Q2 2023 GrowGeneration Corp Earnings Call
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Hello, and welcome to grow generation second quarter 2023 earnings Conference call. My name is Chris I'll be coordinating your call today. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time.
I'll now hand, the call over to clay <unk> with ICR.
Please go ahead.
Good afternoon, and welcome everyone to the grid generation second quarter 2023 earnings results Conference call today's call is being recorded.
Today are Darrin Lambert co founder and Chief Executive Officer, and Greg Sanders, Chief Financial Officer of grow generation Corp.
You should have access to the Companys second quarter earnings 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 1095.
Forward looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward looking statements made today.
During the call we will use some non-GAAP financial measures as we describe business performance.
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.
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 time allows now I will turn the call over to our co founder and CEO Darin Lindbergh Darren.
Thanks, Glenn and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2023 financial results and our full year 2023 guidance.
As always I want to thank each one of our employees across our company for their continued support of <unk>.
I am grateful to our entire team for stepping up to every challenge and for being steadfast in executing our company's strategy.
I am pleased with <unk> second quarter results and happy to discuss the great progress we've made against some of our key initiatives.
<unk> future growth and profitability.
The official launch of our new ERP system on July one.
In the second quarter of 2023, we generated net revenue of $63 9 million, which represents a 12% sequential improvement over the first quarter of 2023 <unk>.
Consistent with the expectations, we communicated earlier this year.
Recall that historically, the second quarter is the strongest quarter of the year due to seasonality of the planting and growing cycle.
I'm, especially pleased that we generated positive positive adjusted EBITDA of 856000 in the quarter.
Which represents a significant improvement versus the prior quarters adjusted EBITDA loss of $1 8 million.
As we detailed on previous calls we've made significant progress right sizing our cost structure over the last year.
We're encouraged that those efforts are now bearing tangible results in our P&L.
Additionally, we ended the second quarter was $71 million of cash cash equivalents and marketable securities no debt and $77 million of inventory on our balance sheet.
And year to date, we've generated more than $7 million.
Operating cash flow.
All this to say despite the ongoing challenges in our industry grow Gen remains in a strong financial position to continue investing for growth, while putting profitability at the forefront.
I'll reiterate that we are happy with our second quarter results that represents the progress we've been striving to achieve.
However, the broader cannabis industry continues to face headwinds.
And <unk> is not immune to these issues.
With capital availability and investment and an all time low and interest rates, reaching their highest point since 2007.
Growers simply arent building out capacity, which means demand for durable products has slowed beyond what we expected.
In addition, the federal Legislative agenda has not moved in our favor and in fact, it seems to be getting less favorable.
On a positive note. We are seeing continued market acceptance of our private label brand strategy and growth in our consumable products <unk>.
Including our recently launched nutrients and added his line drip hydro and our cocoa line of products chart core.
What remains true is that we believe we've made significant progress transforming our business to be more nimble.
Patient and better positioned for profitable growth in 2023 and beyond.
And we certainly not backing away from the priorities, we outlined last quarter.
We're singularly focused on managing our business despite what's happening in the cannabis industry and may continue to weigh on the balance of the year.
While we maintain our cautious optimism about the next 12 months. It's fair to say we are now more on the cautious side about the backend back half of the year.
Last time, we spoke.
That said investing for growth and searching out opportunities is what we're coming to work for every day.
As we discussed last quarter, what that means in practical terms is.
We will continue building and growing our private label brand portfolio and expanding our distribution channels.
We remain on the acquisition front with multiple multiple acquisitions in the second quarter and most importantly, we're putting profitability at the forefront.
Focusing on margin expansion and profitable growth.
Briefly on each of these.
We remain committed to the expansion of our proprietary and distributed brands and we are very satisfied with the results of our private label products.
Private label accounted for $7 6 million of retail and ecommerce sales in the second quarter of 2023.
Which is around 15% of our overall retail e-commerce sales.
Up from 10, 7% in the second quarter of 2022.
In addition, <unk> is currently working on an expansion initiatives that will enhance the shopping experience for all garden enthusiasts.
In 2024, we expect to add dedicated gardening sections and select retail stores to attract the home gardening consumer.
This development will feature traditional gardening products alongside our private label brands.
