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GrowGeneration Revenue Up 300%. Time to buy?

By May 13, 2019 No Comments

gglogo_withtag-coloredDenver-based, GrowGeneration Corp. (OTCQX: GRWG), one of the larger chains of specialty hydroponic and organic garden centers—currently with 21 locations out of roughly 1,000 hydroponic stores in the U.S—yesterday reported results for Q1 2019 ended March 31. The company showed improved results in all financial areas, including a small, positive net income. They also gave revenue guidance for 2019 of $60-65 million.

GrowGen sells thousands of products, many targeted to cannabis growers, including organic nutrients and soils, advanced lighting technology and state of the art hydroponic equipment to be used indoors and outdoors by commercial and home growers.

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The stock rose 19% on the news—because, lo and behold, it is a reasonably priced “cannabis-related” stock. These are not common. The price investors are currently paying for each dollar of revenue (its Price to Sales ratio) is only 3, a normal rate for many industries but a low ratio for the inflated cannabis industry.

This is probably largely due to the fact that GrowGen is not as directly in the cannabis business as many other firms, only tangentially through its sales of hydroponic gear that appeals to cannabis growers.

Its reasonable P/S ratio suggests investors are pricing this company for its current revenue (probably including its 2019 revenue projection of $65 million), not for large future revenue increases beyond that, like they are doing for many cannabis companies on the wholesale side.

This is good for investors, as it makes a buying decision easier, though it does not by itself indicate a time to buy. If you think GrowGen can generate strong future revenue increases above $65 million—and turn them into steady and stable future income—then the stock is a good value today. But if you think, as investors may at the moment, that the company could have trouble turning future revenue growth into a steady and stable future income, then don’t be lured in.

We are optimistic, because the company is on a good growth trajectory, and the overall market is growing. But potential investors should watch for indications that the company’s hydroponic gear market is growing, and that it can turn revenue into greater profits in coming quarters.

GrowGen’s Q1 financial highlights include:

  • revenue of $13.1 million, up 300% over Q1 2018 revenue of $4.4 million.
  • adjusted EBITDA of $615,509 up from $(367,000) in Q1 2018.
  • net income of $229,000 compared to a net loss of $(953,430) for Q1 2018.
  • same store sales up 42% compared to Q1 2018.
  • gross profit margin of 28% compared to 27% for Q1 2018.
  • store operating costs of 15% of revenue, down from 20.4% in Q1 2018.
  • corporate overhead at 10.5% of revenue, down from 21.8% of revenue in Q1 2018.
  • $6.6 million in cash and equivalents as of March 31, 2019.

The increase in revenue was mainly driven by adding 14 new stores and a new e-commerce site in 2018, the combination of which added $9.9 million in revenue in Q1 2019. More recently in 2019, GrowGen bought stores in Denver, Palm Springs CA and Reno NV, and opened stores in Tulsa OK and Brewer ME.

Its Q1 revenue of $13 million, when annualized, suggests an annual revenue pace of $13 x 4, or $52 million. So, their guidance of $60-65mil suggests they will add about $10 million above their current pace from new sources in the coming quarters of 2019.

Average store operating costs decreased by adding new, larger, higher volume stores with a lower percentage of operating costs to revenues. Gross margin was 28%, not as good as it is in the wholesale cannabis side of the business.

Darren Lampert, Co-founder and CEO said, “The (new stores) are all performing better than expected. We have a strong pipeline of new acquisition targets set to close in Q2. The company continues the process of up-listing to a larger exchange. We are increasing our guidance for 2019 revenue to $60M-65M and adjusted EBITDA to $.14-$.18 per share for 2019.”

GrowGen continues to focus on eight markets and the new e-commerce site. They believe growth opportunities exist in each market, and quoted estimates of market growth reaching $23 billion in a few years. They will continue to pursue new store acquisitions, products and online sales.

Sales broke down as follows:

  • Colorado $3.3 mil from five stores = $660k per store
  • California $3.2 mil from six stores = $533k per store
  • Oklahoma $1.5 mil from two stores = $775k per store
  • Michigan $1.5 mil from three stores = $500k per store
  • Rhode Island $1.5 mil from one store = $1.5 mil per store
  • Nevada $867k from two stores = $434k per store
  • E-commerce $681k
  • Washington $327k from one store = $327 per store
  • Maine $54k from one store = $54k per store

GrowGen’s goal is to own and operate branded stores in all major legalized cannabis states in the U.S. and Canada. They believe their cash and equivalents are sufficient to fund operations for the next 12 months.

Source GrowGen press release

 

 

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