Chit Chat Stocks - GrowGeneration (GRWG) | Not So Deep Dive

Episode Date: September 7, 2021

GrowGeneration operates retail hydroponic and organic gardening stores. This includes many different products from lighting to hydroponics products. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of GrowGeneration. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:14) Industry | (7:53) Management & Ownership | (9:49) Valuation | (12:17) Earnings | (13:22) Balance Sheet | (15:12) Our Analysis | (17:25) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday not-so-deep-dive episode on Chitchat Money. We have Brad Freeman on the show today, and it was your pick, and you picked Grow Generation. It is an interesting

company that people might associate with the cannabis industry because that is what they're serving or part of the market with that they're serving. But Brad, I got to ask, how did you find this company? Sure. So I talk a lot about the three multi-state operators, MSOs, or American growers that I own, just for full disclosure, Air Wellness, Cresco Labs, and Green Thumb Industries. So when I bring these up, a lot of the time, the response from people is, well, what about ancillary plays? And it's this one, and then Innovative Industrial Properties, I think it's called, like IIPR or something like that. I'm not super familiar with that one. But those are the two names that come up for ways to approach the space in a more ancillary way

instead of directly touching the plant. So I thought it was probably time for me to check it out so I could give a more informed and more valuable opinion the next time somebody asks me about it. Yeah, we'll hopefully connect part of the cannabis supply chain. I'll let Ryan introduce the company. But first, I have to talk about our sponsor for the Tuesday episode, with potential multi-beggars. The aim of potential multi-beggars is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. Potential multi-beggars is a service at Seeking Alpha. You've heard the head of the service, Chris, from Growth to Value is a pseudonym. He's been on the show before. They do tons of writing for the service. There's an overview

of the week every Sunday with updates on all the picks, markets in general, any news from the stocks in the potential multi-baggers universe. There's a chat community where you can talk directly to Chris. He can kind of help you understand what's happening. You can ask him questions if you're worried about stuff or if you have ideas, and he can share doubts, successes with everyone in the portfolio, or excuse me, everyone in the community. And it's great. There's tons of other features that I'm not even mentioning here. But so if you want to become a multi, you can go to Seeking Alpha and look for From Growth to Value, Google potential multibayers or go to at from value on Twitter. We'll link it in the show notes.

Ryan, do you want to introduce? Another good sales tip. Another good selling point for us. Go listen to our show with him because he kind of sells the service almost inadvertently by his analysis. Yes, exactly. And it helps us. Yes, exactly. If you want to hear his analysis in audio form, we did a show with him on Fiverr, did about 45 minutes to an hour on that. And it was great that's an example of the type of stuff you know he's looking at if that's your style this could be perfect for you but ryan do you want to introduce grow generation it's grow not growth generation right it's grow it's grow generation growth generation sounds like a good investing omen but yeah anyway so grow generation is the largest hydroponics supplier in the u.s so i did

have to go look up what hydroponics was and verticalroots.com defines hydroponics as a way to skip the soil sub in a different material to support the roots of the plant and grow crops directly in nutrient rich water basically it's all the necessary uh tools equipment uh products used to farm inside am i is that kind of a good way to put it without the sun and soil yeah um and so this includes selling items like organic nutrients or soils but then also uh items like lighting or equipment or a whole bunch of more like actual hard products not as they define it as either consumables or uh non-consumables and it's about a 40 60 split uh on their as far as products go so it's pretty well versed i think they have a huge range of products i'm not going

to be able to get into all of them but that's kind of just the area that they're focused on and so they do it through a whole bunch of different retail stores i think they have 60 different uh storefronts now and the stores come in all different types and sizes so it's not like one uniform layout type or one uniform size like you might find with like a starbucks or mcdonald's or a franchise like that this is more since they acquire a lot of the small individual shops and mold them into grow generation stores it's very kind of uh it's like a melting pot of different retail stores so it's all kind of coming together and a lot of them actually serve multiple functions. So some of the garden centers actually serve as warehouses or distribution or

fulfillment centers. But the majority of their sales come from customers that are individual cultivators or indoor gardeners, that kind of thing. And then they also have commercial customers. And so the commercial customers make up about 25% of overall revenue. So think of a commercial customer. Those are the ones that Brad, that you just mentioned, correct? Yeah, for sure. Yeah. And so like that, if a commercial customer gets a cultivation license and they have to outfit their area with lighting, equipment, all that stuff, they'll come to Grow Generation and they have longer-term contracts with them. They'll get bulk pricing options. And then they also get a representative from the company for

