GrowGeneration (NASDAQ:GRWG) reported earnings last month (May 8th) and shared insight into its 2024 outlook. It also gave its expectations for the rescheduling of cannabis. GrowGeneration’s stock price has fallen 13% since I last covered the company in April. The stock price has taken a wild ride, while it experienced two sector rallies. The cannabis sector has cooled off for the summer and awaits news about rescheduling. GrowGeneration shows positive financial recovery and promising long-term growth. I feel that it is the best choice among cannabis support stocks and continue my rating of a Hold.
Current Operations
GrowGeneration considers itself the largest chain of hydroponics and organic grow equipment in the US. It currently operates 46 retail grow-supply locations across 18 states, including distribution centers and e-commerce websites. The company sells indoor and outdoor grow equipment and supplies. Its audience consists of home growers, professional growers, commercial growers, and business to business sales. The company offers commercial consulting and financial services to its clients. GrowGeneration sells its own in-house proprietary branded products through its retail and wholesale channels. Its subsidiary, MMI, sells grow racks, benches, and shelf systems.
Current Synergies
GrowGeneration reported that its same store sales are showing positive growth YoY and that its operating costs are at an all-time low. The company sees these metrics as indicating a turning point in its financial performance. It shows recovery in its recent attempts at right-sizing. Proprietary brands made up 22.6% of total sales within the Gardening and Cultivation segment. GrowGeneration intends to increase sales of its proprietary products because they return higher margins. It is developing new proprietary products to bring to market.
The company believes that rescheduling of cannabis will broaden its operating markets. It will result in US operators saving money and building out more facilities, which will turn into more sales for GrowGeneration. The global hydroponics market is currently valued at $13.9 billion and is expected to grow at a CAGR of 13.4% by 2030. GrowGeneration is looking to international markets for its future growth. It stands to gain as US regulation on cannabis changes.
GrowGeneration plans to close more stores over 2024. At the same time, it will increase its B2B and e-commerce operations where the demand is higher. The company recently opened a 100,000 square foot distribution warehouse in Ohio. GrowGeneration is expanding supply chain distribution versus opening up more stores. These moves will put the company on the right path for long-term growth.
Q1-2024 Results
GrowGeneration reported revenues of $47.9 million compared to $56.8 million, representing a 16% decline YoY due to 15 fewer retail outlets. Revenues for same store sales including e-commerce were $38.2 million compared to $38.6 million, representing a 1% decline YoY. Same store sales were positive YoY when excluding eCommerce. Revenue from storage solutions was $4.8 million compared to $7.7 million, representing a decline of 37.9% YoY.
Within the Cultivation and Gardening segment, proprietary brand revenues were $9.726 million versus $9.027 million YoY. Non-proprietary brand revenues were $33.382 million versus $40.100 million YoY. Within Cultivation and Gardening, consumables made up $30.181 million and durables made up $12.927 million. Total revenue for the Cultivation and Gardening segment was $43.108 million versus $49.127 million YoY. Revenue for the Storage Segment was $4.780 million versus $7.700 million YoY. The company expects this segment to pick up during Q3 and Q4-2024.
Profit margin for revenues was 25.8% representing an improvement QoQ. The company closed four stores during Q1-2024. It reported a net loss of $8.8 million, which represents an increase YoY but decrease QoQ. Full year 2024 revenue guidance is between $205 and $215 million. GrowGeneration will release its Q2-2024 results in August. The market estimate is $54.69 million, representing a decrease YoY and an increase QoQ.
