Q1 2022 GrowGeneration Corp Earnings Call
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Good day, everyone and welcome to the grow generation first quarter 2022 earnings call.
At this time I'd like to turn the call over to Clay Crumbly. Please go ahead Sir.
Thank you and welcome everyone to the grow generation first quarter 2022 earnings results Conference call today's call is being recorded with.
With us today are Mr. Darin, <unk> co founder and Chief Executive Officer, and Jeff Lasher, Chief Financial Officer of grow generation Corp.
You should have access to the company's first quarter earnings press release issued after the market closed today.
This information is available on the Investor Relations section of grow generations 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 certain risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward looking statements made today.
During the call we will use some non-GAAP financial measures as we describe business performance.
SEC filings as well as the earnings press release, which provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website.
Following prepared remarks, we will take questions from research analysts.
I ask that you limit yourself to one question and one follow up if you have additional questions. Please reenter the queue and we'll take them as time allows.
Now I will turn the call over to our co founder and CEO Darin Lampert Darrin.
Thanks Clay.
Hey, good afternoon, everyone.
Thank you for joining us today to discuss our first quarter 2022 financial results.
Your guidance.
I will begin with a brief discussion of a challenging start to the year, which has been slower than we hoped.
Followed by a summary of what we're currently seeing in the U S cannabis market.
Anish by reiterating our confidence in the longer term strategic vision for growth generation.
Some positive developments in the quarter against that strategy.
Then turn the call over to our CFO , Jeff Lasher, who will take you through the details of our first quarter results and our updated full year 2022 guidance.
I'd like to start by thanking each one of our employees across our corporate center and 63 retail locations.
We need supportive grow Gen and your dedication to our vision and strategic plan.
While 2022 is off to a slower start than any of us would prefer.
We remain confident in the longer term opportunity that exists within the hydroponics industry.
We exited the quarter with excess inventory and we didn't anticipate the demand for hydroponics would remain as slow as it has where as long as it has.
As a result, we saw fewer vendor rebates and more obsolescence in the first quarter, which consequently.
Negative impact on our gross profit from our lower sales days than we originally planned.
As I can tell you firsthand this isn't the first time the industry has experienced a downturn.
And as we gave last time, we expect this one to forecast in the near future.
In the meantime, I want to reassure you grow Jay Rosen is on solid financial footing to weather. This fall mechanical cycle and we are focused on controlling the reasons of gateways that are fully under our control.
As a result, we firmly believe we are well positioned to emerge stronger when the market eventually turns which it will.
We have a strong balance sheet and we don't anticipate the need for external debt or equity issuance. We currently have $56 million of cash and cash equivalents with zero debt.
Other words the company has the ability to meet the operational needs of the business without additional capital.
Our cash from operations was negative in the quarter due to inventory purchases and pavement of customer deposits. After the <unk> acquisition, our underlying business generated positive cash flow from operations.
I mentioned this to say, we feel very good about our liquidity position well into the foreseeable future even if the current market conditions persist throughout this calendar year.
We're taking an active approach to managing the business in a way that preserves cash through working capital optimization, which Jeff will discuss in more detail later or more aggressively right sizing our cost structure in light of the car.
Demand in this space.
Now I'd like to say a few words about the broader industry.
Landfill hydroponics remained soft as.
As we see a large oversupply of cannabis in the consumer marketplace that has all been awesome growth capex projects.
This is most pronounced in markets, such as California, Oklahoma, and Michigan, which representing the aggregate over 55% of ourselves.
I can't tell.
Tell you exactly when this dynamic will shift, but I can tell you that grow Gen remains poised to capitalize on the rebalanced when it does.
On a positive note, we do see opportunities for cultivation growth emerging states and regions, including the northeast Midwest and New England, which is where we will focus our greenfield and commercial efforts.
More specifically on our business I want to reiterate our five strategic initiatives. This year, which we believe will better position us for growth in 2023.
First we are focusing our growth prospects on opening greenfield retail location.
There was the most potential opportunity.
As we've outlined before this includes our plans to open new first time retail locations in Mississippi, Missouri.
Jersey, New York and Virginia this year.
While we are reassessing our goal of adding 15 to 20 new stores. This year are 10 to 15 store goal reflects our strategic decision not to open new stores within existing markets, where oversupply is most pronounced.
We plan to open our Mississippi retail location in June In addition, Missouri, New Jersey, and Virginia are all at the lease signing stage and we plan to have these locations opened in the second half of 2022.
We also plan to have New York locations operational by the end of 2022.
Second we are investing in company wide technology to drive operational excellence deliberately deliver our omnichannel strategy.