them at all times. So they can always talk to a customer rep. And so it's just, those are much bigger contracts. And like I said, that makes up about 25% of overall revenue, but it's not just physical retail. They also have two websites which customers can order from. I think they were in the process of implementing buy online, pick up in store same day. I'm not sure if that happened yet. It said they were in the process of doing that on their last 10K. But the two sites are growgeneration.com and agrin.io. Growgeneration.com, you can buy basically what you'd buy in store and have it shipped to you. But then agrin.io is more of a way for commercial customers to manage their purchases and logistics. They say in the 10K that it's a portal. So it's a little

more holistic than just a simple e-commerce website. So you can like check out inventory and whatever the commercial buyers might need. I'm not sure what exactly all their needs would be, but it seems like a small part of their overall revenue anyways. A little bit about the history. I'll try not to step in Brad's spot too much because there isn't too much about the company, but most of the history is around the founders. So it looks like it was incorporated in Colorado in 2014, both Darren Lampert and Michael Solomon, who Darren Lampert's the CEO today. And then Michael Solomon is the president. They were the ones that started it. They both have backgrounds that I don't think involve cannabis or farming or even agriculture

at all so kind of it seems like a new endeavor for them but they're obviously seven years into this so they and they've proved that the company has grown since uh first coming public in 2016 there's been some doubters that we'll maybe talk about on the second half but yeah there has uh but to their detriment i guess like they grow generation is now we'll talk about it they are profitable and they're doing fine they have 60 stores now i think they had 52 at the end of 2020. And they keep acquiring some, it's a very steady pace. Yeah. Yeah. Acquisitions are a part of their growth strategy. So just keep that in mind. And then we'll talk about same store sales as well, but do you want to get into the industry? Yeah. I'll keep this one simple because

it's very easy to analyze. There are 1800 hydroponics focused stores in the United States. So you can look at that number and reference the total number of stores they have. So they're getting, you know, decent market share right now, but there's still a huge opportunity in front of them. The market size is apparently close to $10 billion right now, but it's expected to double over the next decade with the growth from cannabis in the United States and globally, and also the growth of vertical farming, which cannabis is almost kind of more of a sure thing. Vertical farming is more of the, you know, we did a show on App Harvest. There's a lot of people doing ventures in that. And it's kind of, it's unsure how big of that industry it's going to be,

but they use stuff like this. Competitors, again, pretty easy to identify. There are the small chains that Grow Generation is trying to buy out. So they compete with them, but they're buying them. There's Home Depot, and then there's also Lowe's and stuff like that. And there's also a little bit from Amazon and eBay. Very simple to understand. Brad, did you have anything else on this? Yeah. Just one more competitor to call out to be on people's radar, which is they're pretty darn large is scott's miracle grow so they they've done a fantastic job at pivoting from this traditional gardening niche to taking advantage of the the great american growth story that that is cannabis so another one to focus on but you did a good job covering the rest the is scott's

miracle grow a wholesaler for these products or do they have stores like grow generation so they're they're b2b and b2c just like grow gen um and it's my understanding that these large multi-state operators are pretty much most of them. It is fragmented. So there are exceptions are choosing between GrowGen and Scott's Miracle-Gro at this point. Okay. That's good to know that I definitely missed that. And yeah, Scott's Miracle-Gro, they have made that big pivot to cannabis over the last few years. I remember hearing that. But Brad, do you want to hit management and ownership more deeply? Absolutely. So CEO is Darren Lampert, founding member of Lampert and Lampert. So an institutional fund. Usually a good sign when somebody's name is on the company, but he was

also a former portfolio manager. And other than that, just rising right on up to the CEO of a multi-billion dollar publicly traded company in GrowGen. So not a ton of notable experience beforehand before getting or starting this high profile endeavor. But yeah, so the president is Michael Salomon, as Ryan mentioned, former chairman of Skinny Nutritional Corp. I had to look up what that was. Again, not a ton of really high profile experience before stepping into this role. The CFO is Jeff Lasher. He was the former CFO of Crocs, so a very notable consumer name. Most recently, the CFO of Coravin, a CPG company. And then the COO is also a former SVP at Crocs. So quite the talent pipeline from Crocs to Grow Generation, as I'm sure all of our listeners

