Q2 2022 GrowGeneration Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the grow generation second quarter 2022 earnings results Conference call. At this time are getting additional participants and should begin in a couple of minutes. We appreciate your patience and ask that you. Please remain online.
[music] [music].
Good day, ladies and gentlemen, and welcome to the grow generation second quarter 2022 earnings results Conference call.
Today's call is being recorded for opening remarks, I'll turn the call over to clay Craigslist from ICR. Please go ahead.
And welcome everyone to the Grad generation second quarter 2022 earnings results Conference call. Today's call is being recorded with US today are Mr. Darin Lambert co founder and Chief Executive Officer, and Jeff Lasher, Chief Financial Officer of grow Generation Corp. You should have access to the company's second quarter earnings press release issued after the market closed.
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.
Those described in these forward looking statements.
Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward looking statements made today.
During the call we will use some non-GAAP financial measures as we describe business performance the SEC 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 our prepared remarks, we will take questions from research analysts we ask that you. Please limit yourself to one question and one follow up if you have additional questions. Please reenter the queue and we will take them as time allows now I will turn the call over to our co founder and CEO Darin Lindbergh Darrin.
Thanks Clay.
Good afternoon, everyone.
Thank you for joining us today to discuss our second quarter 2022 financial results.
I will begin with a brief discussion of the challenges that continue to pressure all aspects of the U S. Cannabis on hydroponics markets. I'll, then provide an overview of how our <unk> business is performing.
Highlights the aggressive proactive steps.
Taking to adapt.
I'll finish by reiterating our confidence in the law.
Longer term strategic plan for growth generation.
I will then turn the call over to our CFO , Jeff Lasher, who will take you through the details of our second quarter results.
Our updated full year 2022 guidance.
I would like to start by thanking each one of our employees across our corporate center and 62 retail locations.
Can you support of grow Chen.
It's been a challenging few months, but along with the rest of the executive team.
Appreciate your hard work and dedication to our vision and strategic plan.
We will not come as a surprise to anyone on this call that the candidates industry is currently experiencing an unprecedented and prolonged downturn that is negatively impacting all participants across the candidates value chain.
From growers to suppliers to retailers.
Great Jen, while our sales and profit generation in the first half of the year have clearly underperformed our original expectations.
And while we're planning for the law to continue through the second half.
We remain dedicated to controlling the areas of the business, which we are able to control.
We identified early the need to proactively make changes in our business and we're shifting our priorities to put less focus on our five strategic imperatives, and putting even more emphasis on cost controls.
Inventory reduction and cash generation.
As a result of our actions over the last few months, which we will discuss in more detail later.
I wanted to reassure you grow Jane is on solid financial footing.
We have a strong balance sheet and we don't anticipate the need for external debt or equity issuance.
We currently have $65 6 million of cash and cash equivalents with zero debt.
As we sit here today, we feel very good about our liquidity position well into the foreseeable future.
And the company has the ability to meet the operational needs of the business without additional capital even if the current market conditions persist.
As it relates to the broader industry supply and demand remains out of equilibrium with a large oversupply of cannabis in the marketplace.
As a result, we're always have slowed capex projects, which is directly pressuring hydroponics sales year to date.
The trends are most pronounced in major markets, such as California, Oklahoma, and Michigan, which represent an aggregate over 56% of our retail sales.
In summary, we've seen cannabis demand and therefore hydroponics demand slow nationwide.
And we're not able to accurately predict when the industry will get out of this rut.
On a positive note, we do see continued opportunities for cultivation growth emerging states and regions, including the northeast Midwest and New England, which over time is where we will focus our store expansion and commercial efforts.
In addition, there've been some positive developments on the legislative front.
The state of California recently eliminated the cultivation tax.
We'll make legal cannabis more competitive in the marketplace, where wholesale cannabis prices remain well below year ago levels.
The federal level lawmakers in the United States.
Introduced new legislation that if passed would pave the way to federal cannabis legalization.
While the general consensus is that the bill faces an uphill battle to overcome a Republican filibuster.
We were encouraged that the conversation on Capitol Hill seems to be gaining traction again.
As we said before we manage our day to day operations and planning for the future under the going assumption.
This is not federally legalized in the U S and <unk>.
Other words, our business model does not depend on that outcome.
That said, we think it's only a matter of time until lawmakers in Washington catch up with the American public.
Overwhelmingly support federal candidates for utilization.
The first half of 2022, Hasnt been easy, but we've made a lot of progress strengthening our business over the last six months as I have mentioned earlier, our balance sheet is strong and healthy.
We have $65 $6 million of unencumbered cash we reduced inventory by 7 billion from 106 million to $99 million in the second quarter. So a combination of inventory management and selling out of closeout product.
If there's a silver lining to this exceptionally difficult operating environment.