Our enterprise resource planning or ERP platform will speed transactions of the cash register and store unified our customer databases and create a more efficient inventory demand planning and purchasing system.
Third we are establishing a network of five distribution centers in key locations to serve our retail stores E Commerce and commercial customers. Our fifth distribution Center will open in June , adding an incremental 100000 square feet of warehouse space to service, the Midwest, New England admit Atlantic regions having.
Eastern West Coast distribution.
How is the lower freight costs mix, our private label items with our distributed products and better serve our customers on a national level.
Now have over one 1 million square feet of retail and warehouse space.
We are driving sales of proprietary brands and private label products. This includes investments in resources to provide customer service product development and distribution excellence.
Private label on retail stores accounted for $3 6 million of retail sales, which is around 5% of our overall retail and ecommerce sales ship hydro our proprietary nutrient and added in wine launches and grow Gen stores later in the month of May.
Non retail store segment, our recent acquisition of <unk> G will enable us to expand the distribution of some of our 400 private label Skus into 750 hydroponics stores across the U S. Starting in the second quarter.
Revenue from our non retail distribution business.
Including HR G and then my power aside charcoal and other owned brands totaled 15% of sales.
Cool.
In the first quarter, we combined e-commerce operations and infrastructure to operate beside the generated $5 $3 million in online sales in Q1.
This results in long term capabilities to service customers more efficiently with reduced freight and cost of delivery times, while maintaining competitive pricing as well as the ability to leverage our operating expenses.
In summary, our first quarter comparable sales declined 35% year over year and comparable sales sequentially declining each month, so far in 2022.
The revenue weakness is not abating in the second quarter.
April same store sales remain under pressure from declining demand for durable goods, including lighting and HVAC products as well as lower demand from large commercial accounts.
We remain committed to the strategic and commercial initiatives and we firmly believe these strategies will make us stronger in 2023.
As Jeff will detail for you we are reducing our guidance for both net revenue and adjusted EBITDA for the full year 2022, so essentially reflect the continuation of the current sales environment across the remainder of the year, while we hope the market improves we think it's prudent to take this more cautious approach given where are we.
And today and now I will turn the call over to Jeff Lasher, Our Chief Financial Officer, Jeff.
Thank you Darren I will address our first quarter financial results and then I'll discuss our updated full year 2022 guidance today.
For the first quarter grow generation generated revenue of $81 8 million.
Versus $90 million in the first quarter of 2021, representing a decline of approximately 9% or $8 $2 million.
The decrease in revenue.
Was primarily attributed to a $25 $1 million decrease in same store sales revenue and stores and a $1 million decline in E. Commerce revenue for web stores opened in both periods.
This was partially offset by a 11 $3 million of incremental revenue from non comp stores and stores opened or acquired last year.
Sales of non retail businesses, including the acquisition and integration of HRD.
NII increased from $2 $8 million in the same period, 2021% to $12 $2 million in the first quarter of 2022.
Our same store sales for the first quarter was $47 $7 million.
Compared to prior year sales of $74 million.
Representing a 35% decline against the comparable year ago quarter.
Gross profit margin was 27, 1% for the first quarter down approximately 110 basis points from the prior year, but up from Q4 the.
The year over year margin decrease in the first quarter was related to unwrap captured freight expense diluted impact of pass through freight charges to customers at costs inventory write downs and discounting activities.
Gross profit dollar generation in the first quarter decreased 12, 8% from the prior year, including the impact of additions of acquisitions in retail stores.
E Commerce, and our non retail segment.
Total operating expenses in our retail stores and our E. Commerce segment sequentially declined from the fourth quarter of 2021. However, the addition of <unk> and <unk> for the for the quarter resulted in an overall increase in operating expenses, which totaled $14 $5 million compared to $8 two.
In the first quarter of 2021.
On a year over year basis, we added 37 retail locations and several non retail acquisition.
Which contributed to the increase in the first quarter store operating costs on an absolute basis versus the comparable year ago period.
Selling general and administrative costs were sequentially down in the first quarter of 2022 at $10 $3 million compared to fourth quarter of 2021.
Of the $12 million of SG&A in the quarter $1 6 million was derived from stock based compensation.
Additionally, the recent acquisition of LMI, and <unk> added an incremental $1 $6 million to SG&A expense in the quarter. We've taken a number of steps to decrease operating expenses, including resizing the payroll consolidation of the ecommerce web stores that reduced marketing expenses and operational changes.
For the quarter, we had higher expenses, including an increase in bad debt reserves and expenses for the termination of office leases.