would expect. Yeah. It said something about the CEO here was at the company called PopSockets. That's huge. Yeah. PopSockets. Sure. Yeah. Oh, and then I'm sorry. In terms of ownership, so Salomon and Lampert both own roughly two and a half percent of the company. Insiders together own 8%. So really not a huge insider presence. BlackRock and Gotham are the two largest fund or institutional holders. BlackRock's got 4%, Gotham's got 6%, 52% overall is held by institutions. Yeah. And they have a lot of ownership among the companies they acquire because they're using their share price kind of as part of the acquisition tool. If you look that their share count does go up steadily and that's because they're trying to do this

roll-up strategy. If you remember, we've done a show on a Tyrion in the past and I know right now that company might not be people, you know, might cringe when they hear that name because of how that stock did, but it's a similar thing where they're trying to, you know, roll up the different industries and when their stock price is high, they're using that to their advantage, at least sometimes. But I would definitely look at the specific deals that they do. Brad, do you have something else? No, I was just going to say good addition. Thank you. Thank you for mentioning that. I should have added that in. No worries. I'll get to valuation. Market cap $1.9 billion. Ticker is a GRWG. Price to sales of 5.7. Price to gross profit of 20.8. So you can see that the gross

margins are not very high. Ryan will probably get into more of that on the earnings. Nothing really, they talk about adjusted EBITDA, but that's not something I particularly was worried about when looking at it. You can kind of see that their margins are going to be lower, maybe 10%, 12% is optimistic unless they can really expand that gross margin. Expect share count to steadily rise. I think one of the best or two best metrics to track here would be revenue and gross profit per share. Those over the last four months would probably be the best metric here. Yeah. And I'd also maybe just add a number to that valuation. I believe they're guiding for somewhere around 50 million in current year adjusted EBITDA. Obviously, that's guidance.

So that would pay them at about 40 times adjusted EBITDA, which once again, as an acquisitive company, adjusted EBITDA is not necessarily the best proxy for true profitability, but I'll get into the earnings. So they had first half 2021 revenue of $216 million. That was up 182% year over year. Gross margin grew slightly from the year before from, I think it was like 26.7%. I know it was in the 26s to 28.3% during this period. Net income was $12.9 million, so they were profitable.

Operating income was $17 million. They're doing about 1% operating cash flow margins. But part of that, the reason that they had low operating cash flow conversion compared to gap reporting was they kind of bolstered their inventory. They spent up a lot on adding to their inventory. That's probably from the companies they acquired too. when they acquire a store, you know, there's got to be inventory there, stuff like that, yeah.

And then they had 25 and a half million in adjusted EBITDA for that period. Once again, take that with a grain of salt. And then Q2 revenue growth on a per share basis was still about 131% year over year. So really strong, even if you include dilution. And they had 60% comp store sales growth in the first half of the year.

So really, really strong top line numbers. They've proven that the economics do work. they aren't astounding margins, but they can be profitable. And then they're guiding for about $455 to $475 million in full year revenue. So yeah, all around really solid earnings. And that's probably why it's commanding sort of a premium valuation for what would look like a traditional retail business. Yeah, definitely look at the long-term stock chart. They've had quite the run in 2020 and 2021 has been you know pretty flat but that you know they uh kind of hit escape velocity uh they could have been a meme stalker you know the cannabis stuff will get

wild sometimes so who knows if they got time to that but brad do you want to wrap up the first half with balance sheet absolutely uh so not as really not as bad as i was maybe um expecting or fearing due to this whole public market roll-up philosophy and all the inorganic growth they've had. But not as bad as, again, we talked about Ethereum a little bit. They're in much better shape from a balance sheet perspective here. But $67 million in cash and equivalents, another $57 million in marketable securities that it does not include in these cash equivalents. So total liquidity, I think you can put around $125 million. It's got another $120 million in inventory and prepaid costs, as Ryan was hitting on a little bit. It does have $108 million in