We've used this opportunity to more closely evaluate our retail footprint and cost structure.
Throughout the first half of the year, we've reduced our expense base by roughly $1 5 million a quarter through a combination of labor management and tighter day to day expense controls.
In the second half of the year, we are projecting a decrease of an additional $1 million a quarter sequentially.
Similarly through store closures and expense control.
In total we estimate that our annual run rate expense will be down about $13 million by year end 2022, when compared to Q4 2021 pace.
That is $26 million of expenses in Q4, 2021 down to $22 7 million in Q4, 2022, not including annualized contributions from HR G and MMR.
While dismissing employees is never an easy decision.
Im confident we have made the right choices to strengthen the company and better position <unk> to make a strong recovery.
In terms of our store count we've closed two stores in July .
And we will be closing an additional three to five stores this year.
The majority of these consolidations are simply eliminating redundancies in the footprint so on lots of those stranded costs.
In fact, we expect very little if any loss sales due to these closures as most of the stores within 20 miles or another grow gen retail location.
As a reminder, we recently opened our new Greenfield location in Jackson, Mississippi, and our new location at Ardmore, Oklahoma that opened earlier this year.
It's performing as well as can be expected given the market conditions.
As of now we've scaled back store opening plans and only have two to four locations planned before year end as we have shifted our priorities to manage through this downturn.
Notwithstanding these signed leases that will be opening retail locations.
In Missouri, New Jersey, and Virginia.
The takeaway is we still believe there are compelling opportunities to acquire and build new stores in states, where we don't yet have a physical presence throughout the eastern parts of the country and in the Midwest.
As I hope you can see we were actively prioritizing working capital optimization to preserve our capital base or right sizing our cost structure to reduce our breakeven and enhanced our future margin structure.
We believe that when the cannabis industry. Eventually recovers. These efforts have put <unk> in a better place to emerge stronger with an even more attractive financial algorithm as the leading hydroponics retailer and private label supplier.
Our private label strategy.
One of the top imperatives this year.
Driving sales of our priority brands and private label products and we're investing in resources to provide customer service product development and distribution excellence private label, a council for $6 $5 million of retail sales, which is around 11% of our overall retail and e-commerce sales.
Drip hydro our proprietary nutrient not into Hawaii, Washington grow Gen stores during the second quarter is off to a strong start.
And our non retail store segment, our acquisition of HR G is enabling us to expand the distribution of some of our 400 private label Skus. This 750 hydroponics stores across the U S.
We have already made good progress against this goal during the second quarter.
Revenue from our non retail distribution business, including HR G. And then my power Assai chart core and other owned brands totaled 16% of sales in the second quarter.
<unk> contributed over 21% of gross profit.
I want to make a few points.
About our performance in the quarter.
Clearly we are not satisfied with the current sales trends in the business.
Our second quarter comparable sales declined 57% year over year with generally equal distribution of dollar sales across April may and June .
We did not see a seasonal increase in revenue in June , which historically showed an increase of over 10%.
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 also have not seen a material improvement in the July trend, which was down approximately 52% compared to last year on a same store comp basis.
On a positive note private label sales and margins have held up relatively well and.
And we generated positive operating cash flow in the second quarter of $3 8 million.
Due to our concerted efforts to reduce inventory and optimize our working capital and preserve cash.
In terms of profitability, we had a GAAP net loss in the quarter inclusive of goodwill and intangible impairment.
We delivered an adjusted EBITDA loss in the second quarter of $2 9 million with a gross margin of 28, 5%.
These results in <unk>.
Included a few items worth noting.
Transportation costs were $3 8 million in the quarter, which we estimate is roughly triple our volume adjusted historical normal and.
And we expect these elevated costs to continue in the back half of the year as we look to minimize procurement.
So rebalancing inventory and store closures.
We incurred a half a million dollars of severance costs related to workforce reductions and we incurred $800000 of bad debt expense.
The declining macro environment in the industry have adversely impacted the enterprise value since our last quarterly report.
This triggered a review of goodwill and intangible assets acquired in business combinations over the last few years.
Impairment expense is a result of declining enterprise values throughout the peer group.
Net of these items, we estimate our adjusted EBITDA would have been more consistent with the first quarter, reflecting the difficult decisions. We have made throughout the quarter to rightsize, our expense structure and ultimately reduce the companys breakeven point.
As Jeff will detail for you shortly we are reducing our guidance for both net revenue and adjusted EBITDA for the full year of 2022 on.
On the topline the revised guidance reflects a third and fourth quarter that closely resembles the trends we saw in the second quarter, which as you will recall was sequentially softer than the first quarter.
From a margin perspective, we expect continued pressure from elevated freight cost to be at least partially offset by the ongoing benefit of reduced G&A expense on the mixed benefit from a higher proportion of private label sales.
