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GrowGeneration [GRWG] Conference call transcript for 2022 q4

2023-03-15 20:10:12

Fiscal: 2022 q4

Operator: Hello, and welcome to GrowGeneration’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is JP, and I’ll be coordinating your call today. I will now hand the call over to Clay Crumbliss with ICR.

Clay Crumbliss: Thank you, and welcome, everyone to the GrowGeneration Fourth Quarter and Full Year 2022 Earnings Results Conference Call. Today’s call is being recorded. With us today are Darren Lampert, Co-Founder and Chief Executive Officer; and Greg Sanders, Chief Financial Officer of GrowGeneration Corp. You should have access to the Company’s fourth quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of GrowGeneration’s website at ir.growgeneration.com. 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 filings 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 our prepared remarks, we will take questions from research analysts. Now, I will turn the call over to our co-founder and CEO, Darren Lampert.

Darren Lampert: Thank you, Clay. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results and our full year 2023 guidance. As always, I want to thank each one of our employees across our company for your continued support of GrowGen. The last year has been extremely challenging, but I, along with the rest of the executive team, appreciate your continued hard work and dedication to our vision and strategic plan. Regardless of the market challenges throughout the year, and really over the last three years since we entered the pandemic, the team has been steadfast in executing our business model. I commend our entire team for stepping up to every challenge that has come at us over this time period. We were pleased that our full year 2022 net revenue, $278 million, was in line with our previously communicated guidance range. We are also encouraged that our efforts in 2022 to rightsize the business are starting to show in our financial results. And we are optimistic that the work we’re doing is putting GrowGen in a significantly better position going into 2023. Further, for the first time in seven quarters, we believe GrowGen will see sequential revenue growth in Q1 2023 versus Q4 2022. In addition, we believe that gross margin will normalize in the mid- to high-20s, beginning in Q1 of 2023. In 2022, we invested in our stores, product portfolio, supply chain, technology, and other strategic initiative as part of our long-term strategy to enhance profitability. In the fourth quarter, we added three members to senior management in the hydroponic industry, in the areas of commercial sales, supply chain, and product development. We also have significantly increased our volume of our private label products driven by our Drip Hydro and Char Coir brands. Private label accounted for $26 million for retail and e-commerce sales in the full year 2022, which is around 12% of our overall retail and e-commerce sales, growing 6% year-over-year as a percent of sales. Our team also continued to make advancements in our supply chain through the expansion of our distribution centers and fulfillment hubs with now total eight locations, with our newest center in Columbus, Ohio expected to be operational before summer. With that as a backdrop, our day-to-day strategy is generally the same since we last spoke. We remain hyper-focused on controlling costs and generating cash, and we made significant progress in 2022. While some of these efforts have come at the short-term expense of our gross margin, especially in the fourth quarter, we firmly believe these decisions are putting GrowGen in a better place to be stronger and more nimble than ever before. It’s important to reiterate that GrowGen remains on solid financial footing. We have a strong balance sheet, and we don’t anticipate the need for external debt or equity issuance. We ended the 2022 fiscal year with $72 million of cash and cash equivalents and marketable securities and no debt