Second <unk> is actively seeking accretive acquisitions, where we believe they are complementary to our current business we.
We believe we're one of the few companies that is well positioned and well capitalized enough to take advantage of the attractive valuations in the Hydroponics Garden Center space, our track record of execution with prudent balance sheet management and controlling expenses allows us the flexibility.
So far this year, we acquired a store in <unk>, Michigan in January we ended our 17th state with the acquisition of a store in Bozeman, Montana in early April .
We acquired a retail store in Jackson, Michigan in April and then her 18th state with the acquisition of two retail locations in Alaska and Maine.
Third we are prioritizing profitable growth, which we believe we will attain through our continued efforts to expand revenue and execute our margin expansion strategies. We are constantly analyzing the business for additional optimization and cost cutting opportunities and expect to continue benefit.
Flow through our margins through the remainder of 2023 and 2024.
As part of these efforts we are constantly assessing the performance of our stores with respect to redundancies in the footprint.
Separately and importantly, I am pleased to announce that we are fully rolled out and implemented our new ERP system with Oracle next week and point of sale and warehouse management systems with Manhattan Associates during the second quarter.
This represents a tremendous milestone for <unk> and our <unk> supply chain management capabilities and will directly benefit our company in terms of better freight and logistic rates optimized order timing and filling and ultimately improve customer service and relationships.
Like many other ERP rollouts ours has not been without its challenges and it will take time before benefits fully materialize.
While we are confident in our internal team and their ability to manage through the transition.
Encouragingly most of the issues, we've encountered had been relatively minor and we were pleased with the progress that has been made to date.
We're continuing to work through solutions to some of the more disruptive situations that we expect to have some impact on our third quarter results.
This early in the quarter, we are not prepared to quantify those potential impact if any on today's call.
Despite that we are happy where we are in the process and we will.
Forward to updating you on our progress during our third quarter call in November .
Turning to guidance full year 2023, we're updating our guidance to reflect our view of the broader industry today, given our expectation of softer than expected demand in the third and fourth quarters of this year.
We now expect net revenue in the range of $220 million to $225 million and adjusted EBITDA loss in the range of minus $4 million to minus $6 million.
With that I will turn the call over to our CFO Greg Sanders.
Thank you Darren and good afternoon, everyone.
First I will address our second quarter 2023 financial results and then I will discuss our updated full year 2023 guidance.
For the second quarter grow generation generated revenue of $63 9 million versus $71 million in the second quarter of 2022, representing a decline of approximately 10, 1% our.
Our same store sales for the second quarter 2023 were $44 7 million compared to prior year sales of $52 6 million, representing 15, one decline against the comparable year ago quarter.
The decline in same store sales in the second quarter represents a significant sequential improvement over prior quarters, specifically, we observed a 21, 5% sequential improvement in the second quarter compared to the first quarter year over year same store sales percentage.
Our ecommerce revenue showed a nine basis point increase year over year and remained normalized at $3 7 million or.
Our distribution and other revenue was $13 3 million for the quarter compared to $12 million in the year ago period, representing an improvement of 10%.
Gross profit margin was 26, 8% for the second quarter of 2023.
Down approximately 185 basis points from the first quarter of 2023.
The decrease in gross margin in the second quarter of 2023 was largely attributed to a 133 basis point impact from shrink and obsolescence expense, primarily driven from the restructuring of our distribution facilities as well as a 32 basis point impact for margin pressure on lighting, primarily.
Driven from vendor price reductions the restructuring was a onetime event and related to the closure of our Ogden distribution facility and setup costs associated to Preopening of our Columbus, Ohio distribution facility.
Store operating costs and other operational expenses declined from $13 8 million in the second quarter of 2020 to $12 3 million in the second quarter of 2023, representing a 10, 9% reduction.
Savings year over year were primarily attributed to rationalization of store count as well as payroll reductions.
We believe that the expense reductions to date are sustainable and we expect to execute upon further reductions in the back half of 2023.
Selling general and administrative or SG&A costs were $7 5 million in the second quarter of which 947000 was derived from stock based compensation.
This compares to $6 8 million in the first quarter with 567000 of stock based compensation. This represents a 10% increase quarter over quarter to SG&A, primarily driven from share based compensation.