With that I will turn the call over to our CFO , Jeff Lasher.
Yeah.
Thank you Darrin first I'll address our second quarter financial results and then I will discuss our updated full year 2022 guidance.
For the second quarter grow generation generated revenue of $71 1 million versus $125 9 million in.
In the second quarter of 2021.
Representing a decline of approximately 44%.
The decrease in revenues was primarily attributable to a 57% decrease in same store sales revenue.
And at $8 $3 million decline in E Commerce revenue.
This was partially offset by a $7 million increase in non retail businesses, including the acquisition and integration of <unk> and <unk> into our.
Distribution and other segment, which increased that segment sales to $12 million this quarter from $5 billion a year ago.
Our same store sales for the second quarter 2022 were $44 8 million compared.
Compared to prior year sales of $104 1 million.
Representing a 57% decline against the comparable year ago quarter.
This comp base includes ecommerce web stores that operated in both periods for 2021 and 2022.
Gross profit margin was 28, 5% for the second quarter of 2022.
Up approximately 140 basis points sequentially from the first quarter.
Gross profit dollar generation in the second quarter decreased 43% from the prior year, including the impact of additions.
The acquisitions and new stores in our retail stores e-commerce, and our non retail segment.
Our retail gross margins in the quarter were flat to last year, but aggregate gross margins benefited from a decline in E Commerce volume.
As a percentage of total sales from 10% of revenue to 5% of revenue as well as an increase in mix of distribution and other segment revenue for 4% of revenue to 17% of revenue.
The distribution in other segment has meaningfully more favorable gross margins than our retail and e-commerce segments.
We did have a significant headwind on a gross margin basis percentage basis from freight and shipping expense.
On an absolute basis freight expenses in line with last year, but as Darin mentioned with the decline in sales volume the percent of revenue spent on freight increased substantially in the second quarter.
Store operating costs and other operational expenses declined sequentially from the first quarter.
Overall, the expense directly associated with revenue production declined from $14 $5 million in Q1 to $13 8 million in Q2.
Selling general and administrative or SG&A costs were $10 6 million in the second quarter.
Of which $1 1 million was derived from stock based compensation.
This compares to $10 3 million in Q1 with $1 $6 million of stock based compensation expense.
Total SG&A expenses were impacted by $500000 of severance related expenses and $800000 of bad debt expense more than doubled the amount of bad debt related expense in Q1.
Compared to the same period last year SG&A expenses increased to $100000 in the second quarter 2022, with overall savings offset by the addition of HR GMI.
And the previously mentioned increase in bad debt.
On a year over year basis, we added six retail locations from 58 to 64 stores in the second quarter, which also contributed to the increase in second quarter store operating costs on an absolute basis versus the comparable period, one year ago.
As Darren outlined we have taken a number of steps to right size operating expense, including resizing, the payroll consolidation of the ecommerce web stores that reduced marketing expenses rationalizing our store count and other operational changes.
Depreciation and amortization of intangibles was $4 8 million in the second quarter of 2022.
In addition, as Darin mentioned the company had a one time impairment of goodwill and intangibles associated with the previous acquisition.
This $127 $8 million will not impact the day to day operations of the business and as it related to the contraction of the Companys enterprise value.
This onetime noncash expense resulted in a valuation allowance expense of additional $1 million associated with the temporary impairment of deferred tax assets as we do not project the ability to use those operating loss credits in the foreseeable future.
However, the loss generated will result in a tax refund of approximately $3 million later in 2022.
Income tax was a benefit of $283000 in the quarter. The income tax provision was impacted by the valuation allowance of $1 million.
For 2022, we are forecasting a financial loss for tax purposes, but with the valuation allowance, we do not expect significant income tax provision benefit or expense for the remainder of the year.
Net loss for the second quarter was $136 4 million or $2.24 per diluted share.
Compared to net income of $6 7 million or <unk> 11 per diluted share from the comparable year ago quarter.
Just a reminder, that impairment income tax expense represents a preliminary amount and remains subject to change following the completion of a normal quarter and accounting procedures.
Adjusted EBITDA, which excludes the expenses associated with interest taxes, depreciation amortization impairment and share based compensation expense was a loss of $2 9 million for the second quarter of 2022 compared to income of $14 5 million in the second quarter of 2021.
We estimate this quarter's adjusted EBITDA loss includes roughly $1 3 million.
Unusual items that we expect should either become less impactful or will not.
Not repeat going forward, including bad debt expense and cost of labor reductions.
Related to the balance sheet. The company ended the quarter with $55 $6 million of cash and $10 million of marketable securities that are mature and available for sale.
Total liquidity was $65 6 million at the end of 2022.
The company reduced inventory by $6 9 million offset partially by a $2 2 million increase in prepaid inventory.
