GRWG: GrowGeneration Reports 3Q Results; Sales +109%
By Steven Ralston,
CFA
OTC:GRWG
READ THE FULL GRWG RESEARCH
REPORT
EXECUTIVE SUMMARY OF RECENT EVENTS
In the third quarter of 2018, sales increased 109%
to approximately $8.41 million versus $4.03 million during the
comparable quarter in 2017. Working capital has
improved 315% to $23,139,534 due to a $10
million private placement of common stock in May, an $8.9 million
convertible debt offering in January and $2.5 million from the
exercise of warrants and options. As a result, shares outstanding
have increased 62.9% to 27,437,113 shares since year-end
2017.
As part of its e-commerce strategy, management is
pursuing the development of e-commerce platforms. In September
2018, the company acquired and now operates
HeavyGardens.com, an online storefront for
cultivators. The acquisition added an operational e-commerce sales
channel to GrowGeneration’s (GRWG) brick
& mortar store chain. Eventually, the company’s 10,000+
cultivation products will become available to growers in every
state via the HeavyGardens website. Management plans to extend the
reach of HeavyGardens to Canada and Mexico in the near future. The
e-commerce site generated sales of $124,794 during the third
quarter. Management projects that HeavyGardens will generate
revenues of over $5.0 million during 2019.
On October 16, 2018, GrowGeneration announced the planned formation
of GrowGeneration Canada in order to service the
Canadian cannabis cultivator. Management plans to acquire
profitable hydroponic retail, wholesale and grow supply businesses
in the provinces of Ontario and British Columbia, which will be
financed by accessing the Canadian public markets.
The company’s second retail store/warehouse operation
location in Oklahoma is scheduled to open on January 14,
2019. Complementing the Oklahoma City location, the 10,000
square-foot facility will be located in Tulsa. The Boulder Colorado
store was closed on September 30, 2018 with commercial customers
now being served by the Denver store. Therefore, the company’s
store count will temporarily decline to 18 until the new Tulsa
Oklahoma store opens in January.
Our earnings model indicates that the company should turn
EBITDA positive in the upcoming quarter.
Over the last two months, the cannabis stocks have endured
a significant decline with cannabis-related companies
correcting an average of 19% and speculative cannabis companies
dropping 53%.
RECENT NEWS
3Q Financial Results
In the third quarter of 2018, sales increased 109%
to approximately $8.41 million versus $4.03 million during the
comparable quarter in 2017.
View Exhibit
I
The increase was primarily due to eight new stores openings, which
more than offset the less than 1% declines in sales in Colorado and
Nevada and the effect of store consolidations. The acquisition in
Rhode Island added $1.1 in sales. Revenues from the
California market increased 319% (or $2.6 million) to $3.4
million, primarily due to the addition of three new acquired
stores, which more than offset the $81,000 decline in sales from
the fires near the Santa Rosa store.
Operating expenses rose 73.6% with the main contributors being a
76.7% increase (or $614,289) in store operation expenses and a
71.2% increase (or $191,713) in salaries and related
expenses.
The company’s net loss contracted to $784,573 (-$0.03 per diluted
share) from $460,877 (-$0.03 per diluted share) in the comparable
quarter in 2017.
Since the year-end 2017, shares outstanding have increased 62.9% to
27,437,113 shares. Working capital has improved 315% to $
23,139,534 due to the private placements completed in January and
May.
Canadian Initiative
In October 2018, Canada became the largest country in the world to
legalize cannabis. With burgeoning growth of licensed producers,
along with provisions for micro-cultivation licenses and
home-growers, Canadian cannabis consumption is expected to grow by
35%. A Deloitte survey estimates that the total Canadian cannabis
market (medical, illegal, and legal recreational) could generate
between $1.34 billion and $7.17 billion in sales in 2019.
On October 16, 2018, GrowGeneration announced the planned formation
of GrowGeneration Canada in order to service the
Canadian cannabis cultivator through a portfolio of one-stop, grow
supply retail stores, together with supporting wholesale equipment
operations and grow supply companies. Initially, management is
seeking to acquire profitable hydroponic retail, wholesale and grow
supply businesses in the provinces of Ontario and British Columbia.