Compared to the second quarter last year SG&A expense decreased $2 3 million in 2023 with overall savings driven from payroll reductions and increased cost control over a broad range of categories.
Depreciation and amortization of intangibles was $3 8 million in the second quarter of 2023 compared to $4 8 million in the year ago period.
In the second quarter of 2023, the company did not recognize an income tax benefit or expense.
Grow generation is using a zero percent tax rate as its deferred tax assets are not expected to be realizable.
As such the company has established a full valuation allowance, primarily resulting from the 2022 impairment of goodwill.
Net loss for the second quarter was $5 7 million or negative <unk> <unk> per share compared to a net loss of $136 4 million or negative $2 24 per share in the year ago period.
Compared to the first quarter of 2023, the company improved net income from a loss of $6 $1 million to a net loss of $5 7 million <unk>.
Adjusted EBITDA, which excludes interest taxes, depreciation amortization restructuring charges and share based compensation was $856000 profit for the second quarter of 2023 compared to a loss of $3 million in the second quarter of 2022.
Compared to the first quarter of 2023, the company improved adjusted EBITDA from a loss of $1 8 million to $856000 profit, primarily resulting from the increased revenue as well as sustainable reductions in expense and.
In the second quarter. The company included $1 2 million of expenses related to store consolidations and restructuring costs of establishing a distribution center in Columbus, Ohio.
Related to the balance sheet.
As of June 32023, the company had total cash cash equivalents in marketable securities of $70 6 million, which was a decrease of $1 $3 million to the first quarter of 2023.
The company leverage $3 $2 million of cash in the second quarter for investment of acquisitions from a year over year perspective, cash and cash equivalents increased by $5 million, mainly due to inventory rationalization measures and other strategic initiatives within working capital the company executed on.
Quarter over quarter improvements within accounts receivable prepaid and accounts payable from a cash flow perspective.
As such the company generated positive cash from operations of $3 9 million in the quarter.
In the second quarter, the company increased inventory by approximately $1 1 million.
Compared to the first quarter the increase in inventory position was largely due to stocking orders of a more seasonally active second quarter further with the rollout of the new ERP at July one 2023, the company increased inventory to hedge potential risks on a short term basis with regards to change <unk>.
Management of new technology, as we contemplate the back half of 2023, the company will aim to reduce its overall inventory position, while ensuring that we continue to meet the procurement needs of our customers.
Now moving to our full year 2023 outlook.
As Darin mentioned, we are changing our previously communicated guidance with full year 2023 revenue to be between 220 at $225 million in full year adjusted EBITDA loss to be in the range of minus $4 million to minus $6 million. While we are pleased with our second quarter results we have.
Not yet seeing the industry improvements in the third quarter to date that we initially expected.
Within our second quarter results, we observed continued stabilization in our expense structure and believe that we achieve sufficient alignment on cost of sales as we contemplate the back half of 2023 and a lower sales demand, we expect to execute on further opportunities for cost savings.
As Darin mentioned, we expect continued industry headwinds in the latter half of 2023 and are cautiously forecasting revenue and adjusted EBITDA to slow sequentially through the balance of the year compared to our second quarter results.
That said, we remain confident in our ability to navigate the industry and we will continue to stay focused on managing the balance sheet and controlling costs and our efforts to return the business to profitability, while driving long term shareholder value.
Positioning the business for long term profitability continues to be a top priority in 2023, our approach to capital allocation remains focused on a disciplined approach to return on invested capital. We completed three M&A transactions at desirable valuation in the second quarter, and we will continue to execute.
Upon the right opportunities to sustainably grow our business, we are investing in transformational technology that will help propel our company through future business cycles. Lastly, we continue to invest capital in our development of private label products and initiatives that expand our value proposition to a broader base of customers.
To close I'll reiterate that our daily mandate is executing our business strategy with a sharp focus on long term profitability and shareholder value with that I will turn the call back over to Darin for closing remarks. Thank you Greg.
Where we open the lines for your questions I wanted to reiterate that <unk> is on solid financial footing with a strong balance sheet healthy liquidity and a solid cash position we.
We continue to manage your business prudently.
