GrowGeneration Corp. (GRWG) Earnings Call Transcript

Hello everyone, and welcome to Grow Generation's second quarter 2026 earnings conference call. My name is Melissa and I will be your operator for today's call. At this time, participants are in a listen-only mode. Following prepared remarks, we will open the call to questions. from analysts with instructions to be given at that time. This conference call is being recorded, and a replay of today's call will be available on the investor relations section of Grow Generation's website. We will now hand the call over to Phil Carlson with KCSA Strategic Communications for Introduction and the Reading of the Safe Harbor Statement. Please go ahead, Phil.

Thank you, Operator, and welcome everyone to GrowGeneration's second quarter 2026 earnings results conference call. With us today from Grow Generation are Darren Lampert, co-founder and chief executive officer, and Greg Sanders, chief financial officer. Company's second quarter 2026 earnings press release was issued after close of market today. Copy of this press release is available on the investor relations section of the Grow Generation 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 FCC 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. SEC filing as well as the earnings press release, which provide recommendations of non-GAAP financial measures to the most directly comparable GAAP measures, are all available on our website. Following the prepared remarks, management will be happy to take your questions. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue, and we will take them as time allows. Now I will hand the call over to Grow Generation's co-founder and CEO, Darren Lampert. Darren, please go ahead.

Thanks, Phil, and good afternoon, everyone. Thank you for joining us to review Grow Generation's second quarter 2026 financial results and to discuss our outlook for the rest of 2026. I'm pleased to report that our sales momentum in early 2026 continued into the second quarter. This marks our third consecutive quarter of year-over-year revenue growth. Following the actions we have taken over the past few years as part of our larger strategy to transform ProGeneration into a commercial proprietary brand-driven business. This growth strategy is centered around three key priorities. expanding our commercial platform, growing our proprietary brands, and maintaining a disciplined cost structure. Our expanded commercial B2B business is a core growth driver of our strategy. Through our digital B2B platform, GrowGenPro, we have strengthened our relationships with both single and multi-state operators, greenhouse growers, and many other commercial cultivation customers throughout North America. These customers recognize the value we provide, with many of them adopting our products and growing protocols into their operations. Another key component of our strategy is growing our proprietary brands across additional channels. Aside from building stronger brand loyalty, proprietary brand sales also represent higher margins, recurring consumable purchases, and create greater competitive differentiation for GroGen in the marketplace. Our efforts have been very successful as we continue to see increased adoption, proprietary brands such as Char-Cour, Drift Hydro, The Harvest Company,.

