GrowGeneration Corp. ($GRWG)

Hello, everyone, and welcome to GrowGeneration's First Quarter 2026 Earnings Conference Call. My name is Matthew, and I will be your operator for today's call. [Operator Instructions] This conference call is being recorded, and a replay of today's call will be available on the Investor Relations section of GrowGeneration's website. I will now hand the call over to Phil Carlson with KCSA Strategic Communications for introductions and the reading of the safe harbor statement. Please go ahead, Phil.

Thank you, operator, and welcome, everyone, to GrowGeneration's First Quarter 2026 Earnings Results Conference Call. With us today from GrowGeneration are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer. The company's first quarter 2026 earnings press release was issued after close of market today. A copy of this press release is available on the Investor Relations section of the GrowGeneration 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 provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are all available on our website. Following prepared remarks, management will be happy to take your questions. [Operator Instructions] Now I will hand the call over to GrowGeneration's Co-Founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. Thank you for joining us to review GrowGeneration's first quarter 2026 financial results and to discuss our outlook for the rest of 2026. Over the past several years, we have transformed GrowGeneration into a more focused and efficient business. Our first quarter results reflect our continued progress highlighted by our second consecutive quarter of year-over-year growth, improving profitability and continued expansion of our proprietary brand mix. While the first quarter is typically our seasonally slowest period, revenue exceeded our expectations, driven by momentum in our commercial business and meaningful contribution from our Storage Solutions segment. As we move through 2026, we remain focused on 3 priorities: expanding our commercial B2B platform, growing our proprietary brands across additional channels and continuing to improve operating efficiency through the cost reduction initiatives we have implemented over the past several years. Together, these initiatives are helping improve revenue quality, support margin expansion over time and position the business for more sustainable profitability. As I mentioned, our commercial B2B business remains the core driver of our growth strategy. Through GrowGen.Pro, we continue to expand relationships with multistate operators, greenhouse growers and other commercial cultivation customers across North America. Within our commercial business, we continue to see increased adoption of proprietary brands such as Char Coir and Drip Hydro as customers standardize around reoccurring consumable programs. At the same time, we continue to reposition our legacy retail footprint into commercial sales and service centers, allowing our technical sales team to deepen customer relationships and support larger commercial accounts more efficiently. Beyond our core commercial business, we are also expanding our proprietary brands into adjacent channels and new customer categories. Because these brands were developed for professional cultivators, we believe they are well positioned to expand into broader horticulture and consumer markets. Early adoption has been very positive. During the quarter, we continue expanding distribution into lawn and garden channels through online big box retail and our direct-to-consumer platform, The Harvest Company. We also continue expanding our commercial presence in Canada and advancing additional international distribution relationships. Importantly, these initiatives leverage the same proprietary brand portfolio and supply chain infrastructure already supporting our commercial business, allowing us to pursue growth opportunities without materially increasing complexity across the organization. We also continue to benefit from the structural cost reduction initiatives implemented over the past several years. Much of this work is now reflected in our operating structure, positioning the business to generate improving profitability as revenue scales. We also continue to maintain a strong balance sheet, ending the quarter with $41.1 million in cash, cash equivalents and marketable securities and no debt. This financial flexibility supports continued investment in our strategic priorities while maintaining a disciplined approach to capital allocation, including our share repurchase. Turning to the quarter itself. First quarter revenue exceeded our expectations and marked our second consecutive quarter of year-over-year revenue growth despite operating with a smaller and more efficient footprint. This performance was driven primarily by continued momentum in our commercial business, expanding proprietary brand penetration and strong growth in our Storage Solutions segment. Proprietary brand sales represented 37% of Cultivation and Gardening revenue during the quarter, reflecting continued progress in shifting our sales mix towards higher-value recurring consumable proprietary branded products. We also saw strong performance from our Storage Solutions segment, where revenue increased 35.5% year-over-year. This segment continues to benefit from increasing capital investment activity across a broader range of end markets and contributed meaningfully to both revenue growth and profitability during the quarter. Overall, we believe the quarter reflects continued progress against our strategy to build a more focused, commercially driven and profitable business. From a profitability standpoint, our first quarter results highlight our continued progress in improving the quality and efficiency of our business. While gross margins were impacted by factors related to store consolidation activity and product mix during the quarter, we believe these pressures are largely short term in nature. At the same time, we continue to see meaningful benefits from the cost reduction initiatives implemented over the past several years, which contributed to improved profitability during the quarter. As we move through 2026, we expect improving gross margins, continued operating discipline and increasing operating leverage. Looking to the second quarter, we expect revenue in the range of $42 million to $44 million, along with a return to positive adjusted EBITDA. For the full year, we remain focused on expanding proprietary brand penetration towards our approximately 40% target and achieving approximately breakeven adjusted EBITDA for 2026. Before I hand the call to Greg, I'd like to briefly comment on the regulatory environment. On April 22, the Acting Attorney General signed an order moving state licensed medical cannabis to Schedule III of the Controlled Substances Act, providing immediate 280E tax relief to qualifying operators. This is a meaningful tailwind for our customers. And as their financial position strengthens, their capacity to invest in the cultivation infrastructure we provide grows with it. While the process remains ongoing, we believe GrowGeneration is well positioned to support our customers as the industry continues to mature and evolve. That concludes my remarks. Now I'll turn the call over to our CFO, Greg Sanders.

