GrowGeneration Corp. Q1 FY2026 earnings call

• Strategic Priorities

  • Grow and expand the commercial B2B GrowGen Pro platform, building deeper relationships with multi-state operators, greenhouse growers, and other commercial cultivation customers across North America
  • Increase penetration of higher-margin, recurring consumable proprietary brands (including Char-Corp and Drip Hydro) across existing and new adjacent channels
  • Continue improving operating efficiency and profitability through structural cost reduction initiatives implemented over the past several years
  • Maintain a disciplined approach to capital allocation supported by a strong, debt-free balance sheet

• Operational Updates

  • This marks the second consecutive quarter of year-over-year total revenue growth, despite a reduced store footprint (19 locations as of Q1 2026, down from 65 previously and 31 in Q1 2025)
  • Legacy retail locations are being repositioned as commercial sales and service centers to better support larger commercial accounts
  • Proprietary brands developed for professional cultivators are being expanded into broader horticulture and consumer markets, including distribution through online big box retail and the company's direct-to-consumer platform The Harvest Company
  • The company is expanding commercial presence in Canada and advancing new international distribution partnerships, leveraging existing supply chain infrastructure to avoid added organizational complexity
  • A new $10 million share repurchase program was authorized by the board of directors during the quarter, to be executed opportunistically
  • The U.S. rescheduling of state-licensed medical cannabis to Schedule 3 provides immediate 280E tax relief for qualifying operators, which is expected to strengthen customer balance sheets and increase demand for the company's cultivation products

• Financial Performance Highlights

  • Total Q1 2026 net sales were $38.4 million, up 7.5% year-over-year from $35.7 million
  • Gross profit was $9.7 million, flat year-over-year; total gross margin was 25.4%, down from 27.2% in Q1 2025 due to temporary short-term pressures
  • Total operating expenses decreased 23.4% year-over-year to $15 million, driven by cost reduction initiatives
  • GAAP net loss improved to $4.9 million ($0.08 per share) from a $9.4 million loss ($0.16 per share) in Q1 2025
  • Non-GAAP adjusted EBITDA loss was $1.6 million, a $2.4 million year-over-year improvement
  • Ended the quarter with $41.1 million in cash, cash equivalents, and marketable securities, with no outstanding debt

1. Cultivation and gardening segment: Q1 2026 net sales were $31.9 million, compared to $30.9 million in Q1 2025. Proprietary brand sales accounted for 37% of this segment's revenue, up from 32% year-over-year. Gross profit for the segment declined year-over-year due to inventory charges from four store closures and a higher mix of lower-margin durable products; excluding these one-time impacts, margins were consistent with the prior year.
2. Storage solution segment: Q1 2026 net sales were $6.5 million, up from $4.8 million in Q1 2025, representing a 35.5% year-over-year revenue increase. Gross profit for the segment increased 42.7% year-over-year, with gross margin improving 200 basis points to 39.6%. This segment contributed 16.9% of total company net sales in Q1 2026.

• Full year 2026 guidance is reaffirmed: management maintains the prior forecast of total net revenue in the range of $162 million to $168 million, and approximately break-even adjusted EBITDA for the full year
• The target for proprietary brand penetration of cultivation and gardening revenue remains approximately 40% by the end of 2026, and management expects to reach this target before the fourth quarter
• Second quarter 2026 guidance calls for net revenue in the range of $42 million to $44 million, with a return to positive adjusted EBITDA
• Gross margins are expected to return to the 27% to 29% range for the remainder of 2026, after temporary Q1 2026 pressures from store closures and inventory liquidation

• Temporary gross margin pressures in Q1 2026 came from multiple sources, including inventory liquidation and disposal charges from store closures, a higher mix of lower-margin durable products, and 50% tariff impacts on certain imported products that affected results
• Forward-looking results are subject to inherent uncertainties, including the ongoing regulatory process for cannabis rescheduling and recreational cannabis scheduling changes scheduled for June, which could impact customer demand and industry dynamics
• Timing and potential amounts of tariff refunds from the federal government are uncertain, with no guarantee that claims will be approved or materialize in the near term
• Actual results may differ materially from management's forward-looking guidance due to a variety of risks, including changes in industry supply-demand balance, cannabis pricing, and customer capital investment activity

Q: What near and long-term impacts will the 280E tax relief from cannabis rescheduling have on Grow Generation's durable goods business, given many customers have delayed infrastructure upgrades due to cash flow constraints?

A: Rescheduling is a meaningful long-term tailwind that strengthens customer balance sheets, increasing their capacity to invest in facility infrastructure. The company's bidding pipeline for lighting, dehumidification, and other cultivation infrastructure is now the strongest it has been since 2021, and management expects growing durable goods demand throughout 2026, as many facilities are in need of refurbishment after delayed upgrades. Increased durable adoption is also expected to drive follow-on demand for recurring consumable proprietary products.

Q: How should gross margin evolve sequentially through the rest of 2026 after the lower-than-expected Q1 reading, to reach full year targets?

A: Q1 2026 gross margin was 1.5 percentage points lower than expected due to temporary impacts from four store closures and liquidation of obsolete non-proprietary inventory. Very few additional store closures are planned for the remainder of 2026, so this one-time impact will not repeat. Tariff pressures from Q1 are also expected to dissipate in Q2, and gross margin is expected to return to the 27% to 29% range for the rest of the year as faster-growing proprietary brands (which carry higher margins) continue to increase mix share.

Q: The current acceleration in facility build-out activity is the strongest since 2021. Is this driven primarily by rescheduling, or are there other contributing factors?

A: The increase in activity is driven by a combination of factors. Many customers delayed facility refurbishment for over a year while managing tight balance sheets, so pent-up demand is accumulating. Rescheduling is returning $1 billion to $2 billion of capital to industry balance sheets, which is enabling planned upgrades to more efficient cultivation equipment. Improving industry supply-demand balance and potential export opportunities that would reduce domestic supply are also stabilizing pricing, improving customer willingness to invest. Grow Generation's strong balance sheet also allows it to offer customer financing to support upgrades, further driving demand.

Q: How much Q1 2026 gross margin impact came from closed location inventory liquidation, and how much more inventory will need to be worked through in Q2?

A: The total gross margin impact from four Q1 store closures was approximately 1.5 percentage points, including discarded inventory, discounted liquidation sales, and incremental freight for moving inventory. Far fewer store closures are planned for the remaining three quarters of 2026 than occurred in Q1, so this level of impact is not expected to repeat. The company already has sufficient inventory reserves in place for remaining planned activity, so no material additional margin pressure is expected from this line item for the rest of the year.