in and power SI. With this strategy, we set certain goals for ourselves in 2026, including proprietary brand penetration, reaching 40% of cultivation and gardening revenue by year-end. Based on our performance to date, we have updated our full-year adjusted EBITDA goal and now expect to generate adjusted EBITDA in the range of $2 million to $3 million. This is significant for growth generation, as it shows the progress we have already made, as well as the ongoing evolution of our business, as we set the bar higher in order to keep driving revenue growth, reduce costs, and improve margins. Now let's look at our second quarter results. We generated total revenue of 43.2 million, which was in line with our expectations. It represents both sequential and year-over-year growth, even as we operated with a smaller retail store footprint. We reported proprietary brand sales representing approximately 40% of cultivation and gardening revenue, compared to 32% in the same period last year. So we are already at our year-end target mix just halfway through the year. In addition to reaching this target, these results represent our progress in building a more focused, commercially driven, and profitable business. We've continued to transition our sales towards higher value, recovery consumable, proprietary branded products. Expanding proprietary brands is central to our margin expansion and long-term value creation strategy, and we are very pleased with our progress. Our MMI storage solution segment also delivered solid results this quarter with $8.3 million in revenue. MMI continues to benefit from higher capital investment activity and its diversification into industrial, agricultural, and specialty end markets. We expect this segment will continue to generate steady growth throughout the remainder of 2026. All this has contributed to expanded margins. For the second quarter, we achieved gross profit margins of 28.5%, a sequential improvement of 310 basis points from 25.4% last quarter and compared to 28.3% last year. Turning to expenses for the quarter, we reduced store and other operating expenses by approximately 22% year over year and total expenses by 13%. These results display the considerable benefits we have achieved from the increased efficiency and cost reduction initiatives that we have been implementing over the past several years. All of this contributed to GroGen achieving positive adjusted EBITDA for the second quarter. As I mentioned earlier, this is an important milestone for us. Aside from increased profitability, it demonstrates the value we have created through our strategic initiatives as we continue to transform ourselves into a stronger business with increased growth prospects. I'm not just talking about the operational improvements we've made. I'm also talking about our emphasis on revenue quality. We're growing higher margin sales as part of our revenue mix, particularly through our proprietary brands. Also, attaining positive adjusted EBITDA this quarter has now led us to reach even higher, as we have raised our full year, 2026, adjusted EBITDA goal to the range of $2 million to $3 million. As part of this strategy, we have also continued to maintain a strong balance sheet. Today, we possess one of the strongest balance sheets within our industry. This financial flexibility gives us a considerable competitive advantage as we seek further infrastructure projects and take steps to increase our proprietary brand expansion. At quarter end, we have $41 million of cash while having no debt. have the resources to keep investing in our growth initiatives, also maintaining disciplined capital allocation. His financial strength also supports our stock repurchase activity. During the second quarter, we repurchased 700,000 shares of common stock at an average price of $1.38 per share. Regarding our forward outlook for the third quarter of 2026, we anticipate revenue of between $44 million to $46 million. At the same time, we expect to generate positive adjusted EBITDA for the quarter. This gives us the confidence to upgrade our full year 2026 guidance, which includes net revenue in the range of $162 million to $168 million and adjusted EBITDA in the range of $2 million to $3 million for the full year. Before I turn the call over to Greg, I want to give some perspective on the latest developments around Schedule 3 rescheduling for adult-use cannabis. Since our last earnings call, the ALJ concluded its formal hearings. While our ruling is still pending, we are confident that regardless of policy, timing, Rogen is well positioned to support increased investment activity from our customers. We believe there is no other organization better suited for this. With our growing portfolio of proprietary brands and infrastructure builds, and system integrations, longstanding customer partnerships, and our talented and seasoned management team. All of this is supported by our industry-leading balance sheet and proven track record of execution. 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 second quarter 2026 results, and then I'll provide additional context on our outlook for the year. Our second quarter results represent another step forward in the transformation of growth generation. We delivered our third consecutive quarter of year-over-year growth, continued expansion of proprietary brand penetration, delivered positive adjusted EBITDA, and maintained the disciplined cost structure that we've built over the past several years. These results reflect continued execution against the strategic priorities that we've outlined to investors. For the second quarter of 2026, Grow Generation reported net sales of 43.2 million, an improvement of 12.6% sequentially, and an increase of 5.5% compared to 41 million during the same period last year. Revenue growth continues to be driven primarily by our commercial B2B business and increasing adoption of our proprietary brands, both of which remain strategic priorities for the company. Net sales in our cultivation and gardening segment were $34.9 million for the quarter, compared to $32.9 million in the same period last year. Proprietary brand sales represented 39.7% of cultivation and gardening revenue, up from 32% in the prior year. This was mainly driven by our strategic initiative to increase our sales mix of higher margin proprietary products, proprietary brand penetration continues to improve the quality of our revenue by increasing gross profit dollars and reinforcing our long-term margin expansion strategy In our storage solution segment, net sales were $8.3 million for the quarter, up from $8.1 million in the second quarter of 