Current industry landscape with an emphasis on sustainable growth margin expansion and profitability.
We're encouraged by our continued progress and remain laser focused on controlling what we can control and ultimately emerge as a stronger nimbler and more profitable company.
Thank you for your time today and thank you for your interest and grow generation, we will now take your questions.
Operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear at three <unk> prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press <unk>.
<unk> followed by two.
You are using a speaker phone please lift the handset before pressing any keys.
Your first question comes from Aaron Grey Alliance Global Partners Aaron. Please go ahead.
Hi, good evening and thank you very much for the questions.
First one for me I want to talk about the guidance as it relates to maybe the embedded gross margin expectations. So you talked about for this quarter 130 basis points from the shrinkage restructuring so imagine that's more than one time event.
So just how best to think about gross margins in the back half you get that 130 back that lighting reduction of 32 basis points is that going to remain within that so just any of the gross margin expectations for <unk> for the back half embedded.
And the guidance would be very helpful. Thank you.
Greg do you want to take that yeah, So hey, erinn.
As far as the back half of 2023, we're anticipating gross margins to normalize.
And then the mid to upper Twenty's and what does that mean for our business generally we're looking at a gross margin profile in that 27% to 8% range and we're continuing to focus on private label penetration as a long term strategy to continue to expand our gross profit margin on a long term perspective.
Yes, Aaron with that we are seeing and we saw in the second quarter is tremendous discounting coming out of some of the vendors in the industry to move in to move inventory and with that we've taken some onetime lumps on certain products that we are holding in inventory and we do believe that will that will alleviate.
Through the back half of the year, but on a normalized basis, we still do believe that you will see margins.
Normalizing in the high Twenty's.
We do believe.
When this all shakes out that you will see margins at <unk> in the low thirty's, but certainly not in the back half of this year.
Thank you I really appreciate that detail and then go more towards the topline lowering the back half expectations, you expect <unk> it sounds like.
Came roughly in line with what you were expecting answer than the street was so looking towards the back half from what Youre seeing are you seeing just.
More of a shake out maybe within the cultivators than you might've been expecting less man or is it just.
Same clients, but then they are buying less maybe some more color in terms of what's driving that and what youre seeing out there and then whether or not you think that might be more protracted being more of a shakeout or if it's just the current customer base buying less and maybe rebounds more than 224, so more what you're seeing in terms of that outlook would be appreciate it. Thank you.
Yes, right now and we're just not we're not we're not seeing a pick up in capex.
Most of the cultivators or managing a value balance sheets and waiting the industry and waiting out the industry downturn.
You've heard us for most of the Msos and single state operators Theyre not building unless they have to do right now.
I think the name of the game right now is just wait and see and what Youre seeing is a very slow adoption in new states coming coming aboard.
In all states a lot of the cultivators are happy with their position right now and theyre not taking shots at adding to the positions they are adding to dispensaries, but certainly not to cultivation right now.
What youre going to need right now in the industry is whether it's the same facts, whether whether its legalization, whether whether it's something to get a shot in the arm for which we're also hearing from the cultivators around the country and the large operators is theres just no capital come again, and I think you'd see that also from your vantage point.
And I do believe that the industry needs capital right now.
There was there was a tremendous amount of facilities built in 2020 in 'twenty, one and you start to seeing that people are just optimizing their facilities right now, but most of the sea changes you've seen in lighting and do use do you mystification came in 2020 in 'twenty, one and there will be a refresh cycle.
Coming in the next couple of years, we know what the products that have been bought but we still do believes that it's going to take time.
Our our business was up 12% quarter over quarter, which we couldnt be happier with but right now we're just not seeing the enthusiasm from our customers right now on the build side of it but like anything else, there's still managing their cultivation facilities and buying products from us every day.
Really appreciate that color and ill jump back in the queue.
Thank you. Your next question comes from Brian Nagel Oppenheimer, Brian . Please go ahead.
Hi, good afternoon.
Good afternoon, Brian .
I guess a follow up on that.
Question, Darren I know, we've talked a lot about.
The impacts of.
Your partner is not not.
Not as aggressively or not building out.
Infrastructure, but are you say as you look across the chain.
You'll see some of these states are probably more legal or more.