That totaled about $1 million depreciation and amortization of intangibles was $4 $5 million in the first quarter of 2022.
The breakdown is $2 7 million of amortization and $1 8 million of depreciation for new store openings and technology.
As we go forward depreciation and amortization expense will continue and we forecast that amortization will be about $12 million in 2022 associated with acquisitions over the last couple of years, including the 2022 acquisition of <unk>.
Income tax provision was a credit of $1 $6 million in the first quarter of 2022, following the net loss in the quarter for.
For 2022, we are forecasting a financial loss for tax purposes.
Net loss for the first quarter was $5 $2 million or <unk> per diluted share compared to a net income of $6 1 million or <unk> 11 per diluted share for the comparable year ago quarter.
Adjusted EBITDA, which excludes the expenses associated with interest taxes, depreciation and amortization and share based compensation was a loss of $700000 for the first quarter of 2022 compared to income of $11 $1 million in the first quarter of 2021.
Related to the balance sheet. The company ended the quarter with $47 $3 million of cash and $19 million of marketable securities on the balance sheet that are mature and available for sale if needed.
Total liquidity was $66 $3 million at the end of March 2022.
The company reduced ongoing legacy inventory and legacy company prepaid by about $13 million, however, including inventory purchased in the <unk> acquisition and acquired shortly after the acquisition total inventory was flat at $106 million.
Prepaid inventory and other prepaid assets fell from $16 1 million to $7 million in the quarter.
Total receivables increased from $8 2 million to $9 $4 million with the addition of <unk> activity.
Quarter, we used cash in operations to pay down accounts payable from 17 million to $14 $2 million at the end of the quarter inclusive of <unk> payable.
Also consumed about $4 million for payments of accrued liabilities.
<unk> payroll related items.
Customer deposits fell from $11 7 million at the end of 2021 to $77 $2 million at the end of March 2022, reflecting lower commitments of capital products that required deposits in advance of production.
Overall, managing other working capital needs in the first quarter resulted in an underlying generation of $3 million of cash from operations of any existing at the end of 2021, however, cash flow from operations in the first quarter was burdened by an inventory build for HRC.
$5 million and the overall result was a usage of cash in the quarter, a $2 3 million.
We are now expecting and planning for an acceleration of the decline in comparable store sales across the country throughout 2022.
The sales results in the latter half of the first quarter in the month of April period sequentially in <unk>.
It forced us to revise downward our sales projections for the year.
Specifically April was down more than 50% on a same store sales basis, and we have not seen any improvement in the beginning of may.
As a result, we are now forecasting comparable sales decline at or below Q1 results for Q2 and for Q3.
We are up against an easier comparison in Q4 of 2022 and presently forecast of high single digit decline in comparable store sales in Q4.
We expect gross margins to remain pressured get moving into the second and third quarters, followed by a projected margin expansion in the fourth quarter on a year over year basis.
We are continuing to take steps in executing our business strategy to focus on generating cash from operations during the challenging industry environment.
We're doing this with a focus on inventory reductions tight management of critical authorization and modification of key vendor terms to shore up the company's balance sheet and cash position.
As mentioned the cash generated by legacy 2021 operations was positive in the first quarter, but we made a substantial investment in the wholesale hydroponics business, specifically the acquisition of inventory build of HRD.
Total net cash used in the investment of <unk> and the expansion of distributed brands inventory for that business. After the acquisition was $12 million.
Which does not include the common stock issued in the course of the acquisition valued at $5 $7 million.
At the time of the acquisition on January 31, 2022, <unk> had $4 $2 million of inventory when we acquired 5 million additional inventory to support expansion of product offerings into control systems and led lighting.
<unk> contributed $3 $4 million of revenue in the quarter.
But did not materially contribute to EBITDA.
We're planning for total capital investments outside of acquisitions, primarily for new store build out to $15 million to $20 million.
Thus far we have spent $4 $5 million in 2022.
The other addition to the enterprise that produced better than expected EBITDA and cash flow with a memory company specializing in manufacturing and selling your vertical benching and racking systems for both the retail and agricultural markets.
Mmm business benefited from continued expansion of fulfillment center conversions and retailers former retail only locations are converted to multichannel fulfillment centers across the country.
We are now expecting full year 2022 revenue to be between $340 million and $400 million in full year, adjusted EBITDA to be above breakeven, but less than $10 million all including the recent acquisition.
The low end of our guidance range Embeds a continuation of current trends we are seeing today.
As such we are not expecting adjusted EBITDA in the second quarter of 2020 to be significantly different relative to first quarter results.