on our balance sheet, representing a sequential increase of $1 million in our net cash position since the end of the third quarter of 2022. This marks the second consecutive quarter that we have grown our cash balance despite the incredibly challenging industry conditions. Now, I’d like to provide a brief overview on some of our key business initiatives throughout 2022, how we see those going forward in 2023. We cognized the need early last year to focus our organization on cost control, store consolidation, inventory reduction and cash generation. In 2022, we reduced inventory by $28 million compared to the end of 2021, including a sequential $12 million reduction in the fourth quarter from the end of the third quarter. These inventory reductions have generally occurred at discounted prices, which clearly pressured our gross margin in 2022, but we believe it was the prudent thing to do as we optimized our working capital base and prioritized cash generation and balance sheet preservation. Partially offsetting the negative impact of our gross margin contraction, we made significant progress rightsizing our expense structure in 2022. We made the difficult decision to reduce our payroll base by a total of $12 million throughout 2022. In terms of our store footprint, we made considerable progress eliminating market redundancies and overlaps by closing eight stores in total for 2022. We also continued to expand into market where we see long-term value, opening five new stores and included four new states where we didn’t previously have retail operations. These new locations, including Virginia and New Jersey stores, branded as GrowGeneration, Hydroponic and Garden Center, which we think represents an opportunity to provide a broader in-store product assortment that should allow us to increase store traffic and productivity by attracting new customers. Next, we reduced our store account by three stores and ended the year on December 31st with 59 locations in operation. We expect these initiatives in 2022 to continue benefiting our company well into 2023, including cost savings flow through from store consolidations, reduced payroll expenses, improved shipping costs from declining ocean freight rates, reduced headwinds from inventory discounting on our margins, and a greater percentage private-label sales. This will all have a positive impact on adjusted EBITDA dollar generation and margin. Going forward, we expect to continue seeking out acquisitions in white space markets where we think it makes sense. We’ll also continue product development around our key brands and private label offerings. We’re focused on monetization of our 1 million square feet of retail space, including merchandising and product education with key partners and our laser focused on execution of the various business transformation initiatives, centered around supply chain and enhancing our customer journey. GrowGen is a unique, highly differentiated retailer. We are the leader in a large, fragmented market. Our customers have a passion for our GrowPro lifestyle. GrowGen is more than just a retailer. We are a developer of market leading brands and private label products. We’re distributors supporting the entire hydroponic growing community, and we are above all a passionate and dedicated partner to our customers. We live our mission and value, and our culture defines our relationship with our customers. We’ll be celebrating our 10th anniversary in a year. As we begin the New Year ahead, we take great pride in our past and we’re equally excited about our future. Turning to guidance for full year 2023, we expect net revenue in the range of $250 million to $270 million, translating into adjusted EBITDA in the range of a $4 million loss to a $1 million profit. As part of that, in the first quarter of 2023, we expect net revenue in the range of $55 million to $57 million, translating into adjusted EBITDA in the range of a $2 million loss to a $4 million loss. With that, I will turn the call over to our CFO, Greg Sanders.

