GRWG - GrowGeneration Remains Bearish After Q3 2023 Earnings

2023-11-13 22:50:14 ET

Summary

• GrowGeneration's Q3-2023 earnings showed a decline in performance, except for increasing gross margins; the company is currently right-sizing.
• The demand for hydroponic grow equipment has decreased, but the opening of new legal markets may change the trend.
• GRWG stock price has been down 64% over the last year.
• The cannabis sector awaits news on cannabis rescheduling and the passage of the SAFER Banking Act; otherwise, the cannabis market is bearish.
• I reiterate GrowGeneration as a hold for now; greater market volatility remains an issue for cannabis stocks.

GrowGeneration ( GRWG ) recently announced its Q3-2023 earnings and showed a decline in performance across the board, with the exception of increasing gross margins. The company is in the process of right-sizing its operations and inventory. Its operating costs are decreasing, but the company has further to go before it is consistently showing free cash flow or net income.

The demand for hydroponic grow equipment has decreased and it is unclear what event will change the trend. Ohio recently legalized recreational cannabis and will open up new markets. The cannabis sector currently awaits two key events: the rescheduling of cannabis and the passage of the SAFER Banking Act . Analysts are mixed whether these events will have any attention until next year. If either one goes through, then there will be a short-term cannabis rally and GrowGeneration's stock will see some uptrend.

As it stands, the market is suffering volatility around geopolitical crises and future rate hikes. These events may lessen over the next two months and the market could enter a bullish trend. If the market starts a new sustained rally, GrowGeneration's stock price may only see some action. For now, I rate the company as a hold. Investors should watch the company's stock and for developments in the cannabis sector. The company's stock price will likely remain volatile with only short-term gains.

Business Operations

GrowGeneration is a cannabis support stock. The company sells hydroponic grow supplies and other essential products and grow systems for cannabis and other plants. The company carries equipment for indoor and outdoor growing, including nutrients, grow mediums, and lights. GrowGeneration operates about sixty hydroponics retail centers in sixteen US states. It has distribution centers and runs an e-commerce website. Besides retail sales, the company offers wholesale distribution, professional growth consultations, and in-house financing. GrowGeneration carries popular name-brand hydroponics equipment along with its own in-house branded products.

Q3-2023 Earnings Report

GrowGeneration reported $55.7 million in net revenue, representing a 13% decline from the previous quarter and a 21% decline YoY. The company reported a net loss of $7.3 million, which represents an increase from the previous quarter and YoY. GrowGeneration reported cash and cash equivalents of $66.6 million and currently has no debt. Adjusted EBITDA was negative $0.908 million compared to negative $2.7 million YoY.

The company's gross margin has improved to 29.1% compared to the previous quarter and YoY. The company has been right-sizing its inventory and store count to bring in higher profit margins. It closed six retail stores during Q3-2023 and will close six more during Q4-2023. Same-store sales for Q3-2023 were $40.7 million, representing a 14.4% decline YoY. E-commerce sales of $2.7 million were down 10.2% YoY. Distribution revenue was $11.5 million, representing a decrease of 42% YoY.

The company is taking measures to ensure future profitability. It has recently employed a new ERP system (Enterprise Resource Planning) which will help identify business solutions, including profitable SKUs. GrowGeneration is still adjusting to the new system. Otherwise, the company is getting rid of redundant and non-selling inventory, while giving preference to items in high demand and with higher profit margins. The company continues to roll out its own in-house products to meet industry needs. It is also considered the most efficient use of its distribution system.

The market estimate for GrowGeneration's next earnings release is $45.52 million, which will represent a further decrease in performance. Setting aside the weakened demand, the company's core metrics are still strong. Its assets outweigh its liabilities and the company has sufficient cash on hand for continued operations. Investors will want to see the company report net income on a consistent basis and free cash flow.

Historical Performance and Valuation

Financial data from Seeking Alpha and valuations from TIKR

The company has reported lower earnings over the last five quarters compared to previous years when demand was higher. GrowGeneration consistently shows a profit but also reports a net loss each quarter. The company's cash on hand has remained around the same amount. The company has reported free cash flow in the past and is able to reach that metric again. The company does not suffer from poor financial performance and is capable of great improvement.

GrowGeneration is currently undervalued based on its book value per share and its NTM Total EV / Revenue. Why then is the company not a buy? The cannabis sector has been bearish and market volatility has been brutal on small caps. The stock price is likely to decrease more before a new trend emerges. The company may report improved performance, but market volatility will still remain an issue concerning a buy signal.

Stock Price Movements

1-year stock price performance chart from StockCharts.com

GrowGeneration's stock price has been down 64% over the last year. It has experienced the same bearish conditions as the rest of the cannabis stocks. The company's stock price currently trades below its 20/50/200 moving-day averages. It has been down 61% over the last six months and 32% over the last month. The market consensus on the target stock price is between $4.25 and $4.50 per share. The price is unlikely to return to the $8.00 price channel of last year.

Investment Strategy

I rate the company as a hold for now and warn that the stock price may drop before a new uptrend emerges. There may be short-term rallies headed into the new year. Any news about the SAFER Banking Act or rescheduling will rally cannabis stocks. These events may only give temporary momentum to GrowGeneration's stock price.

Conclusion

GrowGeneration is undergoing restructuring in order to become more profitable. Demand for cannabis grow equipment has decreased and the company is reporting lower sales. The cannabis sector awaits catalyzing events like rescheduling and the SAFER Banking Act, but these items are unlikely to receive attention until next year. The market itself may turn bullish before the year ends, but it may only translate into slight gains for cannabis and cannabis support stocks. For now, I reiterate GrowGeneration as a hold .

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