Expect gross margins to remain under pressure throughout the balance of the year due to discounting and elevated freight cost.
The operating expenses to be controlled and sequentially down in the second quarter before increasing on an absolute basis in the third and fourth quarters due to the expansion of retail store footprint.
As we said on our last earnings call. We continue to expect for 2022 that are proprietary brand power is high in charcoal will benefit from the industry focus on yield and quality and product, but other areas, including lighting control systems and HVAC will be under pressure.
As a result, we have significantly constrained our inventory purchases as we focus on our brands and decreased working capital needs.
We will add new stores in the latter portion of 2022 that should generate incremental sales as they come online throughout the balance of the year.
So far in 2022, we have opened a new location in Ardmore, Oklahoma, and the Texas border and relocated stores and Auburn, Maine and rate in California.
Our new Jackson, Mississippi location will open this summer followed by more locations and new markets throughout the east and Midwest before year end.
Just as importantly, we believe that our additional investments in technology distribution capacity in private label sales.
We will increase EBITDA margins in future years.
Total cash generated by the business will benefit from the companywide focus.
On inventory and management of balance sheet items, including receivable we.
We have modified our tactical response to the market and constrained inventory purchase plan substantially we maintain a strong cash position without the immediate need for external debt and do not foresee a need for debt or equity issuance. We do anticipate that we will generate positive cash from operations. This year in excess of our adjusted EBITDA.
<unk> I close I would like to point out that the company has recently changed audit firms.
As previously disclosed.
As such our Form 10-Q filing with the SEC will be filed at a later date.
Required given this recent change for more information. Please see our form <unk> filed with the SEC filed earlier today.
Our focus for 2022 is on execution to setup the company for a strong future with the new retail locations private label and proprietary brands improved technology superior distribution capabilities and our strong e-commerce platform built to scale profitably.
With that I will turn the call back over to Darrin for closing remarks.
Thank you Jeff.
Before we open the lines for questions.
Want to reiterate that we are not satisfied with our results in the first quarter.
We acted quickly in January with cost reductions to prepare to weather the industry downturn.
<unk> is on solid financial footing with a strong balance sheet and healthy liquidity position and solid underlying cash generation.
Confident that when the candidates cycle turns and the excess supply in the marketplace. Eventually normalizes, which we firmly believe it will grow Jen will be well positioned to recover quickly and fully.
Our strategic acquisition of <unk> accelerates, our expansion of our proprietary and distributed brands outside of our retail locations and the 750 independent locations.
Satisfied with our results with both charter and power side and are very excited to be gaining to begin selling driven by Joe nutrients in additives.
Addition of MMR strengthens our position to gain indoor vertical cultivation projects within our leading benching and racking systems controlled environment, agriculture and sustainable AG.
In the development stage, and we believe more local communities, while investing sustainable indoor vertical farms local production of leafy Greens Tomatoes, fruits and other food products.
We've taken the actions needed to reduce our expenses and drive cash generation, while focused on our growth plan.
For your time today and thank you for your interest in <unk> generation, we will now take your questions operator.
Thank you if you would like to ask a question. Please signal by pressing star one on your telecom keypad if.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again, Please press star one to ask a question.
And we'll pause for just a moment to allow everyone an opportunity to signal.
And our first question will come from Brian Nagel with Oppenheimer.
Hi, good afternoon.
Hey, Brian .
So.
First question wanted to ask I guess.
Darren it's more geared for you just from a bigger picture perspective going back to the <unk>.
Do your opening comments you made in your prepared remarks.
I guess I understand better.
Industry per sector perspective, what's happening here, because if you look at it and we started talking about these headwinds.
Oversupply.
Cases slower licensing basically midway through last year, and I think now we'd say they persistent headwinds persistent if not intensified.
Longer and further it was supposed to tell me, what's actually happening now.
If I heard you correctly it sounds like the oversupply now it's not just a west coast or California issue its into some of these other markets as well so I guess, maybe what's happening.
Is there is it.
<unk> supply issue, where you're starting to see a demand.
They're a demand issue as well.
And would it make sense could could've supply issue actually persist more than one year or does that is it looks like a self correcting mechanism mechanism within there.
I can start Brian to start with.
You know there is some certain amount of licensing in every state that goods on those business day.
So it was always our thesis from the start that.
We were going to move from state to state and that's as states became more mature.
Would see a slowdown in capex build outs and that's what we've seen and.
And what you've seen in California, Oklahoma, Michigan, starting to spread into other states as the.
States are fully built out and what you see every three to five years is refresh cycles with new lights.
New control systems, and new products coming to market.