goodwill. That's versus $62 million year over year. Again, public market roll-up, ton of acquisitions, ton of M&A. I think that can sort of be expected. It's not super alarming to me, but is a number to keep an eye on for shareholders going forward for sure. It's got negative 32 million in net accounts receivable. So it is funding some operations with accounts payable. 27 million it has on the balance sheet and what it's called operating lease liabilities, but it's got very, very little long-term debt on the balance sheet. It is paying an 8.125% interest rate on that debt, but again, it's very, very small. Only $3 million in stock-based compensation so far this year. That's versus $5.3 million year over year to date, so first six

months of the year. It's got another 425,000 shares available in warrants for future issuance, but that's really, that's a roughly 1% dilution. I'm sure, and they called this out several times throughout all of their SEC filings that they're going to have to raise more cash in order to fund this really aggressive market share grab that they're embarking on right now. But it is net income positive. And balance sheet is not really a red flag, like I was assuming it was going to be heading into this episode. Yeah, they have a decent amount of cash to kind of go for the next, it depends how aggressive they're going to be, but they have a decent amount of cash to maybe to go for the next year or so depending on how much cash they can generate but balance sheet is

very important here and the stock price can you know that's uncertain but that can be very important as well when they do these acquisitions but let's hit an ad break and then we'll get back talk more about grow generation it's for you credentials to advance confidence to stand out in your career at regent university you'll join more than 30 000 world changers making a difference in high demand fields. Pursue your bachelor's, master's, or doctorate online or on campus in Virginia Beach. Your degree from top-ranked Regent University is waiting. So is the world you will elevate. Say yes to your purpose and position yourself for a brighter future. Visit regent.edu slash learn more. regent.edu slash learn more.

This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era. KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back. Next up, we have anecdotal evidence. Brad, they had some shops in Michigan. I don't know if you've been to them, but no? I have not. I will be totally candid with our listeners. That is my preferred elixir over the adult beverages and the alcohol space, but I do not really grow my own. I don't really, it's a pretty time-consuming endeavor. So yeah, no direct experience with Grow Generation.

No LED lights on the property? No, I'm saving up for those at the moment, but no led lights currently uh ryan i'm assuming nothing when they have no shops out here um or no they have one they have one and uh two in washington yeah two that they they just bought but i think they might be on the east side of the state no they're one they were in uh north seattle one was in north seattle so technically not too far from us but i will get some anecdotal evidence yeah maybe maybe not i don't know i don't know if i'm in a market for a 400 led light but we'll see. Let's hit future growth opportunities though. They got some very interesting things that I see here. So Brad, what do you have? Yeah, mine is really straightforward. So just

benefiting from this really large legalization and regulation momentum that our country is currently enjoying. So Gallup, the most recent Gallup poll has public approval pushing 70% for broad scale legalization. It was under 30% when I was born in 1997. So more than doubled in our lifetime so far. You've got deep red states like Mississippi and South Dakota, really, really convincingly and easily passing medical reform. So the whole partisan divide doesn't seem to be there like it used to in the past. So I just see more and more states continuing to legalize and that continuing to grow the total addressable market for GrowGen. Yeah. And can you explain for someone that might not know this industry at all,

how that would benefit grow generation? Sure. So the, the, so because grow gen is so involved in, in, in the operations and the businesses of, of these large multi-state operators, they're, they're essentially just going to mirror the growth and the expansion of, of these, of these companies as they enter new States, they are, they're, they're not going to, or they haven't yet vertically integrated any of this fertilizer or light or anything like that. So GrowGen is going to continue to be a trusted partner for them in these new states, and they are going to need more stores and more capacity and more inventory to support more legal cannabis being sold. I mean, just thinking about states like New York coming online for recreational cannabis soon, Texas' governor talking about allowing veterans with PTSD to start using medical cannabis, that's the first inkling of any kind of willingness to legalize in Texas we've ever had. So the larger the population footprint of Americans with with legal cannabis, the more demand there's going to be to support all of the all of the orders and all of the sales that are going to come.

