Hello, everyone, and welcome to GrowGeneration's Second Quarter 2024 Earnings Conference Call. My name is Nic [ph] and I will be your operator for today's call. At this time, participants are in a listen-only mode. Following prepared remarks, we will open the call to questions from analysts with instructions to be given at that time. The conference call is being recorded, and a replay of today's call will be available in the Investor Relations section of GrowGeneration website. I will now hand the call over to Phil Carlson with KCSA for introductions in the reading of the safe harbor statement. Please go ahead.

Thank you, and welcome everyone to the GrowGeneration's second quarter 2024 earnings results conference call. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration. The company's second quarter earnings press release was issued after the market closed today. A copy of this press release is available on the Investor Relations section of the GrowGeneration’s website at ir.growgeneration.com. I would like to remind everyone that certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements made today. During the call, we'll use some non-GAAP financial measures as we describe business performance. The SEC filing as well as the earnings press release which provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following our prepared remarks, management will be happy to take your questions. 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 hand the call over to our Co-Founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2024 financial results. Today, we reported solid second quarter results that were consistent with our expectations, as we continue to leverage our strong portfolio of proprietary brands. As always, I want to thank our GrowGen team members. All of our employees have worked tirelessly to help drive our results and we appreciate all their hard work and commitment to our company's continued growth. GrowGen's second quarter results included net revenue of $53.5 million, an increase of 11.7% sequentially from $47.9 million in the first quarter. In addition to sequential sales growth, adjusted EBITDA loss was $1.1 million for the quarter, a $1.7 million improvement from Q1. Importantly, proprietary brand sales remain relatively flat as a percentage of cultivation and gardening net sales during the quarter, but increased from 21.5% compared to 16.7% in the same period last year. It is important to note that proprietary brand sales increased in July with the increase of sales of Drip Hydro, Charcoir and The Harvest Company as customers migrate from trials to sales. As some of you may know, for quite some time we've been taking actions to expand sales of these higher margin proprietary products. This percentage increase highlights the growing market adoption of our proprietary brands, including Charcoir, Drip Hydro and The Harvest Company, and the success of these initiatives. In addition to our top line success, gross margins for the second quarter was 27%, a 110 basis point improvement over last quarter. These results reflect the growing percentage of our proprietary brand sales as well as ongoing focus on streamlining our business with margin expansion and cost reductions front of mind in all our operations. Before Greg takes you through our second quarter…

Thank you, Darren and good afternoon, everyone. As Darren mentioned, we are pleased to report that our second quarter results were generally in line with expectations and we made solid progress in several key areas. Starting with second quarter sales, GrowGeneration reported net revenue of $53.5 million compared to $63.9 million in a year ago period, representing a 16.3% decline. On an absolute basis, this includes 19 fewer retail locations to close the second quarter. On a sequential basis, revenue increased from $47.9 million to $53.5 million representing an 11.8% improvement. This improvement was achieved despite closing seven stores between the first and second quarters of 2024, illustrating the strength of the existing stores in our portfolio. Same-store sales for the second quarter were $41.1 million compared to $43.9 million in the prior year, a decrease of 6.2%. Excluding e-commerce sales, from the same-store sales comparison, the retail business declined by 3.4% compared to the year-over-year period. While we saw signs of strength in the California and Michigan markets, we felt continued pressure in Oklahoma as well as headwinds in the northeast markets that had an impact on the overall same-store sales metric. As we have highlighted, we will continue to right-size our retail footprint in the back half of 2024 to prioritize our strongest performing store locations that service higher volumes of commercial growers. Storage Solutions revenue for the second quarter was $7.4 million compared to $8.4 million in the prior year, a decrease of 11.3%, which was largely due to various projects being pushed into the third quarter from a timing perspective. On an absolute basis, private label or proprietary brand sales were $9.9 million for the second quarter compared to $9.3 million in the second quarter of 2023. Proprietary brands accounted for 21.5% of gardening and cultivation…

Thank you, Greg. We are very proud of the results we delivered for the second quarter, including sequential revenue growth and increased sales from our proprietary branded products. This in turn drove margin and adjusted EBITDA improvement during the quarter. At the same time, even with the progress we have already made, we recognize there is more work to be done. We are looking ahead to the remainder of 2024, and it's a 2025 as we implement our strategic restructuring plan to expand our brand portfolio, accelerate revenue growth, reduce costs, drive higher margins and position GrowGen for long-term profitability as the market landscape continues to evolve and improve. Again, I'd like to thank our investors for their continued support, as well as all our team members for their hard work which makes our success possible. That concludes our prepared remarks. I will now ask the operator to open the line for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mark Smith from Lake Street Capital Markets.