We were always of the opinion that when you came out of the screen wave in 2020 election with a democratic sweep.
We were of the opinion is as was everyone else that new states would come to market quicker that you'd see legalization moving much quicker.
But really what you've seen is the opposite which you've seen as more red tape more roadblocks from our government and what you've seen is a tremendous amount of money coming into the industry and the same states and you sort of build outs in California, Michigan and Oklahoma.
Took off in that 2020 to 2021 area.
You saw also a tremendous upgrade cycle from from.
From any energy inefficient lighting to led.
Led lighting. So we're seeing right now really is you've seen the illegal markets in California are persisting.
You're also seeing states that are fully built out with excess product and you've also seen wall Street step back in and stopped fueling the building in certain of these states.
<unk> seen an oversupply in dropping our pricing on the cannabis side of it so you're seeing the perfect storm in a lot of ways.
Certainly not.
Not in a good way for the Hydroponics area you heard it on Hawthorne is call. The other day, you're probably going to hear it on the hydro harms call. Today. So you are going through right now there's this perfect storm, where where where groups are not building new facilities. So so really some of the higher some of the higher sales more sales number.
And in our business are disappearing, which is led lighting dehumidification control systems. So grow generate now is selling you know basically <unk>.
Consumable products to grow clients every day and some of our big build outs have just stopped.
And that will.
Client demand, we'll certainly take back off with with more consumption of cannabis, but if the industry stays flat.
And Canada stays where it is right now I think the industry will be a Christian from toughest sooner some tough times.
We're still of the belief as you hear from many proponents that the industry is going to $100 billion. This decade and it sits in that low 20 billion dollar place right now so with that there will be a tremendous amount of building. So <unk> right now is taking a wait and see attitude.
As you.
Have you heard today, we've cut costs tremendously we got ahead of it.
So at the beginning of the year, we brought inventory down we've right sized staff within our stores and pretty much running right now on an EBITDA adjusted EBITDA breakeven.
We have a very strong balance sheet right now building stores in new states coming aboard were very very high on.
The Mississippi market, which is which is open cultivation. We're building a 35000 square foot store that should be opened in June .
We will be building stores in Virginia, and New York, New Jersey.
And we do believe these markets will will will bring back growth within the industry.
And we do believe that the oversupply conditions out west as they have in the past will youll see supply and demand come to that point, where individuals are going to start growing again and making money.
The outdoor season weather wise has has been pushed back.
Almost three weeks out west right now so we're still hoping to see that outdoor builds coming but we have not as of yet.
We haven't seen the spring pickup that we saw last year. So we're being extremely conservative with guidance right now until we see that turn into market.
Okay got it that's really helpful. There and then I guess as my follow up.
Or for Jeff you talked about Youre, just kind of and Darren you just alluded to it as well just kind of maintaining the finances here through this difficult period.
What are the other what are the levers could you pull to the extent that results tracking week or maybe even weaker.
What levers could you pull or would you poll here just to help stabilize the stabilize the financial side.
Yes, so I think theres a few things that we still are.
Corporate into our guidance and continue to work on and through the.
Of course of the year you know the number one for US is cash from operations focusing on the balance sheet strength, focusing on inventory turns and improving our overall situation.
And you can you can see that in our inventory numbers.
As we come out with.
The the inventory numbers throughout the calendar year, we are focused on improving that position we've improved it so far this calendar year.
Notwithstanding the investment that we've made in HR G and the ability for us to convert that to.
Additional brands offering for them for the distribution business, we've come down fairly substantially and inventory from 12 31 to today on the legacy businesses. When you take out M. I N H O G and we continue to look at our turns we continue to look at our expense structure.
Sure to find opportunities.
Within the labor efficiencies at the store level and at the management level and.
Administrative level, but also looking for efficiencies.
Within outside.
Outside services and marketing costs and things like that we believe that the technology investments that we've made over the course of the last year that will lead up to the launch of our new ERP system here.
And a couple of months.
It will substantially improve our distribution efficiencies.
And allow us to better understand the physicals in the business and drive for better results. So all of those things we continue to make sure that the business is maturing rapidly in order to be positioned for.
For the.
Position ourselves from the customers.
And positioned to grow profitably in the future.
Alright, Thanks, a lot I appreciate it.
Thanks, Brian .
Yeah.
And our next question will come from Aaron Grey with Alliance Global partners.
Mr. Gray your line is open for a question. Please go ahead.
I apologize I was on mute hi, thanks for the questions.
So first question for me I appreciate the comment on the broader dynamics one of the other things you guys mentioned was lower demand from your larger customers.
