3 Reasons to Consider GrowGeneration for a Mixed Profits Report
GrowGeneration (NASDAQ: GRWG) sent mixed signals to investors when it released its third quarter results on November 11. Although it exceeded revenue estimates, a shortfall and a downward outlook have left the company’s stock price stuck in a certain price range since.
Nonetheless, the nation’s largest specialist hydroponic and organic garden center supplier has built a reputation as a leading supplier to the rapidly growing cannabis industry. Even though the latest report brought some disappointments, this retail stock still has the potential to benefit from its cannabis association and generate additional growth for investors for three reasons.
1. There is potential for rapid expansion despite supply shortages
GrowGeneration supplies hobbyist and professional growers in the hydroponics industry. This target market suggests that the company has many similarities to that of Tractor supply (NASDAQ: TSCO), a retailer with nearly 2,000 stores in 49 states that supplies hobbyist and professional farmers. Like Tractor Supply, GrowGeneration locations are average 15,000 square foot stores.
This shows the potential of GrowGeneration, which operates just 62 total sites between California and Maine. In its call for third quarter 2021 results, management reiterated its wish that the GrowGeneration stores will eventually be operational in all US states.
Additionally, management reaffirmed its goal of operating 100 locations by 2023. This year, supply shortages and an overabundance of cannabis on the West Coast have slowed store construction. Nonetheless, the company expects to overcome these challenges by the second half of 2022.
In addition, GrowGeneration’s proprietary products continue to sell well. One of its house brands, Power Si, sells in Canada and Europe. In addition, these specialty items now represent 9% of its turnover. By 2023, GrowGeneration expects these products to represent 25% of sales, indicating a rapid pace of expansion.
2. GrowGeneration stocks are trading at a low multiple
Investors should also understand that GrowGeneration generates profit. Many start-ups, even in retail, often report losses for years before finally becoming profitable. As a result, its price-to-earnings ratio is slightly below 75. While it is well below the multiple of 800 earnings it posted at the start of the year, it is still significantly higher than Tractor Supply’s multiple of nearly 30. . associated with the stock price falling nearly 70% from its February high.
The costs of GrowGeneration reduced the potential higher profits that could have lowered the P / E ratio. The company spent $ 36 million on store operations in the first nine months of 2021, nearly triple the expense for the same period in 2020. Depreciation costs almost sevenfold over the same period to reach $ 8.5 million. Additional stores and pre-opening spending were a big contributor to both increases.
In addition, these costs did not affect the price / sales (P / S) ratio, which was just above 3. Although it is well above the multiple of 2 of Tractor Supply’s sales, it is nevertheless appear GrowGeneration significantly cheaper. Investors should also remember that this P / S multiple is down from the multiple of 15 reached in February.
3. GrowGeneration drives comparable store sales growth
Recent comparable store sales (or comps) could also indicate an underlying strength. In the third quarter, the company recorded a 16% year-over-year increase. While this slightly exceeded Tractor Supply’s build growth by 13%, it declined significantly from its 60% build growth reported in the second trimester.
This news could naturally alarm investors due to the aforementioned oversupply issues on the West Coast. But shareholders should also realize that the number of stores has doubled from 31 to 62 in the past year, and the comps only include stores that have been open for at least a year. Therefore, the company calculated this metric with just 25 stores, including 10 in California, Nevada, Oregon and Washington. This indicates that the number of lineups should improve as the business can include more stores less influenced by the West Coast’s oversupply.
The state of GrowGeneration
An oversupply of cannabis on the West Coast and an insufficient supply of key materials has undoubtedly slowed GrowGeneration. Nonetheless, the company continues to grow at a rapid pace and the massive drop in the share price has brought it to a reasonable valuation. When more investors start to notice the growth, they can view this time as a buying opportunity.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.