We also consumed about $4 4 million for payments associated with technology and distribution investments cash.
Cash generated from operations in the quarter was $3 $8 million, primarily from the reduction in inventory.
I will now discuss our updated expectations for the balance of the year.
We saw an acceleration of declines from first quarter sequentially into the second quarter.
We have not seen an improvement in the third quarter to date through July from those <unk>.
As such we are now expecting and planning for comparable store sales across the country in the second half of the year to resemble the first half.
Specifically July was down 52% on a same store sales basis.
As a result, we are now forecasting comparable sales declines.
Declines at or below Q2 results for Q3 and continued continued degradation in comparable store sales for the fourth quarter.
Overall, we anticipate revenue to be down 30% to $55 million in the second half of 2022 compared to first half revenue of $152 9 million.
We are now expecting full year 2022 revenue to be between $250 million and $275 million and full year adjusted EBITDA to be.
To be $12 million or a loss of $15 million loss.
All including the contribution from recent acquisitions.
The middle of our guidance range Embeds, a continuation of the current trends we are seeing today and the low end contemplates a further deterioration in the operating environment.
We expect gross margins to remain under pressure throughout the balance of the year due to lower sales volume that produces deleverage of the supply chain as well as discounting and elevated freight cost.
We expect adjusted EBITDA in the third quarter of 2020 to be a loss in the range of $3 million to $5 million weighed down by elevated gross margin pressures additional in place separation and store closure costs and other expenses.
We expect operating expenses to be controlled and sequentially down in the third and fourth quarters. As we are now planning for fewer retail store openings than we previously expected to add to the absolute dollar expense in Q4.
We are continuing to take steps in executing our business strategy to focus on generating cash from operations during this challenging industry environment.
We are planning for total capital investments outside of acquisitions, primarily for new store build outs and technology investments of $6 million to $9 million for the back half of 2022.
Thus far we have spent $8 8 million in 2022, we have opened a new location in Ardmore, Oklahoma, Texas border and relocated stores and Auburn, Maine as well as rent in California.
Our new Jackson, Mississippi location in July .
Opened in July we have closed two stores and plan to close three to five additional locations and we are in the process of reviewing additional store closures.
We estimate year end store count to be around 60.
With that I will turn the call back to Darrin for closing remarks.
Before we open the lines for your questions.
I want to reiterate that while 2022 is not shaping up as we initially expected.
We're making the tough decisions necessary to ensure we are in the best place possible to emerge stronger than ever when the industry. Eventually it turns around.
We are actively focused on the areas of the business that we can control and we acted quickly beginning back in January to reduce costs and prepare to weather the industry downturn.
We accelerated those efforts even further during the second quarter by delaying a few of our strategic goals. This year in favor of right sizing our cost structure with significant workforce reductions, including a couple of high level executive positions and store count rationalization.
As an update on our five key initiatives our ecommerce sites have been combined and we are actively working on efficient operation of profitable web stores.
We have opened five new and relocated locations, but scaled back near term openings, considering the industry wide sales slowdown.
Our technology improvements are delayed until later this year.
We continue to expand private label penetration was 11% of retail sales from brands that we have control over.
And our distribution and other segments continue to be an area that shows incremental revenue and beneficial margins, we have not changed investment activities segment.
We remain committed to the expansion of our proprietary and distributed brands outside our own retail locations and a 750 independent locations.
We are very satisfied with the results of both chalk Cork and powered Psi on a <unk>.
Very excited to have introduced Zip hydro nutrients in additives.
The addition of <unk> strengthens our position to gain indoor vertical cultivation projects with their leading benching and racking systems.
Controlled environmental agriculture and sustainable.
We're only in the developmental stage and we believe more local communities will invest sustainable indoor vertical farms to local production of leafy Greens Tomatoes, fruits and other food products.
<unk> remains on solid financial footing with a strong balance sheet, a healthy liquidity position and solid cash generation.
We're confident that when the cannabis cycle turns.
Excess supply in the marketplace eventually normalizes grow Jim will be well positioned to recover quickly with a more attractive expense structure on a lower G&A base from which to build.
Thank you for your time today.
Thank you for your support and grow generation.
We will now take your questions.
Operator.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad, if you're 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, we'll pause just a moment.
To give everyone an opportunity to signal for questions.
Okay.
Yes.
We will take our first question from Scott Fortune with Roth Capital Partners. Please go ahead.
Good afternoon, and thanks for the question just wanted to focus here and obviously a lot of exposure in California.
Yes.
Your thoughts there.
We're seeing the cultivation licenses up for renewal in October and it sounds like mainly in California called the visit or not planning this year with new license.
And the ongoing pressure for a lot of these small growers.
What's your sense of California that playing.
