as we focus on our own brands and decreased working capital needs are.
Our cash from operations in 2022 will benefit from the focus on inventory management, SKU rationalization and a decrease in other working capital accounts.
We will add 15 to 20, new stores in the latter portion of 2022 that should generate an average incremental sales of $1 million to $2 million per location in 2022 as they come online throughout the year.
As mentioned these locations will be in new states on the east coast and the Midwest.
Just as importantly, we believe that our additional investments in technology distribution capacity and private label sales will increase gross margin in future years.
Total cash generated by the business will be about 25% to $30 million. This cash generation is in line with adjusted EBITDA expectations and represents the actualization of plans to manage balance sheet metrics, including receivables and inventory.
Maintain a strong cash position without the immediate need for external debt and do not foresee a need for debt or equity issuance.
Total investment activity, including acquisition of <unk> is estimated to be about $30 million in total for 2022 with about two thirds of that investment earmarked for new retail stores and the remainder for the <unk> acquisition and technology investments.
Shares outstanding will increase only slightly from our present level of 61 million shares primarily reflecting share based compensation in 2022 and shares issued for business combinations in the first quarter.
We expect amortization expense to be about $12 million in 2022, and depreciation expense to increase from about $2 million a quarter in the first half to $2 $5 million a quarter in the second half with a total of $8 million to $10 million for the year expense for share based compensation will be largely in line with 2021.
Our focus for 2022 is on execution to set our company for a strong future with new retail locations and proved technology superior distribution capabilities and a strong e-commerce platform to scale profitably.
As you've likely seen by now this afternoon, we filed a form <unk> 25, with the SEC as notification that we will not meet the March one 2022 deadline to file our Form 10-K . This.
This is due to our new status as an accelerated filer this year and as a result, our need for more time to complete the year end reporting processes.
At this time as disclosed in the <unk> 25 filing we do not anticipate any material modifications to the financial statements included in the earnings release today I will now turn the call back to Darrin.
Thank you Jeff.
As we continue to navigate through the headwinds of the hydroponic industry, we're starting to see signs that the market could rebound later in 2022.
Once the sign that the Mississippi.
Open cultivation license market.
It provides us with opportunities to outbid hundreds of new license holders in the second half of the year.
As such <unk> plans to have as Jackson location operational in Q2.
We are also seeing increased momentum in New York, New Jersey, Virginia, and Illinois for adult use licensing and finalization of the respective rules and regulations.
We will be focusing much of our new store growth in those markets are.
Our strategic acquisition of <unk> accelerates, our expansion of proprietary and distributed brands outside of our own retail locations into over 750 independent locations.
Mobile media strengthens our position to gain more indoor vertical cultivation projects with a leading benching and racking systems.
Our future success revolves around execution efforts in new stores technology distribution centers product offering enhancing E. Commerce user experience. We believe we have the best team in the industry to deliver that execution.
Now I'll turn it over the call for questions.
Thank you.
I'd like to ask a question. Please signify pressing star one on your telephone keypad Guinea for using a speaker phone. Please make sure that your mute function is turned off to lay your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
We will take our first question from Chris Carey with Wells Fargo Securities. Please go ahead.
Yeah.
Hi, everyone.
Okay.
Good afternoon, Chris Hi, Chris.
Sure.
Thank you for the question so.
Yes.
Just to start.
Can you maybe just go through.
Why building 15 to 20 stores.
Given the.
The market uncertainty or having those new stores have again, given the market uncertainty is is the right decision versus maybe just hunkering down and letting.
The market stabilize and then connected to that just on on the year.
The guidance and the cadence that you're implying for the year can you maybe just review your expectations for.
Same store sales in the first half relative to the back half conscious of your.
Total company sales that Youre expecting about the same store sales would also be helpful.
Yes, Chris that's a handful im going to start it off and I'll send it over to Jeff <unk>.
Susan key Greenfield new stores in new locations.
Based upon licensing.
Our original plan as you probably know is the Greenfield was to purchase best of breed scores in mature states.
