- While the Majority of Pot Stocks Continue to Post Huge Losses, Top Ancillary Firm GrowGeneration Has Quietly Built One of the Cannabis Industry’s Few Profitable Companies
- 2019 Was a Monumental Year for GrowGen and Was Highlighted by the Company’s Uplisting to the NASDAQ
Most companies catering to the legal cannabis market are operating heavily in the red. Extensive government regulations in the U.S. are preventing the industry from flourishing as it should. The patchwork, state by state nature of cannabis legalization, is forcing companies to build fully independent entities in each state they wish to operate in.
The high costs to acquire licenses and establish growing/processing operations in a new state are weighing these companies down. Factor in the sky-high taxes most states place on cannabis and its little wonder why it’s so challenging to run a profitable cannabis company. However, there are certain cannabis companies that have been able to avoid these regulatory pitfalls.
Companies that do not touch the cannabis plant directly, commonly referred to as ancillary players, are free of virtually all of the oppressive regulations hurting the marijuana sector’s growers and retailers. One such company is GrowGeneration (NASDAQ: GRWG), a leading ancillary retailer of cannabis grow lights, hydroponics equipment and processing supplies.
These types of stores have been around for a while, but for the most part, they’re independent, “mom and pop” operations. GrowGeneration started out as a single store and grew from there, gradually buying out its regional competitors along the way. Now, with 27 stores across ten states, GrowGen is the largest retailer of its kind in the United States. The company also operates an online retail platform called Growgen.Pro.
In addition to serving the amateur home grower, GrowGeneration also has a commercial division, which caters to large, professional growers, including several publicly traded companies. Previously disclosed clients include, Curaleaf (CSE: CURA) (OTCQX: CURLF), Green Thumb Industries (CSE: GTII) (OTCQX: GTBIF) (FRA: R9U2), Cresco Labs (CSE: CL) (OTCQX: CRLBF) (FRA: 6CQ), Acreage Holdings (CSE: ACRG.U) (OTCQX: ACRGF) (FSE: 0VZ) and iAnthus (CSE: IAN) (OTCQX: ITHUF) (FRA: 2IA).
This past year proved to be the best year yet for GrowGeneration. In addition to adding ten stores to their portfolio during the year, 2019 was the first full year GrowGen had its website up and running, serving customers in all 50 states. 2019 also saw GrowGen roll out its enterprise resource planning (ERP) tool company-wide. The ERP brings a host of corporate functions into a centralized and streamlined platform. The ERP was one of GrowGen management’s primary goals for 2019, and its successful rollout had a very positive effect on the company’s financial results.
Key 2019 Earnings Highlights:
- Revenue soared 176% from $29 million in 2018 to $79.73 million in 2019.
- Gross margin improved from 22% in 2018 to 28% in 2019.
- Operating margin rose from -15% in 2018 to 3% in 2019.
- Net income increased from a $5 million loss in 2018 to a $1.8 million profit in 2019.
On March 30th, GrowGeneration participated in a conference call with analysts to discuss the company’s 2019 financial results. Below are some of the most important comments from GrowGen’s earnings call:
“Our same-store sales were up 62% in Q4 2019 versus Q4 2018. For the full year, same-store sales were up 36% versus for full year 2018.”
“To highlight our market by market growth, Colorado was up 132% year-over-year at $15.4 million. California was up 161% at $15.6 million. Michigan was up 200% at $9.3 million. Oklahoma was up 2,400% at $11.8 million. Our commercial sales finished its first full year at $17 million. And our e-commerce sales finished the year at $4.8 million.”
“The Company completed the rollout of its new ERP platform in 2019, and it is now fully deployed, providing business intelligence to lower costs, improve departmental productivity, integrate our online and store sales and supply channels, providing real-time forecasting and reporting tools.”
“Our online business, GrowGen.Pro is projected to exceed $10 million in revenue in 2020… Our commercial division is projected to do $30 million in annual sales for 2020.”
“Revenue guidance for 2020 is $130 million to $135 million, adjusted EBITDA guidance for 2020 is $11.5 million to $13.5 million, revenue guidance for Q1 2020 is $31.5 million to $32.5 million.”
Read or Listen to the Full GrowGeneration 2019 Fiscal Year-End Earnings Call Transcript Here.
The Future Looks Bright For GrowGen
GrowGeneration began 2020 firing on all cylinders: newly acquired stores are performing better than management’s expectations, cost-saving initiatives are improving margins and, perhaps most importantly, the company is still expanding rapidly. GrowGen management set a goal to enter six new states (MO, IL, FL, AZ, NJ, PA) in 2020.
GrowGen scratched Florida off that list when the company acquired Healthy Harvest, an 11,000 sq. ft. retail store serving the greater Miami area. Management believes this store will bring in over $12 million in revenues each year and give the company the ability to sell its goods to Puerto Rico and the rest of the Caribbean islands.
Most recently, GrowGeneration announced the opening of the largest hydroponic store in the United States. The 40,000 sq. ft. facility is the company’s 2nd location in Tulsa, Oklahoma. Oklahoma might be the least regulated cannabis market in the country, so the industry is exploding in the state. GrowGen will look to capitalize on this boom by using its facility as a retail store, a distribution hub and a space to demonstrate products and concepts, such as vertical farming. The company is referring to the facility as a “Super Garden Center” and intends to build more of them across the U.S.
Coupled with its impressive revenue growth, the fact that GrowGeneration is now generating net income puts the company in the upper echelon of the cannabis industry. GrowGen is executing and even exceeding most of its goals for expansion and profitability. As the U.S. continues to legalize cannabis in more states, GrowGeneration will have the opportunity to enter new markets.
Expect management to continue executing on cost-saving measures and raising net income as a result. With FY19 net income of $1.8 million and a market cap hovering around $125 million, GrowGeneration has a price-to-earnings (P/E) ratio of 69. For a company that is growing as fast as GRWG, and with margins steadily improving, a P/E of 69 seems like a bargain, especially given the unprofitability of the rest of the cannabis industry.
Learn more about GrowGeneration: Website | IR Website | Investor Deck | GRWG Chart
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Disclosure: The Cannabis Investor does not hold a position in any of the stocks mentioned in this article. The author of this article does hold a position in GRWG.
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