Playing out the rest of the year and then your footprint in California front from a store base side of things.
Yes, Scott as I know as you know Scott, California is the epicenter of cannabis and always will be.
There is a tremendous base of cultivators and the state of California, and there is also a tremendous.
Tremendous.
Illegal market coming out of California, and we believe you will see an equilibrium somewhere you've seen positive events in California over the last few months with the with the state tax giving back almost a $160 a pound for the cultivators out in California.
We've seen a very slow outdoor season in California, which usually bodes well for the newer markets.
Are our bread and butter in California is the legal markets. It's the indoor grows so.
So we feel pretty comfortable with where the market is and we opened a store in L. A last year that is progressing well and.
Our California stores, albeit down.
Have been stable over the last few months.
Got it and then I appreciate the color there and then can you provide a little more touch points from the top customers on the commercial side versus smaller operators kind of the ordering.
Kind of in California. Some of those other pressures did what percentage of revenues is driven from kind of the recurring fertilizers and medians now versus more of the equipment purchases overall what are your business now.
Yes, I think what you've seen this year Scott with the downturn in the candidates markets and the downturn in the capital builds.
We have probably seen a shift to about 75% on the consumable products in 25% on the capital build products, but we do believe.
With the growth of this industry, you will see a resurgence of capital build projects in the future when that occurs we just don't know right now you.
Are you seeing some positive talk right now on Capitol Hill from Schumer Booker.
More articles were out today, so youre starting to see that compromise going into the interim elections and like anyone we certainly have our fingers crossed and as you know the cannabis the candidates markets right now are about a $20 billion market in the forest Kiss Little our $100 billion by the end of the year and when you compare.
Due to the wine and spirits markets almost at that trillion dollar Mark we think there's tremendous upside within the growth of any industry, you do see ups and downs and Unfortunately, right now Scott Youre seeing downs you heard it from hydro farmer in Hawthorne This week.
The markets have been tremendously challenging and grow Jen has taken all steps that we can and we will continue to take steps to stabilizing this business and bring it back to profitability.
Thank you so as a color I'll jump back in the queue. Thanks Darren.
Thanks Scott.
We will take our next question from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening and thank you for the questions.
So first question for me.
The broader kind of a landscape and your customer base, so capital markets environment.
Difficult for them right now almost always kind of has been given federal illegality.
And that creates difficulty in retaining.
Particularly we think about the <unk> headwinds that your customers face. So I guess my question is as we're kind of facing this reset now.
Supply in key markets pricing pressure, which makes it even more difficult to be profitable, especially cash flow with the <unk>.
How do you think about changes that are going to be needed at the federal level, So really get.
That shift back to where you might have been last year and do you think safe would be enough for that if <unk> is not being included in it was more just how does the depository banking side. Thank you.
I think to start with Aaron.
<unk> certainly bring us the legitimacy to the markets, which I think everyone is looking for.
All we all we all we all know that no build outs in new facilities cost a lot of money.
Right without what Youre seeing right now is on the on the cultivator side, they're also preserving cash for the future. So what youre seeing is just a tremendous amount of.
Yes.
Of individuals that are just they are happy with what they have right now.
Again, if the industry stays at the level. It is right now there's enough facilities to handle that so then really the question that we'll have and I think it's more of a question for the American public is cannabis as the candidates industry, you're going to grow from where it is today.
Where the estimates are in the future.
And we still do believe that in the future you will see.
A tremendous amount of business coming in from typical lag in indoor growing well, which will which should be a boost for the heights of the hydroponics.
The CE industry on a go forward basis.
But we do believe that.
The Safe Act will give a boost to the market so give a boost to the capital equipment markets and what Youre seeing right. Now also as you know as new states come on board, albeit much slower than we expected.
Our capital builds right now going on in New Jersey, and New York Youre seeing them, starting in Mississippi, but very slowly Virginia, Missouri, So you're starting to see builds we're seeing builds all the time, but just not at the same levels, we saw a year ago.
Yeah.
Okay. I appreciate that color, that's really helpful. There and I was giving you guys cash position, which remain strong you mentioned about how you don't need to take on any more equity or debt and you guys are taking your own initiatives on the expense side.
On the flip side of it I'm sure you guys are better positioned than many of your competitors and even other people within the hydroponics supply chain you know potentially so during.
During these times, maybe not now, but how do you think about potentially getting more aggressive in finding opportunistic M&A opportunities is that NASA from I think about on horizon is that something you might be seeing excellent there might be even more cash constrained while dealing with fundamental headwinds that you guys are as well. So let me get your outlook in terms of whether or not there would be M&A that might be opportunistic.
Right now for you guys. Thank you.
Yes, Erin I think you know me well enough that you know the company well enough.