We will be able to compete on states that have been.
Either recreational or medical legal for some time with very favorable growing laws, but we're starting to see right now is a push towards legalization back east.
It's pretty broad licensing so we're seeing a push in Europe , New Jersey, Virginia, and Missouri, and when we look towards the landscape within these new states coming on board, while there are no stores that.
Fit the <unk> criteria, we've been quite successful in Greenfield stores in new states as we've done in Oklahoma, We've recently done in California.
We Didnt Brewer, Maine, where we've run in Colorado. So when we look at the return on invested capital, we're starting to see a push towards greenfield in new locations building them to our criteria.
Which would boost our future growth with our distribution centers opening around the country, our stores will be a little smaller.
And we will be able to service customers with solutions to grow within all of these new emerging states around the country.
This said the rest of this question over to Jeff.
Yes, Chris.
When we look at our guidance for the calendar year.
And what's incorporated into that guidance.
We see the market.
<unk>.
And what's incorporated in guidance is that due to the decrease in our commercial capex sales to customers that are operating grow facilities.
The difficult same store sales comps from last year.
We're not going to comp in 2022.
And lower than originally projected sales and some of our acquisitions and new stores.
Specifically in the California market.
In the back half of the year, we do expect some growth and we do see some incremental growth in our proprietary brands.
That are focused on the consumable side of the business and add tremendous value.
To grow operations customers full.
Full year comps, we're projecting to be down about 5% to 10% on a same store sales basis with significant degradation in Q1 right now we're forecasting about 35% drop in same store sales for the fourth for the first quarter.
Based on the start of the year, our most difficult period of comps was in the first quarter.
Specifically in the first couple of months breaking.
Breaking down.
'twenty one to 'twenty two revenue, though the comp store revenue.
Of about $350 million from stores and $36 million from E. Commerce, we still expect total revenue in those retail business to be down about 5% to 10% as I mentioned, but we will see incremental revenue from investment activities, including the new garden centers that Darren talked about and the proprietary brands that will generate.
Accretive revenue and we expect positive growth from our proprietary brands in 2022.
Thank you so much for that if I could just.
Hi.
Just just one.
Follow up here.
When you when you are looking at.
Yes.
The market moving out East can you maybe just touch on how your how your business model might evolve from maybe more of a retail.
Driven consumer out west versus maybe more of a BBB type consumer our E store or whether thats relevant factor. Thanks, so much.
Yeah, Chris I think when you take a look at the 63 garden centers, we have currently.
Our garden centers or <unk> and also a BDC. So our garden centers are set up for both currently.
And we will be building the garden. Similarly, so if you went counseling, Oklahoma saw the four centers that we built and also <unk> hundred 20000 square feet. We just put online in southern California. The stores are set up for both <unk> and <unk>.
Again, their app, they're able to service growers of all types from the largest msos in the country.
Single I'd growers to the single single grower growing the plant outdoors.
Okay.
Thanks, so much.
Thank you, we'll now take our next question from Andrew Carter with Stifel.
Hey, Thanks, good afternoon or evening, whatever wherever you are.
To ask you is first off just kind of a housekeeping question.
Filling.
Any kind of potential restrictions around the ability to issue equity or anything like that if you don't meet certain deadlines.
The end of this month, just a real quick one on that.
Yes.
Andrew Yes.
Yes.
No Andrew we have until March 15th on the extension and we don't see it at this point, we don't anticipate any problems meeting that that deadline.
Okay. Great second question, I guess I would ask it kind of gets into Chris Christy's question, I guess with the 15 to 20 stores you are planning this year and that could be anywhere from $15 million to $40 million in the revenue guide.
How much flexibility is that how much and how much of that is tied in the kind of the new state openings I know that last year. It was slower to get I mean ardmore is going in in January I think there are for next year, how can you get those.
Faster next year and are you watching anything to just not not open ahead ahead of the market.
Jeff do you want to take that.
Sure Yes.
As we look out into this calendar year.