Right. And this may be a pun intended a little bit in the weeds here, but what so the like marijuana industry or cannabis industry, it takes really precise like water stuff and, you know, like light. right? So it's not like something you can just throw outside and have a whole range. The conditions, yes. The growing conditions have to be precise. Thank you, Ryan. Is that correct? Yeah. Cannabis plants are extremely sensitive to the timing of lighting. They're extremely sensitive to phosphorus and nitrogen concentration levels in soil. They're very sensitive to water. Anyone pretty much can grow cannabis. But if I tried to, it would really suck compared to um, what these, what the broad scale, uh, growers who have mastered the process are doing. So yeah, uh, it, one of the concerns I'm sure we'll hit on maybe later in the show is that a lot of people

think of cannabis as a commodity, but, but one, one strain, one, one type of, uh, of genetic, uh, identity for, for a strain can be extremely different, um, from both a price point and a cost perspective for, from one grower to the next and from one state to the next, because, um, the, the quality of these processes vary so, so broadly across, across operations. Like just for example, Air Wellness just purchased a company called Tahoe, Tahoe Hydroponics, I think it's called in Nevada. And he said one of the core reasons they bought it was so that they'd have access to all of these master growers that, that Tahoe has on its roster.

So it's really an intellectual property grab almost in a, in a consumer package goods space. It's pretty interesting. So I think about it more like like fine wine and how and how there there's different tastes and and different preferences um so i i don't see cannabis as a pure commodity but but yeah just that's probably a longer answer than you were looking for but that's kind of where i see it no that's a great overview and it shows why your hydroponic equipment you want that quality product you want the high quality brand that you trust but ryan do you want to talk about yours what do you have here uh yeah well yeah private label but

there's something i was kind of thinking about that maybe that this is kind of speculation on my part, and I might be wrong to think this way, but would it be better to buy storefronts in the States that haven't legalized it yet? Because you're still doing like vertical farming. That's not illegal. So would those be the lower cost? And then as they get legalized, you can kind of migrate into the other products as well. I feel like maybe it's better to just wait, but I imagine you're still getting stores for cheaper prior to legalization. Brad, you probably know the best on this? No, I mean, it's a really interesting thought. So the largest American grower, the name of the company is Cureleaf, and they've been purchasing grow houses in states that are

kind of prepping and gearing up for legalization, but haven't yet done it. And they're doing it for that very reason, because the real estate is so much cheaper before this regulation hits. So it's definitely an interesting concept to consider. And there's weird states that are embracing the growing like oklahoma's a huge hotbed for this which seems strange you would not have expected that um but there's also and then there's also the medical twist right where some states a lot of states have legalized medical and that can be a huge market as well but absolutely and i i think um i i it's interesting because so recreational cannabis why are people smoking recreational cannabis and it's generally um mood and anxiety or just to be put in a better place so a lot of

the executives and the CEOs see this kind of medical recreational divide being torn down over time so that cannabis is really, it's seen as more of a therapeutic for cater towards sleeping or cater towards increasing your appetite or lower anxiety or things like that. So that's not super important, but I'm personally fascinated to see how the medical recreational labels change over time because, I mean, in the state where I am, I'll just give a story. When I was an undergraduate, when my friend was getting a medical card, he told me he walked into the store or he walked into the doctor's office and it was a doctor with a button down and all the buttons on his button down were unbuttoned. So, all the chests were hanging out. They were listening to

Bob Marley. They were just having a great time. They asked two questions and he walked out with the paperwork. So it was extremely relaxed and extremely easy. So I think that just feeds into the fact that the divide between recreational and medical isn't as pronounced as people think. And when the South Dakotas of the world also pass recreational cannabis and when the rest of the state holdouts kind of move on from holding out, that'll come down. All right, Ryan, anything else with private label? Yeah. So they have private label brands. I believe it was according to the 10K, I think 16 different stock keeping units and a majority of those products are

the consumables. So like soil and, uh, nutrient stuff. Um, and so in the first half of 2020, uh, less than 1% of sales came from the private label products in the first half of 2021, 7% of their sales came from that. So it's growing rapidly and it does have higher margins. I don't think it was specifically broken out, but they said it would boost margins the more that a private label outpaces traditional sales all right yeah that makes sense i mean that's relating that to their

overall sales growth i mean private label what is that growing like to a thousand percent it's from a low base but that's impressive and maybe that'll have margins over time uh i'll hit mine vertical farming so this equipment is also important for that industry it's not just for cannabis it's more for gardening in general so we did the show on app harvest and that looked like a hard business to make money in but it's because they had to spend a lot of money on stuff that could be you know from a wholesaler or commercial you know company like grow generation and if people are going to spend a lot of money building these things there's a potential you know for consistent customer base for grow generations products that's a bit more speculative but if

