GRWG - GrowGeneration: Will The Profitable Growth Forecasts For 2023 Impress The Markets?

2023-04-05 04:29:08 ET

Summary

• GrowGeneration recently reported its Q4-2022 and FY2022 financials.
• The company restructured and “rightsized” its business operations in 2022.
• Its Q4-2022 report shows a decline in revenue and an increase in a net loss as a result of the strategic change.
• Now that its balance sheet has stabilized, the company predicts growth and profit for 2023.
• I rate the company’s stock as a neutral buy since it has decreased so much in price, but there may be an investment opportunity around the corner; you should keep an eye on its performance.

Cannabis stocks and support stocks have been down for the last year and there is no foreseeable end to the downtrend. The companies have not weathered the volatility storm. Rate hikes, inflation, recession, and global instabilities have wrecked the consumption markets in all sectors. The tightening economic conditions has forced cannabis companies to restructure and pull back from the thriving conditions which surrounded the markets post-COVID.

GrowGeneration ( GRWG ), the largest hydroponic and grow supply retail company in the US, has followed the same downtrend and as a result had to restructure its business to adapt to the changes in the market. The company's stock price has fallen from $60 to $3 per share over a period of two years. The company's financial performance during 2022 experienced a pivotal moment during Q2 when the extreme loss compared to other quarters became apparent. The company, in return, took drastic action.

Restructuring or Rightsizing

The company performed the standard procedure for such a large net loss. Overstock was put on clearance and shops were closed. The company cut spending across the board and made their current assets more efficient. The fruit of these actions are beginning to show with its most recent financial report (Q4-2022) from March 15th.

In 2022, the company made strategic changes in order to "rightsize" its business operations and balance sheet. The company's Q4-2022 report shows the accumulative results of the changes, including a decline in revenue and margins. This low point with its increasing net loss represents the last segment of shrinkage for the company. A new trend towards profitability is now underway.

Business Operations

The business strategy and previous performance of GrowGeneration is very impressive. There is a likelihood that the company will return to higher sales volume and higher margins soon. The company provides material support to hydroponics and organic gardening, both commercial and small scale, with its largest audience being the cannabis industry.

GrowGeneration sells hydroponic grow supplies, including grow lights, grow mediums, plant nutrients, and grow systems. Its products are standardly used in outdoor, tented outdoor, and indoor grow operations. The cannabis industry is reliant on these types of high-quality grow products and systems in which GrowGeneration specializes.

The company operates 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 grow consultations, and in-house financing. GrowGeneration sells all the popular name brand hydroponics products and its own line of white label products. The company has partnerships with leading hydroponics brands, including a recent one with Grodon , a hydroponics grow medium.

Financial Performance

In its recent Q4-2022 report, the company writes about its strategic "rightsizing".

"…we reduced inventory by $28.5 million, eliminated redundancies in our store footprint, reduced payroll by 30%, and ended the year with $71.9 million of cash and short-term securities on our balance sheet with no debt."

The company says that the worst is over and it now looks forward to sequential quarterly growth. It also states in its recent reports that margins will improve and stabilize compared to last year's performance.

The company reported for Q4-2022 revenues of $54.5 million representing a 40% decrease from last year's same quarter ($90.6 million). The decrease was mainly attributed to lower sales in its retail outlets.

The decline is significant, and the company's margins also compressed. The company reported gross profit of $9.6 million compared to $23.1 million in the same quarter of last year. Gross profit margins fell 790 basis points YoY. The company reported an overall net loss of $15 million compared to a net loss of $4.1 million YoY.

The company reported an EPS of -.25 compared to a -.07 YoY. Its adjusted EBITDA was -$10.2 million compared to -$1.7 million YoY. The company writes about its EBITDA loss, "The reduction in Adjusted EBITDA(1) was primarily driven by lower sales and unfavorable gross margin impacts, as well as store closure expense and inventory cleanup measures."

The following chart shows GrowGeneration's financial performance over the last two years. (data is from www.TIKR.com)

The company's stock is trading right around its book value of $3.55 per share. The company's forward estimates indicate that it is currently undervalued compared to previous quarters. Total Enterprise Value and Market Cap have significantly declined along with the company's stock price.

Q2-2022 showed the steepest decline in net loss, while Q4-2022 showed a low point for overall revenues. Revenue estimates for 2023 do not show any significant improvement until Q3-2023. Market consensus expects revenues for Q3 to be around $70.34 million. GrowGeneration forecasts overall revenues for 2023 to be between $250 million to $270 million.

The company's assets far outweigh its liabilities. Although the company is not currently reporting free cash flow, it is free of bank debt and has a large cash reserve. With the current restructuring period over, the company is hoping for higher revenues and margins over 2023.

Stock Price and Investment Strategy

GrowGeneration's stock price traded over $60 per share back in February 2021, but since then it has dropped to its current price of $3.35 per share. Its stock price has traded under $10 per share since last April and has declined over 65% over one year. The stock price has recently been bouncing between $3 and $4 per share. There is no sign that a new uptrend will occur or if it will ever stabilize over $4 per share anytime soon. The stock price was under $4 per share for all of March.

According to its financial performance and stock price performance, the stock deserves a rating of neutral buy for now. It is worth watching the company's financial performance and keeping an eye out for any stock price uptrend or market rallies. Although no long-term investment seems prudent for the moment, one may consider short-term possibilities. Call options at the $4 strike price are trading at a discount and a covered or naked call strategy may be invoked, if a new uptrend appears or if there is a sustained rally.

Conclusion

GrowGeneration performed really well during the pandemic and post pandemic periods. Since then the company's stock price and profits have significantly declined. Larger market volatility played a major role in its stock price down trending over the last two years. A shrinkage in cannabis markets and in retail markets in general caused the company's revenues and profits to decline. During 2022, the company made the difficult decision to restructure and "rightsize" its business operations. We are now seeing the fruit of these changes and the company says that 2023 will be profitable. Larger market volatility remains and I rate the company as a neutral buy. I recommend watching the company's performance and stock price movements. If the price begins to stabilize around $4 per share, then one may consider short term investment opportunities. If it undergoes any kind of sustained rally or higher price stabilization, then a buy rating will be advised.

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