2025. Storage Solutions continues to provide an increasingly diversified revenue stream outside of traditional cultivation markets. We continue to see healthy customer demand across retail, industrial, and commercial infrastructure projects, reflecting ongoing investment in warehouse modernization and automation. This diversification helps reduce earnings volatility while providing additional opportunities for profitable growth. Gross profit was 12.3 million for the second quarter of 2026, compared to 11.6 million during the same period last year. In cultivation and gardening, gross profit increased year-over-year, primarily due to increased sales volume and a higher mix of proprietary brand products. Storage solutions gross profit dollars declined modestly due to project mix and rising transportation costs during the quarter, despite higher sales volume. Total company gross margin was 28.5% compared to 28.3% last year. The improvement reflects the continued expansion of proprietary brand sales within our cultivation and gardening segment, partially offset by higher transportation costs. Now turning to expenses, in the second quarter of 2026, store and other operating expenses declined by approximately 21.9% to $6.1 million, compared to $7.9 million in the second quarter of 2025, reflecting the benefits of our cost reduction initiatives. Selling, general, and administrative expenses were $6.5 million, or a 5% increase compared to $6.2 million last year, primarily due to increases in our commercial sales structure that support our growth initiatives. total operating expenses decreased by $2.2 million, or 13.1%, to $14.7 million, compared to $16.9 million in the comparable 2025 period. Depreciation and amortization totaled 1.5 million, down 1.2 million, or 44%, compared to 2.7 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. Gap net loss decreased to $2 million, or negative $0.03 per share, a $2.8 million improvement compared to a net loss of $4.8 million, or negative $0.08 per share in the prior year period. The improvement was primarily driven by reduced operating expenses, revenue growth, and lower depreciation and amortization. In the second quarter, as expected, we returned to positive adjusted EBITDA. Non-GAAP adjusted EBITDA, as defined in our press release, was a positive $0.3 million, a $1.6 million year-over-year improvement compared to a loss of $1.3 million in the prior year. Returning to positive adjusted EBITDA marks an important milestone in the transformation of growth generation. The past several years, we have sustainably reduced our cost structure. improved operating leverage, and position the business to return to sustainable profitability as revenue continues to recover. Now turning to the balance sheet, we ended the quarter with $41 million of cash, cash equivalents, and marketable securities and no debt. Our debt-free balance sheet continues to differentiate growth generation within the industry and provides us with significant flexibility to invest in organic growth, evaluate strategic opportunities, and opportunity for growth. return capital to shareholders. Earlier this year, our board of directors authorized a share repurchase program of up to $10 million of the company's outstanding common stock, reflecting the board's confidence in the long-term intrinsic value of the business and our commitment to discipline's capital allocation. During the second quarter, the company repurchased 700,000 shares of common stock at an average price of $1.38 per share, exclusive of incremental direct costs. As of June 30, 2026, approximately $9 million remained available under the the stock for purchase program. We intend to execute the program opportunistically during the remainder of 2026, subject to market conditions, capital allocation priorities, and applicable securities law. Now turning to our outlook. We are raising our full year 2026 adjusted EBITDA guidance while reaffirming our revenue outlook. We We continue to expect net revenue in the range of $162 million to $168 million and now expect adjusted EBITDA in the range of $2 million to $3 million for the full year, compared to our previous expectation of approximately break EBIT. The increase reflects our strong execution year to date, continued focus on revenue quality, proprietary brand penetration, disciplined cost management, and the expected recognition of previously incurred IEPA tariff refunds during the third quarter. For the third quarter, we expect net revenue in the range of $44 million to $46 million while continuing to generate positive adjusted EBITDA. As we look ahead, we believe Grow Generation is operating from a position of strength. We have returned the business to revenue growth, materially improved profitability, maintained a strong debt-free balance sheet, and continue to execute a disciplined long-term strategy. While there is still work ahead, we believe the progress we've made over the past several years has established a much stronger foundation for long-term shareholder value creation. 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. Overall, we delivered a strong second quarter, generating revenue growth across most areas of our business, expanding proprietary brand penetration, reducing costs, and improving profitability while reaching a positive adjusted EBITDA for the quarter. performance continues to reflect the benefits of our expanding commercial platform and our improved operations and reduced cost structure. This also enables us to once again end the quarter with a strong balance sheet and no debt. Moving forward, we will remain focused on executing our strategy and continuing our transformation into a commercial proprietary brand driven business. stay focused on driving continued revenue growth while refining our revenue mix, improving margins, and expanding our profitability as we continue to advance towards our year-end goal of proprietary brands representing 40 percent of cultivation and gardening sales, and our updated goal of generating full-year adjusted EBITDA in the range of $2 million to $3 million. As you can see from this quarter's performance, our strategy is continuing to drive improved financial and operating results. And we look forward to keeping you updated as we make further progress during the balance the year. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press Press the star followed by the Q. If you are using a speakerphone, please lift the handset before pressing any keys. We ask that you limit yourselves to one question and one follow-up question. The first question comes from Aaron with Alliance Global Partners. Please go ahead.