Greg Sanders: Thank you, Darren, and good afternoon, everyone. First, I will address our fourth quarter and full year 2022 financial results, and then I will discuss our preliminary outlook for the 2023 fiscal year. Starting with our fourth quarter results, GrowGeneration generated revenue of $54.5 million versus $90.6 million in the fourth quarter of 2021, representing a decline of approximately 40%. Our same-store sales for the fourth quarter 2022 were $34.3 million compared to prior year sales of $71.4 million, representing a 51.9% decline against the comparable year-ago quarter. Our e-commerce revenue declined on a comparable base from $7.7 million to $3 million. Our distribution and other revenue was $13.5 million for the quarter compared to $4.6 million in the year-ago period, representing an improvement of 195%. Gross profit margin was 17.6% for the fourth quarter 2022, down approximately 830 basis points sequentially from the third quarter of 2022. Gross profit dollar generation in the fourth quarter decreased 7.9% from the prior year, which includes the addition of gross profit from acquisitions of HRG, MMI and St. Louis Hydro in the trailing 12 months. The Company sold over $12 million of overstock and aged inventory in Q4 clearance events that we estimate resulted in a total gross margin degradation of 332 basis points. Further, the Company increased its inventory reserves by over $2 million in the quarter, which had a 379 basis-point impact. The combination of these two strategic initiatives resulted in a 1 time margin reduction of 7.1%. Our Q4 strategic initiatives to further rightsize the inventory of the business are largely complete as of December 31, 2022, and better position the Company as we move into 2023. Store operating costs and other operational expenses declined sequentially from the third quarter. Overall, store operating expense declined from $14.5 million in Q1 to $13.8 million in Q2 to $13.6 million in Q3, finally to $12.8 million in Q4. The savings recognized throughout 2022 were primarily attributed to payroll reductions. We anticipate further cost decreases to continue into 2023, resulting from the execution of store consolidations in the latter half of 2022. Selling, general and administrative or SG&A costs were $8.6 million in the fourth quarter of which $1 million was derived from stock-based compensation. This compares to $8.8 million in the third quarter with $1.3 million of stock-based compensation. This represents a 2.3% improvement quarter-over-quarter to SG&A. Depreciation and amortization of intangibles was $4 million in the fourth quarter of 2022 compared to $4.1 million in the year-ago period. Compared to the fourth quarter last year SG&A expense decreased $2.8 million in the same period of 2022 with overall savings driven from payroll reductions and increased cost controls over a broad range of categories. Income tax in the fourth quarter was a benefit of $248,000 for tax purposes, but with a full valuation allowance we did not observe a significant income tax provision benefit or expense in the period. Net loss for the fourth quarter was $15 million or negative $0.25 per share compared to a net loss of $4.1 million or negative $0.07 per share for the comparable year-ago quarter. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and share-based compensation was a loss of $10.2 million for the fourth quarter of 2022 compared to a loss of $1.7 million in the fourth quarter of 2021. We estimate this quarter’s adjusted EBITDA loss includes roughly $1 million in expense associated with the closure and consolidation of our Las Vegas, Compton and Cotati locations, and nearly $4 million associated with the inventory clean-up measures taken in the fourth quarter. These areas of execution were strategic initiatives taken to position the Company for 2023. Cash generated from operations in the quarter was $2.6 million, primarily attributed to the reduction in inventory and additional measures taken to strengthen the balance sheet. Now, I will provide a quick overview of our results for the full year 2022. Net sales were down $144 million for 34%, $278 million from $422 million in the full year 2021. Gross profit for the full year 2022 decreased by $48 million to $70.2 million, and gross profit margin was 25.3% in 2022 compared to 28% in the full year 2021. As Darren mentioned earlier, we have taken a number of steps throughout the year to rightsize operating expenses and reduce our selling, general and administrative expenses base by roughly $20.7 million through operational rationalization, workforce reduction, and tighter day-to-day expense controls. Related to the balance sheet, as of December 31, 2022, the Company had total cash, cash equivalents and marketable securities of $71.9 million. Within working capital, the Company reduced inventory by $28.4 million, partially offset by a $2.6 million increase in high credit worthy accounts receivable. We also invested approximately $9 million for payments associated with technology and distribution investments. On a full year basis, the Company generated $12.5 million in cash from operating activities, primarily driven by the reduction of inventory and prepaid accounts payable. I will now discuss our guidance for the full year 2023. We expect full year 2023 revenue to be between $250 million and $270 million, and full year adjusted EBITDA to be in the range of a $4 million loss to a positive $1 million profit. Our updated guidance assumes quarter-over-quarter improvements in Q1 of 2023 and further revenue and profitability improvements continuing into the second and third quarters of 2023. The improvement in adjusted EBITDA expectations is primarily driven from the execution of our 2022 reductions to payroll, our eight store closures and our inventory optimization efforts. We expect gross margins to normalize into the mid- to high-20s in the first quarter of 2023. On a comparative basis to the fourth quarter, management expects modest improvements in revenue in Q1 of 2023, which would be the first quarter-over-quarter improvement to revenue since the second quarter of 2021. We expect operating expenses to be controlled and sequentially down in the first quarter as we recognize additional cost improvements from our strategic initiatives. We are positioning the Company and executing our business strategy to focus on cash from operations and EBITDA improvement. As we mentioned earlier, we expect that our headcount reductions are largely complete and the heavy lifting to correct our inventory position was mostly concluded in the last two quarters of 2022. With that, I will turn the call back over to Darren for closing remarks.