Have legalized more recently are you seeing a different trend there or is it really across the board.
I think what we're seeing is a much slower trend in new new legalized states.
This late this late in the game there are plenty of individuals that are still buying from the illegal markets.
What they've done their whole lives. So its just taking time.
If you convert them over to the legal markets, but youre also seeing a lack of capital.
Wall Street has not raised money for promote for any of the Msos recently on what Youre starting to do is seeing sale leasebacks here and there, but youre hearing it from the whole group.
Everyone's optimizing their balance sheets, and waiting and waiting it out and.
That's not necessarily bad for grow jet and again, we had a profitable quarter, we were up 12% quarter over quarter.
We've made tremendous strides in our private label brands and we still do believe that you will see from <unk> next year.
As us getting into the gardening space, we attended our first gardening show.
A few weeks ago, and we had tremendous interest and grow Gen products. We believe a lot of the products that we're selling into the cannabis space from good changeable into into gardening.
<unk>.
You go through customer segmentation and just what we're hearing and seeing from speaking with stores out there that we believe the distribution centers that we're setting up right now the leading ERP system that we just set up will give us the ability to sell <unk> products into thousands of.
Much deeper in the states that were red.
Where I appreciate the caller thanks darn.
You're welcome.
Thank you. Your next question comes from Andrew Carter Stifle Andrew. Please go ahead.
Hey, thanks, good good evening.
Kind of looking in the back half guide you, you're applying kind of actually flat with the first half of the year store base was 64 at the end of the quarter. If I caught that is it are you closing more stores are are the stores that your bill that are greenfield.
In line with your projection kind of <unk>, yeah, what's the store closure target for the second half.
No I'll start with the stores that we've purchased this year and you are in line with our targets and performing well and we have no issues with the with with any of the purchase that we've made this year.
As we said they're thinking that in in in.
And our script today and press release, we will be closing some more stores with distribution that we built out in her new European system. There are certain stores that are close to other locations.
And with the industry, where it is right now so we believe there is room for optimization. Both on you know you know right around progenitor cost and we will be working on cost structures over the next six months.
Second question to ask about how <unk> you mentioned discounting you mentioned lighting in particular, so number one how much more do you have how much inventory is kind of upside down or was that all taken and how pervasive is the discounting is it isolated lighting are you seeing any other product categories as well.
I think in the second quarter, Brian It was isolated mostly the lighting there was lighting inventory that we had from some major <unk>.
Vendors of ours that that that that uhm discontinued certain models and broke pricing down you know up to 80 per cent on certain of those models and corrosion was holding inventory and it also did bring down pricing for the rest of the industry. During those cells are most of that had been touring has been moved through so we don't see it.
Continuing.
And again, we you know we took our lumps in the second quarter because of it.
You see sporadic discounting you're seeing stores going out of business you know around the country. So you know there's always you know if it if it's not one thing it's another but like you know like anything else as you've heard you know our private label brands are performing well, 15% of sales within within our stores right now and that's that's not within our distribution channel.
<unk>, we're selling it to 500 stores around the country. So we do believe as we continue to bring out best of breed products that you know margins will go higher and sales will go higher we're working through a tremendously different difficult time in this industry and our team has done a tremendous job navigating the waters.
Thanks, I'll pass it on.
Thank you.
Thank you. Your next question comes from Eric Deloria, Craig Hallum Capital Group, Eric. Please go ahead.
Thank you for taking my questions. So my first one it sounds like the guide Uhm is mostly resulting from sort of lower than expected durable sale. So my question is how consumable sales are are sort of training.
So far this year and sort of west embedded in the guide here you know you're you're commenting on private label sales, which are you know mostly in the consumable area that you know you're considering continuing to see some strength. There. So it just kind of wondering if you can sort of shape. The second half outlook you know started between durables.
<unk> and consumables that'd be great. Thanks.
Greg you Wanna try to unpack that for us yeah.
Yeah, Yeah. So Eric you know for the for the back half of the year. We're looking at total revenue of somewhere in the range of 100 $105 million.
You know, we traditionally see more strength in the third quarter of course in the fourth in terms of what what does that mean for capex or consumables and what we've been seeing from a training perspective over the last several quarters is a is a mix of about 70 30, even as high as 70 525 on consumables versus Capex.