Just as we think about these northeast states kind of coming online and some of the licensed structures that can be a little bit different than Michigan, a california, or Oklahoma, I think there'll be a little bit more of a reliance on some of the larger players out there. So can you talk about some of the initiatives you have with those players because.
I think if you have more of a lag to capture some of the growth there, yes there'll be other license I believe you know in the New Jersey, New York, and Virginia, as the world, but less so than those other three markets. We've now seen a downturn, which drove a larger growth last year. So just your initiatives with some of those larger customers and how those are kind of evolve. Thank you.
Yeah, and we have a very talented commercial team grow Jen that does represent many of the large cultivators around the country.
We're in constant contact with them.
Our rolling out new products constantly we have an eye on 630 light right now that we believe is best of breed.
A benching company doing vertical racking right now so we are certainly looking right now to be a one stop shop for most of these large cultivators around the country.
We do we do service most of them and you know we have the best solution Best service the supply in the country and we also have dedicated reps that spend time in the cultivation centers around the country and they do work with hand in hand with a lot of the large cultivators that do have licensing in these new states.
Okay, great. Thank you and I appreciate that and then just going back to your initial question asked so just taking a look at that three to five year reset cycle.
And if you think that holds for some of those markets like California, Michigan as well as Oklahoma just given it makes up such a large set of your revenue base.
These other states coming online given the license structure that you're currently seeing even if everything did go up from regulatory perspective, do you think that would be enough to kind of offset this three to five year reset cycle.
These other three markets as these are going through the build out cycles that'd be one.
Yeah, one of the things Erinn about $66, 65% of our sales right now are on the consumable side of about 35% of the non consumable side of it and the consumable side of it as well as products that individuals need on a daily weekly basis, so from that side of it we feel pretty comfortable.
On the reset refresh cycles, which are usually seen as new products coming to market or energy efficient products, whether on the lighting side of it could you notification side of it.
Or the control system side of it. So it is right now it seem that wait and see category and what you're really seeing is you know were over a year, probably a year and a half into that right now.
So we certainly believe that there'll be new products rolling out and more money coming back into the markets and we do believe there'll be enough to offset it.
Non consumable products are our lowest margin products that we do sell.
While our consumable products are at a higher margin base for us. So we do believe we're well positioned to recapture the.
The growth as as as the industry comes back and continues its growth and we do believe that we will capture a large surge of new states coming on board and as we said earlier, we're building right now in Mississippi, signing leases right now in Virginia.
New Jersey and Missouri.
And we do believe that you will see growth coming what Youre also seeing from grow Gen. Right. Now is private label products, we have over 400 private label Skus.
We are selling we are in the midst of launching drip hydro into the markets in the middle of the middle of the late May that we believe is going to be an extremely successful nutrient lines.
While the early Earth.
<unk> has been phenomenal on the product.
We look forward to talking to Wall Street about it on our next earnings call.
Alright, great. Thanks for the kind of going to jump back to the queue.
Our next question will come from Andrew Carter with Stifel.
Yes. Thanks, good evening. So that's for the back nine this is implying a 14% to $74 million absolute increase so.
So first off a couple of things just so we can get all our models squared away could we get the same store base for each of the next three quarters. So we understand that component, but second how much M&A is in the numbers are in the final nine and then also how much is going on what's the new store.
Frankly relocation revenue thanks.
So Andrew.
Yeah, Andrew so to break down your question and in order to be clear.
There the M&A that we've already done this calendar year.
The acquisition.
Of HR G, which is the distribution business.
As well as the acquisition at the end of calendar year 2021.
Which is the business that we acquired in New York The M I.
Business that makes benches.
That those businesses are incorporated into our guidance for 2022, we are not assuming any additional acquisitions.
In 2021.
I'm sorry 2022.
The acquisitions at this point.
We believe.
We at this at this point don't have any targets that make sense to us and we are.
Always on the lookout for additional opportunities for us to expand our network. However, we don't.
Have any targets insight at this point in time.
Yeah, but when you look at the.
Okay.
No no go ahead Andrew.
I was going to say what I'm asking is you have a plan for the year and theres going to be incremental M&A from either the wrap or the or in the my HRD. How much is that embedded in the final nine months, that's what I'm asking plus the new store openings.
Yeah. So the.
As we disclosed at the end of the calendar year the M M I.
<unk> business.
Is you know total revenue for LMI is.
In the low double digit millions and same with HR G. After the conversion of that business to distributor.
The business that we have for new stores, we anticipate with our reduction in new store openings and really refocusing our attention on <unk>.
Virgin markets for us.