Have plans already in the course of events.
To start the process of building locations.
In and around markets that are emerging so when we look out right now like you mentioned Ardmore, Oklahoma opened in January .
Have a relocation in Auburn, Maine, that's taking place in February .
Did put take place in February we have Jackson, Mississippi that opened in the first half of 2022.
We're going to relocate our Redding location.
So those four are pretty much locked in and happening as we speak.
And then as we look out into the summer time, we've got a locations in Virginia, Illinois, Missouri, Connecticut lined.
Lined up and indications of interest two locations in specific cities in there.
Those marketplaces.
Further investigations are going on in.
Other markets, specifically in New York, which will be later in the calendar year.
And then we also have additional opportunities that are presenting themselves in new Jersey. So.
We're actively looking for smaller footprint locations in that eight to 15000 square foot square.
Square feet of retail selling space. They will have some soil yards in the back there'll be serviced from a distribution on more of a two step basis, which will be more efficient for us and will allow us to operate those additional locations with lower inventory. So the models will look a little bit different on the east coast.
As we get over there.
No.
Cost of real estate on the East Coast is is more than what we see in Oklahoma and southern Colorado in places that we've historically been and we've been able to get larger facilities here.
Here on the East coast will have more reasonably sized locations.
And there'll be serviced within a one day.
Service range from our distribution center that we're building that will launch in the second half.
Hey, Andrew.
I understand.
Andrew would you say you would understand as a matter of size, we built over 250000 square feet of space last year, and we expect to do the same this year just more locations smaller space, but pretty much in course with what we built last year in 2021.
That's helpful I'll pass it on.
Thank you we'll take our next question from <unk> with Oppenheimer.
Hi, good evening guys.
So the first question I have just with regard to.
Private sector.
Sector of macro pressures in our Darren you've spent a lot time youre talking about this but so I heard you say at the end of your prepared commentary you talked about maybe some of the.
<unk> youre seeing on the legalization front in the eastern part of the United States.
Is there anything as you look to the West coast.
These oversupply issues are you starting to see any signals there that those issues are beginning to correct.
The one thing that we have seen recently, we have certainly seen stabilization of candidates pricing out west.
We've also seen an increase in pricing recently.
So.
As always.
Which is always favorable we saw similar issues back in 2018 that we're seeing right now out in glass.
California is the largest the largest market in the country, probably the largest in the world and we have tremendous.
We have tremendous confidence in the California market. We've recently built Greenfield two large locations in California that are up and running and ramping nicely.
So we're quite confident in our California locations bolt ons, both in Socal and also in North Kao and.
And we believe that.
Everything goes through California, and the California markets as you've seen before it will rebound.
And we are quite confident with our locations in California, We're starting to go out and we're starting to move out of a seasonable slow time of year, and California going into the spring time.
So we usually seen a tremendous rebound in our California stores and our stores out west.
Going into March and April .
So.
We will know a lot more on our first quarter call, which is in the beginning of May really how March and April shapes up in California to see if there is a rebound.
That's helpful. The second question I have I'm, just with respect to the guidance and.
So if you look at it.
The initial 2022 sales guidance youre kind of suggest that given what you reported for 2021.
Toggling flat I guess.
Better cooperative kind of flattish.
The question I have is we talk a lot about just given the cadence of acquisitions made in 'twenty one.
The underlying revenue run rate.
That you would be exiting 'twenty, one would be higher than reported revenues. So as you look at that guidance.
Is this a function of now you've taken into consideration these industry headwinds and in forecasting or or you actually starting to reevaluate the potential the underlying potential of even structural potential for some of these acquisitions that were made in 'twenty one.
So I'll unpack that for you as.
As far as the guidance for 2022, and as I mentioned with Chris's question earlier, we are anticipating.
Same store sales decline in Q1, and then full year same store sales decline, which obviously pressures that run rate because the run rate assumed.
Comparable performance on a year over year basis, some of the acquisitions that we bought on the West Coast earlier in 2021 are also disappointing in their sales volume.