There's a deal on the table that makes sense for grow Jen, we will look hard certainly hard at it whether it's on the product side of it on the or on the storage side is it if it's accretive and it's for the right price we're always looking at.
Right now it has to be the right price and.
You know we look at deals all the time, so, but fortunately or unfortunately, we havent pulled the trigger we pulled that we pulled the trigger on two deals earlier. This year. One was I think the last day of December .
And we bought a charge this year and we're very satisfied with both of those acquisitions. So it's not that we've been that quiet. This year. We have we have done some acquisitions and store openings, but right now we're balancing the two and if something comes by our guests that we believe makes sense and it's for the right price.
We certainly will take a hard look at it.
Okay, great. Thank you very much for the detail I'll jump back in the queue.
Sure.
We will take our next question from Ryan Meyers Lake Street Capital markets. Please go ahead.
Hey, guys. Thanks for taking my question.
First one for me so that three to four stores that you plan on opening just kind of curious what your level of confidence is that youre going to be able to generate some solid business out of these in the near term and really any color around those three to four openings would be helpful.
Yes, a couple of things there are new markets, Ryan and we do feel quite comfortable we have business in those markets already.
Have a very vibrant commercial team out there. So these arent new states for US is just new states for us with locations to better serve the cultivators and growers in those states the stores that we're building in.
New Jersey, Virginia.
In Missouri are smaller than our average stores so.
It will definitely supply them to our supply chain, but we're quite confident that we'll get these stores profitable as we did with Ardmore, Oklahoma about six months ago.
Great. That's helpful and then Darren you've kind of alluded to this on the call, but you know given the tough candidates market what kind of opportunities are you guys seeing out. There then see a you know a vertical growing indoor growing for agriculture, and do you have really anything in the pipeline there.
It's still been very slow.
Certainly we see we see certain transactions on the hemp side of it.
But on the other side of that we're starting to see we're starting to sell some products into to the colleges that are starting to build greenhouses on premises, but it's been a very very slow uptake. We think it's going to be in 2023 projects for <unk>.
Certainly we've been working on our business this year.
And 95% of what we do right now is into the cannabis space.
So we have plenty of work to do on our on our other side of the business, but we do believe in the next couple of years, you'll see that industry is starting to gain some traction.
Got it thanks for taking my questions.
Thank you Ryan.
We'll take our next question from Andrew Carter with Stifel. Please go ahead.
Hey, Thanks, Good evening I guess, the first thing I wanted to ask and backing up on the initiatives I Wonder have kind of an understanding of where you are in terms of harmonizing number one are all your stores and district and distribution centers.
Integrated from a back office perspective, ERP, where you have visibility and then on the new distribution centers are they in the place where they're starting to enable the company supply chain or is it still kind of test and learn and not really benefit benefit until 2023.
First one.
Yeah.
Jeff I'm going to turn it over to you.
Yeah, Andrew So just so you understand how the store side. The 63 stores are connected together.
There's a variety of systems that we use within the organization.
The retail store side all of the acquisitions that we've acquired over the last couple of years get plugged into our systems. The same day, we acquire them and when you start receiving data and information.
From them, we do have a technology investment that will go in next year that will supplant that and provide better efficiencies for us.
We're still doing quality control and validation.
And some exercises on on that technology investment the distribution centers, we have one active and we have one that's still waiting on final development.
What youll be in Ohio are they.
It will provide.
Provide opportunities for us to.
To be more efficient in the distribution of our private label business as well as our own distributed brands business, which is their primary focus in the near term and then longer term.
Abilities to service the stores.
A variety of different products as well as e-commerce deliveries.
So we're looking forward to that as we build out the network, but the primary benefit.
For the distribution center strategy will really be a longer term.
Okay.
Ill ask offline Im little confused on the first one but second question I wanted to ask is.
You have visibility on what's going on the competition out there are kind of the competing private private label retailer sorry, hydroponics retailers trying to hang on is the rationalization going as the new states are opening are you seeing that start to open right alongside your where Youre planning flags, but anything you can help us to give us about how the competitive set.
Thanks.
Yes.
Andrew would you.
We're seeing some competition right now is lessening.
We haven't seen many new low keeping the new store groups pop up of late.
We just opened a large store in Mississippi, I think we're probably the only one in Mississippi right now so I think youre seeing the doldrums straight around the industry right now everyone is feeling it you heard it from hydro from you heard it from Hawthorne.
You heard this.
The degradation in their sales going on in 2022, and that's from individual stores not buying so we do believe that we hear from stores every day. So we have.
We certainly have the ear to the ground and we understand what's going on in the industry and I think the competitors are probably feeling it worse than great Jay.
Okay.
Thanks, I'll pass it on.
We will take our next question from Eric <unk> with Craig Hallum. Please go ahead.
Yeah.