We anticipate that the 10 to 15 retail stores will add around about $5 million to $10 million.
Call, it $10 million plus or minus revenue for the calendar year, depending on the openings, but that's the way we look at it today.
Okay.
Question I'd ask is I mean this is the second delayed filing you've had here and I know theres been a lot of guidance revisions you're not alone.
But I guess I would ask is is there like an issue with the systems or something another round that you need to go or something like another level of investment anything you can help us out with thanks.
So we've already been making those investments Andrew and I appreciate your patience on that.
Have matured as a business and where we've added complexity to the business, which obviously adds.
Time and effort and detail.
Two that closed process I can tell you that moving from <unk>.
To a large accelerated filer at the end of the calendar year.
Accelerated the calendar for us.
Fairly substantially at the end of the year and then a marginal impact on the quarters we.
We do anticipate we don't anticipate any further delays.
And filing status in the future quarters. This quarter, we just needed that extra a couple of days.
To finish up some things that we're working on in conjunction with the 2022 and they are complex business combinations that we've done over the past.
You know year and a half but.
But we don't anticipate any further delays in future quarters, most notably with the launch of next week.
In the summer, we anticipate that that will dramatically improve our ability.
To turnover there.
The results and get out even earlier than what we're getting out today.
Thanks ill pass it on.
And once again, if you'd like to ask a question. Please press star one.
If you do find that your question has been answered you may remove yourself from the queue by pressing star two.
Well now take a question from Scott Fortune with Roth capital.
Yes, good afternoon lump all of focus back on California as it related as you saw the downturn came in Colorado about four years back, but how are you looking at from our standpoint.
Obviously, there was no single signals from California that is correcting here.
Remind us how much of the sales come from California, and the retraining makes you you said that 55%, which is great but can you put that in perspective of kind.
Kind of are you seeing customers going out of business or are we losing cultivators, obviously it was a tough environment in California.
Or or and then just kind of put that in perspective, the downturn in Colorado you saw in your strong store base do you think your store base is fine there or maybe even some more right sizing or shrinking the store base in California, How do you look at those 23, California stores in this current environment.
Yes, Scott.
I'll start.
There are 23, California stores are pretty spread out between northern California, and southern California, we have certain concentration in certain areas.
That consolidation may come into play in 2023.
Most of our stores in California are still profitable, but we always take we take a hard look up from a on a quarter by quarter basis.
Cut costs tremendously in the California markets.
Summer summer season, as consumer planting is coming so the spring season is coming.
We'll take a harder work after we see what happens in the spring.
A lot of our stores out in California, and the northern California areas are very springtime sensor for outdoor growing.
So we still haven't gotten there.
Tremendous handle on the outdoor season in California.
So we're still we're still looking our California business is in the low twenties right now percentage of our business.
The larger part of the spoke about was the Oklahoma and Michigan markets, but right now I think it's just too early to really discuss consolidation of our some of our stores out in California.
Got it and then maybe just to provide a little color on the private label side I know some initiatives you're still looking at potential the nutrient side. There, but are you seeing customers trade down in price and that kind of benefiting you private label side, how you think the customers.
Kind of.
With the inflation environment and challenges.
Affecting them how are you.
Seeing the play.
Trade down or anything like that on that side of things and obviously M&A. It has to be a great opportunity, but any opportunities for M&A on the private label side still.
I think right now as you know.
Our private label brands are growing a lot of them have come from in house as I as we spoke earlier in the midst of launching drip hydro, which is a product that comes from grow jet all of our power ESI in charcoal products with two brands, we bought last year, which are both performing well on MMA, we purchased this year.
One of the interesting you know purchases this year for grow Gen was HR G <unk>.
<unk> G was the distribution company that we're selling power of Science chart corporate grow Gen into 750 hydroponics locations around the country.
So we will be using <unk> to distribute products.
Private label grow Gen products into other stores around the country, we believe best pricing in best of breed products that'll be happening later in the second quarter also will certainly get a better handle for that going into the third quarter call. So and also drip hydro we will be distributing into other stores.
Starting in the third quarter.
No it's good.
Customers are they trading down how you're seeing the customer react.
And the inflation pressures going on right now.
Our pricing on some of our private label products, our <unk> product is probably.
As a premium product and so as our power aside products.
So really you know a lot of good Sam products are premium products right now right or I am lighting is priced very competitively in the market.
And ions had a tremendous 2021 and it's off to a decent 2022, but pricing on on the lighting side has come down you know from vendors and distributors in some stores. So you've seen you know 1100, all right et cetera that are trading at $800 right now so.
<unk> seen pricing come down with the competitive side of the market in stores around the country.