Hi, guys. Greg, I wanted to just circle back first off on something that you had said. Just, is there any additional kind of guidance or insight you can give us on gross profit margin? Both kind of near term and I know it's going to be choppy as you guys close some stores and maybe liquidate some inventory in those stores, but also kind of long-term if you guys have set kind of goals or an idea of where you would like to be longer term on gross profit margin.

Yeah. Mark, as we work through the restructuring announcement that was published in July, we anticipate moving out of position of certain inventory products that will have an impact in the third and fourth quarter of this year. We believe at this point the second quarter was our strongest gross margin period relative to the work that we have to do on that end to prepare the business for 2025. We expect it's probably in that low to mid-20s range as we work through a lot of the inventory reductions that we'll experience in the back half of the year. We believe what that will ultimately lead to for the business in '25 is a margin point in the high-20s, low-30s, as we look forward at the business, particularly with our strategic goal in mind, increasing proprietary brand sales next year.

Perfect. And then the only other question I had kind of restructuring here, just any update on timing of these closures? I think, Darren, you had said, do you expect to be done by early Q1. Should we expect this to be kind of fluid month to month, or will we see any lumpiness in the closures here over the next couple of months?

Right now, we're scheduling three for the next three months. So, we believe that all nine stores will be closed probably in that November timeframe. So, we believe everything will be closed before year-end. There may be some legacy leases that go over to 2025. We certainly hope not. We're working hard on transferring leases and working out payment plans and getting rid of leases as we speak. We have some favorable leases within our portfolio that we'll have no issues getting rid of. But like anything else. During restructuring and closing 19 stores, there are some problem leases always, but none of them are material and we will work through them.

That's great. Thank you.

Next question will be coming from Brian Nagel from Oppenheimer.

So, my question just with this restructuring, the repositioning of the business, how should we think about the investment needed to execute this? I mean, both from maybe from a money standpoint, but then also just kind of even a process standpoint. I mean, how cumbersome or expensive could this be?

We believe not much, Brian. In prior closings, we're up to 65 stores, so we've closed over 20 stores in the last couple of years. They've been running anywhere from 150 to 250 a store. Right now, we have nine stores left. So, you're talking somewhere in that $3 million to $5 million range. And some of its inventory, some of it's working out leases, and some of it's severance to our employees. But we believe that 80% of that will be done before year-end, and we will be going into 2025 as a pretty clean company. And there was a question asked earlier by Mark Smith with regards to inventory and margins. And the one thing when closing stores, there's two things we do with existing inventory and stores. One, as we rationalize it, we put all of it on sale opposed to moving it. It keeps goodwill with customers. It keeps customers with GrowGen to shop at adjacent stores or online or through our commercial team. So, we do a tremendous amount of discounting right now when closing stores. And that's why you will see degradation in margins over the next two quarters.

Got it. And I guess, beyond closing stores, the reposition of the real estate fleet, I would think there's also some other reposition in the business, right, Darren?

100%. With 31 stores, we will be much more nimble. We will be focusing on private label brands and really business to business. The industry has changed in our mind. We've seen it over the last couple of years. We've been closing stores, and we haven't really been in the market buying. And really what we're positioning GrowGen for is new product launches, getting our private label division up to 35% of sales, which is our highest margin business. And really, basically taking care of our commercial customers, which amount probably right now to 60% to 70% of our business. 25% of that goes through our commercial team right now, the remainder of shops within our stores. But the industry has changed over time, and we're changing with it. We believe coming out of this restructuring, you will have a leaner company with a tremendously different cost structure. We've cut over $40 million of expenses to date. There's another $12 million of expenses coming. You'll see a higher margin business, and you'll see a company that's starting to make money and grow. And we couldn't be any more excited about it. We've done it slowly. We've closed one store a quarter, two stores a quarter. And with that, it hasn't gotten us to where we want to get, hasn't gotten us to be able to cut enough from the back end of it, from the corporate side of it. So, we're doing what we have to do, and we're doing really going back to our core, which is servicing business to business commercial and product launches. And our product launches are going well. We had our highest percentage of private label sales in the month of July. We had sort of big bump up in July overland over the second quarter. So, it's another two quarters of hard work, Brian, but we believe that our shareholders in the company will bear the benefits of it going into '25.

I appreciate the color, Darren. Thank you.

Thank you, Brian.

Next in line will be coming from Aaron Grey from Alliance Global Partners.

Hi. Good evening and thank you very much for the questions. So first one for me. Just in terms of the digital initiative, while part of the decision appears to be cost based, I'm just curious, could that also open up the ability to service some new customers that might not have been in the vicinity of your prior brick and mortar stores? And then, just if you could help in terms of how it will be structured now, have you already kind of piloted, how the program will work in terms of the ease of transitioning the customers to the model, including the potential to pick up from warehouse or potentially have it delivered?