Darren Lampert: Thank you, Greg. Before we open the line for your questions, I want to reiterate, while 2022 was a challenging year for everyone in the cannabis value chain, GrowGen remains focused on the areas of the business that we can control. We continue to make strong gains against our priorities, drive cost control, consolidate stores, reduce inventories, and improve profitability, while preparing to capture the many growth opportunities that lie ahead, all of which we expect to drive incremental benefits in 2023. We remain committed to the expansion of our proprietary and distributed brands. We are very satisfied with our results of our private label products, including Char Coir and Drip Hydro. The addition of MMI strengthens our position to gain indoor vertical cultivation projects within their leading benching and racking systems. Controlled environmental agriculture and sustainable ag are only in the development stage. And we believe that more companies will invest in sustainable indoor vertical farms for local production of leafy greens, tomatoes, fruits, and other food products. To close, while we expect a degree of continued uncertainty in 2023 and we are not planning for an imminent turn in the cannabis cycle, we remain nimble and well-prepared for a turnaround when it happens. Thanks to proactive management of the business in 2022, we believe GrowGen is on solid financial footing with a solid balance sheet, healthy liquidity, and a solid cash position. Thank you for your time today, and thank you for your interest in GrowGeneration. We’ll now take your questions. Operator?

Operator: Thank you. Your first question comes from the line of Mark Smith from Lake Street Capital.

Mark Smith: First question is really around inventory. You did a good job getting those levels down, but it sounds like you had to clear some stuff out to kind of get there. Can you just talk about your comfort with inventory levels today? And do you still have any inventory that you think still needs to maybe be cleared out here in 2023?

Greg Sanders: Hey, Mark. This is Greg. We reduced inventory $28 million in the year, $22 million in the last two quarters of the year. At this point in time, we’re carrying $77 million in inventory as we concluded the year. We believe that the volume of inventory that we have is appropriate for the business on a forward-looking basis. Our inventory isn’t completely perfect, but we think it’s in a very good position at this point with all of the efforts that we’ve taken, primarily over the last two quarters. We don’t expect any major changes in our inventory volume as we move forward.

Mark Smith: Excellent. And then just following up on that, can you talk a little bit about kind of the mix of consumables versus more kind of capital equipment? And Darren at the end, you talked a little bit about we’re maybe not seeing improvement yet in the industry, but are you seeing signs of that? And your guidance for the year, does that include the beginning of more build-outs of kind of new growth facilities?

Darren Lampert: Yes. Mark, I’ll start at the beginning. When you look at the mix of our inventory right now, we’ve moved through a tremendous amount of non-consumable inventory in 2022. So, when you look at the tremendous reduction, you’re really looking at the lighting side, the DE side, and the products that we use in build-outs. We’ve kept our inventory up on the consumable side. Those are products that our customers need on a weekly, daily basis. So, we’ve kept that to a point where we’re very comfortable. When you unpack the second parts of the question, we have been grinding around the bottom for the last -- probably for the last three to four months. And March is the first month that we are starting to see some upticks. We’re starting to see more bidding out there on commercial products back east. And we are seeing stabilization. We have consolidated some of our stores around the country. We consolidated our stores. And we feel that we’re in a very good position right now going into 2023. We’re seeing stabilization on pricing on cannabis out in California. That’s what we’re hearing from our customers. We’re also hearing out in the California markets that you are starting to see the large amounts of supply starting to dwindle. So, we are keeping an eye on the outdoor season right now that’s coming up in April. But, we have seen a little stabilization in our business.

Operator: Your next question comes from the line of Brian Nagel from Oppenheimer.

Brian Nagel: So I want to -- my first question, and just basically to follow up on that the question, the prior question, just with respect to the overall industry. So, Darren, you’re saying, you’re seeing -- we’ve been kind of grinding along the bottom, maybe seeing some sign to stabilization here. So as you look at -- I know this -- we’ve been talking about the factors that weighed upon the industry now for a while, over supply, maybe slower licensing. As you look at the business now and you look at some of the stabilization, is it becoming clearer whether those factors we discussed were more transitory in nature, or has there been a sort of, say, a reset lower on the underlying growth potential from an industry perspective within the space?