Great. Thank you for taking my question.
So you've mentioned.
This increasing mix of private label.
Also mentioned some of these newer stores are going to be a bit smaller than perhaps what we're used to seeing.
Certainly has gone through a bit of an evolution here and it sounds like.
So far in 'twenty, two it's been sort of a cold hard assessment with <unk>.
Some of these.
Notable changes here I was wondering if you could maybe just give us sort of an updated kind of north star.
What you guys are looking for whether that's a mix of.
e-commerce versus retail.
Overall store sizes can you just give us a sort of high level overview of how your northstar or strategy has shifted.
Within the past six months call it thanks.
Yeah, a couple of things one I don't think we've shifted that much we have been steadfast with our private label Rollouts are looking to go from where we started I think a couple of years ago, a 2%. We're now at 11%. So we've been pretty steadfast on that.
Store acquisitions. This year, we have slowed down and we've told Wall Street, we were slowing down store acquisitions and going to an opening platform. This year, albeit much less than we thought as we work on the business and walk work through the downturn of this industry.
Any time, you see a slowdown in industry you need to caution yourself and I think that's what <unk> is doing right now our margins. This year at 28, 5%. This quarter I think it was a phenomenal feet. During these times.
As Jeff mentioned in his call our shipping costs. This quarter were at over three times the norm.
Back past, so we've done a tremendous job managing.
Supply chain, bringing inventory down and also bringing payroll that youre looking at a $13 million drop this year and overall expenses, but grow Jens <unk> thesis has not changed it may have slowed down for the time as wall Street is back out and we do believe that.
The federal government has slowed the industry down for the time being.
But we do believe that you are in the first inning of a nine inning game and Thats always been what grow Jen has told wall Street that in the early innings you know every once in a while.
Things slow down and they have slowed and we are working through it we've kept our balance sheet is strong we're bringing inventory levels now.
And we're continuing to do business every day and help the cultivators and the growers.
States do what they do.
Okay.
Okay. That's helpful.
Specifically on sort of private label E Commerce and inventory can you just kind of give me a sense of how you are envisioning all those sort of evolving throughout the year or maybe even beyond as it relates to e-commerce and retail sort of looking forward.
What's your target mix of retail versus E. Commerce is if we're going to see a bit more of a.
Push towards.
E Commerce or Omnichannel as you are looking to slowdown some capex spending and <unk>.
There were some costs so.
Maybe just kind of touch on how youre looking at your ideal mix of retail versus E Commerce and then.
Jeff maybe you can just kind of comment on how we should think about your ability to further wind down of inventory throughout the year. Thank you.
I'll start and I'll, just turn it over to Jeff we are in the process of remodeling our online site and you will see a new rollout by year end hopefully sooner.
As we stated earlier, we've integrated our sites agron and grow generation Dot Com Agron was specifically a commercial ordering site. Most of its business was big build outs. It was lighting the modification control systems in that part of the industry has slowed dramatically.
So we have done is we've pivoted we are redoing our sites I think they are in final development right now and will be two sites and one both both.
Looking for business from the individual growers in the large cultivators, but not as much weighted towards the large commercial builds.
The stores, it's business as usual.
Private label traction within our stores.
11% of sales and going higher we just launched we just launched with hydro which is off to a great start, which we believe will increase our private label sales going into the third and fourth quarters of this year. So I believe.
As usual it grow Jan.
You know again.
We're waiting for a turn in the industry and as we wait for the turn we believe we have made this company better this year, we've reduced cost tremendously.
We are working on our balance sheet, and we're doing what needs to be done right now.
We do believe that the industry will turn you know it may not be this year and maybe next year it will be going against much more comps next year, we're against the blistering comps from the first half of last year as you all know.
So we will see where the industry goes we'll see.
And to the interim elections, if something gets passed on the same factors or a combination of a couple of the different acts out there but.
We still are very positive on what we built to grow Jen <unk>.
62 stores.
Three different divisions of grow Jen and Theyre all pro forma.
As far as the specific inventory actions that we've taken in and progress. We've made on the inventory side. We ended the year with $106 million of inventory of $105 6 million that.
That included the legacy business from 2021 as.
As well as the acquired inventory when we acquired <unk>.
Went up to $106 million at the end of the first quarter and then down to 99 million at the end of second quarter, we have seen.
A decline in our revenue and I'm, sorry in our inventory for the retail business overtime and that retail business decline.
For inventory continues to progress.
Through the third quarter.
And we have seen an investment that we've made on the <unk> side.
To expand that that business and we've plateaued on that investment in other words, we don't need a lot more inventory, we do have some timing issues when it comes to some of our private label inventory.
That we bring in throughout the year on a seasonal basis to in preparation for peak season.
And that ends up with some some variances quarter to quarter.
And.