X like Darrin alluded to earlier, we're just not seeing you know the.
The build activity that we expected and many of the newer states that have come online recently. So you know, we're we're hitting the brakes, a little bit on expectations in the back half and focusing on driving profitability from from the base of revenue that we expect now in the back half. So I hope hopefully that helps answer the question.
Yeah, no that does and could you just kind of help us frame. It a bit. So you know currently 70 30 ish consumable durable split how has that changed you know from like the Heydays of 2021, and 2022 and just kind of wondering where you see.
You know durables kind of bottoming out I mean is it reasonable to assume that you know consumable sales are kind of continuing to grow nicely and you. Just have this you know that's just being you know kind of more than offset by by durables here and that eventually durables will start to bottom and you'll kind of return to growth just on consumables is that sort of the right way to think about it or.
Is there anything else that you would add to that.
Yeah, I could I could take that correct. One the consumable part of our business is is and always will be the stronger part of our business is the reoccurring Misty reoccurring part of our business. When you look at the durable business you know, sometimes it's a one time sale or a big bill that at low margins. So when you look at <unk>.
We will continue to build a consumable brands and we do believe our consumer will brands have access into other parts of the industry into the gardening space and that's really what excites us today.
We believe right now that that's that's 70 30 70 525 mix will set you may have certain quarters.
Aw pockets of strength on the bill side, but most of it you know most of it does go away you know when you find saturation on the building. It just depends how this industry continues to grow when you look a few years ago forecasts were to go to $100 billion by 2030 on the legal side of it and you know right now.
You know you're still under 30 billion. So the industry has slowed so I would tell you that dependent upon the growth of the industry from the cultivator size on the cultivation site is really how.
How large are durable business will grow, but we feel quite comfortable that the other part of the business to consumer what part of the business does pay the bills and during the heyday was probably 60 40 <unk>.
Right now, it's probably running 70 525, if you took a hard look at it and but we do believe there'll be there'll be billed there'll be refresh cycles coming online. So you will see pockets of strength in the future.
Okay, Great. That's very helpful. But you know it sounds like this you know 70 30 Slash 70, 525 is kind of a sustainable for the <unk> for the status quo, which is good to hear my last question is just on had a thing about <unk> and the second half of the year. You know obviously there was some commentary on continued rationalized.
Expenses and more store closings, but I just wanted to see if perhaps there'll be any impact from me ERP implementation I may have missed a comment there. So just wondering if you could kind of flesh out the opex implications for the second half of the air. Thanks.
Yeah, Eric I think what you saw from us in the second quarter as we took down total expense 600 grand compared to the first quarter. So we did see some improvements in the second quarter itself.
And we believe that will continue to see.
Expense improvements both in SG&A, an operating expense in the in the back half of the year, we're continuing to execute on store consolidations tour will see improvements directly in operating expense and we have some some improvements in SG&A that we expect as well in Q3 and Q4 so you'll see continued improvement from us <unk>.
M a cost perspective, as we get through the remainder of the year.
And that's important to us as we look at profitability against a lower base or or aiming for that metric uhm against the lower base.
Thank you for taking my questions.
Yep.
Thank you. Your next question comes from Scott Fortune Roth M. Kam Scott. Please go ahead.
Yeah, good afternoon, and thanks for the questions I just want to follow up on I guess Coupla, you a bigger mortgage California, Michigan.
You've seen uhm weakness across the boy expecting against the crowd support.
But just speak to those state tomorrow, or we have a higher exposure. What are you kind of thing and and kind of turn around and pay attention in California or lumping. All just came together here.
Yeah, you'd think when you look at California, right now Scott, we're seeing we're seeing.
Forest Ranch in Northern California, then we are in southern California, right now, even though our store is growing in downtown L. A when you go out to the email out to the coast it out to Temecula in that area answer in Lake.
Lake Elsinore was sitting tremendous weakness out there so I guess it it seems to be that it's scattered and I think it's scattered more with the outdoor growers you know our Santa Rosa stores performing well. So we are seeing some strength in California, and we are seeing some weakness in California and you know we are on you know we do believe.
That will be causing probably.