vertical farming really takes off that could be a huge huge potential for a generation and all the hydroponic sellers and i feel like people are rooting for vertical farming to work um and typically when that happens uh we'll get some few billion in spac dollars yeah you get government help probably with that as well so i imagine that it's it's kind of more of an inevitability just some nice and there's some nice subsidies flowing to app harvest who the real products will flow to grow generation that'd be nice um all right highlights and low lights brad what do you like? What do you don't like about growth generation? Sure. Highlight, really impressive, surprisingly impressive blend of growth. Some of it was inorganic, but like Ryan was talking about,

66% same-store sale growth is really impressive. But that blend of elevated growth and profitability, not super common in equity markets for 2021 and not super common for a company this early on in its expansion curve and its maturity. But for low-light, and this might be a little contradictory, to some people, but there's very little barrier to entry for the ancillary cannabis place. One of the reasons why I own the companies that touch the plants is because regardless of this opportunity being so large and so quickly growing, um, the, the, the large consumer package goods and pharmaceutical companies can't, they can't get involved right now. They can't touch the plant because it's federally illegal. And that's creating this, this kind of insulation that

this, this artificial competitive mode, allowing the growers that I, that I own and some of the other ones to build these massively profitable businesses so that when the time finally does come where someone like a Unilever can finally get into the space, it's going to be through M&A because these players are going to be so built out and so mature and so developed that it's not going to make any sense to try and organically compete with them. So that same barrier to entry doesn't exist for growth generation. They don't touch the plant. They don't do anything federally illegal at this point in time. So anyone with storefront, anyone with deep pockets can look at this opportunity and say, I want a piece of it. And that's already starting to happen. So

that's the concern is the moat, not to use a cliche, but that's where I see it. We love the cliche of the moat. And I think that is a big question here. Where is the rub on the moat? And I mentioned that if you're looking at that same store sales number, 60% is super strong and it looks great, but it was coming off a really weak base from Q2 2020. They expect, I believe, the slowdown to go down to like 20% or even lower than that. I think it was either 10% or 20%. That is still really good. Same store sales growth, but not nearly as good as 60%. All right, Ryan, what are your highlights and lowlights? Well, my highlights are that comp store revenue has been, even though it was 60% this quarter or

this first half of the year, that even if it has a big pullback, that's still strong, say it's 10 to 20%, somewhere in there, that's really good. And I like the commercial relationships. I think they said they have thousands of those. Low lights for me though, part of it is, I don't know if this is the beginning of a secular trend or if they got a big boost in farming due to COVID. I know that if you go, and I'm going to talk about this here. So Hindenburg released a short report a year ago, and they have been wrong so far, if you're looking at the short-term stock price. But on that, they had calls with a lot of the representatives at some of these growth generation stores, and those representatives said, we've never had volume like this. We've never had this many people coming into the store.

COVID, for some reason, was like a big spark for us. people trying to want to do stuff like that okay and then but i mean 2021 that's kind of it stayed almost weird yeah and so that's the other part is but you look at like vertical farming you look at the growth of cannabis it feels like those are more secular trends and then the the real low life for me is the management woes so if you read that hindenburg report i know some people will probably shrug it off but there is a lot of involvement uh from management with organized crime uh the that's never good president and co-founder his old company skinny skinny nutrition uh sold fruit flavored zero calorie water and they went bankrupt in 2013

amidst a bunch of director resignations because there was like undisclosed lawsuits and so he doesn't really have a very rosy background um and so just some of the management background stuff that makes me a little wary. Yeah. And what's weird is when I didn't know about the Hindenburg report and I read the conference call and kind of read their letters and they seem very confident because they get straight to the point. They tell it kind of like it is. They're not trying to beat around the bush and they're saying what they're going to do. And I thought it sounded really competent, but that is the worry whenever you're reading a conference call. People in the executive roles are there because they're the best salesman in the world or salesperson in the world. They can