Thank you, Darren, and good afternoon, everyone. I'll begin with a review of our first quarter 2026 results, and then I'll provide additional context on our outlook for the year. Overall, our first quarter performance was consistent with our expectations and reflected continued progress on our key operating priorities, including proprietary brand mix expansion, cost discipline and improving adjusted EBITDA. For the first quarter of 2026, GrowGeneration reported net sales of $38.4 million, up 7.5% compared to $35.7 million during the same period last year. This year-over-year revenue growth was led by our commercial B2B business. Net sales in our Cultivation and Gardening segment were $31.9 million for the quarter compared to $30.9 million in the same period last year. Proprietary brand sales represented 37% of Cultivation and Gardening revenue, up from 32% in the prior year. This was largely driven by our strategic initiatives to increase our sales mix of higher-margin proprietary products, which remains one of the primary drivers of our margin expansion and long-term profitability strategy. In our Storage Solutions segment, net sales were $6.5 million for the quarter, up from $4.8 million in the first quarter of 2025. Growth in the segment is being driven by increasing capital investment across a broader set of end markets as customers continue to invest in infrastructure, automation and facility expansion. This trend is supporting both volume growth and a more diversified demand profile. Gross profit was $9.7 million for the first quarter of 2026, consistent with the same period last year. In Cultivation and Gardening, gross profit declined year-over-year, primarily due to inventory-related charges from 4 store closures and a higher mix of lower-margin durable products. Excluding these items, margins would have been generally in line with the prior year. This was partially offset by strength in Storage Solutions, where higher volume and a 200 basis point improvement in gross margin to 39.6% drove a 42.7% increase in gross profit dollars. Total company gross margin was 25.4% for the quarter compared to 27.2% in the prior year period. Now turning to expenses. In the first quarter of 2026, store and other operating expenses declined by approximately 27.2% to $6.4 million compared to $8.8 million in the first quarter of 2025, reflecting the benefits of our cost reduction initiatives. Selling, general and administrative expenses were $6.9 million, a 2.6% improvement compared to $7.1 million last year. Total operating expenses decreased by $4.6 million or 23.4% to $15 million compared to $19.6 million in the comparable 2025 period. Depreciation and amortization totaled $1.6 million, down $2 million or 55.1% compared to $3.6 million in the same period last year. The decrease primarily reflects asset retirements related to cost reduction initiatives and certain intangible assets reaching the end of their useful lives. GAAP net loss decreased to $4.9 million or negative $0.08 per share, a $4.5 million improvement compared to a net loss of $9.4 million or negative $0.16 per share in the prior year period. The improvement was primarily driven by higher revenues, reduced operating expenses, lower depreciation and amortization, partially offset by lower gross margin percent. Non-GAAP adjusted EBITDA, as defined in our press release, was a loss of $1.6 million, a $2.4 million year-over-year improvement compared to a loss of $4 million in the prior year, primarily reflecting the impact of our cost reduction initiatives and improved operating leverage. Now turning to the balance sheet. We ended the quarter with $41.1 million of cash, cash equivalents and marketable securities and no debt. This reflects our continued focus on liquidity, working capital discipline and inventory quality. Our balance sheet strength provides us with the financial flexibility to execute our strategic priorities while maintaining a disciplined approach to capital allocation. During the first quarter, our Board of Directors authorized a share repurchase program of up to $10 million of the company's outstanding common stock, reflecting our view that the current share price does not reflect the long-term value of the business. We intend to execute the program opportunistically, subject to market conditions, capital allocation priorities and the applicable securities laws. Now turning to our outlook. We are reaffirming our full year 2026 guidance. We continue to expect net revenue in the range of $162 million to $168 million and approximately breakeven adjusted EBITDA for the full year. Our outlook reflects a continued focus on revenue quality, proprietary brand mix and disciplined cost management. For the second quarter, we expect net revenue in the range of $42 million to $44 million with a return to positive adjusted EBITDA. To summarize, our year-over-year revenue growth in the first quarter was driven by continued strength in our commercial business and a meaningful contribution from our Storage Solutions segment. We also delivered improved profitability, reflecting the impact of our cost reduction initiatives and a more efficient operating structure. We ended the quarter with a strong liquidity position and no debt, providing flexibility as we continue to execute our strategy. Looking ahead, we remain focused on driving revenue quality, expanding proprietary brand penetration toward our approximately 40% year-end target and delivering breakeven adjusted EBITDA for the full year. With that, I'll turn the call back to Darren for closing remarks.