And those are two to three stores in California, you know in the third and fourth quarters. We also see weakness in the San Diego area. So you know I think it's case by case just dependent upon your you know where the customers on where they feel comfortable growing right now, but some of the some of the old very strong areas.
In California, or we can become very weak and it's mostly outdoor growing out there.
Michigan right now for US is is pretty steady we're not seeing a lift in Michigan, but we're not seeing further degradation in business in Michigan right now.
Back East again back he's still remains you know <unk>. It it remains fluent for US. So you know business right now you're still the same store sales were down 15% in the in the second quarter and that was versus 37 in the first quarter and 50, something a year earlier, so you're seeing certainly.
That you know <unk>, we're getting to that breakeven on same store sales point. So we've we've definitely seen an uptick but not like where you would like to you know we were <unk> certainly you know expecting much more pick up going into the third and fourth quarters and you know one of the reasons were bringing numbers down today as we speak to <unk>.
Invaders everyday.
Our guys are on the street, we have seen over 600 employees out there and they're just not seeing you know, they're they're not seeing the work coming in on on the build side right now, but again on the other side of it people are buying soils everyday people buying new change to feed the plants everyday. So you know we still have we still have 75000 customers.
Coming into graduate.
Okay I appreciate the color of that and then just real quick here Uhm, Let me see one of your peers are or supplier.
You call them.
<unk> and you can coordinate <unk>, maybe it's time for the hydroponic market crime, it's gonna start getting more combinations together.
It typically I I know you can't really talk about specifically, how you're looking at the competitive or paying the partnerships opportunity.
And I'm <unk> market kind of going forward here overall.
You know the one thing I could tell you as you know we built this business from you know from zero revenues in 2014 $30 million of revenue in 2018, our balance sheet remains the strongest in the industry, which gives us tremendous flexibility really to do you know you know basically to build out the business model that we.
Set forth, where tremendously excited about bringing our products into the home and garden space as I said earlier, we were at our first.
Our first garden show I had tremendous interest from.
The independent Garden Arena. So we're very excited we're bringing best of breed products to market.
Does <unk> need to consolidate the answer's definitely not.
Like always Scott as I say whatever's in the best you know whichever best for our shareholders will always entertain but we've both quite a business. We just built out <unk> system, that's taken us two years and a tremendous amount of money. We built up distribution. So we have distribution of leading products that can go you know anywhere.
<unk> gardening and what this world lacks right now is really an independent gardening, you know chain that has been that it has the knowledge of grow Jan.
Got it and I appreciate the call it <unk>.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone. Your next question comes from Mark Smith Lake Street Capital markets Mark. Please go ahead.
I guess my question, it's really just first off around the comfort with the current inventory you talked about some some tough.
Weakness with lighting is there anything else that you've got an inventory that you're a little nervous about or how did you guys feel about it.
Yeah, I I definitely.
Go ahead I'm sorry.
Oh, no you're good yeah, Mark Hey, I think when you look at our inventory, we re wrapped up inventory slightly in the quarter largely due to you know some risk associated with the R. P launch I think the the E. R. P launch from at all practical standpoint for US one went pretty well at the beginning of July here. So we're working on bringing inventory back down a bit.
In the second half.
Now that we're comfortable with with kind of where we're at on that initiative.
You know in in terms of our inventory itself, we look at it from an obsolescence lower cost of market Overstock position you know frequently every single quarter at a minimum so we feel good about our reserves and how we look at our inventory, but we're certainly looking to make some incremental improvements or the back half of the year, particularly as it relates to the updated.
Sales forecast that we have.
So hopefully that helps.
Oh that's helpful.
Other questions just as soon as we think about the the store count kind of Big picture here Darren.
Yeah. It sounds like a couple of more closures come in probably in in some of the more mature bigger states for you.
Can you talk to things you know, which state you're really like I think you mentioned New York, Ohio, You know, where you really want to expand it and then also you know as as you look at Pierce you'd mentioned you know some peers going out of business or hurt just as they kind of liquidate their inventory.
Does that present, a good long term opportunity as you move into a market you know somebody else kind of goes out of business and then it gives you opportunity to really take share over time, we were talking about you know where you're seeing the opportunities whether it's from closures from peers or states, where you really want to expand.