really convince you some things and you got to really look at that Hindenburg report and see, all right, do I disagree with what they're saying here? Can I prove that what they're saying is true or not? Are they just making some assumptions? All that stuff. It isn't a deal breaker because some of the stuff was like slightly detached from them. Like they hired someone who had a speculative background or stuff like that, but it's worth reading if you own the stock. Yeah, for sure. All right. I'll hit my highlights. I think, you know, industry is tailwinds are nice it's niche enough i believe to build a customer base outside of the home depot and lowe's core crowd where you couldn't you know home depot and lowe's they

both have incredible competitive advantages where you're starting up a home improvement retailer i mean no one even tries that anymore it's insane but with this little niche home depot does this type of stuff but it's it's a large enough market where someone like a grow generation and they, I don't know how many SKUs they would have at a store, but I'm assuming it's like 100 or 200 or something like that or more. Home Depot is not going to be able to carry all that. You'll have all the specialty brands for cannabis, farming, all that stuff. And like Brad was saying earlier, you need very specific, high quality products. I think that is a potential for them to build out this niche compared to Home Depot or Lowe's who people are probably

thinking about as the big competitor, Scott's Miracle-Gro as well. I guess we should talk then too low lights though market opportunity is uncertain in my opinion um and i would like to have them acquire companies with cash from operations because using the stock now feels good but that's not a guarantee it's going to stay this high and then if they have to do the debt markets um they would have to take out high interest loans so a relatively high interest notes it sounds like it'd be like eight to ten percent something like that so that's not great for me all right we we we should probably kind of speed through these last two here. What's Brad, what's your bull case? Sure. Sorry. I've been talking a lot. I'll go quickly. Um, so the bull case, I don't see this

as a massively scalable business for these individual growers and individual gardening projects. I see that as more of kind of like a, a medium-sized hobby niche, but if this can become the go-to ancillary crop supporter for all major MSOs, all major multi-state operators, I think that's the bull case. And I think those B2B contracts can be extremely lucrative and extremely durable. So that's what I'll be looking for. Yeah. I'd almost rather have them, even if they have to do like bulk pricing discounts, I'd almost rather have those commercial lock-ins than selling to that more single operator crowd or the little individuals. And there's not very many single operators. I mean, you have to get the license. So the single

operators are, they're, they're wink, wink, you know, what are you doing this for? I'm planting some tomatoes. I mean, that's exactly what came to mind when I read some of the stuff. But anyway, my bull case is that this is the two secular trends we talked about, which is multi-state operators in cannabis and then vertical farming. Those kind of help push growth for the company. And then they're able to sustain comp store sales growth of around 10% to 15%, somewhere in there. If they're able to do that, if they're able to continually acquire companies and do so out of their cashflow that they're in a really good spot. I think this could make a pretty good investment. Yeah. I kind of had to put it into

some store count numbers. I think if they get to 150 stores, you know, you can get a high single digit comp sustained, uh, you know, which would be a lot lower than it is now, but still really, really good compared to almost all other retailers. Uh, if they can get to 10% cashflow margins, which if you look at their gross margin, that's probably right around where they're going to have to be at. And then a share count doesn't, you know, skyrocket. It has grown a lot, but remember, I would look at gross profit per share, you know, cashflow per share, revenue per share, stuff like that. That would probably, you know, if they do all those things, 150 stores, sustained comps, and they get to those cashflow margins, that probably adds up to good stock performance,

especially when you look at their guidance for at least this year for revenue, that's going to slow down a lot. They're not going to grow at a hundred percent forever, but. Yeah. I'd also assume some multiple compression. Yeah, for sure. I mean, right now, if you think 10% cash flow margins, they're trading at like 55, 60 times. I mean, no stock trades at that maturity. So yeah. All right. Bear case, Brad, what do you have? Yeah. So I'm, I do sort of agree with Brett that this is niche enough to kind of distract away from big boys trying to compete, but still Home Depot, Lowe's, Menards, Walmart, all these companies, if they want to, if they see this opportunity is attractive enough,

they can dedicate resources they can dedicate a lot more than 120 million dollars and um to to build this opportunity out so that's that's where i see it um as developed players realizing how how incredible this opportunity truly is and taking market share yeah they can they can easily be the low-cost provider if they want to absolutely grow generation will have to if okay if home people and lows try to go after this opportunity really strongly growth generation is going to have to build like some uh their brand really strong because the only way to differentiate yourself is to show that like all right you buy from us you have the most high quality products that's tough to do they probably could but it's not a guarantee and that

definitely is a risk all right ryan what's your bear case um my my bear case is and i actually did not dig into the acquisition specifically i assume these acquisitions are being made at least partially or fueled partially by stock. It's a mix. Yeah, usually. But they have so many, I can't remember all of them. It was usually a mix. So I think right now they have a pretty low cost of equity and they're able to acquire with that premium valuation. But if that is not a sustainable advantage, and if that subsides, you have a very Ethereum-like situation where you then have to start buying these with either cashflow or 8% cost capital in your debt, You might be able to get better rates than that if you have cash flow at that point.

