GrowGeneration Corp. — Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. GrowGeneration operates retail garden centers, e-commerce, and distribution and other businesses, with 62 retail locations in 18 states at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $63.9 | $71.1 | $120.8 | $152.9 |
| Gross profit | $17.1 | $20.2 | $33.4 | $42.4 |
| Gross margin | 26.8% | 28.5% | 27.7% | 27.7% |
| Operating loss | $(6.6) | $(136.8) | $(14.3) | $(144.0) |
| Net loss | $(5.7) | $(136.4) | $(11.8) | $(141.6) |
| Adjusted EBITDA, non-GAAP | $0.9 | $(3.0) | $(0.9) | $(3.8) |
| Operating cash flow | Not separately presented | Not separately presented | $7.4 provided | $1.6 provided |
- Q2 sales fell 10.1% year over year; management attributed the decline primarily to a 15.1% same-store-sales decrease. Six-month sales declined 21%, with same-store sales down approximately 26.5%.
- Q2 segment sales: Retail $46.9 million (down from $55.4 million); E-commerce $3.7 million (roughly flat); Distribution and other $13.3 million (up from $12.0 million). For six months, segment sales were $86.3 million, $7.0 million, and $27.4 million, respectively.
- Q2 gross margin contracted 1.7 percentage points, while the six-month margin was unchanged year over year. Retail gross profit declined; distribution and other gross profit increased.
- Operating expenses were $23.7 million in Q2 and $47.8 million for six months. The much lower year-over-year totals largely reflect the $127.8 million impairment recorded in Q2 2022, not solely current-period cost improvements. Store and corporate costs also declined, with management citing payroll reductions and store consolidations.
- Q2 net loss was substantially smaller than the prior-year loss, principally because the prior-year quarter included the impairment charge. Q2 2023 included $1.2 million of restructuring charges in the Adjusted EBITDA reconciliation.
Cash, liquidity, and balance sheet
- At June 30, cash and cash equivalents were $29.6 million and marketable securities were $41.0 million, or $70.6 million combined. Cash alone declined from $40.1 million at year-end 2022.
- Working capital was $126.2 million, down from $134.9 million at December 31, 2022. Current assets were $162.9 million and current liabilities $36.7 million.
- Six-month investing cash outflow was $17.6 million, including net marketable-security purchases, $5.5 million of property and equipment purchases, and $3.2 million for acquisitions. Financing cash outflow was $0.2 million.
- Reported current long-term debt was $17,000; the filing does not show material conventional borrowings. Operating lease liabilities totaled $45.3 million, including $8.2 million current. Total liabilities were $74.2 million and stockholders’ equity was $206.5 million.
- The company reported no off-balance-sheet arrangements expected to have a material effect. Management said additional equity or debt financing may be needed to support future store and business expansion.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or other quantitative guidance. Management intends to continue expanding retail, commercial sales, distribution, and proprietary brands through organic growth and acquisitions.
- Management attributed weaker sales to same-store declines and described a competitive, fragmented market. The filing also cites economic and industry uncertainty; actual results may differ materially from forward-looking statements.
- Management concluded that deferred tax assets were not expected to be realizable and recorded a valuation allowance; the six-month effective tax rate was zero.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2023 because of material weaknesses. Identified deficiencies include accounting resources and processes, risk assessment and monitoring, IT general controls, inventory counts, valuation controls, and segregation of duties. Remediation was ongoing and not complete.
- As a subsequent event, an arbitrator on July 26, 2023 denied Total Grow’s claims and awarded GrowGeneration $1.5 million plus interest at 8% compounded annually from March 15, 2021, and certain costs. The award settled the matter; the company had previously accrued a $1.5 million reserve against the note receivable.
- During the first half, the company acquired five locations and entered two new states, including the May 2023 purchase of Southside Garden Supply in Alaska. Acquired businesses contributed $1.3 million of reported six-month revenue.
Important facts for investors to verify
- Whether same-store sales and retail gross margin stabilize after the reported declines.
- Whether positive quarterly Adjusted EBITDA can be sustained; the six-month figure remained negative, and this measure is non-GAAP.
- Progress and testing results for remediation of the material weaknesses in financial reporting controls.
- Cash generation, use and liquidity of marketable securities, and whether expansion requires external financing.
- Collection timing and accounting treatment of the Total Grow arbitration award, including interest and the previously accrued reserve.