Going into 2022, so our vision of those.
Units are challenged this is still a relatively immature marketplace and with a lot of uncertainties and the actual end state run rates for these locations.
And we do anticipate a longer term recovery as Darin was talking about but just for projection purposes in 2022 that feed into our inventory demand structure. We are taking a conservative position. So that we make sure that we are generating cash for the organization and <unk>.
<unk> a strong balance sheet throughout 2022.
Okay.
Thank you very much.
Thank you, we'll now take our next question from Aaron Grey with Alliance Global partners.
Hi, good evening and thank you for the questions.
So first question for me.
Going back to California, 30, 23 stores today, 30% of revenue.
Back to 2018.
Little bit and just thinking back to Colorado right you guys.
2016 at 10 stores and then you had some similar dynamics in terms of pricing pressure consolidation. There and then you cut down your stores to five by the end of 2018. So just with the 23 stores in California. Today. I know you said you are happy with the footprint now, but if you then start to see that rebound in March or April that you mentioned at what point do you think that may be.
This cultivation.
It doesn't come back or do you see some consolidation.
Not be the need for that many stores in the state that you kind of look back and see what type of footprint you might need there.
Arent you looked at our California footprint.
It runs north.
It goes from North North, Northern California, Southern California or San.
San Diego La.
Up towards Arden's count when you go look down in northern California that runs right up the coast. So we go from from Humboldt straight down at the Santa Rosa, So we're pretty happy with the locations of our stores.
Is there a possibility that we can close a store or two there is always that possibility, but the majority of our stores are making money.
Functioning well.
When you look at the market right now that always gives me tremendous confidence youre looking at candidates market right now that's anywhere from 20% to $25 billion and Youre still seeing forecast even today.
$100 billion by 2030, so youre looking at compounded annual growth rates of 20% is to say that through this decade.
<unk>.
People will tell you that is the underlying crop is going to grow with that.
That rate that the hydroponic industry will grow we will grow with it and we are the leader in the industry. So we have tremendous confidence that these growth rates in the plant touching side of it we're going to continue to grow we will grow with it we were $30 million company coming out of 2018.
$422 million in revenue three years later, we did it quite profitably.
We are quite comfortable where we are right now we've made it through some really difficult times 2021.
We grew over 100% during extremely difficult times with supply chain, we built our private label brands from one 5% up to 8% on.
We've doubled revenue in our stores, we had same store sales growth of 24% coming off 63% the year before.
37% the year before so it was a little lumpy of the year and we have seen a slowdown and we continue to see that slowdown, but our forecasts are based upon you know we haven't seen a turn yet our forecasts are based that attorneys and comment.
And we do believe that turn comes in the second half, but as of now we're extremely guarded and will continue to be until we get confirmation of that turn out west.
Thanks for that color.
For me on private label initiative, just given the pricing pressure that you're seeing overall in the market I don't know if that might offer some opportunity for you guys, especially at some of your buyers get more price conscious and you guys offer that lower priced private label offerings. So just want to know if youre seeing any of that in the marketplace and the opportunity you might have there going forward in 2022. Thank you.
We build private label from one 5% to 8% this year and forecast them going higher next year, while we continue to bring out best of breed products into the market.
Just added <unk> to the suite on the pension side of it our lighting is selling well so our core and power aside we had a wonderful year, we're starting to.
Tremendous pickup on our truckload brands right now.
We are offering our customers best in breed products with better pricing and we do believe that it is working and will continue to work within our stores.
Alright, great. Thanks for the call I'll jump back into the queue.
Thank you, we'll now take our next question from Glenn Mattson with Ladenburg Thalmann.
Hi, I guess.
You talk about.
Adjusted EBITDA about in line with operating cash flow for the year.
And then Capex maybe.
Resulting in some sort of free cash flow, that's about breakeven plus or minus I think maybe correct me if I'm wrong there but.
Just with that outlook and with the uncertainty in general in the backdrop, just curious about how you feel.
With the cash position as it relates to.