But our plan is to continue to address inventory and keep the focus on our inventory as a opportunity for us to generate cash.
In the near term.
Okay, great. Thanks appreciate the color.
We will take our next question.
Andrew <unk> with Oppenheimer. Please go ahead.
Alright, Thank you for taking my question.
Just regards to top line.
Behind all of the current industry noise is there anything that gives you or anything that suggests the potential rebound in sales once we get through the back half of 2022, and then I guess just in regards to Darren <unk> prepared remarks.
What gives you confidence that the current sales wall is more cyclical in nature rather than structural.
Yes, the answer to that is.
Yes.
Core funds.
Sales were down 63% quarter, I think hydro from probably more so you've heard from our suppliers.
And you've also heard from you know again, we understand the state of the industry.
So we do believe that grow Gen is holding up much better than our peers and the rest of the industry.
Like anything else.
If you believe in the if.
If you believe in the forecast for the underlying industry, which is the cannabis side of it the cannabis growers.
Do you believe in the growth that the growth forecasts the industry isn't a lull right now which will come back if candidates.
Sales.
Klein and don't go forward like forecast it.
You May see you may see some more severe issues with this industry.
From everything that you hear out there and from the American people year hearing seven over 75% acceptance of candidates right now.
And Youre still seeing.
States that have not built out and people unable to get candidates that we still believe there's tremendous traction for this industry and I think you've heard it from most of the cultivators out there. The msos everyone's still will tell you that this is the early innings of an industry and it's the making of an industry like any.
Else it takes more than a few years to make an industry. This is same thing happened with alcohol coming out of prohibition.
Okay. No that's very helpful and I guess, maybe my second question is.
Do you guys consider like further legalization necessary for the intermediate to longer term growth of the <unk>.
Generally the industry as a whole.
We don't but I think what you certainly will need.
As well as the Safe Act with certain other help from the federal government.
If the cultivators can't make money, it's going to be quite hard for them to continue in business.
So what youre seeing right now with $2 <unk>, which is a tax ramifications to the growers and the lack of money coming in through Wall Street building facilities is quite expensive these days.
<unk> capital has to come into the industry and without the Safe Act.
Wall Street is pulled back.
And we do believe that there are there are a bunch of different bills right now that are pending going into the interim elections.
And we do believe that there is that there is a likelihood that something does get past that we do believe will bring tremendous help to the industry.
Okay.
Great and much.
We will take our final question from Glenn Mattson with Ladenburg. Please go ahead.
Hi, Thanks for taking the question most of them have been asked already but just one more on the inventory.
Maybe can you just talk about.
The the possibility of any obsolescence or anything like that is there is there a large portion of that made up of like equipment. That's just not moving right now that maybe maybe.
It won't be.
Is viable six or nine months down the road or something and then what would be like the ideal days of inventory or what kind of what kind of level, you're targeting as you kind of.
So it is lower level.
Perhaps my last for a little while.
Yes, so on the obsolescence opportunity or risk of their organization.
We review that on a regular basis and adjust our inventory based on.
Lower of cost or market.
The analysis that we do.
And try to position our inventory for accounting purposes.
To reflect that risk.
As far as opportunity to sell some product at lower than the normal margin. That's that's a decision that we make on a regular basis and we and I think we mentioned that in the script.
That we are looking at some opportunities to discount in order to move some inventory off.
Not a dramatic discount that we're selling below cost, but one in which where we're aggressive in the marketplace to to move product and gain market share.
Over the over the course of the back half of the calendar year.
As far as the opportunity for us too.
Improve our gross margin return on investment of inventory.
Or inventory turns we're obviously always looking at opportunities for the right sizing of inventory, but it's also important to recognize that we need to service our customers with a selection of products in our stores.
That are readily available so there's a balancing act between the need for inventory to maintain our sales and our market share in the marketplace.
Versus the pure spreadsheet analysis that would define.
To find a lower set of inventory and we're constantly.
Constantly reviewing that and adjusting our inventory targets levels based on that balance.
Okay. Yeah. Thanks for that color and then just quickly on the cost cuts would you expect those to flow through rather quickly or just some some cadence on.
Thanks.
We expect our Q3 cost structure to reflect a number of actions that we took in Q2.
And for our Q3 cost structure to be lower than Q2.
Okay, I'll take up more offline thanks very much.
Ladies and gentlemen. This concludes today's question and answer session I will now turn the call back to clay Cramblit for additional closing remarks.
Thanks, Keith and thank you everyone for your interest in Grad generation. Please reach out to ICR with additional questions at grow Gen. IR at ICR, Inc. Dot com and we look forward to updating you on our three key results later in the year. This concludes our call.
Ladies and gentlemen, we appreciate your participation you may now disconnect.
Okay.
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Yes.
Okay.
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