Historical Financial Performance
Amounts in $US millions* Q1-2024 Q4-2023 Q3-2023 Q2-2023 Q1-2023 Revenues 47.9 49.5 55.7 63.9 56.8 Cost of Revenues 35.5 37.8 39.5 46.8 40.5 Gross Profit 12.4 11.6 16.2 17.1 16.3 Operating Expenses 21.8 23.2 24.5 23.7 24.1 Operating Income (9.4) (11.6) (8.3) (6.6) (7.8) Net Income (8.8) (27.3) (7.3) (5.7) (6.1) Cash & Short-Term Investments 61.3 65.0 66.6 70.6 71.9 Total Receivables 8.0 9.1 8.4 7.3 7.6 Total Current Assets 141.7 147.5 163.8 162.9 163.9 Total Long-Term Assets 230.4 239.1 277.2 280.7 282.6 Accounts Payable 12.4 11.7 20.2 17.9 15.4 Total Current Liabilities 29.3 30.9 40.5 36.7 33.2 Total Long-Term Liabilities 65.1 65.7 77.2 74.2 71.9 Book Value / Share $2.69 $2.82 $3.26 $3.37 $3.45 Current NTM Total EV / Revenues .59x .72x 0.63x 0.69x 0.69x 0.72x Price / Share $2.41 $2.86 $2.51 $2.92 $3.40 $3.42 Total EV 128.00 153.4 132.04 153.58 181.83 185.53 Market Cap 146.31 175.9 153.89 178.80 207.53 208.60 Medium Price Target $3.41
*data from Seeking Alpha and TIKR
Revenue numbers have decreased because the company is closing retail outlets. They have closed 15 shops over the last twelve months. In line with this trend, costs of revenues have also decreased, which has produced higher margins. Operating costs have decreased, but net loss remains consistent, although decreasing. The company had higher costs for Q1-2024 due to severance packages and other issues. If the company is correct in its future outlook for 2024, then these numbers will improve over the year, especially during Q3 and Q4.
GrowGeneration is undervalued according to its book value per share, forward multipliers, and median target price. It is not clear when the company will report net income versus net loss. If its storage solutions segment returns to last year’s revenue numbers, then things may be more promising. Otherwise, it will take time and the market conditions will have to change a bit before financial performance improves. The stock will remain undervalued.
Stock Price Movements
Although the stock price has undergone a few cannabis sector rallies, it is down 32% over 12 months, down 4% over 6 months, and down 11% over 1 month. It is up 18% over 3 months, but currently on the downtrend. 40% of the stock is held by large institutions. 94% of its outstanding shares are float, indicating a possible short squeeze. News and developments about cannabis regulation in the US will cause this stock to rally. Last August, news about cannabis rescheduling sent the stock above $4 per share.
Investment Strategy and Risk
GrowGeneration is at low risk of poor financial performance. The company will see an increase in revenues over 2024. Long-term growth is pretty certain for this company. GrowGeneration has the necessary resources to continue its current business strategy. The company will expand its online sales and distribution, increase its white label proprietary products, and grow its storage solutions segment.
A long-hold strategy for GrowGeneration’s stock comes at a moderate to high risk. The stock price is likely to fall lower before it finds higher price channels. News about cannabis regulations in the US may rocket the stock to new highs or bring it to new lows, if the news is bad. There is uncertainty in the cannabis sector, which will continue to affect cannabis stocks and support stocks. There is also greater market volatility over this summer, which may bring down the stock price.
Conclusion
GrowGeneration is showing progress with right-sizing, increasing margins, and lowering operating costs. The company saw positive growth YoY in terms of same-store sales. The company is benefiting from its in-house proprietary brands as well as a large number of consumable products. The company plans on increasing its online presence and its distribution footprint. If cannabis is rescheduled, the company foresees an increase in demand for its products and services. I rate the company as a Hold and recommend that investors watch the company and sector for developments.
Alan Sumler
Welcome to the home of The Cannabis Report: a monthly report on the cannabis industry. I am an analyst and consultant in the cannabis industry. I have contributed to High Times Magazine. I currently have a book out, Cannabis in the Ancient Greek and Roman World. I am most interested in technical stock analysis, option strategies, small cap strategies, and emerging markets. Feel free to contact me with any questions about the cannabis industry or publicly traded stocks in the cannabis industry.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GRWG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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