Thanks, Greg, and thank you again to everyone for joining us today. In closing, we believe the first quarter reflected continued progress against the strategic and operational priorities we have been focused on over the past several years. We delivered another quarter of year-over-year revenue growth, continued expanding proprietary brand penetration, improved profitability and maintained a strong balance sheet. As we move through 2026, we remain focused on growing our commercial platform, expanding higher-margin proprietary brand sales, driving operating leverage and executing with discipline across the organization. We believe these initiatives position the company well to continue improving profitability and creating long-term shareholder value. We appreciate your continued support and look forward to updating you on our progress throughout the year. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] And your first question comes from Aaron Grey of Alliance Global Partners.

First question for me. Just on the rescheduling news, I want to talk about maybe some of the more near-term impacts and through the mindset of maybe durables and some of the delays in refresh, just given some of the tough cash flow issues and balance sheet issues some operators have had. It might be a bit too early, but could you talk about some potential impacts of now getting clarity on the 280E on the go-forward and potentially getting some forgiveness on the legacy taxes owed and what impact that could have to open up to refreshes and your durables business?

Yes. We've been talking about this for a while. We certainly think it's a meaningful tailwind for our customers. As their financial position strengthens, their capacity to reinvest money in the infrastructure, we believe will provide GrowGen with probably a long-term durable mix going forward into the future. We're starting to see it now. We have never been -- we have been this active since 2021, bidding out lighting, dehumidification and infrastructure for facilities. So we're pretty excited about it. And as we focus on the B2B side of our business, we're in a beautiful spot right now, and we are able to finance. So we think you will see continued movement in the durable side of the business throughout the year. There's some important -- certainly important conversations coming up in June on the recreational side of it. But the money that's coming back to these balance sheets will be spent a lot of facilities right now need refurbishing. So we're pretty excited, and we saw the mix starting even in the first quarter. But right now, our pipeline hasn't been this strong since '21. And we certainly are looking for a long-term boom on the durable side of it, which also comes into play on the consumables side of it also.