With the acquisitions estimated to cost at least $20 million, the
company plans to finance GrowGeneration Canada separately from US
operations by accessing the Canadian public markets.
View Exhibit
II
To Open 2nd Location in Oklahoma
On November 29, 2018, GrowGeneration announced the signing of a
lease to open its second retail store/warehouse operation location
in Oklahoma. The 10,000 square-foot facility is located in Tulsa
and is scheduled to open for business on January 14, 2019.
Acquisition on Online Platform
(HeavyGardens.com)
On September 17, 2018, GrowGeneration announced the acquisition of
HeavyGardens.com, an online seller of hydroponic,
specialty and organic gardening supplies. The acquisition adds an
e-commerce sales channel to GrowGeneration’s brick & mortar
retail chain. Launched in July 2017, this online platform will
ultimately expand access to the company’s 10,000+ cultivation
products to every state. Also, management plans to extend the reach
of HeavyGardens to Canada and Mexico in the near future. Management
projects that HeavyGardens will generate revenues of over $5.0
million during fiscal 2019.
VividGro Designates GrowGeneration as First Preferred
Vendor for GroBar X Lighting Solutions
On November 13, 2018, VividGro announced that GrowGeneration has
been designated as its first preferred vendor for the GroBar-X
series of lighting solutions. In addition to carrying GroBar X
GrowGeneration will carry not only GroBar X, but also VividGro’s
FlowerMax, GrowMax and VegMax fixtures.
View Exhibit
III
COMPANY OVERVIEW
GrowGeneration owns and operates specialty retail
hydroponic and organic gardening stores that target the rapidly
expanding licensed cannabis cultivators in key markets
throughout the United States, specifically where the use of medical
and/or recreational marijuana has been recently legalized. Also,
management is expanding the company’s model into Canada where
recreational cannabis was legalized in June 2018.The company’s
stores cater to the full spectrum of growers from small home-grower
operations to large-scale commercial farms, both indoor and
outdoor. Starting in 2014, the company has opened and acquired
numerous stores, strategically upgrading initial sites to improved
locations with higher visibility, stronger customer bases,
increased square-footage and higher volume potential. Currently,
the company is operating 18 stores: five in
Colorado, six in California, three in Michigan one in Nevada, one
in Washington State, one in Rhode Island and one in Oklahoma. Sales
growth is expected to be driven by increasing the number of company
retail stores, organic growth at existing stores and online
initiatives with HeavyGardens.com and amazon.com. In addition, the
company has formed a subsidiary, GrowGeneration Hemp Corp, to help
further develop the domestic hemp farm industry and further advance
GrowGeneration’s penetration in serving this growing market.
View Exhibit
IV
Management’s goal is to become a national
provider of equipment and supplies for growing cannabis,
along with organic fruits, vegetables, herbs, greens and other
plants. Over the last four years, the company opened or acquired
many locations such that it currently owns and operates 18 retail
stores, which have been right-sized and positioned in optimal
localities. The company continues to expand targeting
states where legislation is creating huge demand for cannabis
cultivation. The sales staff is knowledgeable providing
advice and solutions to customers. Another customer inducement is
the breadth of inventory, which allows for a one-stop shopping
experience. Management’s other initiatives include
developing e-commerce platforms (currently the
company’s website, HeavyGardens.com and amazon), the establishment
of a national sales team and providing high-margin house brand
products. Ultimately, the company’s size should provide economies
of scale, particularly volume discounts from manufacturers and
distributors.
Indicated Target
Based on comparative analysis that utilizes the valuation metric of
Price/Sales, an industry mid-second quartile P/S multiple (on TTM
sales through the third quarter of 2018) indicates a share price
target of $4.85.
SUBSCRIBE TO ZACKS SMALL CAP
RESEARCH to receive our articles and reports emailed
directly to you each morning. Please visit our website for additional information on Zacks
SCR.
DISCLOSURE: Zacks SCR has received compensation from the
issuer directly or from an investor relations consulting firm,
engaged by the issuer, for providing research coverage for a period
of no less than one year. Research articles, as seen here, are part
of the service Zacks provides and Zacks receives quarterly payments
totaling a maximum fee of $30,000 annually for these services. Full
Disclaimer HERE.