Your appetite for acquisitions and what level of cash do you think the company needs.
To maintain just on the balance sheet is a core position.
So I'll walk through some of the ins and outs there on that just to make sure. We have clarity and then I'll have Darren give you some color on the.
On the on the industry. So when you look at the just like you mentioned, we are anticipating adjusted EBITDA.
In that 30% to $35 million range for 2022, we anticipate that our cash from operations on our cash flow statement will be about the same as our generated EBITDA as we manage our working capital and our balance sheet requirements to run the stores will then take that cash.
<unk> reinvested back into the company.
Both with the.
New stores that will be opening the 15 to 20 stores that will consume.
Round about $20 million and then we will have about $10 million associated with acquisitions and technology expenditures. So the total <unk>.
Investments into the.
Business will be round about that $30 million to consume the cash that we generate.
And we will be round about the same cash position. According to our plans at the end of the year.
If things go the way we project them to go.
I would mention that.
On a quarterly basis, theres going to be some ups and downs. However.
For example, we acquired <unk> this quarter and the cash necessary for.
Or that business.
We will burden this quarter plus the revenue in this quarter will be the smallest revenue for the four quarters as.
As we projected right now so the cash.
We will be at a low point in March 31, and then we'll build back up in the.
The three quarters that we have left of the calendar year.
As far as spending on acquisitions, what we've said on the call as well as our <unk>.
Prior call.
We are focused on.
New stores, new Greenfield locations to be the source of growth from a square feet under our retail umbrella.
That said if there was a great acquisition, we would certainly entertain it but we would want to have a positive.
Return on invested capital right away.
Right now we think the better use of our capital as a company is to invest in new stores.
Rather than to try.
Try to acquire locations in the emerging states.
Okay.
Is there is there something is there appetite for acquisitions on the private label side than that perhaps.
So I'm not sure I can get to that.
Well then if there is if there is something out there that jumps out is that we believe will be a.
Tremendous investment for our shareholders.
We're open to it but as of now there is nothing on our place when it comes to the product side.
So like anything else if it's there.
We would certainly take a hard look at it.
Right now there was nothing in the Hopper.
Okay, great. Thanks.
Thank you and once again Thats star one.
And we'll take our next question from Eric <unk> with Craig Hallum Capital Group.
Great. Thanks for taking my question.
So you guys have been kind of highlighting the.
The difference in.
Sort of durable goods versus consumable goods.
I guess things like lighting, and HVAC versus nutrients et cetera could you just give us a sense of the overall <unk>.
And margin profile for those two.
Product categories here.
Yes, I'll take a stab at that and then Darren could talk about the trends that we're seeing in the marketplace around our durables versus consumables, but I think when we look at our gross margins for consumables. They are in general higher than our margins for the durables spin.
Specifically associated with lighting and other capital needs for operations.
You need to standup a grow facility. The consumables market is also where we focused our proprietary brands, which also helps us on the gross margin side.
We have a pretty good lineup of products for from a proprietary brands perspective as well as the.
The distributor distribution brands that we represent so we're pretty excited about where that's going and the opportunity that we have on the consumable side.
To make up some of the ground.
The capital the shortage of capital equipment.
Being bought in the marketplace.
Eric I think theres been no secret that we and the rest of the hydroponics industry has seen a slowdown in capex projects.
Which is really lighting and HVAC and thanks, so much for more products, but we are quite confident with some of these emerging markets.
Coming onboard New Mexico, Missouri, and New Jersey, Mississippi, New York, where we do believe.
The capex projects will.
Begin to gain momentum.
As we continue to develop commercial relationships in other markets. So we're quite confident that you will see a tremendous amount of building starting in the second half of this year, if not sooner and we do believe that we will get it.
Certainly our fair portion of these large build outs.
So we are pretty upbeat.
Until these deals start coming into the house.
We are guarded children until we start seeing them come into the house.
Yes, I think that definitely makes sense and I appreciate that color.
I also appreciate all the guidance that you guys have given from a modeling perspective.