Okay. Great. That's helpful color, Darren. Second question for me, just as we look at 2Q and for the remainder of the year, is as we think about some sequencing of the gross margin, you talked about 2Q being positive EBITDA. How should we think about the role of gross margin and potential step change there? And then how we think sequencing through the year to get to the full year guide?

Yes, Aaron, thanks for the question. So we were happy with the first quarter results coming in at $38 million against our full year goal of $162 million to $168 million in sales. As we look at Q2, Q3, we see the business ramping Q2 $42 million to $44 million in sales and margin profile back into that 27% to 29% range. I think what you saw in the first quarter was we closed 4 stores, and it had a 1.5 points impact on margin, so slightly lower than expectation. But I think the good news is, as we look at the remainder of the year, we have less store closures scheduled as of this point in time. So we expect less impact in future reporting periods from the closure activity. And we think with $125 million to $130 million in revenue remaining in our full year guidance that we'll be able to position the business back into that 27% to 29% range for the full year.

Yes. And the other side of that also in the first quarter, as we transition this company into a business-to-business as opposed to business-to-consumer, and our private label brands are growing certainly quicker than we have expected, and we believe you'll see those in the 40s before the fourth quarter of this year. We have had some inventory issues with some products that have been sitting around that have become obsolete and slow moving, not our brands, but other brands. So we have gotten a little more aggressive in the first quarter, marking some products and selling some products at discounts. And you'll see that moving positively through the end of the -- through the rest of this year. So you will see margins start ticking back up.

And your next question comes from Brian Nagel of Oppenheimer.

So there are a few questions there. I guess I want to go back to the question was just asked. And look, I -- recognizing there's a lot of moving parts happening both at GrowGen and in the sector. But as you think about -- you mentioned in response to the prior question that you've seen this most build-out activity, I'm probably not using the right words, most build-out activity since '21. Do you think is that a function of, I guess, the rescheduling? Or is there another factor at play or some combination of factors?

I think there's a couple of different functions, Brian. To start with a lot of the facilities do need to be refurbished. Like GrowGen, a lot of our customers have been extremely concerned about their balance sheets as we have. And they have pushed refurbishment and building out another year or a year longer than they could have. So I think everyone has been managing balance sheets. But on the other side of it, we do believe that with rescheduling, the amount of money coming back into this industry, anywhere between $1 billion and $2 billion back on to balance sheets. I mean, people are looking for more efficient ways to grow, and there are more efficient products out there today. Most of our customers are growing much more efficiently than they used to, getting many more -- getting more pounds per light than they used to, more ounces per light. So it's this trade-off that you're starting to see. But on the other side of it also, GrowGen is well positioned from a balance sheet side to lend money to our customers and to help them refurbish facilities. So I think it's coming from everywhere. What you're also starting to see, as you probably heard from the MSOs that supply/demand is starting to come into balance. With rescheduling on the medical side, there is talk about some certain of our companies, the MSOs exporting cannabis over into the European markets, which will bring, again, less supply offline here. So hopefully, prices stabilize and start going back up. So we haven't seen the industry in this shape since 2021. And I'm a firm believer right now. Most of the companies that are in business that are doing well that have retained balance sheets, they're going to be around for a long time to come. And you're going to see a tremendous sea change in this industry. And I do believe from our side of it, from the equipment side of it, GrowGen is going to lead it. We have changed this business tremendously. We have hired facility advisers, technical advisers. We have groups of GrowGen employees going to facilities on a daily basis, helping with grows, recommending different products to our customers. So the business is just tremendously different. We're down to 19 facilities right now from 65. And what you saw in the first quarter was year-over-year growth with 12 less facilities. And I think we've been pretty transparent that usually, when we close facilities, we've been losing up to 50% of walk-in business. So you're still seeing revenue growth on that side with many less stores. So the revenue growth that you're seeing in the first quarter, albeit small, was really greater than it looks. And we believe you'll see this growth throughout the year. One of the exciting parts even you're seeing on the expense side, the expenses coming down, but you're seeing revenue starting to go up. And we think we're just -- we think this is a reset like anything else, Brian. We spent from 2021 to 2026 resetting GrowGen. And we believe right now, we're in that position right now where you'll see quarters over growth, and you'll see GrowGen returning to where it was back in the early 2020s.

