GrowGeneration Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results. GrowGeneration operates retail garden centers, e-commerce, and distribution and other businesses; it reported 56 retail locations across 18 states.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $55.7 million | $70.9 million | $176.4 million | $223.7 million |
| Gross profit | $16.2 million | $18.3 million | $49.6 million | $60.7 million |
| Gross margin | 29.1% | 25.9% | 28.1% | 27.1% |
| Operating loss | $8.3 million | $8.1 million | $22.6 million | $152.1 million |
| Net loss | $7.3 million | $7.2 million | $19.2 million | $148.8 million |
| Adjusted EBITDA (non-GAAP) | $(0.9) million | $(2.7) million | $(1.9) million | $(6.5) million |
Q3 diluted loss per share was $0.12; nine-month diluted loss per share was $0.31. Sales declined 21.4% in Q3 and 21.1% year to date. Management attributed the year-to-date decline primarily to same-store sales, down approximately 22.9%.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $31.4 million at September 30, 2023, versus $40.1 million at December 31, 2022. Marketable securities were $35.2 million, bringing cash and marketable securities to approximately $66.6 million.
- Working capital was approximately $123.4 million, down from $134.9 million at year-end 2022.
- Nine-month operating cash flow was $2.8 million, compared with $9.9 million in 2022. Investing cash outflow was $11.2 million, including net purchases of marketable securities, $6.0 million of property and equipment, and $3.1 million of acquisitions. Financing cash outflow was $0.2 million.
- The balance sheet reported no current portion of long-term debt at September 30, 2023. Lease liabilities totaled $44.8 million, including $8.4 million current; these are operating lease obligations.
- Total assets were $277.2 million and stockholders’ equity was $200.1 million. The company said it may need additional equity or debt financing in the future to support its growth strategy.
Material changes and management commentary
- Q3 retail sales were $41.4 million, distribution and other sales were $11.5 million, and e-commerce sales were $2.8 million. Retail and distribution sales fell year over year; e-commerce was relatively flat.
- Gross margin improved despite lower sales. Management cited payroll reductions and savings from store consolidations as drivers of lower store operating costs; SG&A also declined.
- The nine-month comparison in operating loss and net loss is significantly affected by a $127.8 million impairment recorded in 2022. No goodwill or finite-lived intangible impairment was recorded in the first nine months of 2023.
- The company invested excess cash in marketable securities and continued implementation and design of a new enterprise resource planning system. It acquired Southside Garden Supply and other small businesses for total consideration of approximately $3.2 million.
- No specific revenue, earnings, or cash flow guidance was provided in the filing.
Risks, contingencies, and unusual items
- Management concluded disclosure controls and internal control over financial reporting were not effective as of September 30, 2023 because of material weaknesses. Areas cited include control environment and risk assessment, accounting resources and policies, IT general controls, inventory counts, valuation processes, and segregation of duties. Remediation is ongoing and the weaknesses were not yet considered fully remediated.
- Management applied a full valuation allowance to deferred tax assets, concluding they were not expected to be realizable. The nine-month effective tax rate was (0.42%).
- In a dispute with Total Grow, an arbitrator denied the counterparty’s claims and awarded GrowGeneration relief on its counterclaim in July 2023. The company is attempting to collect the award; the filing does not state a clear expected recovery amount.
- Management said ordinary-course legal claims were not expected to have a material adverse effect, while noting that future outcomes and defense costs could affect results. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether sales declines and same-store sales trends stabilize, particularly in retail and commercial fixtures.
- Whether gross-margin improvement can be sustained while revenue remains lower and the company continues to report operating losses.
- Cash generation, liquidity needs, and any future financing plans; assess marketable securities alongside cash and lease commitments.
- Progress and testing results for remediation of the disclosed material weaknesses in financial reporting controls.
- Collection status and accounting treatment of the Total Grow arbitration award.