Darren Lampert: Yes. Brian, my belief is that on a go forward basis, you’ll see much slower growth in the hydroponic and cannabis industries. I think the hyper growth, the 20% year-over-year compounded growth that people are expecting through the 20s, I don’t believe that to be true any longer. I think what you’re seeing right now is an industry that has tremendous potential. But I do believe that you will see slower growth in this industry. You’ll see tremendous consolidation in this industry. And I do believe that what you’ve seen over the last 20 months there was many reasons for it coming out of COVID. There was a tremendous amount of capital coming into the cannabis industry that has slowed in the last 20 months. And like most industries, in the early stages, you do run into these issues. And I think what you’re seeing right now is inventory is coming down, both on the cannabis side of it, but also more importantly on the hydroponic side of it. There was a tremendous amount of hydroponic equipment that was brought into this market to fuel the build-outs and the feverish build-outs that you’ve seen. And that is slowed to a much more normalized base. And forecasting is going to become much easier for GrowGen as we build out our distribution centers. So, we believe that you will see growth in this industry, but I think the hyper-growth that people thought, you will not see in the future.

Brian Nagel: And then, I guess to follow up on that, as you look at some of the new markets and where you’ve seen license -- I guess legalization and then subsequent licensing, particularly on these, how would you characterize that initial build out in those markets versus what you saw in some, like the Michigans or Oklahomas?

Darren Lampert: You’re seeing a much slower ramp back east in Virginia markets. It’s taken an enormous amount of time to get regulations passed, but it’s also taken an enormous amount of time to get properties built. And one of the issues that you’re seeing, Brian, is with the slowdown in the Oklahoma markets and the Michigan markets and the California markets, the capital has dried up. And with the dry-up of capital, you’re seeing much less building and you’re seeing -- you’re not seeing the race to the start, which you’ve seen years ago. So, you’re seeing a much more controlled build-out environment. And I do believe that’s what you will see in the future. And we’re seeing that in the stores that we’ve opened. We opened five new stores in four states last year, Virginia, New Jersey, Missouri, and Mississippi. And we’re seeing -- we were seeing stores go profitable first month into builds, and we’re not seeing that right now. Albeit we are seeing ramps in all our stores that we’ve built, but not the ramps that we’ve seen back in ‘18, ‘19, and ‘20.

Brian Nagel: Got it. And then, just one more, if I could flip it back just more specific to your business. So, you closed a number of stores. As you look at the base now, is it -- are there -- would there be additional closures or is it basically cleaned out and poised to grow from here? And then, a follow-up to that, the stores you closed, I assume those were acquired stores, not stores that GrowGen opened organically, correct?

Darren Lampert: That is correct, Brian. On the other side of that, we still do believe that you will see a few more store closures from GrowGen this year, but not anywhere near the pace last year. We’re targeting anywhere from one to four store closures this year. And just so you do know, most of our store closures come when leases are up and we’re not renewing leases. So, the costs have been pretty tame for store closings. And we have kept a good portion of business, but not as much as we would have liked from these store closures.

Operator: Your next question comes from the line of Chris Carey from Wells Fargo.

Chris Carey: Hey guys. Why do you expect revenue to increase quarter-over-quarter? Are you seeing something -- can you expand on March? I think, you highlighted that. Secondly, this acquisition you did, is that material?

Darren Lampert: The acquisition that we’ve done in March was not material. They’re very small acquisitions. But we are seeing a little pickup in business in March over fourth quarter of last year. And we are going into our seasonally strongest period, which is the second and third quarters. And what we’re hearing from our commercial team, our store team and our customers is that business is starting to pick up and we’re starting to see it in our consumable side of it, and we are starting to see much more quoting on the commercial side of it back east and in new markets.

Chris Carey: Okay. So, this is what you’re seeing, not necessarily what you’re projecting, just to confirm?

Darren Lampert: It’s what we are -- well…

Chris Carey: But you’re seeing this currently is the point.