That's very helpful, Darren. And so my second question, and you just touched on there, again, if I make sure I'm looking at the numbers correctly, but the revenue -- this is your second consecutive quarter of revenue, total company year-on-year revenue growth. And it looks -- I mean, if I'm reading the numbers right, the revenue growth accelerated rather significantly -- the rate of growth accelerated rather significantly in Q4 and Q1, that's correct? So what's that? I mean how should we think about what happened basically between those 2 quarters?

I think it's twofold. One is year-over-year revenue growth that you saw 2 quarters in a row, Brian. We usually see revenue growth from first -- fourth quarter to first quarter, and then you'll see tremendous revenue growth in the second and third quarters, which are usually our strongest quarters. But we're looking at year-over-year growth. And when you look at last year first quarter, we had 31 stores, and we're down to 19 stores, 19 locations right now. And you're still seeing revenue growth with 12 less locations.

And your next question comes from Mark Smith of Lake Street.

I wanted to dig in just a little bit more on some of the inventory in the closed locations and sales. I realize this puts some pressure on gross profit margin as you're clearing some of this out. But I'm curious if you can quantify at all maybe how much of the sales kind of came from these closed locations inventory and if there's still some inventory out there to work through in Q2?

Yes, Mark. So in the first quarter, we closed 4 locations. And with that, we include some level of detail on the adjusted EBITDA add-back schedule. We estimate that the actual impact on gross margin was about 1.5 points to kind of push us back in the guidance range if we hadn't closed those locations from activity that's really twofold. One is what ends up getting discarded and two is what's liquidated throughout the course of the pre-closing activity. And then there's incremental freight and certain things potentially as well in terms of moving the inventory from those activities. And I think when you look at the business and maybe the outlook for the rest of 2026, I don't think you'll see as many closures as we had in the first quarter in the next 3 quarters combined. So we expect lesser activity on that end from a closure perspective. And outside of that, we expect business as usual. We have sufficient reserves in place on our inventory right now. So we don't expect quite the impact that we had in Q1 throughout the duration of 2026.

Mark, also on the other side of it, there were certain margin pressures from tariffs in the first quarter. One of our largest product, our largest internal product is Char Coir, and we were dealing with 50% tariffs in the first quarter. So again, products that came in usually third, fourth quarter had a very large tariff on it. So those will start dissipating also going into the second quarter as new product comes into GrowGen. So besides what you saw margin degradation with closed stores and some inventory, you also saw some tariff impact in the first quarter.

Perfect. And tariffs was actually my next question. Just kind of curious, impact on tariffs, what you're looking at today and if you can quantify at all, Greg, maybe any potential refund that you can get on IEEPA tariffs?

Yes. We're -- I mean, like all companies right now that had tariff impact over the last year or so, we're actively pursuing claims that could be refundable to the business. It's too early to comment on what the impact might be. I think all companies are wrestling with kind of the forward-looking expectations for the federal government. But we are pursuing our IEEPA refunds and are hopeful that things will progress in a way that will help the business throughout the back half of the year or into 2027, depending on timing and how things continue to progress.

Thank you, and there are no further questions at this time. I'd now like to turn the call back over to Darren Lampert, Chairman, Co-Founder and CEO, for closing comments.

Thank you. I'd like to thank our shareholders for their continued support, and we look forward to updating you on our second quarter results in August. Thank you very much and have a beautiful night.

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