You know it goes both ways I mean, we've done that when we moved into the Missouri market. We <unk>, we we built a store out and and Saint Louis and prior to opening our store in Saint Louis a competitor went out of business. We bought their inventory took their staff and moved into the garage.
<unk>, so let's say it gives you a tremendous <unk> opposed to buildings store slowly you can you know again, if you can take a store that makes sense in a place you Wanna be it's always easier than building right. Now. So we do look at that and even looking at stores that could be closed doors taken their inventory and customer.
<unk> in this industry, it's quite <unk>.
You know many customers still like to shop at their old hydroponics sore from 10 years ago. They have friends that work. There. So you know we're very careful.
When it comes to that and we've turned down a lot of purchases that.
Weren't weren't weren't where we wanted to be and we do believe with distribution and grow Jen private label products. You know there are places that we have good customers that we sell to that we'd rather not compete with right. Now. So you know we weigh everything and whatever's in the best.
Just of our company, we will do so right now it's not a rush to build 100 stores that rush was a coupla years ago three years ago when the when the industry was booming right. Now you know were solely focused on.
You know on managing our our footprint managing our balance sheet, managing you know our private label initiatives and distribution right. Now. So you know we will be adding stores muscle than we thought you know and waiting really to see where this industry goes but we are focusing so as I said really on getting.
<unk> <expletive> up and getting private label you know.
Into into into other locations.
Excellent. Thank you.
Thank you. Your next question comes from Glen Mattson Ladenburg Glen. Please go ahead.
Yeah, So private label I saw at 15% I know that's kind of like flatline.
From last quarter, I think last quarter was around the same level.
A big year over year can you just talk about you know what what do you do to push that a little higher over the over the medium term you've talked about a little bit but just some some detailed maybe unlike new product innovation I mean talk about the gardening space, that's interesting, but I imagine it could take some time to build progress there and while you touched on that also in it.
Guarding space could you hit on.
What kind of a designated to make to go after that space given that there's other incumbents and all that kind of thing. Thanks.
Mmm Questionably to start with we have many Ah line extensions coming out you know what brand that we do have so you'll see you know a line extensions within our <unk> Pedro brands within our charcoal brands. So we continue to innovate.
We have another line extension shortly hopefully coming on the drip on the powder side or liquid branch. So like anything else. You know private label is growing started zero a coupla years ago, you will have certain quarters of stagnation within it as new products come to market <unk>.
So again, we're very happy with that the gardening space right now Glen we're not you know.
That is that's a work in progress with the second quarter event next year that we're putting together a plan that we will update wall Street on probably in the fourth quarter.
Okay and is there any other comments you can make a lot of top line in terms of seasonality the back half because I'm just going back historical like in 2022, which was not necessarily a banner year.
It was kind of flak you to to Q3, 2021, which is a different.
Environment, obviously, it was down you.
You know, maybe 10% or something Q2 Q3 is that.
Obviously Q4 is the weakest, but can you just give us any sense of the magnitude from from one corner to the next.
I think what you've seen also.
Yeah, I think we use also seen him prior years was outstanding stores during the seconds in second or third corner, which <unk>, which helped sales and you know in the latter part of the year, but the second quarter is planting season third third quarter was harvest season for outdoor so we usually see the strongest strongest part of the season is in second quarter and third quarter used.
Does remain strong as Greg said, a little earlier and it was as we said a little earlier you know we're still assessing you know a <unk> system. The rollout was like anything else always challenging so we're still assessing what certain shelves lost because of it but we do believe that you know, it's it's moving in the right direction, we <unk>.
Just not seeing right now you know the <unk> the kind of Capex building, we would like in the third quarter and it's quite early and we thought it was prudent to bring numbers now certainly we hope we beat them.
Right now you know third quarter appears to be slower than the second and the fourth quarter, usually is the slowest corner of the year.
Okay, great. Thanks.
Thank you there are no further questions at this time I will now turn it back to <unk> for closing remarks.
Alright, Thank you for joining our second quarter earnings call today, and thank you for your interest and grow generations does that conclude with the call and will speak to you again in November you may disconnect.
Thank you ladies and gentlemen does conclude your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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