Greg Sanders: Yes, Chris, and I’ll jump in as well here. One of the key reports that we use on a daily basis is our daily sales report. And we’ve seen revenue pick up across the country in Q1, on a comparative basis in our retail markets. And that’s part of the optimism that we have around the Q1 numbers and an improvement in the first quarter sales in comparison to Q4.

Chris Carey: Okay, great. That makes total sense. Just on the daily sales comment that you just made, are you seeing daily sales stabilize and start to pick back up? Is that what you’re kind of referring to with the daily sales on a comparative basis?

Darren Lampert: Yes, exactly. We’re seeing improvement in Q1 versus last quarter.

Chris Carey: Okay. Got it. And then just the final question is, if you could put it all together, why you think this is happening? Is it just because at some point the market has to bottom and stabilize? You highlighted pricing seems to be normalizing, inventory seems to be normalizing. Is it just like, do you have any theories about why it’s happening just in aggregate? That’s it for me.

Darren Lampert: Chris, we’re 20 months into a downturn into a market that we still do believe like many, has tremendous potential. 20 months is a long downturn for any cycle, and we are starting to see a pickup in business in March, and as we saw in the last couple months. So we’re starting to feel a little better about the industry. When you start taking a look and talking with our customers, when we have thousands of them. They’re starting to see price stability in the California markets to increasing pricing. They’re starting to see some of the illegal -- some of the illegal growers have gone out of business, and we’re hearing up to 15% of the market in California has closed. So, you’re seeing a smaller base of growers out there, which brings down, as you probably know, supply on the cannabis side of it. So, we are starting to see that. We’ve also seen the same in Michigan. We’ve seen closures in Michigan. So with that, you’re going to see strengthening from the individuals that are still in business. But one thing that we haven’t seen as of yet, you’re not seeing money come back into the markets. And we have been extremely diligent on lending money to customers ours as we continue to keep our balance sheet in tremendously good condition. But we do see right now as our side of the industry consolidates, we see tremendous acquisitions out there. And we do believe that you will see some at GrowGen this year. We don’t think there’ll be any material acquisitions this year. There’ll be some smaller ones filling in white space around the country but we will keep Wall Street and you posted on those.

Operator: Your next question comes from the line of Eric Des Lauriers from Craig-Hallum Capital Group.

Eric Des Lauriers: Great. Thank you for taking my questions. Congrats on the strong balance sheet management here, pretty impressive. My question is kind of following-up on some of these trends that you’re seeing. And if I’m understanding correctly, you’re seeing sort of continued weakness in the more durable CapEx products in your business, but seeing overall, I guess, consumable stabilization or maybe even quarter over to quarter growth in consumables in Q1. My question is, what, in terms of same-store sales growth your guidance assumes. I guess mostly with respect to consumables, I mean, are you expecting to see sort of year-over-year growth kind of starting sometime midpoint in the year? I guess, if you could just sort of flesh out what your guidance implies from a same-store sales perspective, and then I guess maybe any color between durables and consumables within that would be great. Thanks.

Darren Lampert: To start with, Eric, we don’t break down the future of both consumables and non-consumables. Consumable is our everyday business. That’s what we guide to. We also do guide to some non-consumable build-out projects, which we saw a very little of in 2022. So, when you look at guidance right now for 2023, it embeds three different divisions of GrowGen. We do believe we will see growth in our online division this year versus last year. We also do believe you’ll see growth in our commercial division year-over-year. And we do believe you’ll see growth in our underlying stores starting in the second quarter of this year. We’re still going against some decent comps out of January out of the first part of last year, which really slows down going into the second quarter of 2022. So, we do believe you’ll see a steady rise in decreasing same store sales. And we still do hope that you will see a positive same store sales number from GrowGen going into the latter part of this year. But at this point it’s just too early to forecast that. And if you look at our forecast for 2023, we’re forecasting increased sales going into the second and third quarter coming off guidance, which you’re seeing at that $55 million to $57 million mark in the first quarter. So, you will see continued increases, both on an EBITDA basis and also on a sales basis going into the second and third quarters.