But it just becomes a very different world in a bear market for them acquiring other companies. And the other part, I mean, that's really it. I guess the only nuance, I think Ethereum is a decent comp here, but the only nuance is that you have good comp store growth. And so far they're operating in composites. so yeah that's at least looking better than a tyrian um yeah my bear case financing their growth is gonna prove harder than we might think it's been very easy right now uh and i don't think a retail roll-up deserves a premium valuation if we're looking at see-through cash flow margins which again you have to discount again because they're not going to generate cash for like the

next two or three years if it's at like 55 60 times you know i don't know what does something like this deserve to trade it look at what retailers trade at and maturity however i don't know the some some the best retailers have been some of the best investments of all time so you have to counter that with that home depot walmart tractor supply starbucks all of them all of them oh yeah in the early days they look rough because of the cash they burn. But I mean, they're few and far between, but the diamonds in there can do really, really well for you. All right, let's wrap things up. More or less interested, Brad, what do you think? I got to go less interested. And I will preface this by saying I do understand

why people who want exposure to the space own the company. But if I'm going to have exposure to the space, I want that artificial regulatory mode that I was talking about earlier. And honestly, the names that I own are more quickly growing. They support 55% gross profit margins and they're way cheaper. So that's, I don't know why I would divert any sector attention or concentration to an ancillary play here. That's kind of where I see it. So less interested. All right, Ryan. Optically, I like the idea of choosing the picks and shovels provider for the canvas space um i i like that going into it but the management woes are concerning for me um and it it isn't necessarily super cheap uh so i apologize this was something uh we got some

tweets uh that said like oh you're gonna love it and so i i'm sorry to let you down uh but i'm gonna go less interested yeah i'll go more interested yeah uh there we go one out of three i guess the management thing i didn't read about it so maybe it's worse than i'm assuming just because i kind of read the headline on the hindenburg thing i didn't know about it until right before we recorded so that could change my opinion and the valuation right now is really not something i i think is i don't know seems very overvalued to me but again that could be wrong but what keeps me more interested and maybe puts it on the watch list is the fact that a good retailer in a niche can provide strong returns and durability. I mean, again, like I mentioned

before, some of the best businesses of all time, if you establish that niche, you establish that brand, if it can be the Home Depot-like or the tractor supply, I guess it's probably a better comp because they're more specialized. If they can do that for hydroponics, I think it could be a great business or great stock performer. The other thing to think about is it's very easy to get caught up in the top line growth and especially the comp store growth but it's also a pretty easy comp right now so i moving forward pay attention to organic organic growth or comp growth um because it's not going to stay at 60 i i imagine if it if it does that would be and we're all then we're wrong oh that would i don't know how you do that with the same sizes of the stores i mean that's

just insanity i don't know how you are putting that much through uh you'd have a lot of people change in inventory uh but yeah i guess that'll do it we're one for three sorry for the person that's that predicted we go three for three um yeah it's um yeah sorry you can still it's all right that means the opportunity is there for uh maybe maybe some people just don't understand it uh that's us but what's the stock for next week yeah i'm gonna make us eat some vegetables we're gonna do a home builder uh lenar corporation not exciting uh but yeah lenar corporation been a good performing home builder the last decade we'll study that see how they've succeeded stuff like that brad you have anything else before we wrap up yeah just just to the person who was expecting

us all to love it please please say neener neener neener when it doubles and triples and quadruples over the next couple years i i expect you to gloat because um yeah this isn't yeah we don't we're not shorting it um if it does well we hope we hope any shareholders do well we never we never want anyone to lose money. But that's going to do it for this episode. Thank you all for listening. Remember, none of us are financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.

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