Okay I'll jump back in the queue I really appreciate the color. Thanks again.
Our next question will come from Glenn Mattson with Ladenburg Thalmann.
Hi, yes, thanks for taking the question.
So I'm, just thinking about inventory and the chance for any potential obsolescence and how comfortable you are with the inventory on the balance sheet can you can you go into that at all.
We review, our obsolescence position every quarter and we're comfortable with the reserves that we have in place.
On the lower of cost or market analysis that we do on a regular basis we.
We do have programs in place to address product.
That is starting to slow down and and we have specific programs from a marketing and promotional perspective.
To make sure that we continue to move the product and in.
No concerns on that front.
And is there a target number you want to get to by the end of the year in terms of days of inventory or an absolute dollar number in terms of working down that number over the course of the year.
Yes, Im hesitant to put our neck out there on a specific target of inventory numbers I can say that internally, we're focused on continuing to drive down.
Our inventory levels and get back to a turnover that was similar to what we've seen in the past, which is a four turns a year.
For our inventory so we're focused on improving our turns but at the same time, making sure that we have product available for our customers.
And then we have the selection and the service for the customers to make sure that we're competitive in the marketplace.
So it's a balance between those two you know two issues and we want to make sure. We're taking care of the customers on a long term basis, we have the financial capabilities of being there for our customers and we don't want to change that.
Right.
Darren one someone else asked already about the you mentioned the lower demand from your large commercial accounts when I think about the northeast states. Many of the guys who are biggest there at least early on are not necessarily people who are.
Extremely big in markets, like California, or Oklahoma or anything like that so.
You know when you think about that.
This part of the country and you kind of turning.
The corner in and lifting the canvas market a little bit how can you be you know can you give investors some.
Level of confidence that that you'll participate proportionately.
Proportionately.
Yeah, I think the easy answer to that Glenn as you know we've always participated probably we've always got our fair share plus in every state that we've been in where well known around the country for having the best service solutions supply.
<unk> products.
And the best commercial team out there so I see no reason why why our dominance in other states won't continue back east we have a very strong presence right now in Maine and then.
And in Rhode Island.
And also in Massachusetts, So I see no reason why that doesn't continue straight up into New York, New Jersey and up the coast.
Alright, so I guess, what I'm getting at.
Let me sum it up with this one but if you're comfortable with your inventory level, which is by far your biggest balance sheet.
Asset as far as the cash asset and then.
Your capex has been reduced somewhat here.
So you're going to end the year theoretically with reasonable amount of cash as you work off some of that inventory and I believe you said cash flow from operations would be a better then.
Better than EBITDA.
You're going into the year with the decent are still a significant level of cash.
And I rarely asked this question because I realize it's a question more for the board, but just generally Dara and I guess, what your thoughts are about you know with the stock down where it is potentially making.
Move in towards investing in the company and showing faith in that ability.
The ability to bounce back with the market and do some sort of share buyback or something like that that's it for me. Thanks.
Yeah, I think it's a question for the board everyone has their personal opinions on it I'd rather not discuss it right now, but certainly a question for the board and you know like anything else more to grow Jen will always you know we'll look we'll look at it we will look at where the stock is right now and they can make a rational decision on it but there are plenty of people.
That view stock buybacks into weakness not always is the best use of cash it sometimes.
Especially in onshore markets, so like anything else, one and it will be a question for the board.
Chelsea.
And as a final reminder, please press star one to signal for a question. We will now hear from Ryan Meyers with Lake Street capital market.
Yeah, Hi, guys. Thanks for taking my question just one for me so of the 10 to 15 stores that you guys look to open how many of these do you already have specific geographies identified.
Right now we have we opened a store in Ardmore, Oklahoma, We've also done reloads and inaugurated in reading.
Sign the lease in Mississippi, the store will be operational in June .
It's being built as we speak we have lease signings coming up in Virginia, Missouri, and New Jersey.
So we have specific areas.
Have leases and premises that we are signing.
And we are constantly looking around the country right now so the answer right now we have we have three that we've done.
Mississippi will be or where we are through three lease signings coming up which will bring you up to seven.
Great. Thanks, guys.
And it appears there are no further questions at this time I'd like to turn the conference back over to our speakers for any additional or closing remarks.
I'd like to thank everyone on the call today. Thank you for thank you to our shareholders to each one of our employees. We appreciate everything you do for grow Gen everyday.
We look forward to sharing hopefully some better news on or on our second quarter call coming up in August . Thank you.
And that does conclude today's conference and once again, thanks, everyone for joining US you may now disconnect.
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