Yes, we have. I mean, just to start with, Aaron, majority of the stores we're closing are within proximity to stores of ours. As this industry transforms into business to business, which it is going, commercial, customers want a portal, they want opposed to calling and sending in orders. They much rather go on the portal, know that the product is there, and order it. We opened a hundred thousand square foot distribution facility in Ohio this year. We have one out in Sacramento. So -- and we also have some mini hubs around the country where the growers are. So, we are 100% capable of fulfilling orders, especially private label and distributed products. So, I think we're there right now. What we're also doing on the B2B side and the product side of it is we're opening up individual portals for products that individuals can now go on, go on our websites and buy the products that will be shipped through our warehouses. So just, again, cutting costs and just getting back to -- the industry was a lot about learning and teaching and individuals coming into the stores every day. But over the last couple of years, we've seen definitely the flow within our stores has gone down, and we think that we can service our customers better in a much cheaper way and keep pricing down by doing what we're doing right now, by cutting our store counts down, increasing our warehouse capabilities, and also our B2B bill of online capabilities.

Appreciate that color there. Second one for me, Darren, just in terms of the proprietary brands. So, you're now at about $50 million run rate based on the quarter. I know you have aspirations to increase that to 35% from 21%, but I just want to get your take in terms of the brand equity that's been built within the proprietary brands and how that might offer opportunities for you to increasingly build the brands into third-party stores and distributors outside of just your own. Thank you.

I think right now, about 50% of our brands are going into other stores and going through the distribution channels outside of GrowGen. So, we have built that to date. We are building brand equity by the day. And Drip Hydro is off to a wonderful start. We launched the powders back in January. We had almost 500 trial, active trials going around the country, and they're starting to convert. And we saw that in July as we saw a really nice increase in our private label brand sales in July. It was the highest month we've seen. And it was -- again, it was a tremendous bump from what you saw in the second quarter from us. We're also starting to launch a lot of new products under the Charcoir brands. There's new soils coming out. There's cocoa coins and propagation coming out of that company that we believe will land in the IGC world. But the feedback that we're getting from customers, from other stores and distributors has been nothing short of amazing. And as we said earlier, that we will have another 50 products being launched over the next 12 months to get us to where we want to go. And with that, again, when we talk about margins, again during the next two quarters, we are rationalizing certain distributed products, companies that haven't been good partners to GrowGen. And again, we're shrinking the amount of products that we are carrying in our stores and our warehouses. But we have a lot of great partners out there that we continue to support. That continue to support GrowGen.

Okay, great. Appreciate that, Darren. I'll go and jump back in the queue.

Thank you, Aaron.

[Operator Instructions] Next question will be coming from Andrew Carter from Stifel.

Hey, thank you very much. Kind of a question I wanted to ask here about you kind of gave the gross margin high-20s, low-30s. Could you kind of speak to what, at this revenue base of 195, what your kind of EBITDA margin kind of prospects are, and do you need to meaningfully grow to get to mid single digit? You think you can grow next year. Anything that could kind of help on that side. Thanks.

Greg, do you want to try to unpack that and then I'll finish it up?

Yeah. No, absolutely. As we look at next year, it's a little bit early for us to meaningfully say what our EBITDA is going to look like. We do anticipate for the remainder of the year that revenue is going to be in that 190 to 195 mix which we feel comfortable with. Bringing down revenue for the back half of the year is really just a symptom of the amount of stores we've decided to close in the third quarter being 12 more than anything else. But we do expect margins to return in 2025. And we do believe that positions the business back for profitability in '25. But I couldn't give an exact figure out yet just because it's too early for us.

I guess the second question is, with the focus on proprietary brands, remind us you don't own a lot of manufacturing. I mean, to hit your goals, do you think that you might need to invest in that or do you have enough kind of in a co-packed or co-manufacturing network to kind of support your needs and your penetration goals? Thanks.

Yeah. I think, right now, Andrew, our co-packers around the country and around the world that we use, we have wonderful relationships with. So, we're usually ahead of the game with bringing products in the no less. Our Drip liquids are being manufactured in California, really our hub right now. But a lot of our products are still being manufactured overseas. But we have a pretty decent handle on it. We know our co-packers well. We visit with them. I was with our Charcoir owners the other day out in Seattle. They flew in from India. So, I think it's at this time we're not a manufacturer. So, I think we're going to stick to what we're doing on the co-packing side of it.

Thanks. I'll pass it on.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Darren Lampert for final closing comments. End of Q&A:

I'd like to thank our shareholders and our employees for their hard work, for their dedication, and for their support of GrowGen. We look forward to keeping you apprised of our progress on our restructuring and we look forward to talking to everyone in September. Thank you.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect your lines.