Eric Des Lauriers: That actually segues nicely into my second question here. So, obviously, you guys have talked about guidance, kind of assuming a quarter-over-quarter increase in revenues and EBITDA. I’m wondering if that does extend from sort of Q3 into Q4, sort of -- in other words, if you’re not expecting to see the sort of normal Q4 seasonality that you have in the past. And if not, because you just kind of expand on perhaps why you don’t -- why you do not expect to see that seasonality this year? And then, I guess just kind of a final one, does your guidance assume any contribution from this M&A that you’ve said is potentially likely in this year?

Darren Lampert: Yes, Eric. Right now, none of our guidance -- I mean, our guidance does include M&A we’re doing this year. We also will have some -- we’ll have a few store closures this year. So basically, we look at that as kind of zero out sum. If we do any material acquisitions where -- which we are not expecting right now, that is not filtered into guidance. When it comes to the fourth quarter of this year, it’s just too early to really forecast on that. But the one thing we feel comfortable with that our fourth quarter same source sales and sales number will be higher than what you’re seeing in the fourth quarter of 2022. We are again -- right now a little hard to see if we’ll see -- will see quarter-over-quarter growth in the fourth quarter versus the second and the third.

Operator: Your next question comes from the line of Aaron Grey from Alliance Global Partners.

Aaron Grey: So, first one for me, I just want to dive a little bit deeper into California. Thanks for some of the remarks that you’ve had, Darren. So, we’ve seen a number of active cultivators kind of come down meaningfully as they opted not to renew over the past six months or so, down about 1,200 about or so, just wanted to ask if you had any insight in terms of the outlook on that. It looks like there are a lot more renewals coming up in the next six months. So, you talked about some stabilization of pricing in the state. Do you think there could still be some more trimming of the number of active cultivation licenses? Do you think that has stabilized as people are seeing some more stabilization within the pricing? Thank you.

Darren Lampert: Again, it’s a very difficult question, Aaron. I think a lot of it has to do with financing, and really the state of some of the balance sheets of some of these California growers. I think, we all know that California is the epicenter of cannabis and always will be. And I think, it’s that delicate balance between the legal and illegal markets that you’re seeing right now. But with companies taking a very hard look at their operations right now, their balance sheets and their income statements, some of the larger companies that aren’t making money in California have made that decision right now that they’d rather look a couple years down the road opposed to just standing right now, just difficult margins and a difficult sales environment in California. We are seeing some of our California stores outperforming right now. Our downtown LA store has been growing. Our Santa Rosa store right now is starting to grow again also. We have seen -- when you look at California, much more trouble in the outdoor markets in California. So something that we’re keeping a very close eye on going into the spring this year, and we’ll make some decisions after we see some of our stores that are very, very second and third quarter oriented.

Aaron Grey: And then second question for me is just on private label, in case I missed it. Could you give me target you might have for this year in terms of private label and then how that might impact you guys reaching the higher, low end of the mid- to high-20s gross margin guidance?

Darren Lampert: As we said earlier, our private label penetration in our stores online was up from 6% to 12% of sales this year. And we believe that will continue into 2023. One of the interesting parts, we launched Drip Hydro in the summer of 2022, so you’ll have a full year of growth on Drip Hydro, which is, we believe one of the fastest growing, if not the fastest growing nutrient line in the country right now. So, we have extremely high hopes for that. We are also doing line extensions on Drip and Power Si. So, you’ll see some new products coming out of these brands that we’re very excited about. And the same thing with Char Coir. The biggest issue we had with Char Coir, a couple of years ago was really pricing coming in from indie on freight and we’re seeing freight pricing come down probably 70% in the last year. So, Char Coir, which we believe is the premium brand in the market right now on the coco side, is becoming much more competitive on pricing. And we’re starting to see a tremendous ramp in our Char Coir brand right now. And we are coming out with new products continually right now. And we just brought in extremely talented individual on the R&D side and that’s going to help our private label penetration in ‘23 in the future. So, again, we do expect a nice bump, the number we’re not sure right now, but we will keep you posted on a quarter-over-quarter basis.

