GRWG - Grow Generation: Modest Revenue And Earnings Growth Ahead

Summary

• Even as it regroups, Grow Generation investors will have to continue to lower expectations to get a realistic view of its long-term growth potential.
• For now, GRWG is doing the right thing in lowering inventory and cutting costs in preparation for a macro-economic and sector recovery.
• Looking ahead, I believe the company is going to be profitable, but revenue and earnings growth will be at a modest pace.
• Once it starts to turn around, investors will have to be careful not to make too much out of the inevitable upward turn from pent-up demand.

GrowGeneration Corp. ( GRWG ) has taken a severe beating with its share price over the last couple of years, as it has plunged from a 2-year high of approximately $68.00 per share on February 8, 2021, to its 52-week low of $2.92 per share on October 24, 2022.

Among the negative catalysts have been the fallout from the pandemic, inflation, high interest rates, and being too optimistic concerning the growth trajectory of the cannabis industry in general.

With a lot of inventory to sell through and declining demand, the company has been lowering pricing in order to move product, which has hit the top and bottom lines of the company, although management said the bulk of its low-pricing strategy is over as inventory approaches healthier levels.

For now, the company is focusing primarily on cutting costs and thoughtfully looking at opportunities in a market that has devastated many smaller rivals. With a solid balance sheet and no debt, it is positioned for making acquisitions that could be acquired at bargain prices.

In this article we'll look at some of its recent numbers, the strategy of management under current market conditions, and what the future holds for the company.

Some of the numbers

Revenue in the third quarter of 2022 was $70.9 million, compared to $116 million in revenue in the third quarter of 2021. Revenue in the first nine months of 2022 was $223.7 million, compared to revenue of $332 million in the first nine months of 2021.

Same-store sales in the third quarter were $39.9 million, down 58 percent from same-store sales of $95.4 million year-over-year. Revenue from e-commerce dropped from $10.5 million to $3 million. The decline in e-commerce revenue came from lower demand in the commercial markets as a result of a drop in CapEx.

Total operating expenses in the reporting period were $26.4 million, compared to total operating expenses of $29.4 million in the third quarter of 2021. Total operating expenses for the first nine months was $212.8 million, compared to $73 million in total operating expenses in the first nine months of 2021. An impairment loss of $127.8 million contributed to the huge operating loss in the first nine months of 2022.

Gross profit margin in the third quarter was 25.9 percent, down 250 basis points sequentially, and down 782 basis points year-over-year.

Adjusted EBITDA in the reporting period was negative $(2.6) million, compared to adjusted EBITDA of $10.8 million in the third quarter of 2021. Based upon what it can control and one-time items that aren't likely to repeat, management sees adjusted EBITDA improving.

The company reduced inventory levels by about $10 million in the third quarter.

Net loss in the third quarter of 2022 was $(7.2) million, or $(0.12) per share, compared to net income of $4.03 million, or $0.07 per share in the third quarter of 2021.

At the end of the third quarter of 2022 the company had cash and cash equivalents of $71 million, compared to cash and cash equivalents of $41.4 million at the end of calendar 2021.

The company guided for full-year 2022 revenue to be in a range of $270 million to $280 million, with adjusted EBITDA for full-year 2022 to fall into a range of $10 million to $13 million.

Getting leaner

Based upon the comments from management in its latest earnings report and the decline in cost of sales and operating expenses in the third quarter, the company is starting to make progress on its strategy to cut costs while streamlining the company.

Among the steps taken to lower expenses are the consolidation of its physical and e-commerce stores, cutting its workforce, and improvements in its operations. Through the first nine months of 2022 the company lowered G&A expenses by approximately $7 million.

Operating expenses from its stores dropped from $14.5 million in the first quarter of 2022 to $13.6 million in the third quarter of 2022. As the company continues to consolidate its stores, it expects expenses to continue to fall.

Concerning inventory, the company has worked hard to cut it down to more reasonable levels, and it did so by offering discounted prices in order to move it. While there should be more of that going forward, management said a large part of that has been completed.

Combined with cost-cutting measures listed above, the discounted inventory and resultant margin compression, a decline in ocean shipping costs, and an increase in its higher-margin private label products, the company appears to be well-positioned for whenever the economy and cannabis market turn around. That should also improve EBITDA and profitability in 2023.

Conclusion

One potential positive outcome for GRWG is the current weakness in the market could provide a number of opportunities to acquire companies at attractive prices, since many smaller competitors are either closing their doors or struggling to survive.

With the distribution network it has in place and its strong balance sheet, along with no debt, it is very well positioned to grow via acquisition if the right opportunities emerge, which is highly likely. In has already added two new stores in Missouri and New Jersey and is looking for more in areas where it doesn't have a presence. Last, its strong balance sheet and available capital should allow it to buy in bulk at a lower cost if it makes sense at the time.

When adding everything up together, GRWG is positioned well for a resurgent economy and cannabis market, but as management stated, it's realizing that growth in the cannabis sector is going to be more modest than it thought in the past, and investors should heed to management expectations concerning the future of GRWG.

I think it's going to not only survive, but thrive once things turn around, but the growth trajectory of the company is going to be more incremental than at high levels.

But with the share price trading at attractive levels at this time, I think it's getting close to offering a good entry point. After its earnings report, the share price of the company almost tripled to about $8.60 per share, but it quickly fell back to under $4.00 share soon after.

While that's nice for day traders and swing traders, we do need to be careful not to take positions after a big upward move and get underwater at a high price that the company could take a long time to return to.

As the numbers show and management affirms, the company is positioned to rebound and grow at a more modest pace than expected in the past. That's not to say it won't do well over time, because I believe it will. The best play to me would be to wait for another pullback and use a dollar-cost averaging strategy to take a position in the company, specifically if thinking of holding for the long haul.

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