GrowGeneration Corp (GRWG) is the largest retail chain of hydroponic gardening products in North America with 62 locations and a leading distributor for commercial customers. Without beating around the bush, the target market here is cannabis cultivation with the company benefiting from the wave of regulation and legalization for marijuana. On this point, all of GrowGeneration products are legal and simply serve as the necessary supplies like nutrients, lighting, and environmental controls for both small and large-scale producers. While growth has been strong over the last several years, the stock has been extremely volatile with a sense that valuation reached extreme levels at the highs in 2021. That said, we like GRWG following the selloff considering the company remains an industry leader with overall solid fundamentals supporting a positive long-term outlook.
GRWG Financials Recap
The reality is that the company has a major business that is on track to reach over $420 million in revenue for 2021 and profitability. The company last reported its Q3 results back in November with GAAP EPS of $0.07 on $116 million in sales, which climbed 111% year over year. Within the Q3 results, the company has seen e-commerce sales accelerate while an increasing mix of private label brands.
Even as the gross margin climbed to a record 29.4%, up from 26.5% in the period last year, the market has been focusing on the softer same-store sales which only grew 16% in Q3 compared to an average near 60% over the past two years. The understanding is that the underlying momentum has moderated this year particularly considering strong comps in 2020 which was defined by the early stages of the pandemic where the company benefited from the “stay-at-home” dynamic.
Sales have been supported by several acquisitions over the past several years as part of the company’s strategy to consolidate market share. The deals typically focus on smaller indoor/outdoor garden center stores chains that have a local or regional presence in key markets. In early January, the company announced its latest acquisition of “Mobile Media, Inc and MMI Agriculture“, a manufacturer of high-density mobile shelving and warehouse facility systems being used in vertical farming as a growth area of the industry. Management notes MMI generated approximately $14 million in revenue for 2021 and expects the deal to add new opportunities.
Finally, we note that GrowGeneration ended the quarter with $93 million in cash, cash equivalents, and short-term investments against effectively zero long-term financial debt. We view the balance sheet as a strong point in the company’s investment profile.
GRWG Management Guidance
The latest update from the company has been a revision lower to full-year 2021 guidance. The company now expects revenue between $420 million and $422 million compared to a prior mid-point target of $437.5 million. Still, the preliminary figures represent an increase of 118% over 2020. Similarly, the company also revised lower its adjusted EBITDA target to around $32.5 million compared to prior guidance closer to $42 million.
Here management explains a slowdown in the overall hydroponics market along with higher cost pressures related to macro-level inflationary trends as warranting an adjustment. While 2021 full-year same-store-sales growth of 24.4% over 2020 is positive, the trend is weaker for Q4 with a decline of 12.3% y/y. The company believes it will still be able to generate growth and higher adjusted EBITDA for 2022 with more details when it reports final Q4 numbers.
GRWG Stock Forecast
Shares of GRWG are down a massive 84% over the past year and 90% from its high of $67.75. This is a company that has been called the “Home Depot of weed” capturing momentum in late 2020 with several states moving forward with favorable regulation to open either recreational or medicinal markets out of that years’ November election. This is important because much of the cannabis industry was propelled by a wave of exuberant enthusiasm since the second half of 2020 which has since cooled off.
Part of the weakness in cannabis stocks overall can be traced to weaker than expected growth in 2021 along with no real progress towards the ultimate goal of full legalization at the Federal level. There is also data suggesting the U.S. and Canadian markets have been oversupplied with a glut of production. Nevertheless, even with the broader market volatility, shares of GRWG are still up compared to levels in 2020. Our take is that the company is going through growing pains while the momentum in the first half of 2021 likely set an unrealistic bar of expectations.
One of the challenges for the GrowGeneration is that beyond the “disposables” like nutrients, fertilizers, and specialty soils; higher-value equipment like lighting and benching products for hydroponic gardening is often a one-time purchase or capital investment by customers. In other words, a buyer may have made a large order with GrowGeneration last year to set up shop including all the necessary cultivation infrastructure, but now just needs to maintain the operation. The result is that the top-line momentum slows based on a changing organic sales mix even if the business is fine. There is also a thought that some of the demand was pulled forward back in 2020 during the early stages of the pandemic.
According to consensus estimates, the revenue forecast for 2021 is in line with management guidance at $423 million while the market is looking for EPS of $0.19 which, if confirmed, will represent an increase of 71% over the result in 2020. For the current 2022, the expectation is that while the company can still generate sale upside in 2022 to around 13%, EPS may have some downside amid higher costs and margins pressure. Looking ahead, the market sees growth re-accelerating in 2023 with revenues approaching $586 million, up 23% y/y while EPS jumps to $0.45 benefiting from scale and an expansion into new markets.
The silver lining here is that the selloff has helped to at least balance the valuation. The stock trading at a price to sales ratio of just 1x or even 0.9x on a forward basis looks attractive considering what remains a positive growth story. With the consensus EPS of $0.45 for 2023, shares of GRWG trading at a 1-year forward P/E of 15x is back to levels from 2020. We make the case that GRWG deserves a premium valuation given its industry position and solid fundamentals.
The upside here is that if the company can stabilize same-store sales trends, firming financials going forward can help recover some of the lost sentiment towards the stock into a new rally. The attraction of the retail business, including e-commerce, is some room to sort of manage margins by shifting pricing and promotions which can keep earnings elevated. We see value in the company’s brand and national footprint.
Is GRWG A Buy, Sell, Or Hold?
The cannabis sector and related names like GrowGeneration remain one of the more high-risk and speculative corners of the market. Recognizing the uncertainties and near-term weakness, we are taking a “glass is half full” type of approach. We rate GRWG as a buy with a price target of $9.00 representing 20x multiple on the current 2023 consensus EPS.
Our thinking here is that the share price weakness over the past year has likely already priced in much of the worst-case scenarios, opening the door for the company to outperform what are now low expectations. Longer-term, more markets opening up to cannabis including at-home cultivation would add to growth opportunities. Headlines of progress towards legislation to expand access can be positive for the stock.
Weaker than expected sales trends into the upcoming quarter or disappointing industry data suggesting a slowdown in cannabis market demand overall would force a reassessment of the long-term earnings outlook. Monitoring points include same-store sales trends, as well as the gross margin, which are key metrics to gauge operating and financial momentum.