Operator: Your next question comes from the line of Scott Fortune from ROTH MKM.

Scott Fortune: I appreciate all the color on the pricing kind of overall for the industry, but can you focus a little bit more on your ability to continue whether it’s the being the price leader in your markets or continuing to -- kind of give us a little color on the pricing of the input cost that’s going on. And then what’s the kind of competitive landscape now? I’m sure there’s a lot of pressure from the competitors on your side and potential pricing pressure there, just kind of -- for the pricing within your own stores and that ability right now.

Darren Lampert: I think, Scott, what you’re seeing is similar to the -- our underlying business, which is the cannabis space. There was an abundance of oversupply on the product side, and with this tremendous slowdown in our industry, and when you look at GrowGeneration, our same-store sales were down 51% last year. And I think it was quite a feat when our same-store sales was down 51% and you cut inventory $28 million. So, we did a tremendous job moving through inventory SKU rationalization, and I think you’re seeing that around the country right now. But on the other side, we’re seeing many store closures out there as you’re seeing on the cannabis side of it. So, when industries usually hit bottom, you see consolidation, and we’re starting to see that right now. And again, pricing, pricing at GrowGen has been pretty normalized this year. If you were to take out the tremendous amount of discounting we did on skew rationalization, and certain skews that we needed to bring down, and it was really on the non-consumable side of it that GrowGen along with many companies brought levels up when shipping was so difficult coming out to China back during COVID, and many products came in three to six months later and kind of came in at that downturn of the market. I think you heard similar comments from Bill Toler over at Hydrofarm the other day, and I think you also heard it from Hawthorne. So, as we all work through inventory, we believe pricing will normalize. But when you look at GrowGen, our private label products and some of our higher margin products have been doing a tremendous job really masking the tremendous aggregation and margins that you’re seeing on our sale products to bring inventory down the way we did.

Scott Fortune: I appreciate that. And then, Darren, you’ve been through a few cycles here and we understand the CapEx equipment side, right? That’s been obviously down, very limited capital or production capacity being added here. But outside of new states, obviously that -- will continue, but help us understand, at some point there’s going to be a refresh cycle, right, for a lot of spin that’s going on, a lot of the operators are looking to become more efficient operating on their production side of things. But how do you look at kind of the CapEx spin, and then what happens with -- is there an aftermarket for a lot of these equipment’s like lights and such that you guys can see some growth from? Just kind of step us through that -- the refresh cycle probably not factoring much in there, but the potential there.

Darren Lampert: We believe you will see a refresh cycle coming up, maybe not this year but maybe the following year. I mean, you still are seeing facilities that are using double-ended bulbs and fixtures opposed to LEDs. And again, it’s all a matter of capital, Scott. Wall Street has shut down. Wall Street has shut down the cannabis space, and I do believe you will see a resurgence. You’re starting to even see right now, certain comments that they may be opening up the Toronto Exchange up in Canada to get some more liquidity and capital into these companies. So, there’s a lot of ifs. The one thing that we do know when we look into our 2022 sales, the biggest degradation in sales that we saw was on the capital equipment side. And we’ve been pretty vocal about that. We feel tremendously comfortable with the other side of our business. And that’s the higher margin side of the business. So, where we stand right now with our private label products coming out and with Drip Hydro Char Coir and some of the other brands that we’re launching into the markets, we believe that our margin profile would be very advantageous going forward into the future. And we have stayed away from selling used equipment from GrowGen. We’ve stayed away from the junkyard, and it’s just not in our business model right now. It’s much more on the lower cost illegal side of it. We’re not seeing it going into these legal growers. So it’s something that -- it’s a wonderful, like anything else, marketplace, but it’s not something that we’re going to get involved with right now.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.