If I could just kind of.
Drill into your unit expansion.
15 to 20 Greenfields this year.
Kind of just feels a bit aggressive to me. So maybe you could just sort of help me understand a bit more about the.
Timeline associated with.
With these build outs.
And maybe.
Help us understand like.
When we might be able to tell if that 15 to 20 years.
Sort of increasingly likely or unlikely.
We get for example, if we get Q.
Q2 results in August and you guys have.
Five stores opened by then.
Does that give you enough time to open up the remaining 10% to 15 by the end of the year.
Any color on that sort of timing and how long. It takes you in that outlook would be very helpful. Thank you.
Yeah, Eric we've given a range of 15 to 20, and we are quite comfortable with the lower end of 15.
We are again, we are in an all out Blitz right now working with some large brokerage firms. We have LOI is in place as I said earlier, we built over 250000 square feet space. This year of last year and we do believe it's certainly within within the realm.
We are in March and we certainly understand where we are within the alloy and the LOI process. The lease process. We've just finished we just finished opening ardmore, which is 25000 square foot store and Ardmore, Oklahoma, We're just in the midst of.
Finishing a couple new.
Large locations, we're moving we just moved into a larger location in Auburn, Maine, just we're doing one in reading right now.
And it's been it's then it's full steam ahead on new locations around the country.
Now we are quite comfortable with that number.
Okay. Thank you.
Thank you we'll take our next question from Scott Fortune with Roth Capital Partners.
Yes, good afternoon.
I will focus back on the private label side the initiatives going on there I know you've had a goal to get up to 20%.
Revenues.
Where do you see that private label mix opportunity at the storefront or online channel.
Categories that.
Youre looking at beginning.
And is that 20% mix.
With the environment is kind of is a little bit pushed out a little bit from your expectations from that standpoint.
As of now Scott, we have not pushed out that expectation. We finished this year at about 8%.
My two are.
Tours to our Arsenal, which is a benching company all we are launching a <unk>.
A nutrient brand called drip hydro, which we'll be launching sometime in the first quarter. If not early second quarter. So we think we're pretty much on target, while we feel very comfortable with the.
With the success of our online products and really the progress that we've made if you look this year. If you look into 'twenty. One we built our private label for one 5% in 2028% to 8% of sales and we do believe in 2023, we will hit those numbers.
And it will be a wider array youll see.
The soil industry in the nutrient industry.
We are in the banking industry and also the lighting industry. So our private label brands span.
Pretty much the entire gamut of the hydroponics.
Got it thanks for that color and were real quickly just kind of.
Guidance will be maintained growing E comm around 230%.
Where are you guys kind of initiative and the growth expectation for the E. Comm side with kind of same store sales kind of being a little more obviously music.
<unk>.
And what are the initiatives on E comm as you bought those.
Platforms together here.
Yes.
So yes.
I'm, sorry, I don't recall mentioning the e-commerce growth rate, we actually anticipate.
A reasonable growth of E. Commerce, this calendar year, and we certainly look forward to that being.
Avenue.
Really strong growth once we.
We see federal legalization around the.
Space and our customers start to use more.
Traditional payment methodologies and we are anticipating that coming along in the future and that's why we've put investments into e-commerce .
This year with a lack of that federal legalization. We are planning for an increase in e-commerce , but a more reasonable growth rate on a year over year basis, and that kind of mid single digits number we anticipate on the proprietary brands that we'll see about a little bit better than that mid single digits number approaching.
Of that 10% number.
For the non retail space and that's kind of how we see the legacy business growth rate for.
For the calendar year.
Overall the growth in.
In 2023.
As we position ourselves with the new stores.
And we position ourselves with the HRD.
Business and really invest into that business, we see the future in 2023.
Very strong.
To be a very strong year for us.
I appreciate the color. Thanks.
Thank you and that does conclude today's question and answer session and it also does conclude today's conference. We do thank you all for your participation and you may now disconnect.
Yes.
Yeah.
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Alright.
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