GrowGeneration Corp. Q3 FY2025 earnings call

• Third quarter marked an inflection point with net sales of $47.3 million, up 15.4% sequentially, expanded gross margins to 27.2% and returned to positive adjusted EBITDA of $1.3 million.
• Successful execution of restructuring plan, lowering operating expenses, improving gross margins and shifting revenue mix towards higher-margin proprietary brands. Proprietary brands grew to 31.6% of cultivation and gardening revenue from 23.8% a year ago, with leading brands like Char Coir and Drip Hydro showing strong growth.
• Reduced store operating expenses by 27.8% and total operating expenses by 31.5% year-over-year. Closed 5 stores and expect additional closures in fourth quarter to focus on higher volume, higher-margin markets.
• Completed over $7 million in cultivation infrastructure projects. MMI Storage Solutions segment delivered second consecutive quarter of sequential growth with $8.9 million in revenue.
• Broadening reach beyond cannabis into larger specialty agriculture and controlled environmental markets, including selling brand into independent garden center channel, relaunching website, and distribution partnership with Arett Sales. Entered home gardening market via acquisition of Viagrow. B2B Pro portal adoption by commercial and wholesale customers increasing.
• Further international expansion by entering new high-growth cultivation markets with distribution partnerships, like agreement with V1 Solutions and launch in Costa Rica.

Cultivation and Gardening segment had net sales of $38.4 million for the quarter, down from $41.4 million in the third quarter of 2024. Proprietary brands grew to 31.6% of cultivation and gardening revenue compared to 23.8% a year ago. Storage Solutions segment had net sales of $8.9 million, up from $8.6 million in the third quarter of 2024. Gross profit increased to $12.9 million, up approximately $2 million from $10.8 million in the prior year period. Gross margin expanded to 27.2% compared to 21.6% in the third quarter of 2024.

• Expect fourth quarter revenue of approximately $40 million.
• Anticipate positive revenue growth and positive adjusted EBITDA in 2026.
• Focus on driving proprietary brand mix towards 40% of cultivation and gardening sales, scaling B2B portal automation and reoccurring commercial orders, expanding revenue across independent garden centers, greenhouse agriculture, specialty crops and cannabis, and continuing cultivation infrastructure projects.

• Forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially.
• Impact of tariffs, approximately 1% of sales affected by tariffs.
• Durable sales leading to slight margin decline in fourth quarter as pipeline of CapEx or durable sales expands.
• Risk associated with end of year inventory accounts execution in December, although sufficient reserves are in place.

Q: Just as we think about the mix of sales going forward, expecting proprietary brands 40% for next year. How do you think about the mix of sales for cannabis today versus where it might be 12 to 18 months from now?

A: Darren Lampert says that 40% expected for next year, probably around 35% minimum will be into the cannabis space.

Q: Just how best to think about the puts and takes specifically for the gross margin? Any color specifically on the gross margin, how we should think about that over the next upcoming quarters?

A: Greg Sanders says there's impact from tariffs, around 1% of sales. Durable sales ran from $7 million in second quarter to $13 million in third quarter, pipeline of CapEx/durable sales expanding into fourth and first quarter of next year. Expect compression in fourth quarter relative to durable activity. MMI will go from close to $9 million down to $6 million, less contribution on margin side from them. Also, end of year inventory accounts executed in December with some risk but sufficient reserves.