GRWG: Zacks Initiates Coverage of GrowGeneration

By Steven Ralston, CFA

OTCQX:GRWG

READ THE FULL GRWG RESEARCH REPORT

GrowGeneration (GRWG) 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 anticipates 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 19 stores: six 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 I

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 19 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.


View Exhibit II

KEY POINTS

‣ Grow Generation owns and operates 19 specialty retail hydroponic and organic gardening stores in seven states, all of which have legalized the sale of medicinal and/or recreational cannabis.
• stores offer a wide array of hydroponic growing supplies providing a one-stop shopping solution for both indoor and outdoor operations
• provides supplies to small, medium and large-scale commercial cultivators as well as home growers
• delivers a superior shopping experience with knowledgeable and well-trained employees
• comprehensive offerings of supplies, products and accessories providing a one-stop shopping solution
• embarking on an initiative of expanding into Canada
• economies of scale provide competitive advantage over local, family-owned, one-location stores

‣ Management’s strategy includes:
• build a national network of branded, integrated hydroponic stores in jurisdictions where cannabis has been legalized
• develop a specialized sales team (GrowGeneration ProServices) targeting large-scale commercial farmers
• formed a new commercial division (GrowGeneration Management) to provide turnkey solutions, primarily to new license holders/owners, to set up and construct their initial growing facilities
• implement an e-commerce strategy involving several platforms, including the company’s website, amazon and the recently acquired HeavyGardens.com
• develop ancillary/adjacent markets for incremental sales
◦ formed a subsidiary (GrowGeneration Hemp Corp) for the purpose of increasing demand for hemp-derived products and expanding sales to this industry

‣ Management guidance:
• revenue forecast for 2018 is $37 million
• anticipated sales for Q4 2018 is $10.5 million
• the run rate of annualized revenues coming out of 2018 is $42 million

‣ Near-term catalysts:
• dramatic increase of cultivation licenses in California during the second quarter of 2018
• announcements of new store openings
• expected announcement concerning the company’s Canadian initiative
• results of the online initiatives with amazon and HeavyGardens.com

‣ The company continues to build awareness by attending Analyst Conferences:
• 7th Annual LD Micro Invitational Conference (June 6, 2017)
• Rocky Mountain MicroCap Conference in Denver (September 25, 2017)
• 30th ROTH Conference in Dana Point, California (March 11-14, 2018)
• OTCQX Virtual Conference (October 4, 2018)

‣ GrowGeneration is well positioned to benefit from the legalization of cannabis (both medicinal and recreational) in the United States.

Investor interest in the cannabis market has intensified with the passage of state legislation that allows for legal use of medical and/or recreational cannabis. Current legislation permits medical use in 29 state jurisdictions and adult recreational use in 9 states. In Canada, sales of recreational marijuana are set to begin in October 2018. Assuming no change to the current legal structure, according to New Frontier Data, the domestic cannabis market is a projected to reach $25 billion by 2025. And according to Grand View Research, the global cannabis industry is projected to grow to $146.4 billion, also by 2025.

The market is comprised of many investment categories that have significant business activities, from biotech firms conducting clinical trials on cannabis extracts to licensed recreational cannabis cultivators, from investigating novel drug delivery platforms to developing cannabis-infused consumable products (beverages and edibles), from processing equipment to dispensaries and retailers. The cultivation of marijuana is projected to increase significantly, so should the demand for indoor and outdoor growing supplies, with initial large capital outlays for the build-out of growing operations and subsequently by on-going purchases of consumable nutrients.

GrowGeneration continues to expand a retail platform to provide support to the cannabis cultivation industry by selling supplies to the growers of cannabis, from large-scale cultivation facilities to individual home growers.


View Exhibit III

Management’s Growth Strategy

Management’s multi-prong strategy includes expanding the company’s store footprint (both organically by opening greenfield stores and by the acquisition of leading hydroponic stores) with the goal of building out a national network of branded, integrated hydroponic stores in states (and even Canada) where cannabis has been legalized. The company strives to be the first mover as exemplified by comprehensive portfolios of stores in Colorado and California, and most recently the entry into the emerging medical cannabis market of Oklahoma.


View Exhibit IV

Management is especially pursuing certain high-volume vertical market segments, particularly large-scale commercial cultivators and new cultivation license holders. With GrowGeneration’s prime customers being the large-scale commercial farmers, the company has developed GrowGeneration ProServices, which offers specialized services catered their needs and requirements, not only for their day-to-day supplies, but also for build-outs. Commercial customers can enjoy top-tier services, including a dedicated account manager, private shopping experiences, CAD services, warranty repairs, online account access, permitting assistance, etc.

In mid-2018, the company formed a new commercial division, GrowGeneration Management, which provides turnkey solutions, primarily to new license holders/owners who are setting up and constructing their initial growing facilities. The division’s mission is being supported by a team of grow room designers, mechanical engineers and dedicated commercial salesmen.

GrowGeneration launched GGen Distribution Corp, a wholly-owned subsidiary dedicated to securing exclusive, proprietary products for direct distribution through the company’s retail channels. Subsequently, under an exclusive product development and distribution agreement with Alliance Biologics, GrowGeneration began to sell a complete line of exclusive specialty products and powder fertilizers in the second quarter of 2018. These specialty products, including soil microbials (plant growth-promoting bacteria) and powder fertilizers, stimulate root formation, plant growth and flowering, all of which contribute to enhanced yields.


View Exhibit V

As part of its e-commerce strategy, management is pursuing the development of several e-commerce platforms. On the company’s corporate website (growgeneration.com), a branded e-commerce portal has been designed, which currently displays 15 product departments, under which hydroponic, specialty and organic gardening products are listed. Each product is displayed with a professional photo image and is described in detail.

In September 2018, the company also acquired and now operates HeavyGardens.com, an online storefront for cultivators. The acquisition added an operational e-commerce sales channel to GrowGeneration’s 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. Management projects that HeavyGardens will generate revenues of over $5.0 million during fiscal 2019.


View Exhibit VI

GrowGeneration is in the process of developing a presence on Amazon.com. In July 2018, the company formed a strategic partnership with The Upstart Group in order to enable the company’s full product suite of specialized hydroponic and organic garden supplies to be listed on the amazon online platform.

Also, GrowGeneration is pursuing an initiative to further tap into the hemp market. The company sells products to several hemp farms; however, this effort consists of the formation of a subsidiary (GrowGeneration Hemp Corp) for the purpose of increasing demand for hemp-derived products and bolstering the number of suitable products and equipment offered for sale to the hemp farm industry. The company’s sales efforts will target thousands of hemp farms around the country, particularly in states with the highest number of licensed hemp acres in production, namely Colorado (9,700 acres), Oregon (3,469) and Kentucky (3,271).


View Exhibit VII

GrowGeneration is in the emerging growth phase of its corporate history and in the early stage of establishing its hydroponic supply store footprint. In addition, the company has already embraced digital retailing by pursuing several e-commerce initiatives. The full potential impact of management’s store expansion strategy has yet to be observed. In less than three years, sales have grown from $3.46 million in 2015 to $19.2 million in the latest trailing 12 months (TTM).

Indicated Target

Based on comparative analysis that utilizes the valuation metric of Price/Sales, an average industry multiple (on estimated TTM sales through the just-completed third quarter of 2018) indicates a share price target of $7.40.

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