Hi, good evening and thank you very much for the questions. First question for me, just regarding the updated guide, particularly on EBITDA, you guys held sales and gross margin guide increased EBITDA. It implies 3.3 to about 4.3 million in the back half. So just, you know, given the seasonal softness we usually see in 4Q, you know, how much of it is attributable to just a really strong core 3Q, maybe less seasonality, versus that tariff benefit that you mentioned as well? Thank you.

Hi, Aaron. Thank you for the question. I think first things first, the first two quarters gave us a higher level of confidence in the underlying performance of the business. returning the company to positive adjusted EBITDA in the second quarter, along with returning gross margin to 28.5%, and the cost reduction initiatives that we've executed gives us more confidence in the operating model as we move forward. In addition to our comfort around the business and our execution so far year to date, we WE ARE EXPECTING AN AIPA TARIFF AMOUNT TO BE RECOGNIZED IN THE THIRD QUARTER THAT exceeds $2 million. So that is a primary driver as well for us as we look at the third quarter. And we expect generally for the fourth quarter to return to normal levels of performance relative to seasonality and commentary that we've made historically.

Okay, great. Appreciate that, Kyler. I think a question for me, just regarding proprietary brands, you guys already hit your mark for the full year, within the quarter, essentially being at 40%. So just given growth accelerated in the quarter, maybe talk about some of the dynamics that drove that growth, maybe deeper penetration. penetration within your commercial business and with some of the MS roles that I know you've been targeting. Thank you.

I think we've been pretty transparent, Aaron, that our commercial business, our MSO business, is certainly expanding. We still do believe that we're in the early stages of growth in a bunch of our proprietary brands that are out on the market right now. And we still believe that there's tremendous opportunities on the distribution side of it. I would say right now about 90% of the sales going through our proprietary brands right now are GroGen-centric through our commercial division. We have high hopes that, as the years go on, that many other groups adopt our brands within the industry. So we believe that is just starting and we're getting way more involved in the distribution of our brands on a go-forward basis. And our brands are working. We have hired a bunch of technical advisors that are in the facilities on a daily basis. And the brands are really turning out some of the best cannabis in the country right now, both on the cost side and the quality side. So we couldn't be any prouder of the team that we have out in the markets right now. And really the work that we're doing to transform the industry, really to growing better cannabis at just better levels and better price points.

Great, too. Thanks for the color. I'll go and jump back in the queue.

Thank you. Your next question comes from Brian with Oppenheimer. Please go ahead.

It's Brian Nagel. Nice quarter. Congratulations. Thank you, Brian. So it's going to be a follow-up to the prior question, but you know, here you've had, I guess now three consecutive quarters of pause of year-on-year revenue growth. If you look at the guidance for Q3, again, if I got the numbers right, you're guiding revenue growth year-on-year to be down. So are you... Is there a breaking trend? Is there a reason for that, conservatism? Hey, Brian. Thanks for the question.